As confidentially submitted to the Securities and Exchange Commission on April 2, 2015
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CONFIDENTIAL SUBMISSION ON FORM F-1
UNDER THE SECURITIES ACT OF 1933
FULING GLOBAL INC.
(Exact name of registrant as specified in its charter)
(Translation of Registrant’s Name into English)
|Cayman Islands||3089||Not Applicable|
|(State or other jurisdiction of
incorporation or organization)
|(Primary Standard Industrial
Classification Code Number)
Southeast Industrial Zone, Songmen Town
Wenling, Zhejiang Province
People’s Republic of China 317511
+86-576-86623058 – telephone
+86-576-86623099 – facsimile
|CT Corporation System|
111 Eighth Avenue
New York, New York 10011
+1 (800) 624-0909
|(Address, including zip code, and telephone number,
including area code, of principal executive offices)
|(Name, address, including zip code, and telephone|
number, including area code, of agent for service)
Anthony W. Basch, Esq.
Kaufman & Canoles, P.C.
Two James Center, 14th Floor
1021 East Cary Street
Richmond, Virginia 23219
+1 (804) 771-5700 – telephone
+1 (804) 771-5777 – facsimile
Mark E. Crone, Esq.
Ronniel Levy, Esq.
1330 Avenue of the Americas, 35th Floor
New York, New York 10019
(212) 400-6900 – telephone
(212) 400-6901– facsimile
Approximate date of commencement of proposed sale to public: As soon as practicable after the effective date of this Registration Statement.
If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. þ
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
CALCULATION OF REGISTRATION FEE
|Title of Class of Securities to be Registered||Amount to be|
|Ordinary Shares, par value $0.001 per share||$||30,000,000||$||3,486||(2)|
|(1)||Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.|
|(2)||To be paid upon first non-confidential filing of registration statement with Securities and Exchange Commission.|
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
|The information in this prospectus is not complete and may be changed. We will not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.|
Subject to Completion, Dated April 2, 2015
Fuling Global Inc.
This is an initial public offering of Ordinary Shares of Fuling Global Inc., a Cayman Islands company with manufacturing operations in the United States and China. We are offering of our Ordinary Shares. Prior to this offering, there has been no public market for our Ordinary Shares. We expect the initial public offering price of our Ordinary Shares to be between $ and $ per share. We plan to apply to list our Ordinary Shares on the NASDAQ Capital Market under the symbol “FUOI.” We cannot assure you that our application will be approved; if it is not approved, we will not complete this offering.
We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. Investing in our Ordinary Shares involves risks. See “Risk Factors” beginning on page 11.
|Assumed public offering price||$||$||30,000,000|
Placement fee and commission
|Proceeds to us, before expenses||$||$|
We expect our total cash expenses for this offering (including cash expenses payable to our placement agent for its out-of-pocket expenses) to be approximately $ , exclusive of the above commissions. In addition, we will pay additional items of value in connection with this offering that are viewed by the Financial Industry Regulatory Authority, or FINRA, as underwriting compensation. These payments will further reduce proceeds available to us before expenses. See “Placement.”
This offering is being conducted on a best efforts, all-or-none basis and is not being firmly underwritten. The placement agent must sell all Ordinary Shares offered if any are sold. The placement agent is required to use only its best efforts to sell the securities offered. The offering will terminate upon the earlier of: (i) a date mutually acceptable to us and our placement agent after which the entire offering is sold or (ii) the close of business on , 2015. Until we sell Ordinary Shares, all investor funds will be held in an escrow account at Bank, located at . If we do not sell Ordinary Shares by close of business on , 2015, all funds will be promptly returned to investors (within one business day) without interest or deduction. If we complete this offering, net proceeds will be delivered to our company on the closing date. We will not be able to use such proceeds in China, however, until we complete certain remittance procedures in China. If we complete this offering, then on the closing date, we will issue Ordinary Shares to investors in the offering.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is , 2015.
Table of Contents
|Special Note Regarding Forward-Looking Statements||26|
|Letter from Chief Executive Officer– Mr. Xinfu Hu||27|
|Use of Proceeds||29|
|Exchange Rate Information||31|
|Management’s Discussion and Analysis of Financial Condition and Results of Operations||34|
|Description of Property||66|
|Related Party Transactions||76|
|Description of Share Capital||78|
|Quantitative and Qualitative Disclosures about Market Risk||86|
|Shares Eligible for Future Sale||87|
|Material Tax Consequences Applicable to U.S. Holders of Our Ordinary Shares||88|
|Enforceability of Civil Liabilities||92|
|Expenses Relating to this Offering||95|
|Interests of Named Experts and Counsel||96|
|Disclosure of Commission Position on Indemnification||96|
|Where You Can Find Additional Information||96|
Neither we nor the placement agent has authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our Ordinary Shares only in jurisdictions where offers and sales are permitted.
The information in this preliminary prospectus is not complete and is subject to change. No person should rely on the information contained in this document for any purpose other than participating in our proposed initial public offering, and only the preliminary prospectus issued , 2015 is authorized by us to be used in connection with our proposed initial public offering. The preliminary prospectus will only be distributed by us and the placement agent named herein and no other person has been authorized by us to use this document to offer or sell any of our securities.
Until , 2015 (25 days after the commencement of our initial public offering), all dealers that buy, sell, or trade our Ordinary Shares, whether or not participating in our initial public offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Before you decide to purchase our Ordinary Shares, you should understand the high degree of risk involved. You should consider carefully the following risks and other information in this prospectus, including our consolidated financial statements and related notes. If any of the following risks actually occur, our business, financial condition and operating results could be adversely affected. As a result, the trading price of our Ordinary Shares could decline, perhaps significantly.
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. Our industry consists of a small number of 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.
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, and Hong Kong and Mainland 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 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 building a manufacturing and warehousing facility 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 substantially 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”) and polystyrene (“PS”)), (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.
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 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 and trade secret laws and non-disclosure agreements and other methods to protect our intellectual property rights. We own twenty-eight patents in China 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.
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 $19.52 million in outstanding bank loans as of December 31, 2014. The loans are held at multiple banks and are secured by all of our land and property 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 have guaranteed third parties’ debt, and a failure by such parties to repay their debts may be enforced against our company.
As a condition of obtaining bank financing, smaller companies in China sometimes enter into reciprocal debt guaranties with third parties, pursuant to which the bank agrees to provide loans to one or more unrelated entities if such entities agree to guaranty the loans made to the other entities. On April 3, 2007, our board of directors adopted a resolution to provide joint and several liability guaranty for Wenling Feilipu Electronic Ltd. Co. (“Wenling Feilipu”) to apply for loans from Bank of China Wenling Brach, which introduced our company to Wenling Feilipu for purpose of obtaining loans. The total guaranty amount was RMB 7,000,000. On April 18 and 23, 2013, Wenling Feilipu failed to repay RMB 4,000,000 and RMB 4,000,000 (of which we guaranteed only RMB 3,000,000), respectively, and we were required to repay RMB 6,320,000 on behalf of Wenling Feilipu. We have paid this amount in full and cleared the guarantee.
On November 21, 2014, our board of directors adopted a resolution to provide guaranty for Taizhou Ruige Mechanical and Electrical Industrial Ltd. Co. to apply for loans from Industrial and Commercial Bank of China Wenling Branch in the amount of RMB 10,000,000. Taizhou Ruige has repaid its loan in full, and this guarantee has been cleared.
While we do not currently guarantee any third party debts or intend to enter into any third party guarantees after completion of this offering, if we were to enter into any other guaranties for third party debts and they were to fail to pay, our cash position could be adversely affected and we might be unable to be made whole by our counter-guarantor.
China’s appreciating currency may make our products more expensive to export to other countries.
We sell a majority of our products in the United States. 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 appreciated against the US dollar and Chinese shipping and labor rates increase, our products’ prices have been affected in countries that use these currencies. While we plan to move some of our manufacturing to the United States, we anticipate continuing to produce a significant percentage of our products (and the vast majority of our cutlery products) in China. To the extent the Chinese RMB continues to appreciate and such shipping and labor rates continue to increase, our products could become more expensive and, as a result, less attractive to potential customers in other countries. See “Exchange Rate Information.”
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.
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, all located in the U.S. For the year ended December 31, 2014, sales to our seven largest customers amounted in the aggregate to approximately 52.5% of our total revenue. For the year ended December 31, 2013, sales to our six largest customers amounted in the aggregate to approximately 53.3% 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, 2014 and 2013, respectively, we had zero and two customers, respectively, that accounted for 10% or more of our revenues:
|Purchaser Name||Year ended|
|*||Less than 10% during the period.|
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, 2014, our six largest suppliers accounted for approximately 50.1% of our total purchases. During the year ended December 31, 2013, our eight largest suppliers accounted for approximately 52.3% of our total purchases. During each of the years ended December 31, 2014 and 2013, respectively, we had two and one suppliers that accounted for 10% or more of our purchases:
|Supplier Name||Year ended|
|Brilliance Resources Company Limited||14.7||%||*|
|Koco Group Ltd||10.2||%||13.3||%|
|*||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.
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.
Under the Enterprise Income Tax Law, we may be classified as a “Resident Enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.
China passed the Enterprise Income Tax Law, or the EIT Law, and it is implementing rules, both of which became effective on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.
On April 22, 2009, the State Administration of Taxation of China, or the SAT, issued the Circular Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the SAT Notice 82, further interpreting the application of the EIT Law and its implementation to offshore entities controlled by a Chinese enterprise or enterprise group. Pursuant to the SAT Notice 82, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or enterprise group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate stamps, board and stockholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management often resident in China. After SAT Notice 82, the SAT issued a bulletin, known as SAT Bulletin 45, which took effect on September 1, 2011, to provide more guidance on the implementation of SAT Notice 82 and clarify the reporting and filing obligations of such “non-domestically incorporated resident enterprise.” SAT Bulletin 45 provides procedures and administrative details for the determination of resident status and administration on post-determination matters. 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 common stock, or the gain our non-PRC stockholders may realize from the transfer of our common stock, may be treated as PRC-sourced income and may therefore be subject to a 10% PRC withholding tax. The EIT Law and its implementing regulations are, however, relatively new and ambiguities exist with respect to the interpretation and identification of PRC-sourced income, and the application and assessment of withholding taxes. If we are required under the EIT Law and its implementing regulations to withhold PRC income tax on dividends payable to our non-PRC stockholders, or if non-PRC stockholders are required to pay PRC income tax on gains on the transfer of their shares of common stock, our business could be negatively impacted and the value of your investment may be materially reduced. Further, if we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both China and such countries in which we have taxable income, and our PRC tax may not be creditable against such other taxes.
We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption law.
In connection with this offering, we will become subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We are also subject to Chinese anti-corruption laws, which strictly prohibit the payment of bribes to government officials. We have operations, agreements with third parties, and make sales in China, which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees, consultants or distributors of our company, because these parties are not always subject to our control. We are in process of implementing an anticorruption program, which prohibits the offering or giving of anything of value to foreign officials, directly or indirectly, for the purpose of obtaining or retaining business. The anticorruption program also requires that clauses mandating compliance with our policy be included in all contracts with foreign sales agents, sales consultants and distributors and that they certify their compliance with our policy annually. It further requires that all hospitality involving promotion of sales to foreign governments and government-owned or controlled entities be in accordance with specified guidelines. In the meantime, we believe to date we have complied in all material respects with the provisions of the FCPA and Chinese anti-corruption 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.
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 these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
PRC regulation of parent/subsidiary loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make parent/subsidiary loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
In utilizing the proceeds of this offering in the manner described in “Use of Proceeds,” as an offshore holding company of our PRC operating subsidiaries, we may make additional capital contributions to our PRC subsidiaries, or we may make parent/subsidiary loans to our PRC subsidiaries.
We currently anticipate using a portion of the gross proceeds from this offering to increase the registered capital of Taizhou Fuling (after which time Taizhou Fuling may apply such funds to the purposes described in “Use of Proceeds”). The increase in registered capital will require prior approval from (i) MOFCOM to increase Taizhou Fuling’s registered capital, (ii) SAIC to alter Taizhou Fuling’s business certificate to reflect the increase in registered capital and (iii) SAFE to allow Taizhou Fuling’s bank to convert U.S. dollars into RMB in order to fund such increased registered capital, or each of the foregoing agencies’ respective local counterparts. This approval process typically takes 30 to 90 days, and sometimes longer, from the time MOFCOM or its local branches receive all the required application documents to begin the process. The remaining portion of such gross proceeds will be used to pay expenses related to this offering, for our U.S. operations and for other general corporate purposes. We plan to remit money to China using the capital contribution method. The approval from MOFCOM is the key approval in the capital contribution process, and we believe all other approvals are ministerial if MOFCOM approves such increase in registered capital. We have not yet initiated this process but intend to start the process immediately upon completion of the offering. We do not foresee any problem receiving necessary government approvals for a capital contribution; however, if our application is rejected, we would remit money to China through a parent/subsidiary loan instead. If we are unable to obtain these government approvals on a timely basis, we will not be able to use the proceeds of this offering and capitalize our PRC operations unless and until we are able to remit such funds to China, which could adversely affect our liquidity and our ability to fund and expand our business.
If we are unable to timely remit money to China using the capital contribution method, we would seek to remit money to China through a parent/subsidiary loan instead. Any parent/subsidiary loans to our PRC subsidiaries are subject to PRC regulations. For example, parent/subsidiary loans by us to our subsidiaries in China, which are foreign invested entities (“FIEs”), to finance their activities cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange, or SAFE. On August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-invested company of foreign currency into RMB by restricting how the converted RMB may be used. The notice requires that RMB converted from the foreign currency-denominated capital of a foreign-invested company may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless such investments are otherwise provided for in the business scope. The foreign currency-denominated capital shall be verified by an accounting firm before converting into RMB. In addition, SAFE strengthened its oversight over the flow and use of RMB funds converted from the foreign currency-denominated capital of a foreign-invested company. To convert such capital into RMB, the foreign-invested company must report the use of such RMB to the bank, and the RMB must be used to the reported purposes. According to Circular 142, change of the use of such RMB without approval is prohibited. In addition, such RMB may not be used to repay RMB loans if the proceeds of such loans have not yet been used. Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Rules.
On May 10, 2013, SAFE released Circular 21, which came into effect on May 13, 2013. According to Circular 21, SAFE has simplified the foreign exchange administration procedures with respect to the registration, account openings and conversions, settlements of FDI-related foreign exchange, as well as fund remittances.
Circular 142 and Circular 21 may significantly limit our ability to convert, transfer and use the net proceeds from this offering and any offering of additional equity securities in China, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. FGI receives revenues and purchases raw materials primarily in U.S. dollars but incurs other expenses primarily 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.
According to the SAFE’s Notice of the State Administration of Foreign Exchange on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct Investment, effective on December 17, 2012, and the Provisions for Administration of Foreign Exchange Relating to Inbound Direct Investment by Foreign Investors, effective May 13, 2013, if any of our PRC subsidiaries undergoes a voluntary or involuntary liquidation proceeding, prior approval from the SAFE for remittance of foreign exchange to our shareholders abroad is no longer required, but we still need to conduct a registration process with the SAFE local branch. It is not clear whether “registration” is a mere formality or involves the kind of substantive review process undertaken by SAFE and its relevant branches in the past.
PRC regulation of direct investments and parent/subsidiary loans by offshore holding companies to PRC entities may delay or limit us from using the proceeds of this Offering to make additional capital contributions or loans to our Company’s PRC subsidiaries.
Any capital contributions or parent/subsidiary loans that we, as an offshore entity, make to our Company’s PRC subsidiaries, including from the proceeds of this offering, are subject to PRC regulations. If we make loans to our Company’s PRC subsidiaries, those parent/subsidiary loans are registered and approved by the local SAFE branch, generally receive approval within 20 working days and cannot exceed the difference between the total investment amount approved by SAFE and the registered capital of each of our PRC subsidiaries. As loans, they would bear interest and need to be repaid in the future in accordance with their terms. As our company is a Cayman Islands company, repayment would also need government approval. In our case, we would be limited to making a parent/subsidiary loan of approximately $8.89 million, which is the difference between Taizhou Fuling’s total investment amount as approved by the foreign investment authorities (currently $20 million), and Taizhou Fuling’s registered capital (currently $11.11 million).
If we make capital contributions instead, the total amount of investment in each of our Company’s PRC subsidiaries must be approved by several agencies or their local counterparts. A capital contribution requires (i) MOFCOM approval to increase the registered capital of the entity receiving funding, (ii) SAIC approval to alter the business certificate to reflect such increased registered capital and (iii) SAFE approval to allow Taizhou Fuling’s bank to convert U.S. dollars into RMB in order to fund such increased registered capital, or each of the foregoing agencies’ respective local counterparts. The process of completing a capital contribution generally requires 30 to 90 working days from the initial filing with MOFCOM, rather than 20 working days for a parent/subsidiary loan. On the other hand, there is no limit to the amount we can fund through a capital contribution, and capital contributions do not require repayment or, as a result, payment of interest. For these reasons, although the process of receiving approval is more arduous, we prefer to (and plan to) fund Taizhou Fuling’s operations through a capital contribution rather than a parent/subsidiary loan.
We cannot assure you that we will be able to obtain these approvals in a timely manner or at all. If we fail to obtain such approvals or make such registration, our ability to make equity contributions or provide loans to our Company’s PRC subsidiaries or to fund their operations may be negatively affected, which may adversely affect their liquidity and ability to fund their working capital and expansion projects and meet their obligations and commitments.
Fluctuations in exchange rates could adversely affect our business and the value of our securities.
Changes in the value of the RMB against the U.S. dollar, Euro and other foreign currencies are affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of, and any dividends payable on our shares in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars we receive from our initial public offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of paying dividends on our 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, 2014 and 2013, we had a negative adjustment of $164,781 and a positive adjustment of $431,424, respectively, for foreign currency translations. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, this offering and our reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public companies that have substantially all of their operations in China, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in 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, our business and this offering. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend the Company. This situation may be a major distraction to our management. If such allegations are not proven to be groundless, our company and business operations will be severely hampered and your investment in our stock could be rendered worthless.
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to penalties and limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to distribute profits to us, or otherwise adversely affect us.
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.
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.
However, 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 residents or entities 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.
Risks Related to Our Corporate Structure and Operation
We will incur additional costs as a result of becoming a public company, which could negatively impact our net income and liquidity.
Upon completion of this offering, we will become a public company in the United States. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, 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 will increase our legal, accounting and financial compliance costs and will make many corporate activities more time-consuming and costly.
We do not expect to incur materially greater costs as a result of becoming a public company than those incurred by similarly sized U.S. public companies. If we fail to comply with these rules and regulations, we could become the subject of a governmental enforcement action, investors may lose confidence in us and the market price of our Ordinary Shares could decline.
Entities controlled by our employees, officers and/or directors will control a majority of our Ordinary Shares, decreasing your influence on shareholder decisions.
Upon completion of this offering, entities controlled by our employees, officers and/or directors will, in the aggregate, continue to own a majority of our outstanding shares. As a result, our employees, officers and directors will possess substantial ability to impact our management and affairs and the outcome of matters submitted to shareholders for approval. These shareholders, acting individually or as a group, could exert control and substantial influence over matters such as electing directors and approving mergers or other business combination transactions. This concentration of ownership and voting power may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our Ordinary Shares. These actions may be taken even if they are opposed by our other shareholders, including those who purchase shares in this offering. See “Principal Shareholders.”
The obligation to disclose information publicly may put us at a disadvantage to competitors that are private companies.
Upon completion of this offering, we will be a publicly listed company in the United States. As a publicly listed company, we will be required to file periodic reports with the Securities and Exchange Commission upon the occurrence of matters that are material to our company and shareholders. In some cases, we will need to disclose material agreements or results of financial operations that we would not be required to disclose if we were a private company. Our competitors may have access to this information, which would otherwise be confidential. This may give them advantages in competing with our company. Similarly, as a U.S.-listed public company, we will be governed by U.S. laws that our 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.
We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects.
We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.
As a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.
Our directors’ and executive officers’ other business activities may pose conflicts of interest.
Our directors and executive officers have other business interests outside the company that could potentially give rise to conflicts of interest. For example, our Chief Operating Officer and Chair, Guilan Jiang and her husband and our Chief Executive Officer, Xinfu Hu, own Zhejiang Special Plastics Technology Co., Ltd. (“Special Plastics”) and Wenling Fulin Plastic Products Co. Ltd., respectively. While both companies are engaged in the plastics industry and, as a result, may have competitive overlap with our company, we do not believe they currently compete with our company. Special Plastics is engaged in testing and inspection, and Wenling Fulin Plastic Products Co. Ltd. is a holding company with no investment in any competing business. Notwithstanding the foregoing, if either company were to begin to operate within our industry, we might find a conflict of interest.
Although their business working time at these companies is flexible, Ms. Jiang has historically devoted very limited time to matters concerning Special Plastics and Wenling Fulin Plastic Products Co. Ltd., respectively, and most of her time to matters for FGI. Mr. Hu has historically devoted very limited time to matters concerning Special Plastics and Wenling Fulin Plastic Products Co. Ltd., respectively, and most of his time to matters for FGI. If Ms. Jiang and Mr. Hu devote any significant time and effort to these other companies in the future, such business activities could both distract them from focusing on FGI and pose a conflict of interest to the extent their activities at Special Plastics and 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 natural disaster, 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. If we were to incur substantial losses or liabilities due to fire, explosions, floods, other natural disasters or accidents or business interruption, our results of operations could be materially and adversely affected.
Risks Related to Our Initial Public Offering and Ownership of Our Ordinary Shares
Investors risk loss of use of funds subscribed, with no right of return, during the offering period.
We cannot assure you that all or any shares will be sold. Our placement agent is offering our shares on a best efforts all-or-none basis. We have no firm commitment from anyone to purchase all or any of the shares offered. If subscriptions for shares are not received on or before close of business on , 2015, escrow provisions require that all funds received be promptly refunded. If refunded, investors will receive no interest on their funds. During the offering period, investors will not have any use or right to return of the funds.
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 stock price may be more volatile.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail our company of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Ordinary Shares may decline.
As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, beginning with our 2015 annual report on Form 20-F to be filed in 2016, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We are in the process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly, and complicated. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 20-F following the date on which we are no longer an “emerging growth company,” which may be up to five full years following the date of this offering. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our 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 will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the securities exchange on which we list, and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results.
As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation and results of operations.
We also expect that being a public company and these rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.
The market price of our 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 initial public offering price.
The initial public offering price for our Ordinary Shares will be determined through negotiations between the placement agent and us and may vary from the market price of our Ordinary Shares following our initial public offering. If you purchase our Ordinary Shares in our initial public offering, you may not be able to resell those shares at or above the initial public offering price. We cannot assure you that the initial public offering price of our Ordinary Shares, or the market price following our initial public offering, will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time prior to our initial public offering. The market price of our 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 (i) we raise more money than required for the purposes explained in the section titled “Use of Proceeds” or (ii) we determine that the proposed uses set forth in that section are no longer in the best interests of our Company, we cannot specify with any certainty the particular uses of such net proceeds that we will receive from our initial public offering. Our management will have broad discretion in the application of such net proceeds, including working capital, possible acquisitions, and other general corporate purposes, and we may not spend or invest these proceeds in a way with which our stockholders agree. The failure by our management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds from our initial public offering in a manner that does not produce income or that loses value.
We do not intend to pay dividends for the foreseeable future.
We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our Ordinary Shares if the market price of our Ordinary Shares increases.
There may not be an active, liquid trading market for our Ordinary Shares.
Prior to this offering, there has been no public market for our Ordinary Shares. An active trading market for our Ordinary Shares may not develop or be sustained following this offering. You may not be able to sell your shares at the market price, if at all, if trading in our shares is not active. The initial public offering price was determined by negotiations between us and the placement agent based upon a number of factors which are descried in the “Placement” section. The initial public offering price may not be indicative of prices that will prevail in the trading market.
We will incur increased costs as a result of being a public company.
As a public company, we will incur legal, accounting and other expenses that we did not incur as a private company. For example, we must now engage U.S. securities law counsel and U.S. auditors that we did not require prior to this offering, and we will have annual payments for listing on a stock exchange if we are so listed. In addition, the Sarbanes-Oxley Act, as well as new rules subsequently implemented by the SEC and NASDAQ, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements. While it is impossible to determine the amounts of such expenses in advance, we expect that we will incur expenses of between $500,000 and $1 million per year that we did not experience prior to commencement of this offering.
Shares eligible for future sale may adversely affect the market price of our Ordinary Shares, as the future sale of a substantial amount of outstanding Ordinary Shares in the public marketplace could reduce the price of our Ordinary Shares.
The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our Ordinary Shares. An aggregate of 11,666,667 shares will be outstanding before the consummation of this offering and shares will be outstanding immediately after this offering. All of the shares sold in the offering will be freely transferable without restriction or further registration under the Securities Act. The remaining shares will be “restricted securities” as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act. See “Shares Eligible for Future Sale.”
You will experience immediate and substantial dilution.
The initial public offering price of our shares is substantially higher than the pro forma net tangible book value per share of our Ordinary Shares. Upon the completion of this offering, if you purchase shares in this offering, you will incur immediate dilution of approximately $ or approximately % in the pro forma net tangible book value per share from the price per share that you pay for the shares. Accordingly, if you purchase shares in this offering, you will incur immediate and substantial dilution of your investment. See “Dilution.”
U.S. tax authorities could treat us as a “passive foreign investment company,” which could have adverse U.S. federal income tax consequences to U.S. shareholders.
A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be treated as a “passive foreign investment company,” or a PFIC, for any taxable year for which either (i) at least 75% of its gross income consists of certain types of “passive income” or (ii) at least 50% of the average value of the corporation’s assets produce, or are held for the production of, those types of passive income. For purposes of these tests, passive income includes rents and royalties (other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business) and does not include income derived from the performance of services.
If we are treated as a PFIC, U.S. Holders would ordinarily be able to mitigate certain of the negative tax consequences if they are able to make: (i) a timely qualified electing fund (“QEF”) election; (ii) a protective QEF election; or (iii) a mark to market election with respect to the first taxable year in which we are considered a PFIC during the U.S. Holder’s holding period in its shares.
We are not committing to provide our U.S. Holders with the information required for making a QEF election or protective QEF election. If we fail to provide such information, a QEF election with respect to such entity generally will not be available. In such event, the rules described in the next paragraph generally will apply.
If we are treated as a PFIC, a U.S. Holder that does not make a QEF election generally will be subject to a special tax and an interest charge upon the sale of its shares or receipt of an “excess distribution” with respect to its shares. A U.S. Holder will be treated as receiving an “excess distribution” if the amount of the distributions received by the U.S. Holder in any taxable year is more than 125% of the average annual distributions paid by the Company with respect to its shares during the three preceding taxable years (or the period in which the U.S. Holder held such shares if shorter).
In addition, a portion of any gain recognized by a U.S. Holder upon the sale of our shares may be recharacterized as ordinary income. Further, any dividends received from the Company, if the Company is treated as a PFIC, will not constitute qualified dividend income and will not be eligible for the reduced 20% rate of tax even if such rate would be available otherwise. If a U.S. Holder holds our shares during any taxable year in which we are treated as PFICs, such shares will generally be treated as stock in a PFIC for all subsequent years.
We are subject to liability risks stemming from our foreign status, which could make it more difficult for investors to sue or enforce judgments against our company.
Our operations and assets are located in the PRC. In addition, most of our executive officers and directors are non-residents of the U.S., and 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 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 memorandum and articles of association, then the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the wrongdoers control the company; (3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders under the laws of many states in the United States.
|Special Note Regarding Forward-Looking Statements|
This prospectus contains forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of these forward-looking statements after the date of this prospectus or to conform these statements to actual results or revised expectations.
|Letter from Chief Executive Officer– Mr. Xinfu Hu|
As you read this prospectus, you might be considering investing in Fuling and participating in our future development. I hope, through this letter, to give you a better understanding of our vision and values to help you with your investing decision.
Our Mission and Vision
You may not know the name Fuling, but you probably have used our products. With more than 20 years of hard work delivering top quality products to our customers, Fuling has become an important player in the U.S. disposable serviceware market. We supply serviceware to four of America’s five largest fast food restaurants and more than one hundred other customers, and we expect to continue to broaden our customer base.
Fuling’s vision is to be an international leader in the production of disposable cutlery, straws and other serviceware. We believe that we can continue to produce serviceware of the highest quality without compromising on our dedication to innovation and the environment. We focus on research and development, craftsmanship, manufacturing technology, environmental protection and quality management to ensure that we can provide excellent products reliably and at fair prices. Anything Fuling produces–even something as small as a straw–is imprinted with our culture and values.
Our Guiding Principles
We believe our customers, employees and shareholders are all crucial for our success. Our guiding principle is very simple: if we support our customers and employees, our customers and employees will support our shareholders in return.
We believe that creating lasting value for our customers will bring our shareholders lasting returns. Our dedicated, conscientious employees are the most important factor in customer satisfaction. Without a happy and diligent employee team, we won’t have happy customers; without happy and satisfied customers, we won’t have satisfied shareholders. We believe our employees’ satisfaction and dedication to our mission has been a large reason we have enjoyed continuous growth.
We hope you as investors will not only be rewarded financially, but also share a sense of accomplishment in our contributions to society, both in China and the United States. By investing in us, you help us increase job opportunities, encourage innovation, promote environmental protection, and push economic transformation and improvement.
Our Business Model
The United States is our main market. Our customer base includes major fast-food chains, other leading disposable serviceware companies, retail stores, and small- and medium-sized customers, including distributors.
Years of continuous effort have yielded a sound and efficient business platform in the U.S. We set up three sales companies in the U.S. to specifically service different groups of customers. These sales companies are Fuling Plastic USA Inc., Direct Link USA, LLC and Domo Industry Inc.
In addition, we have distribution centers in New York, Pennsylvania, California, Vancouver and Toronto. We plan to add two more such centers in Chicago and Dallas so that our products will be easily accessible in the entire North American market.
Our business model, simply put, is to produce high quality products, primarily in China, and to sell them in the United States and around the world. In the coming years, this model will not change fundamentally because the costs of manpower, raw materials and operations in China are lower than those in the United States.
However, we are never static. We have taken a firm step in the diversification of production and operation, and have built a factory in the United States.
This is a decision made by our management team after careful consideration. We produce knives, forks, drinking cups, straws, and other disposable serviceware available to the U.S. market, but the transportation costs of these products are different. For example, the transportation costs for cups and straws are more expensive than for other serviceware, due to physical attributes. Therefore, instead of spending more money and resources on shipping, it is more economic to build factories producing these products in the U.S. By reducing transportation costs and raising the level of factory automation, higher salaries and raw material costs in the U.S. can be offset.
In 2014, we established our first factory outside of China, in Allenton, Pennsylvania. This transformative initiative is not an easy step, because it requires the factory to adapt to the local American culture while it has to remain consistent with our three factories in China. In addition, we have been exacting in our demands that the factory be a model of sustainable development and environmental protection.
However, this step will be very beneficial to us, because it systematically integrates the resources from the world’s two leading countries: the U.S. and China. For low-volume, multi-variety, multi-specification orders, we will continue to produce them at our factories in China. For orders of large quantities and single specification, we will be able to produce them with the highly-automated equipment in our U.S. factory.
We plan to invest around one-third of the funds raised in this IPO in the equipment in our U.S. factory and to further develop our U.S. sales network.
We are optimistic about the future of our Allentown factory, and we think this model will be mutually beneficial for both Fuling and our U.S. customers.
Our Approach to Challenges
Our integrity has seen us through numerous challenges over the course of our growth as a company. From the time my spouse, Guilan Jiang, founded Fuling with her sister-in-law Sujuan Zhu, myself and a few close friends after being laid off from another job, Fuling has been successful by addressing challenges directly. We transformed our company from a small producer of plastic furniture, baskets and other plastic products into an initially-small disposable serviceware producer because Ms. Jiang found an opportunity at a chance meeting at a trade fair to supply plastic utensils to a global QSR.
Once we had that opportunity, our team rallied around the mission of providing excellent quality products to ensure that the customer was thrilled with the results. There are no shortcuts to satisfying and impressing customers, only hard work done with integrity. These efforts have, over time, resulted in our company being one of the leaders of our industry in China. Although we are in the leading position in China, compared with the international leading enterprises, we are still in the stage of growing our strength and power.
In any business, innovation often squares off against other competing forces. Besides competitive pressures, financial, exchange rate and many other uncertain factors can also lead to new development crises. We are aware that becoming a public company will bring us more challenges, because of the collision of different cultures, values and laws, and even geopolitical factors. And we will encounter challenges along the way that we do not currently anticipate. However, our many years of dealing at the highest levels with our exacting, multinational clients, with successful results, has prepared us for these future challenges.
We want you to know that we will maintain our culture of addressing challenges directly and our mission of providing environmentally-friendly products. We will continue to focus on R&D of environmentally-friendly raw materials, and achieving zero pollution emissions in the production process. We will defend Fuling’s and its shareholders’ long-term value and interests. Your trust and support will be our greatest asset.
Thank you all once again for considering participating in the development of our business.
CEO, Fuling Global Inc.
|Use of Proceeds|
After deducting the estimated placement fee and offering expenses payable by us, we expect to receive net proceeds of approximately $27 million from this offering. We intend to use the net proceeds of this offering as follows (as to such uses in China, after we complete the remittance process described below), and we have listed the specific uses of proceeds below.
|Description of Use||Amount ($ million)||Percentage of|
|Development of U.S. sales network||5.7||21.11||%|
|Development of Allentown factory||3.3||12.22||%|
|Purchase of land for new factory in Wenling||8.0||29.63||%|
|Construction costs for Wenling Factory – Phase I||5.0||18.52||%|
|Purchase of Equipment and Machinery – Phase I||4.0||14.82||%|
|Research and Development – Process Automation||1.0||3.70||%|
Approximately two-thirds of the net proceeds from this offering will be remitted to China before we are able to use such funds to grow our business. We are permitted under PRC laws and regulations to provide funding to Taizhou Fuling, through capital contributions or parent/subsidiary loans, subject to approvals from or registrations with relevant PRC government authorities. We plan to use the capital contribution to fund Taizhou Fuling. We expect that a properly submitted application will be approved in the ordinary course of business; however, we cannot guarantee such an approval will occur or be timely. If our application for a capital contribution is denied, we will use the parent/subsidiary loan method of funding Taizhou Fuling.
As mentioned, we currently anticipate financing our subsidiaries by means of capital contributions. We currently anticipate using a portion of the gross proceeds from this offering to increase the registered capital of Taizhou Fuling (after which time Taizhou Fuling may apply such funds to building a new facility in Wenling and research and development). The increase in registered capital will require prior approval from (i) MOFCOM to increase Taizhou Fuling’s registered capital, (ii) SAIC to alter Taizhou Fuling’s business certificate to reflect the increase in registered capital and (iii) SAFE to allow Taizhou Fuling’s bank to convert U.S. dollars into RMB in order to fund such increased registered capital, or each of the foregoing agencies’ respective local counterparts. This approval process typically takes 30 to 90 days in total, and sometimes longer, from the time MOFCOM or its local branches receive all the required application documents to begin the process.
We plan to remit money to China using the capital contribution method. The approval from MOFCOM is the key approval in the capital contribution process, and we believe all other approvals are ministerial if MOFCOM approves such increase in registered capital. We have not yet initiated this process but intend to start the process immediately upon completion of the offering. We do not foresee any problem receiving necessary government approvals for a capital contribution; however, if our application is rejected, we would remit money to China through a parent/subsidiary loan instead. If we were to provide funding to Taizhou Fuling through parent/subsidiary loans (rather than the capital contribution method), the total amount of such parent/subsidiary loans may not exceed $8.89 million, which is the difference between Taizhou Fuling’s total investment amount as approved by the foreign investment authorities (currently $20 million), and Taizhou Fuling’s registered capital (currently $11.11 million). To the extent we are unable to receive all of the proceeds of this offering through a parent/subsidiary loan, we would anticipate using such excess in our U.S. operations. By contrast, if we fund Taizhou Fuling through a capital contribution, the amount of our contribution is subject to increasing our registered capital, as described above, and applying to change the approved investment amount is not required. Such parent/subsidiary loans must also be registered with the SAFE, which registration usually takes no more than 20 working days after application to complete. The cost for obtaining such approvals and completing such registration is minimal.
We cannot assure you that we will be able to complete these government registrations or obtain the relevant approvals on a timely basis, if at all. The procedure to remit funds may take several months after completion of this offering, and we will be unable to use the funds in China until remittance is completed. We have not yet initiated the process of remitting money to China using either method but will begin to do so promptly upon completion of this offering. See “Risk Factors — Risks Related to Doing Business in the PRC — PRC regulation of parent/subsidiary loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make parent/subsidiary loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”
Pending use of the net proceeds, we intend to invest our net proceeds in short-term, interest bearing, investment-grade obligations. These investments may have a material adverse effect on the U.S. federal income tax consequences of an investment in our Ordinary Shares. It is possible that we may become a passive foreign investment company for U.S. federal income taxpayers, which could result in negative tax consequences to you. These consequences are discussed in more detail in “Material Tax Matters Applicable to U.S. Holders of Our Ordinary Shares.”
The foregoing represents our current intentions with respect of the use and allocation of the net proceeds of this offering based upon our present plans and business conditions, but our management will have significant flexibility and discretion in applying the net proceeds of this offering. The occurrence of unforeseen events or changed business conditions may result in application of the proceeds of this offering in a manner other than as described in this prospectus.
Other than dividends of (i) $9,000 declared in 2004 and reinvested in the company as additional paid in capital, (ii) $900,000 declared in 2007 and reinvested in the company as additional paid in capital and (iii) $10,274,848 declared in 2014, of which $7,530,000 was reinvested in the company as additional paid in capital, we have never declared or paid any cash dividends on our Ordinary Shares. (Most of the portion of the 2014 dividend that was not reinvested consisted of taxes associated with restructuring the Company.) We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the Board of Directors may deem relevant.
Under Cayman Islands law, we may only pay dividends from surplus (the excess, if any, at the time of the determination of the total assets of our company over the sum of our liabilities, as shown in our books of account, plus our capital), and we must be solvent before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value of assets of our company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books of account, and our capital.
If we determine to pay dividends on any of our Ordinary Shares in the future, as a holding company, we will be dependent on receipt of funds from our subsidiary, Total Faith. Current PRC regulations permit our PRC subsidiary to pay dividends to Total Faith only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation.
In addition, pursuant to the EIT Law and its implementation rules, dividends generated after January 1, 2008 and distributed to us by our PRC subsidiaries are subject to withholding tax at a rate of 10% unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.
Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from operations in China may be used to pay dividends to our company. Taizhou Fuling may go to a licensed bank to remit its after-tax profits out of China. Nevertheless, the bank will require Taizhou Fuling to produce the following documents for verification before it may transfer the dividends to an overseas bank account of Taizhou Fuling’s parent company: (1) tax payment statement and tax return; (2) auditor’s report issued by a Chinese certified public accounting firm confirming the availability of profits and dividends for distribution in the current year; (3) the Board minutes authorizing the distribution of dividends to its shareholders; (4) the foreign exchange registration certificate issued by SAFE; (5) the capital verification report issued by a Chinese certified public accounting firm; (6) if the declared dividends will be distributed out of accumulated profits earned in prior years, Taizhou Fuling must appoint a Chinese certified public accounting firm to issue an auditors’ report to the bank to certify Taizhou Fuling’s financial position during the years from which the profits arose; and (7) other information as required by SAFE.
|Exchange Rate Information|
Our financial information is presented in U.S. dollars. Our functional currency is Renminbi (“RMB”), the currency of the PRC. Transactions denominated in currencies other than RMB are translated into RMB at the exchange rate quoted by the People’s Bank of China at the dates of the transactions. Exchange gains and losses resulting from transactions denominated in a currency other than the RMB are included in statements of operations as foreign currency transaction gains or losses. Our financial statements have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 52, “Foreign Currency Translation”, which was subsequently codified within ASC 830, “Foreign Currency Matters”. The financial information is first prepared in RMB and then is translated into U.S. dollars at period-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) in shareholders’ equity. The relevant exchange rates are listed below:
|December 31, 2014||December 31, 2013|
|US$1:RMB exchange rate||Period End||$||6.1460||Period End||$||6.1140|
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
Over the past several years, the RMB has moved from a period of being tightly linked to the U.S. dollar, to a period of revaluation and strengthening against the dollar and into a second period of current relative stability. Our primary sales outside China occur in Japan, the United States, South Korea, the Middle East and Europe, but all such sales outside China are made in U.S. dollars. Following is a chart showing recent changes in the exchange rates between the RMB and U.S. dollars.
Strength of U.S. Dollar against Renminbi
The following table sets forth our capitalization as of February 28, 2015 on an actual and a pro forma as adjusted basis giving effect to the completion of the offering at an assumed public offering price of $ per share and to reflect the application of the proceeds after deducting the estimated placement fees. You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Share Capital.”
Pre- and Post-Offering Capitalization
As of February 28, 2015
|Ordinary Shares $0.001 par value per share, 70,000,000 shares authorized, 11,666,667 shares issued and outstanding; pro forma reflects shares issued and outstanding||11,667|
|Additional paid-in capital(2)||11,108,133|
|Accumulated other comprehensive gain||1,093,263|
|Total shareholders’ equity||17,861,876|
Gives effect to completion of the offering, at an assumed public offering price of $ per share and to reflect the application of the proceeds after deducting the estimated placement fee and our estimated offering expenses. (See note 2 below.)
Pro forma additional paid in capital reflects the net proceeds we expect to receive, after deducting placement fee, placement agent expense allowance and other expenses. We expect to receive net proceeds of approximately $ ($ offering, less placement fee of $ , non-accountable expense allowance of $ and offering expenses of approximately $ ).
If you invest in our Ordinary Shares, your interest will be diluted to the extent of the difference between the initial public offering price per Ordinary Share and the pro forma net tangible book value per Ordinary Share after the offering. Dilution results from the fact that the per Ordinary Share offering price is substantially in excess of the book value per Ordinary Share attributable to the existing shareholders for our presently outstanding Ordinary Shares. Our net tangible book value attributable to shareholders at , 2015 was $ , or approximately $ per Ordinary Share outstanding as of , 2015. Net tangible book value per Ordinary Share represents the amount of total assets less intangible assets and total liabilities, divided by the number of Ordinary Shares outstanding.
Upon completion of this offering, we will have Ordinary Shares outstanding. Our post offering pro forma net tangible book value, which gives effect to receipt of the net proceeds from the offering and issuance of additional shares in the offering, but does not take into consideration any other changes in our net tangible book value after , 2015, will be approximately $ or $ per Ordinary Share. This would result in dilution to investors in this offering of approximately $ per Ordinary Share or approximately % from the assumed offering price of $ per Ordinary Share. Net tangible book value per Ordinary Share would increase to the benefit of present shareholders by $ per share attributable to the purchase of the Ordinary Shares by investors in this offering.
The following table sets forth the estimated net tangible book value per Ordinary Share after the offering and the dilution to persons purchasing Ordinary Shares based on the foregoing offering assumptions.
|Assumed offering price per Ordinary Share||$|
|Net tangible book value per Ordinary Share before the offering||$|
|Increase per Ordinary Share attributable to payments by new investors||$|
|Pro forma net tangible book value per Ordinary Share after the offering||$|
|Dilution per Ordinary Share to new investors||$|
|(1)||Assumes gross proceeds from offering of Ordinary Shares.|
A US$1.00 increase (decrease) in the assumed public offering price of $ per share (the midpoint of the estimated initial public offering price range shown on the cover page of this prospectus) would increase (decrease) our pro forma net tangible book value after giving effect to the offering by $ million, the pro forma net tangible book value per ordinary share and per share by $ per ordinary share and the dilution in pro forma net tangible book value per ordinary share to new investors in this offering by $ per ordinary share, assuming no change to the number of shares offered by us as set forth on the cover page of this prospectus, and after deducting the estimated placement fee and commissions and estimated offering expenses payable by us.
The following chart illustrates our pro forma proportionate ownership, upon completion of the offering, by present shareholders and investors in this offering, compared to the relative amounts paid by each. The charts reflect payment by present shareholders as of the date the consideration was received and by investors in this offering at the offering price without deduction of commissions or expenses. The charts further assume no changes in net tangible book value other than those resulting from the offering.
|Shares Purchased||Total Consideration||Average
|Management’s Discussion and Analysis of Financial Condition and Results of Operations|
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”
Overview of Company
We are a specialized 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 plastics products. Our largest customer base is in the United States. Our production facilities are state-of-the-art factories in Wenling and Songmen, Zhejiang Province, China, and we have obtained ISO9001 quality management system, ISO14001 environmental management system, HACCP, FDA 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.
Our primary raw materials in production of our products are PP materials, PS materials and styrene polymers, 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, freight costs, 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 54% of our revenue in 2014 and we believe it will continue to be a key area for growth in the coming years. Drinking straws, cups and plates and other plastics products accounted for 16%, 27% and 3% of the total sales respectively in 2014.
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 is the Company’s first production factory established in the U.S. and will principally engage 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.
As of December 2014, our products are sold in over 21 countries and our customers include four of the five largest fast food chain restaurants in the United States.
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 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. However, any future changes in the government’s policy upon plastic related production industry 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 price of crude oil may impact of our profitability
The price of our products’ main raw material is closely associated with that of crude oil. Fluctuating oil price impacts 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 future, oil price fluctuation will impact our profitability.
Fast food industry is expected to grow in a slow-growth environment
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, fast food industry revenue is expected to grow at an annualized rate of 2.0% over the five years to 2019 to $219.3 billion in the U.S.
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 fluctuation may significantly impact our business and profitability
We sell a majority of our products in the United States. 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 appreciated against the U.S. dollar, our advantage in price competitiveness might be impacted. While we plan to move some of our manufacturing to the United States, we anticipate continuing to produce the majority of our products in China. To the extent the Chinese RMB continues to appreciate, our products could become more expensive and, as a result, less attractive to potential customers in other countries.
We have noted the existence of the following trends since the beginning of 2015, all of which are likely to affect our business to the extent they continue in the future:
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. That is, companies that provide eco-friendly products can charge higher prices and thus achieve higher profit margins.
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. With competition being mostly price-based, market players need to improve technology and manufacturing processes to save cost. In addition, the environmental trend will encourage market players around the world to invest more in research and development.
Proximity to key markets is a major success factor
The nature of some of our products (straws, cups and plates, specifically) necessitates operations to be fairly localized, as shipping costs tends to be significant for these products. It makes economic sense to manufacture those products at a location close to markets. In addition to reduced transportation costs and delivery time, this is also helpful for customer satisfaction since we can respond to customer needs more quickly.
In 2014, we commenced construction of a manufacturing facility in Allentown, Pennsylvania, which will provide us a platform to manufacture drinking straws in the United States.
Results of Operations
Years Ended December 31, 2014 and 2013
The following table summarizes the results of our operations during the fiscal years ended December 31, 2014 and 2013, 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)
|As % |
|As % |
|Cost of goods sold||54,503||66||%||48,303||69||%||6,200||13||%|
|Total operating expenses||19,029||23||%||16,389||24||%||2,640||16||%|
|Income from operations||9,649||12||%||4,844||7||%||4,805||99||%|
|Other income (expenses)|
|Interest income (expense)||(1,157||)||-1||%||(647||)||-1||%||(510||)||79||%|
|Loss of debt guarantee for a third party||-||0||%||(1,029||)||-1||%||1,029||100||%|
|Other income (expense)||8||0||%||17||0||%||(9||)||53||%|
|Total other income (expenses)||(552||)||-1||%||(807||)||-1||%||255||-32||%|
|Income before income taxes||9,097||11||%||4,037||6||%||5,060||125||%|
|Provision for income taxes||(1,369||)||-2||%||(587||)||-1||%||(782||)||133||%|
Revenues. Revenues increased by approximately $13.6 million, or 20%, to approximately $83 million in 2014 from approximately $69.5 million in 2013. The increase in net sales was driven by higher amount of products sold, and selling prices. With strong market demand for our products, we were able to raise selling prices to offset raw material and freight cost increases.
Revenue by Product Type
|$ in ‘000||% of sales||$ in ‘000||% of sales||$ +/-||% +/-|
|Cups and plates||22,699||27||%||18,818||27||%||3,881||21||%|
Revenue from cutlery increased by $6.4 million, or 16%, from $38.8 million to $45.2 million in 2014. Sales from products made with nano-modified polypropylene material with our patented technology, increased by $3.4 million. The sales increase of cutlery was driven by the increased average selling price and higher amount of products sold. We raised average selling prices for this product category from $2.16 to $2.31 per kilogram. In addition, we sold 0.82 million kilograms more compared to last year for this product category.
Sales of cutlery made from traditional polypropylene material and polystyrene materials increased by $2.63 million or 16% from 2013. This increase was driven by the increase of average selling prices from $3.32 to $3.69 per kilogram.
Sales of cutlery made from cornstarch biodegradable material increased by $370,000. We expect that our sales from this type of product will continue to grow due to increasing environmental concerns about plastic products.
Sales for straws increased by $3.5 million in 2014 compared with sales in 2013. Our price is very competitive in the U. S market and our products have been receiving substantial interest from customers. The sales increase was driven by the increased average selling price from $3.7 to $4.6 per kilogram and higher amounts of products sold.
Cups and plates
Sales for cups and plates increased by $3.8 million in 2014 compared with sales in 2013. The sales increase was driven by the higher amount of products sold. The quantity sold increased by 12.3% or 624,800 kilograms and the average selling price increased from $3.7 to $4.0 per kilogram.
Other products include products for family use, party and other entertainment purposes. Sales from these types of products decreased slightly by $117,000 in 2014 compared with sales in 2013. The sales increase was mainly due to the discontinuance of certain products.We discontinued certain products including fruit baskets and pepper sauce bottles in 2014. The sales of these products accounted for less than 1% of sales in 2013 and the discontinuation of these products will not have significant impact on our business.
Revenue by Geographic Area (in Thousands) *
|Central and South America||$||760||0.92||%||$||685||0.99||%||$||75||10.95||%|
|Hong Kong and Mainland China||$||122||0.15||%||$||102||0.14||%||$||20||19.61||%|
* 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.
There was significant increase in the sales from the United States market. In 2014, sales from two major new customers, which are large fast food chain store and food packaging distributors in the U.S., contributed $11.6 million. With a new manufacturing facility being built in the U.S, we expect our sales in the U.S market will continue to grow due to the lower cost and localized service to be provided to our customers.
The slight increase for sales from other regions was primarily due to the growing demand and expansion of business.
Cost of goods sold. Our cost of goods sold increased by approximately $6.2 million or 13% to approximately $54.5 million in 2014 from approximately $48.3 million in 2013, which is consistent with sales growth in 2014. As a percentage of revenues, the cost of goods sold decreased by approximately 3% to 66% in 2014 from 69% in 2013. The decrease in cost of goods sold as a percentage of revenues was primarily due to higher selling prices, economies of scale in general, and improved production efficiency, particularly for our cups and plates products.
Gross profit. Our gross profit increased by approximately $7.4 million, or 35% to approximately $28.7 million in 2014 from approximately $21.22 million in 2013. Gross profit margin was 34% in 2014, as compared with 31% in 2013. The increase of 3% was primarily attributable to higher selling prices and economies of scale in general, and improved production efficiency for our cups and plates products.
Our cost and gross margin by product types are as follows:
|Cost $||GP%||Cost $||GP%||Cost $+/-||GP% +/-|
|Cups and plates||11,751||48||%||11,799||37||%||(47||)||11||%|
Cost of revenue for cutlery products increased by approximately $4.27 million to approximately $30.7 million in 2014 compared to $26.4 million in 2013. Gross profit margin was 32% in both years. Cutlery represented the largest portion of sales.
Cost of revenue for cutlery products increased by approximately $4.27 million to approximately $30.7 million in 2014 compared to $26.4 million in 2013. Gross profit margin was 32% in both years. Cutlery represented the largest portion of sales.
Cost of revenue for straws was approximately $9.3 million in 2014 compared to approximately $7.1 million in 2013. The gross profit was approximately 29% in 2014 compared to 25% in 2013. The increase in gross profit in 2014 was primarily attributable to higher selling prices and the economies of scale as unit production costs became lower with higher levels of production.
Cost of revenue for cups and plates was around $11.8 million in both 2014 and 2013. Gross profit was 48% in 2014 compared to 37% in 2013. We started to use new automated equipment and machinery for cups and plates manufacturing, which helped to improve efficiency and lower costs.
Taxes included in costs represent the VAT tax 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 $1.6 million to approximately $12.7 million in 2014 compared to approximately $11.1 million in 2013. As a percentage of sales, our selling expenses were 15% of revenues in 2014 and 2013. The increase in selling expenses is consistent with the increase of revenues and was primarily attributable to an increase of approximately $1.7 million in ocean freight charges.
General and administrative expenses. Our general and administrative expenses increased by approximately $668,000 or 21%, to approximately $3.9 million in 2014 from approximately $3.2 million in 2013. As a percentage of revenues, general and administrative expenses were 5% of sales in both 2014 and 2013. The increase was primarily attributable to the following factors:
(a) an increase in expenses related to preparation for the public listing and IPO of approximately $364,000 in 2014; and
(b) an increase in depreciation expense of $240,000 due to increased purchases of office equipment.
Research and development expenses. Our research and development expenses increased approximately $355,000 to approximately $2.5 million in 2014 compared with approximately $2.1 million in 2013, as we continued to conduct research and development activities, especially seeking to increase the use of environmentally-friendly materials, develop degradable and biodegradable materials and reduce reliance on fossil-based raw materials.
Interest expense. Our interest expense increased by approximately $510,000, or 79% to approximately $1.2 million in 2014, from approximately $647,000 in 2013. The interest rates for our average outstanding loan in 2014 and 2013 were 6.0% and 4.0%, respectively. The average interest rate in 2013 was lower, because we were able to obtain a significant amount of loans at lower interest rates, ranging from 2.6% to 3.5% from certain banks in China.
Subsidy income. Our government subsidy income was approximately $597,000 in 2014 compared to approximately $853,000 in 2013. Our government subsidy income was all granted by local governments in recognizing our achievements in various areas. All subsidies we received in 2014 and 2013 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 $8,000 and $1 million in 2014 and 2013, respectively. In 2013, the Company guaranteed a bank loan for an unrelated third party, which subsequently went bankrupt later in 2013. To fulfill our obligation under the guarantee contract, the Company paid 6.4 million RMB (equivalent to $1.1 million) to the bank from which the loan was originated. The Company has no other outstanding third party loan guarantees. The Company has no intention to enter any third party guarantee arrangement in the future, before or when it becomes a public company.
Income before income taxes. Our income before income taxes was approximately $9.1 million in 2014, an increase of approximately $5.1 million compared with approximately $4.0 million in 2013. The increase was primarily attributable to increased sales and gross margin, as well as decreased other expense as discussed above.
Provision for income taxes. Our provision for income taxes was approximately $1.4 million in 2014, an increase of approximately $782,000 or 133% from approximately $587,000 in 2013. The increase was consistent with the increase of income before taxes while our effective income tax rate stayed unchanged at 15% from 2013 to 2014.
Liquidity and Capital Resources
We are a holding company incorporated in the Cayman Islands. We may need dividends and other distributions on equity from our PRC subsidiaries to satisfy our liquidity requirements. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiaries are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of their respective registered capital. Our PRC subsidiaries may also allocate a portion of its after-tax profits based on PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves are not distributable as cash dividends. 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.
As of December 31, 2014, Taizhou Fuling has outstanding loans of approximately $19.5 million from various banks in China. To secure this debt, Taizhou Fuling has pledged its properties and machinery, equipment, land use rights as well as other assets to banks.
Further, although instruments governing the current debts incurred by our PRC subsidiaries do not have restrictions on their abilities to pay dividend or make other payments to us, the lender may impose such restriction in the future. As a result, our ability to distribute dividends largely depends on earnings from our PRC subsidiaries and its ability to pay dividends out of its earnings. We cannot assure you that our PRC subsidiaries will generate sufficient earnings and cash flows in the near future to pay dividends or otherwise distribute sufficient funds to enable us to meet our obligations, pay interest and expenses or declare dividends.
As of December 31, 2014, we had cash and cash equivalents of approximately $1.4 million and restricted cash of approximately $3.7 million. As of December 31, 2014, we did not have any short-term investments. Our current assets are approximately $34.7 million and our current liabilities are approximately $39.8 million, which resulted in a current ratio of 0.87:1. Total shareholders’ equity as of December, 31 2014 was approximately $17.5 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 and loans from commercial banks. Our working capital requirements are influenced by the level of our operations, the numerical and dollar volume of our sales contracts, the progress of execution on our customer contracts, and the timing of accounts receivable collections.
Based on our current operating plan, we believe that our existing resources, including cash generated from operations, bank loans and 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. The Company expects to be able to refinance its short term loans based on past experience and the Company’s good credit history. As of the end of February 2015, we repaid approximately $7.5 million bank loans and $1.1 million in notes payable which were due in 2015. We also borrowed approximately $11.6 million under new bank loans as well as approximately $1.2 million in new notes payable from various banks in China.
The following table sets forth summary of our cash flows for the periods indicated:
(All amounts in thousands of U.S. dollars)
|Net cash provided by operating activities||$||5,390||$||6,232|
|Net cash used in investing activities||(4,661||)||(8,529||)|
|Net cash (used in) provided by financing activities||(2,153||)||4,075|
|Effect of exchange rate changes on cash||124||134|
|Net increase in cash||(1,299||)||1,912|
|Cash, beginning of year||2,699||787|
|Cash, end of year||$||1,400||$||2,699|
Net cash provided by operating activities was approximately $5.4 million in 2014, compared to cash provided by operating activities of approximately $6.3 million in 2013. The decrease in net cash provided by operating activities was primarily attributable to the following factors:
|·||Net income increased by approximately $4.3 million in 2014 compared to 2013;|
Accounts receivable increased by approximately $4.4 million in 2014 compared to a decrease of approximately $2.3 million in 2013. The increase in account receivable balance corresponded to the trend of increase in sales. Sales increased significantly in the last quarter in 2014 compared with the same period of 2013, including sales made to new customers in the last quarter.
Inventory increased by approximately $2.7 million in 2014 compared with an increase of approximately $2.0 million in 2013. Our inventory level increased because of the expansion of business.
Accounts payable increased by $2.2 million in 2014 compared with an increase of $290,000 in 2013 due to our expansion of business and purchases of inventory to enhance our working capital and liquidity, as we maximized the benefits from the improved payment terms offered by our vendors.
Net cash used in investing activities was approximately $4.7 million in 2014, a decrease of approximately $3.9 million from net cash used in investing activities of approximately $8.6 million in 2013. The decrease in net cash used in investing activities in 2014 was primarily attributable to decreased payments associated with the acquisition of property and equipment in 2014.
Net cash used in financing activities was approximately $2.2 million in 2014, compared to net cash provided from financing activities of approximately $4.1 million in 2013. The decrease in net cash provided from financing activities in 2014 was primarily attributable to (a), a cash dividend paid to shareholders, net of shareholder contribution for $2.7 million, (b) repayment of short term borrowings for $454,000 in 2014 compared to proceeds from short term borrowings for $4.5 million in 2013. The 2014 dividend was incurred in connection with restructuring the Company. A portion of such dividend was reinvested in the Company, while the majority of the balance consisted of taxes in connection with the restructuring.
In 2015, we expect to use capital expenditures primarily to continue to build out and equip our Allentown facility and to develop a new factory in Wenling. We expect that our capital expenditures will increase in the future as our business continues to develop and expand. Our material cash requirements in the next twelve months include (i) Investments of approximately $3 million in the new production lines and manufacturing facilities in Pennsylvania to manufacture our products locally, and (ii) 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. We expect to purchase land use right for approximately $8 million as part of our project to build a new manufacturing facility in Wenling.
Our primary source of cash is currently generated from the sales of our products and bank borrowings. In the coming years, we will be looking to other sources, such as raising additional capital by issuing shares of stock, to meet our cash needs. While facing uncertainties in regards to the size and timing of capital raises, we are confident that we can continue to meet operational needs solely by utilizing cash flows generated from our operating activities and bank borrowings, as necessary.
As of December 31, 2014, the details of all our short-term bank loans and bank acceptance notes payable are as follows:
(All amounts are in U.S. dollars)
|No||Type||Contracting Party||Expiration Date||Amount|
|1||Short-term Bank Loan||Agricultural Bank of China||Various from January to May 2015||$||1,220,306|
|2||Short-term Bank Loan||China Construction Bank||July 2015||$||1,301,660|
|3||Short-term Bank Loan||China Merchants Bank||Various from March to May 2015||$||2,423,560|
|4||Short-term Bank Loan||PingAn Bank||March 2015||$||2,440,610|
|5||Short-term Bank Loan||China Citic Bank||Various from January to April 2015||$||4,507,514|
|6||Short-term Bank Loan||Industrial and Commercial Bank of China||Various from February to December 2015||$||3,585,835|
|7||Short-term Bank Loan||Shanghai Pudong Development Bank||Various from January to March 2015||$||1,971,302|
|8||Short-term Bank Loan||Bank of China||Various from January to March 2015||$||2,073,420|
|9||Bank acceptance notes payable||Industrial and Commercial Bank of China||Various dates from January to April 2015||$||2,678,648|
|10||Bank acceptance notes payable||Bank of China||Various dates from January to June 2015||$||565,685|
Expired loans and bank acceptance notes payable were all repaid as of the date of this filing. As of the date of this filing, the Company has repaid approximately $7.5 million in bank loans and $1.1 million in notes payable that were due in 2015 and has borrowed approximately $11.6 million in bank loans and $1.2 million in notes payable from various banks in China, which are short term in nature and guaranteed by Special Plastics, its shareholders and third parties.
Although we currently do not have any material unused sources of liquidity, giving effect to the foregoing bank loans and other financing activities, including the discounting of bills/notes receivable, we believe that our currently available working capital should be adequate to sustain our operations at our current levels through at least for the next twelve months. We are not dependent upon this initial public offering to meet our liquidity needs for the next twelve months. We will consider additional borrowing based on our working capital needs and capital expenditure requirements. There is no seasonality of our borrowing activities.
Obligations under Material Contracts
Below is a table setting forth all of our contractual obligations as of December 31, 2014, which consists of our short-term loan agreements, loans from third parties and due to related parties:
|Payment Due by Period|
|Contractual Obligations||Total||Less than|
|1 – 3 |
|3 – 5 |
|Short-Term Debt Obligations||$||19,524,207||$||19,524,207||—||—||—|
|Bank acceptance notes payable||3,244,333||3,244,333||—||—||—|
|Capital Lease Obligations||—||—||—||—||—|
|Operating Lease Obligations||4,027,091||384,728||1,213,083||1,306,247||1,123,033|
|Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP||—||—||—||—||—|
|Loans from Third Parties||195,249||195,249||—||—||—|
|Due to Related Parties||38,273||38,273||—||—||—|
Under PRC regulations, all our subsidiaries in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC GAAP. In addition, these companies are required to set aside at least 10% of their after-tax net profits each year, if any, to fund the statutory reserves until the balance of the reserves reaches 50% of their registered capital. The statutory reserves are not distributable in the form of cash dividends to the Company and can be used to make up cumulative prior year losses.
Restrictions on net assets also include the conversion of local currency into foreign currencies, tax withholding obligations on dividend distributions, the need to obtain State Administration of Foreign Exchange approval for loans to a non-PRC consolidated entity. We did not have these restrictions on our net assets as of December 31, 2014 and December 31, 2013. We are also party to certain debt agreements that are secured with collateral on our real property, but such debt agreements do not restrict our net assets and instead only impose restrictions on the pledged property. To the extent we wish to transfer pledged property, we are able to do so subject to the obligation that we settle the loan obligation.
The following table provides the amount of our statutory reserves, the amount of restricted net assets, consolidated net assets, and the amount of restricted net assets as a percentage of consolidated net assets, as of December 31, 2014 and December 31, 2013.
|Total Restricted Net Assets||$||1,862,365||$||1,108,393|
|Consolidated Net Assets||$||17,454,524||$||12,636,010|
|Restricted Net Assets as Percentage of Consolidated Net Assets||10.67||%||8.78||%|
Total restricted net assets accounted for approximately 10.7% of our consolidated net assets as of December 31, 2014. 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.
We had capital expenditures of approximately $4.7 million and $8.5 million for the years ended December 31, 2014 and 2013, respectively for additions to and renovations of our workshops and office buildings; and purchases of equipment in connection with our business activities.
In 2015, our capital expenditures are expected to be approximately $11 million, and will be primarily related to the construction of manufacturing facilities and purchase of land use rights in the United States and China to meet increased global demand for our products.
We expect that our capital expenditures will increase in the future as our business continues to develop and expand. We have used cash generated from our subsidiaries’ operations to fund our capital commitments in the past and anticipate using such funds and proceeds received from our initial public offering to fund capital expenditure commitments in the future.
Off-balance Sheet Commitments and Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders’ equity, or that are not reflected in our consolidated financial statements.
Critical Accounting Policies
We prepare our financial statements in conformity with accounting principles generally accepted by the United States of America (“U.S. GAAP”), which requires us to make judgments, estimates and assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any related disclosures. Although there was no material changes made to the accounting estimates and assumptions in the past three years, we continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.
We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.
Revenue 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.
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.
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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounts Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers: Topic 606. This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to illustrate the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements that will provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a reporting organization’s contracts with customers. This ASU is effective retrospectively for fiscal years, and interim periods within those years beginning after December 15, 2016 for public companies and December 15, 2017 for non-public entities. Management is currently evaluating the effect, if any, on the Company’s financial position and results of operations.
Our management believes that other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
We have been in business for more than 22 years. In the beginning, however, we did not produce the disposable serviceware products we produce today. Instead, for our first 10 years, we sold plastic furniture, 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 2003-04.
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 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 also retained an experienced U.S. QSR chain executive who was instrumental in helping us build direct relationships with other QSR chains. As a result of these efforts, we successfully bid to supply cutlery and straws to the U.S. operations of four of America’s five largest QSRs and our income increased accordingly.
As we have grown into a mature company in our industry, we have developed five main types of customers:
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.
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 extend its term from 15 years to 25 years. Therefore, its term is from October 28, 1992 to October 27, 2017. Taizhou Fuling may apply to extend its term prior to expiration.
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 29,000,000. As a result, 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 the Company’s first production factory established 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 but have not yet dissolved it.
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) nine shareholders own 100% of the equity of FGI.
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.
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.
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 total revenues in 2012 were $7.5 billion in 2012, 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.
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”).
While a majority of our products purchased by our customers use PS and PP, 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. 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.
|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 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.
The following chart shows some of our recent research projects.
|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 Toughening Polystyrene||Self-Developed||2010|
|Development of Silicon Compliance Enhancement Serviceware||Self-Developed||2010|
|Research of Four-Layer Coextrusion Technology||Self-Developed||2010|
|Development of Nano-Modified Composite Serviceware||Self-Developed||2010|
|Research of Temperature Resistance of New Modified PLA Biodegradable Material||Self-Developed||2010|
|Multiple Composite Polystyrene Modified Material||Self-Developed||2009|
|PP And PA6 Blending Technology||Self-Developed||2009|
|New Corn Starch-Based Biodegradable Material||Self-Developed||2009|
|Development of High-Strength Barrel||Self-Developed||2009|
|Development of High Impact Modified PC Serviceware||Self-Developed||2008|
|PP/PS Alloy New Material||Self-Developed||2008|
|SBC copolymer modified GPPS new material||Self-Developed||2008|
|New modified PLA biodegradable material||Self-Developed||2008|
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.
|International Standards Authority, Inc.||Quality Management System||ISO9001:2008||Disposable plastic tableware, plastic drinking cup (pot) production and service||2012-10-10 until 2015-10-09|
|International Standards Authority, Inc.||Food Safety Management System||HACCP-EC-01||Plastic drinking cups and disposable plastic tableware production and service||2013-02-20 until 2016-02-19|
|International Standards Authority, Inc.||Management System||GMP (Tableware Products Good Manufacturing Practices of Drugs)||Plastic drinking cups and disposable plastic tableware production and service||2013-02-20 until 2016-02-19|
|Beijing Zhong-An-Zhi-Huan Certification Center||Environmental Management System||GB/T 24001—2004/ ISO 14001:2004||Production and related activities of disposable plastic cutlery and plastic cups||Until 2017-09-14|
As labor has become more expensive in China, we have found that we have less of an advantage over similarly situated companies from 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.
|Injection Molding Machine||National|
|Vacuum Magnetron Sputtering Coating Machine||National|
|Four-Layer Co-Extruded Sheet Machine||National|
|High-Speed Plastic Molding Machines (Computer Controlled)||National|
From 2012 to 2014, we invested approximately $16 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 $127,000 in 2014, an important 58.75% performance improvement.
We plan to establish an automation department 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 factory and product lines.
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 impending bans on plastic foam containers. Many of these containers are made of a plastic resin known as expanded polystyrene. These polystyrene materials are difficult to recycle. Considering the amount of plastic foam containers consumed every day in big cities which will soon be banned, 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.
The United States’ food and beverage industry is one of the world’s largest users of foodservice disposables; however, the United States has historically relied on imported products, as demand for such products at a low price is high yet 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 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.|
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 commencing operations in our Allentown facility. We will first manufacture drinking straws in our Allentown facility. If the manufacturing of straws at Allentown is successful, we will also consider investing in manufacturing cups in the United States.
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. 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 carryforward of up to $2 million a year.
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
The project construction period should last 24 months, from October 2013 to September 2015. The preparatory work for the project began in the second half of 2013, and we signed an agreement with the Pennsylvania Department of Commerce to invest and build the factory in Pennsylvania in October 2013.
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 are purchasing and installing six straw production lines. These six production lines will be put into operation in May 2015.
From June 2015 to September 2015, the purchase and installation of another six straw production lines will be finished. After these twelve production lines are put into operation and function properly, we plan to buy another twelve straw product lines.
We estimate that the project will be fully completed and its entire operating capacity installed and ready for use in April 2016.
Increase of Production Capacity Anticipated after Completion
The designated annual capacity is 4,800 tons of straw series products. According to our industry experience, market development and detailed specifications of this project, we estimate that in the second full year of the project, the production load should reach 10% of total designated production capacity, 50% in the third year, and 100% in the fourth year, as illustrated in the following chart:
Production Load Estimate
|Project||In 2nd Year||In 3rd Year||In and After 4th Year|
|Straw Production (tons)||480||2,400||4,800|
Estimate of the amount of expenditures
The total investment for the project will be roughly $9.9 million, including approximately $5.6 million of fixed asset investment, and $4.3 million of working capital. We plan to finance the project with a capital investment of approximately $5 million (including $1.7 million we already invested and $3.3 million from IPO proceeds) and long-term loans of approximately $4.9 million.
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.
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.
Our Allentown facility structure will consist of 88,000 square feet on 7.7 acres of land:
The current build-out plan is as depicted below. The right-most figures represent our first four straw production lines. We next intend to build the middle straw production lines and finally, the left-most production lines.
Currently, we have finished all the preparation work of the project, including leasing the warehouse and renovation of the factory. We also have purchased and installed 4 straw production lines. We estimate that we can put these production lines into use in May 2015.
Our primary raw materials are (1) plastic resin (primarily polypropylene (“PP”) and polystyrene (“PS”)), (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 82% of our raw material purchases in 2014. 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.
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.
|Central and South America||760||685||657|
|Hong Kong and Mainland China||122||102||74|
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 five categories of customers (below estimates include sales through distributors to ultimate customers):
|Estimated Sales |
% in 2014
|Estimated Sales %|
|Overseas Dealers||Serviceware, Straws, Cups, Plates||USA||21||%||23||%|
|International QSRs||Serviceware, Straws, Cups||USA||33||%||33||%|
|Retailers||Serviceware, Straws, Cups, Plates||USA, Australia||6||%||7||%|
|Importers||Serviceware, Straws, Cups, Plates||USA, Europe, Central and South America, Australia, Middle East, Canada||33||%||35||%|
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, 2014 and 2013, approximately 39% and 40% of our sales were made directly to end-users and retailers, respectively, and approximately 54% and 58% of our sales were made to distributors including overseas dealers and importers, 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|
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.
Nevertheless, we have been one of China’s largest exporters of disposable serviceware. The China Chamber of Commerce for Import & Export of Light Industrial Products & Arts-Crafts has recognized Taizhou Fuling as Number 3 out of 7,382 plastic kitchenware and serviceware companies for exports from China in 2014, Number 2 out of 4,610 such companies in 2013, Number 1 out of 4,365 such companies in 2012, and Number 2 out of 3,871 such companies in 2011.
We have invested heavily 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 certifications. In addition, our company is rated a Category A enterprise of China Customs, which therefore provides streamlined customs clearance measures. 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:
|·||Zhejiang Famous Trademark|
|·||Wenling Star Enterprise|
|·||Taizhou Quality Enterprise Leader|
|·||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|
|·||Zhejiang Academician Expert Workstation|
|·||Zhejiang Energy Measurement Model Entity|
|·||Taizhou High-Tech R&D Center|
|·||Wenling Government Quality Award|
|·||Grade A Customs Enterprises|
|·||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|
|·||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 Products|
|·||Taizhou Export Famous Brand|
|·||Taizhou Export Famous Brand|
|·||Zhejiang Compliance Credit Export and Import Model Enterprise|
|·||Zhejiang Credit Grade AA Award|
|·||Taizhou Statistics Credit Entity|
|·||Taizhou Top 10 Export Processing Trade Enterprise|
|·||Wenling Star Industrial Enterprise|
|·||AAA Credit Enterprise|
|·||Taizhou Famous Trademark|
|·||Wenling Star Industrial Enterprise|
|·||First recipient in Wenling of Zhejiang Green Enterprise Designation|
|·||Zhejiang Credit Grade AA Award|
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.
The R&D team has eighty-two 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, 2014 and 2013, we spent $2.48 million and $2.13 million, respectively, on R&D. R&D expenditures in each year were for the following purposes:
|Year Ended December 31,|
|Purpose||2014 (in millions)||2013 (in millions)|
We expect to increase our R&D expenditures proportionate to our revenue increase in 2015.
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 particular patent. We currently hold twenty-four issued patents:
|Proprietary name||Patent No.||Patent
|Improvement to water barrel||ZL 2007 2 0109209.7||Utility model||2007.05.11||2008.02.20||2017.05.10|
|Particulate filtering drinking straw||ZL 2007 2 0107560.2||Utility model||2007.03.27||2008.02.20||2017.03.26|
|Straw with a fork||ZL 2007 2 0110304.9||Utility model||2007.06.06||2008.04.30||2017.06.05|
|Food and beverage heater for automobiles||ZL 2007 2 0109842.6||Utility model||2007.05.25||2008.04.30||2017.05.24|
|Straw with a spoon||ZL 2007 2 0111006.1||Utility model||2007.07.07||2008.07.02||2017.07.06|
|Brewing device||ZL 2008 2 0164651.4||Utility model||2008.09.11||2009.08.12||2018.09.10|
|Food grade polypropylene composite material and preparation and uses||ZL 2010 1 0116076.2||Patent||2010.03.02||2013.06.05||2030.03.01|
|Two section straw packaging and transmission system||ZL 2007 1 0156428.5||Patent||2007.10.26||2010.12.15||2027.10.25|
|Split-type goblets||ZL 2010 2 0684010.9||Utility model||2010.12.28||2011.08.03||2020.12.27|
|Plates||ZL 2010 3 0701465.2||Design||2010.12.29||2011.08.03||2020.12.28|
|Cup with curled rim||ZL 2011 2 0049179.1||Utility model||2011.02.26||2011.08.24||2021.02.25|
|Spork||ZL 2010 2 0685416.9||Utility model||2010.12.28||2011.09.07||2020.12.27|
|Multipurpose fork||ZL 2010 2 0685497.2||Utility model||2010.12.28||2011.10.19||2020.12.27|
|Anti-counterfeit bags||ZL 2011 2 0049491.0||Utility model||2011.02.26||2011.10.19||2021.02.25|
|Combined serviceware package||ZL 2010 2 0684440.0||Utility model||2010.12.28||2011.11.09||2020.12.27|
|Hollow-handle cutlery||ZL 2010 2 0684221.2||Utility model||2010.12.28||2011.11.30||2020.12.27|
|Serviceware kit (toughened)||ZL 2011 3 0402067.5||Design||2011.11.07||2012.05.16||2021.11.06|
|Ice cream cup||ZL 2011 2 0561621.9||Utility model||2011.12.29||2012.10.03||2021.12.28|
|Cover/lid||ZL 2012 3 0240031.6||Design||2012.06.11||2012.10.31||2022.06.10|
|Cover remover||ZL 2012 2 0285999.5||Utility model||2012.06.16||2013.01.09||2022.06.15|
|Packaging barrel||ZL 2012 2 0288697.3||Utility model||2012.06.16||2013.01.09||2022.06.15|
|Bowls||ZL 2012 3 0542829.6||Design||2012.11.09||2013.04.10||2022.11.08|
|Plates (honeycomb design)||ZL 2012 3 0543240.8||Design||2012.11.09||2013.04.10||2022.11.08|
|Cutlery with removable structure||ZL 2012 2 0591687.7||Utility model||2012.11.09||2013.05.01||2022.11.08|
|Bowl for noodles||ZL 2010 3 0701464.8||Design||2010.12.29||2011.06.08||2020.12.28|
|Combined fork and cutlery||ZL 2010 2 0683337.4||Utility model||2010.12.28||2011.10.19||2020.12.27|
|Multipurpose clip||ZL 2011 2 0048688.2||Utility model||2011.02.26||2011.10.19||2021.02.25|
|Water dispenser bucket with handle||ZL2011 2 0219976.X||Utility model||2011.06.27||2012.01.25||2021.06.26|
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||Category Number(1)||Approval Date||Expiration Date|
8 - #4712944
21 - #4712943
8 - #4712945
21 - #4712946
8 - #11235808
21 - #11235777
|Taizhou Fuling||21 - #8441442||2011.7.14||2021.7.13|
|Taizhou Fuling||21 - #11235865||2013.12.14||2023.12.13|
|Taizhou Fuling||8 - #11236889||2013.12.14||2023.12.13|
8 - #9966708
21 - #9966694
|Great Plastics||8 - #9966716||2012.11.21||2022.11.20|
|Fuling USA||8 - #4291028||2013.2.19||--(2)|
|(1)||Category 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. Category 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)||The registration is valid as long as Fuling USA timely files all post registration maintenance documents.|
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 Guidance Catalogue of Industries for Foreign Investment (the “Catalogue”), promulgated by the Ministry of Commerce (“MOFCOM”) and the National Development and Reform Commission (“NDRC”), provides for regulations on the foreign investment based on the industries in which the investee operates. It classifies industries into three categories — “encouraged,” “restricted,” and “prohibited”. Industries not listed in the Catalogue are generally deemed as falling into a fourth category, “permitted.” This Catalogue is an important basis for the government to guide investment direction, promote technology innovation and industrial upgrading. Pursuant to relevant laws and regulations, in line with the promotion of energy conservation and green industry initiatives, the approval authorities will strictly control energy-intensive, polluting and natural resources industries, such as projects in low-end, capacity-redundant and over-expansion projects. Environmental protection departments and other departments with jurisdiction will also review such projects for compliance with applicable criteria.
According to the Catalogue, our products fall in the permitted category.
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.
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.
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 Law Firm advises that we, FULING GLOBAL INC. incorporated in Cayman Islands, 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 shall be 13% for certain plastic products.
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.
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.
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.
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.
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.
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.
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.
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.
As of April 2, 2015, we employed a total of 970 full-time and 0 part time employees in the following functions:
|Number of Employees|
|Department||April 2, 2015||December 31, 2014||December 31, 2013||December 31, 2012|
|Human Resource & Administration||45||45||45||46|
|Research & Development||90||88||65||58|
|Sales & Marketing||18||18||18||18|
We saw a decrease in production employees in 2013 as a result of the automation of a portion of our operations and as a result of an early Chinese New Year, which led to some employee departures. Production employees increased in 2014 as our volume of orders required us to hire additional employees to meet demand, notwithstanding automation.
Of our total employees on April 2, 2015, 967 were employed in China and 3 were employed in the United States (not including John Kunes, our U.S.-based Executive Vice President who is an independent contractor). We anticipate that, when our Allentown facility is at its planned capacity, we will have approximately 75 employees in the United States.
Our employees are not represented by a labor organization or covered by a collective bargaining agreement. We have not experienced any work stoppages.
We are required under PRC law to make contributions to employee benefit plans at specified percentages of our after-tax profit. In addition, we are required by PRC law to cover employees in China with various types of social insurance. In 2014, we contributed approximately $387,189 and $585,402 to the employee benefit plans and social insurance, respectively. In 2013, we contributed approximately $297,276 and $522,361 to the employee benefit plans and social insurance, respectively. The effect on our liquidity by the payments for these contributions is immaterial. We believe that we are in material compliance with the relevant PRC employment laws.
|Description of Property|
There is no private land ownership in China. Individuals and entities are permitted to acquire land use rights for specific purposes. We, 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, Fuling USA, a wholly owned subsidiary, signed an agreement 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. We estimate the project will be finished and put into use in September 2015. While we are not dependent on completion of this offering to complete the project, we anticipate that a failure to complete this offering could result in our company needing to find other sources of funding in order to avoid a delay in implementation of this project. At present, we are in the midst of building out our Allentown facility, and it is not yet operating.
Following is a list of our properties, including the first three, which we lease:
|Fuling USA||Commercial/industrial space at 6690 Grant Way, Suite 1, Allentown, PA 18106||2014-03-01 until 2024-05-31||8,175.47|
|Taizhou Fuling||Warehouse at 8 Shengpan Road, Guanweitong Village, Wenqiao County||2013-01-01 until 2015-12-31||5,120.00|
|Taizhou Fuling||Non-residential building in Ximen Village, Songmen Town||No expiration (rights acquired 2000-04-27)||177.58|
|Taizhou Fuling||Non-residential building in Ximen Village, Songmen Town||No expiration (rights acquired 2000-04-27)||668.89|
|Taizhou Fuling||Land in South of Binhai Road, Songmen Town||2007-03-27 until 2053-03-10||13,996.79|
|Taizhou Fuling||Land in South of Binhai Road, Songmen Town||2007-03-27 until 2055-01-14||14,076.80|
|Taizhou Fuling||Land in South of Binhai Road, Songmen Town||2013-07-25 until 2053-03-10||491.05|
|Taizhou Fuling||Land in South of Binhai Road, Songmen Town||2013-07-25 until 2053-03-10||1,471.22|
|Taizhou Fuling||Land in South of Binhai Road, Songmen Town||2013-07-25 until 2053-03-10||2,559.28|
|Taizhou Fuling||Land in South of Binhai Road, Songmen Town||2013-07-25 until 2053-03-10||1,847.10|
|Taizhou Fuling||Land in South of Binhai Road, Songmen Town||2013-07-25 until 2053-03-10||3,694.20|
|Taizhou Fuling||Land in South of Binhai Road, Songmen Town||2013-07-25 until 2055-01-14||7,717.56|
|Great Plastics||E02-2905 lot at Binhai Xincheng, Sanmen County||2010-08-01 until 2060-08-01||30,349.00|
|Great Plastics||Factory building in Binhai Xincheng, Sanmen County||No expiration (rights acquired 2014-02-21)||15,679.28|
|Great Plastics||Dormitory building in Binhai Xincheng, Sanmen County||No expiration (rights acquired 2014-02-21)||4,092.77|
|Great Plastics||Factory building in Binhai Xincheng, Sanmen County||No expiration (rights acquired 2014-02-21)||1,872.22|
|Great Plastics||Factory building in Binhai Xincheng, Sanmen County||No expiration (rights acquired 2014-02-21)||11,813.30|
Fixed assets at our properties consist of office equipment, buildings, structures, ancillary facilities, and equipment for production of plastic food containers and drinking straws.
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 will be funded either through proceeds from this offering if it is successful or through our operating cash flows. The estimated costs for such efforts, along with the description of the purposes for such expenditures, are described in “Use of Proceeds.”
In addition to our property rights, we also currently have agreements to warehouse our products for delivery to customers. We do not own or lease the warehouses in question but instead pay storage and handling fees based on the quantity of goods we are warehousing at such facilities. Upon completion of the build-out of our Allentown facility, we expect to devote approximately 5,013 square meters of such facility to warehousing our products prior to delivery to our customers. We may, from time to time, enter into new agreements to meet our warehousing needs.
Recent Capital Expenditures and Divestitures
The following table sets forth our principal capital expenditures for the fiscal years ended December 31, 2014 and 2013:
|Year ended December 31,|
|Investments in buildings||$||891,205||$||2,297,518|
|Investments in machinery and production equipment||3,347,604||5,780,409|
|Investments in automobiles||10,181||394,327|
|Investments in office equipment||58,711||55,763|
|Investments in electronic and other equipment||352,885||1,294|
|Total capital expenditures||$||4,660,586||$||8,529,311|
All of these capital expenditures have been made at our facilities in Wenling City in Zhejiang Province and for the construction of new workshops and office buildings and purchases of equipment in connection with the expansion of our production facility in Allentown, Pennsylvania. These expenditures were funded by cash flows from operations and debt financing. We made the following expenditures in the period from December 31, 2014 to April 2, 2015:
|Investments in buildings||$||454,334|
|Investments in machinery and production equipment||612,714|
|Investments in automobiles||-|
|Investments in office equipment||6,614|
|Investments in electronic equipment||-|
|Investments in software||28,595|
|Total capital expenditures||$||1,102,257|
In 2015, we expect to use capital expenditures primarily to continue to build out and outfit our Allentown facility and to develop a new factory in Wenling. We expect that our capital expenditures will increase in the future as our business continues to develop and expand. We plan to use the proceeds of this offering to fund these capital expenditures, as described in more detail in “Use of Proceeds.” If we are unable to complete the offering, we plan to fund these capital expenditures through our operating cash flow. If this offering is not completed, our completion of these capital expenditures may be slowed compared to our anticipated timeline to complete such projects.
During the fiscal years ended December 31, 2014 and 2013, we did not have any divestitures (including interests in other companies), and none are currently in process.
The following table provides information regarding our executive officers and directors as of April 2, 2015:
|Xinfu Hu||54||Chief Executive Officer|
|Guilan Jiang||52||Chair of Board of Directors and Chief Operating Officer|
|Yue “Sam” Yu||39||Chief Financial Officer|
|Xiaoling Ye||56||Director (Independent)|
|Zhanfeng Ma||50||Director (Independent)|
|Jian Cao||64||Director (Independent)|
The business address of all such senior management and directors is Southeast Industrial Zone, Songmen Town, Wenling, Zhejiang Province, People’s Republic of China 317511.
Guilan Jiang. Ms. Jiang co-founded Taizhou Fuling in October of 1992 with her husband, Mr. Xinfu Hu, our CEO, and serves as Chief Operating Officer and Chair of the Company. Ms. Jiang co-founded Great Plastics in March 2010 with her husband, Mr. Xinfu Hu, and Ms. Sujuan Zhu, and serves as the Chair. Ms. Jiang has been certified by Zhejiang Province as a senior economist in 2012. This qualification shows that she is an economic professional with rich experience in business management, has a great understanding of economics and has passed certain qualification tests in business field. Currently Ms. Jiang is Deputy Chair of the China Plastics Processing Industry Association, Deputy Chair of the Zhejiang Female Entrepreneur Association, and Chair of the Wenling Plastics Association. Ms. Jiang acted as a representative of the local People’s Congress several times. Ms. Jiang has received an award as an Outstanding Female in China, as a Top 10 Outstanding Female in Zhejiang, and as an Excellent Entrepreneur in Taizhou and Wenling. We have chosen Ms. Jiang to serve as the Chair of our Board of Directors because of her more than twenty years of experience in our industry, and leadership at the national level.
Sujuan Zhu. Ms. Zhu has been a member of our Board of Directors since January 19, 2015. She co-founded Taizhou Fuling in October 1992 and has worked in the financial department of the Company. Ms. Zhu also co-founded Great Plastics in March 2010. We have chosen Ms. Zhu to serve on our Board of Directors because of her more than twenty years of experience advising and assisting our company on finance and management as it has grown.
Xiaoling Ye. Mr. Ye has been a member of our Board of Directors since February 1, 2015. Mr. Ye is currently a Principal Staff Member of the Wenling City Auditing Bureau, auditing financial funds. From 2002 to 2010, Mr. Ye was a Deputy Director of the Wenling City Auditing Bureau, handling audit matters. Prior to 2010, Mr. Ye worked at various other governmental agencies and managed financial matters since 1980. Mr. Ye has been in charge of numerous significant governmental audit and finance programs, including the auditing program of budget and final accounts of Wenling Finance Bureau every year. Mr. Ye presented the budget report he prepared to the standing committee of the People’s Congress in Wenling twice. Mr. Ye is a senior accountant and Certified Public Accountant in China. Mr. Ye has won awards as an Advanced Accounting Worker in China and in Zhejiang. Mr. Ye also acted as adjunct lecturer of audit at vocational schools and classes held by governmental financial agencies. Mr. Ye was a council member, executive council member or deputy secretary general of the Wenling Accounting Society from 1985 to 2014. Mr. Ye studied financial accountancy at the Anhui Institute of Finance and Trade from 1984 to 1987. We believe Mr. Ye’s qualifications to serve on our Board of Directors include his extensive experience in auditing and finance.
Zhanfeng Ma. Mr. Ma has been a member of our Board of Directors since February 1, 2015. Mr. Ma has been the General Secretary at the China Plastics Processing Industry Association since 2008. He is responsible for matters of the secretariat. Mr. Ma has been in the plastics industry for more than 25 years, beginning with research and director positions at the Taiyuan Plastics Research Institute from 1987 through 1999. He served as Secretary-General for the China Plastics Recycling Committee from 2001 through 2009. From 2001 through 2012, Mr. Ma was Deputy Secretary of the China Degradable Plastics Committee. He has served as a member of the (a) Advisory Board of the Ministry of Education, Polymer Processing Technical Committee (2006-2010), (b) China Academy of Social Science Circular Economy & Environment Assessment Production Center (2007-2015), (c) Tariff Commission of the State Council Consulting Committee (2008-2013) and (d) China Bio-based Materials and Degradation Products Standardization Technical Committee (2009-2013). Mr. Ma has been an expert for the Industry and Information Technology Department, Consumer Goods Industry (2009-2014) and China Product Defects and Safety Management Standards Committee (2009-2013). Mr. Ma earned his bachelor degree in August 1987 from Tianjin University of Science & Technology (formerly Tianjin Institute of Light Industry), with a major in plastic processing. We believe Mr. Ma’s qualifications to serve on our Board of Directors include his knowledge of our industry.
Jian Cao. Mr. Cao has been a member of our Board of Directors since February 1, 2015. Mr. Cao has been the Executive Vice President at the China Plastics Processing Industry Association since May 1995 and legal representative since May 2011. In this capacity, Mr. Cao manages the daily operations of the association. Mr. Cao has helped the Association participate in the development of the national standards applicable to the plastics industry. Prior to working with the China Plastics Processing Industry Association, Mr. Cao served a plastic industry association in Liaoning Province, including as general manager, since 1978. Since August 2013, Mr. Cao has also served as a director at Xinjiang Tianye Water Saving Irrigation System Company Limited, a public company in China. Mr. Cao has also been a director at the China Light Industry Federation since May 2012 and Chair of the China Packaging Federation council since August 2011. Since May 2013, Mr. Cao has been chief of the national standardization technical committee for the plastics industry. Mr. Cao earned his bachelor degree in October 1978 from Dalian University of Technology. We believe Mr. Cao’s qualifications to serve on our Board of Directors include his knowledge of our industry, with 37 years experience in the plastics industry.
Xinfu Hu. Mr. Hu co-founded Taizhou Fuling in October of 1992 with his wife, Ms. Guilan Jiang. Mr. Hu serves as Chief Executive Officer of the Company. Mr. Hu co-founded Great Plastics in March 2010 with his wife, Ms. Guilan Jiang, and Ms. Sujuan Zhu and has served as the General Manager. Mr. Hu has been certified by Zhejiang Province as a senior economist in 2013. This qualification shows that he is an economic professional with rich experience in business management, has a great understanding of economics and has passed certain qualification tests in business field. Mr. Hu is also an engineer. Currently Mr. Hu is Deputy Chair of the China Chamber of Commerce for Import & Export of Light Industrial Products & Arts-Crafts, and a member of Committee of the People’s Political Consultative Conference of Sanmen County. Our board of directors has chosen Mr. Hu to serve as Chief Executive Officer because of his more than twenty years of experience in our industry.
Yue “Sam” Yu. Mr. Yu joined FGI in January 2015. From March 2009 until December 2014, Mr. Yu was Chief Financial Officer for Yongye International Inc. Mr. Yu also worked at Underwriters Laboratories Inc. in Asia and Chicago from 2002 through 2007, holding positions including General Manager, Fire and Security Sector, Asia Pacific; General Manager, Suzhou Branch; Business Development Manager; and Manager of Financial Analysis. Mr. Yu also worked at Shenzhen Development Bank. Mr. Yu holds an MBA degree in General Management from Stanford Graduate School of Business and a bachelor’s degree in International Accounting from the University of International Business and Economics, Beijing.
Key U.S. Executives
Robert C. “Bob” Chapleski. Mr. Chapleski has been Vice President of Operations for our Allentown facility since April 2014. He is in charge of overseeing the design, build-out and operations of the facility. Prior to joining our company, from June 2010 through April 2014, Mr. Chapleski was the Director of Manufacturing at Tray-Pak Corporation, a manufacturer of plastic thermoformed foodservice products. From 2006 through 2010, Mr. Chapleski was the plant manager for Niagara Bottling, at which he led the construction, staffing and start-up of a 31,500 square meter bottling facility. Mr. Chapleski earned his B.S. from the U.S. Naval Academy and his M.S. in Industrial Engineering from Louisiana State University.
John C. Kunes. Mr. Kunes is an Executive Vice President at Fuling USA, responsible for developing customer relationships, negotiating distribution logistics, and marketing our products in the United States. Mr. Kunes has been an independent contractor for Fuling USA since October 2009. Prior to joining our company, Mr. Kunes was Director of Operations for Jet Plastica Industries, a plastic foodservice disposables company, from 1998 through 2008. At Jet Plastica he managed more than 600 employees, and implemented projects to enhance efficiency such as automating production lines and matching cutlery production to orders. Mr. Kunes worked as the Director of Finance for Tenneco Packaging from 1995 through 1998 and in a variety of operations and finance roles. He was plant manager and business unit controller for Mobil Chemical Company from 1988 through 1995. Mr. Kunes earned his B.S. and MBA from the Rochester Institute of Technology.
Election of Officers
Our executive officers are elected by, and serve at the discretion of, our board of directors. Our Chief Operating Officer and Chair of our Board of Directors, Guilan Jiang is married to the Chief Executive Officer, Xinfu Hu. Other than this relationship, there are no familial relationships among any members of the executive officers.
Board of Directors and Board Committees
Our board of directors currently consists of five (5) directors. We expect that all current directors will continue to serve after this offering. A majority of our Board of Directors are independent, as such term is defined by the NASDAQ Capital Market.
A director may vote in respect of any contract or transaction in which he is interested, provided, however that the nature of the interest of any director in any such contract or transaction shall be disclosed by him at or prior to its consideration and any vote on that matter. A general notice or disclosure to the directors or otherwise contained in the minutes of a meeting or a written resolution of the directors or any committee thereof of the nature of a director’s interest shall be sufficient disclosure and after such general notice it shall not be necessary to give special notice relating to any particular transaction. A director may be counted for a quorum upon a motion in respect of any contract or arrangement which he shall make with our company, or in which he is so interested and may vote on such motion.
We do not have a lead independent director, and we do not anticipate having a lead independent director because we will encourage our independent directors to freely voice their opinions on a relatively small company board. We believe this leadership structure is appropriate because we are a relatively small company in the process of listing on a public exchange. Our Board of Directors plays a key role in our risk oversight. The Board of Directors makes all relevant Company decisions. As a smaller company with a small board of directors, we believe it is appropriate to have the involvement and input of all of our directors in risk oversight matters.
We currently do not have standing audit, nominating or compensation committees. Our board of directors handles the functions that would otherwise be handled by each of the committees. Prior to completion of our initial public offering, we will establish three standing committees under the board: the audit committee, the compensation committee and the nominating committee. The audit committee will be responsible for overseeing the accounting and financial reporting processes of our company and audits of the financial statements of our company, including the appointment, compensation and oversight of the work of our independent auditors. The compensation committee of the board of directors will review and make recommendations to the board regarding our compensation policies for our officers and all forms of compensation, and will also administer our incentive compensation plans and equity-based plans (but our board will retain the authority to interpret those plans). The nominating committee of the board of directors will be responsible for the assessment of the performance of the board, considering and making recommendations to the board with respect to the nominations or elections of directors and other governance issues. The nominating committee will consider diversity of opinion and experience when nominating directors.
Upon the establishment of an audit committee, the board will determine which of the directors qualifies as an audit committee financial expert.
Duties of Directors
Under Cayman Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. The directors of a company occupy a fiduciary relationship to the Company, which means that they owe heightened duties of good faith and responsibility. Our directors have a duty to exercise the care, skill and diligence that would be exercised by a reasonably diligent person having the general knowledge, skill and experience reasonably to be expected of a person acting as a director and must exercise the knowledge, skill and experience which they actually possess. See “Description of Share Capital — Differences in Corporate Law” for additional information on our directors’ fiduciary duties under Cayman Islands law. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association. We have the right to seek damages if a duty owed by our directors is breached.
A director may vote, attend a board meeting or sign a document on our behalf with respect to any contract or transaction in which he or she is interested. We require directors to promptly disclose the interest to all other directors after becoming aware of the fact that he or she is interested in a transaction we have entered into or are to enter into. A general notice or disclosure to the board or otherwise contained in the minutes of a meeting or a written resolution of the board or any committee of the board that a director is a shareholder, director, officer or trustee of any specified firm or company and is to be regarded as interested in any transaction with such firm or company will be sufficient disclosure, and, after such general notice, it will not be necessary to give special notice relating to any particular transaction.
Remuneration and Borrowing
The directors may receive such remuneration as our board of directors may determine from time to time. Each director is entitled to be repaid or prepaid all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending meetings of our board of directors or committees of our board of directors or shareholder meetings or otherwise in connection with the discharge of his or her duties as a director. The compensation committee will assist the directors in reviewing and approving the compensation structure for the directors. Our board of directors may exercise all the powers of the company to borrow money and to mortgage or charge our undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party.
Other than independence, there are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by us in a general meeting. There are no other arrangements or understandings pursuant to which our directors are selected or nominated.
All directors hold office until the next annual meeting of shareholders at which they are re-elected and until their successors have been duly elected and qualified. Our Chief Operating Officer and Chair of our Board of Directors, Guilan Jiang is married to the CEO, Xinfu Hu. Officers are elected by and serve at the discretion of the Board of Directors. Employee directors do not receive any compensation for their services. Non-employee directors will be entitled to receive up to $13,300 per year for serving as directors and may receive incentive option grants from our company. In addition, non-employee directors will be entitled to receive reimbursement of their actual travel expenses for each Board of Directors meeting attended.
Limitation of Director and Officer Liability
Under Cayman Islands law, each of our directors and officers, in performing his or her functions, is required to act honestly and in good faith with a view to our best interests and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Cayman Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.
Under our memorandum and articles of association, we may indemnify our directors, officers and liquidators against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with civil, criminal, administrative or investigative proceedings to which they are party or are threatened to be made a party by reason of their acting as our director, officer or liquidator. To be entitled to indemnification, these persons must have acted honestly and in good faith with a view to the best interest of the company and, in the case of criminal proceedings, they must have had no reasonable cause to believe their conduct was unlawful. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. These provisions will not limit the liability of directors under United States federal securities laws.
We may indemnify any of our directors or anyone serving at our request as a director of another entity against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings. We may only indemnify a director if he or she acted honestly and in good faith with the view to our best interests and, in the case of criminal proceedings, the director had no reasonable cause to believe that his or her conduct was unlawful. The decision of our board of directors as to whether the director acted honestly and in good faith with a view to our best interests and as to whether the director had no reasonable cause to believe that his or her conduct was unlawful, is in the absence of fraud sufficient for the purposes of indemnification, unless a question of law is involved. The termination of any proceedings by any judgment, order, settlement, conviction or the entry of no plea does not, by itself, create a presumption that a director did not act honestly and in good faith and with a view to our best interests or that the director had reasonable cause to believe that his or her conduct was unlawful. If a director to be indemnified has been successful in defense of any proceedings referred to above, the director is entitled to be indemnified against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred by the director or officer in connection with the proceedings.
We may purchase and maintain insurance in relation to any of our directors or officers against any liability asserted against the directors or officers and incurred by the directors or officers in that capacity, whether or not we have or would have had the power to indemnify the directors or officers against the liability as provided in our memorandum and articles of association.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors, officers or persons controlling our company under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, nor has been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in “Related Party Transactions,” our directors and officers have not been involved in any transactions with us or any of our affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
Code of Business Conduct and Ethics
We currently do not have a code of business conduct and ethics applicable to our directors, officers and employees. However, we intend to adopt one in the near future in connection with our application to list on the Nasdaq Capital Market.
We currently do not have a compensation committee approving our salary and benefit policies. Our board of directors determined the compensation to be paid to our executive officers based on our financial and operating performance and prospects, and contributions made by the officers to our success. Each of the named officers will be measured by a series of performance criteria by the board of directors, or the compensation committee on a yearly basis. Such criteria will be set forth based on certain objective parameters such as job characteristics, required professionalism, management skills, interpersonal skills, related experience, personal performance and overall corporate performance.
Our board of directors has not adopted or established a formal policy or procedure for determining the amount of compensation paid to our executive officers. The board of directors will make an independent evaluation of appropriate compensation to key employees, with input from management. The board of directors has oversight of executive compensation plans, policies and programs.
Summary Compensation Table
The following table presents summary information regarding the total compensation awarded to, earned by, or paid to each of the named executive officers for services rendered to us for the year ended December 31, 2014 and 2013. We do not separately set aside any amounts for pensions, retirement or other benefits for our executive officers, other than pursuant to relevant statutory requirements.
|Name and Principal Position||Fiscal|
|Chief Executive Officer||2013||20,000||0||20,000|
|Chair and Chief Operating Officer||2013||20,000||0||20,000|
|Yue “Sam” Yu(2)||2014||0||0||0|
|Chief Financial Officer||2013||0||0||0|
|Executive Vice President||2013||75,000||149,764||224,764|
|Robert C. “Bob” Chapleski(4)||2014||93,333||4,000||97,333|
|(1)||Consists of social security payments required under Chinese law. Although we also reimburse the referenced individuals for reasonable expenses, such reimbursements do not, in the aggregate, exceed $10,000 for any individual in any year presented and are not considered perquisites because they are integrally and directly related to the performance of such recipients’ jobs. Mr. Chapleski received $500 per month in payment of his health insurance premium.|
|(2)||Mr. Yu became an officer in 2015 and received no compensation in 2013 or 2014.|
|(3)||Mr. Kunes is an independent contractor in his capacity as President of JCK Enterprises. The salary here refers to his retainer fee. Other compensation consists of commissions.|
Mr. Chapleski’s annual salary in 2014 was $140,000. Mr. Chapleski started working for us in May 2014 and received no salary in 2013.
In accordance with the PRC National Labor Law, which became effective in January 1995, and the PRC Labor Contract Law, which became effective in January 2008, as amended subsequently in 2012, employers must execute written labor contracts with full-time employees in order to establish an employment relationship. All employers must compensate their employees equal to at least the local minimum wage standards. All employers are required to establish a system for labor safety and sanitation, strictly abide by state rules and standards and provide employees with appropriate workplace safety training. In addition, employers in China are obliged to pay contributions to the social insurance plan and the housing fund plan for employees. Accordingly, all of our employees, including management, have executed their employment agreements. Our employment agreements with our executives provide the amount of each executive officer’s salary and establish their eligibility to receive a bonus. We believe our labor relationships are good.
Our employment agreements with our executive officers generally provide for a salary to be paid monthly. The agreements also provide that executive officers are to work full time for our company and are entitled to all legal holidays as well as other paid leave in accordance with PRC laws and regulations and our internal work policies. The employment agreements also provide that we will pay for all mandatory social security programs for our executive officers in accordance with PRC regulations. In addition, our employment agreements with our executive officers prevent them from rendering services for our competitors for so long as they are employed.
Other than the salary, bonuses, equity grants and necessary social benefits required by the government, which are defined in the employment agreements, we currently do not provide other benefits to the officers. Our executive officers are not entitled to severance payments upon the termination of their employment agreement or following a change in control. We are not aware of any arrangement that may at a subsequent date, result in a change of control of our company.
We have not provided retirement benefits (other than a state pension scheme in which all of our employees in China participate) or severance or change of control benefits to our named executive officers.
Under Chinese law, we may terminate an employment agreement without penalty by providing the employee thirty days’ prior written notice or one month’s wages in lieu of notice if the employee is incompetent or remains incompetent after training or adjustment of the employee’s position in other limited cases. If we wish to terminate an employment agreement in the absence of cause, then we are obligated to pay the employee one month’s salary for each year we have employed the employee. We are, however, permitted to terminate an employee for cause without penalty to our company, where the employee has committed a crime or the employee’s actions or inactions have resulted in a material adverse effect to us.
We entered into an employment agreement with our Chief Operating Officer and Chair, Ms. Guilan Jiang, effective January 1, 2008. Under the terms of Ms. Jiang’s employment, she is entitled to base compensation of approximately RMB 10,000 per month.
Ms. Jiang’s employment has no expiration date but may be terminated immediately for cause or at any time by either party upon presentation of 30 days’ prior notice in the event she is unable to perform assigned tasks or the parties are unable to agree to changes to her employment agreement.
We entered into an employment agreement with our Chief Executive Officer, Mr. Xinfu Hu, effective January 1, 2008. Under the terms of Mr. Hu’s employment, he is entitled to base compensation of approximately RMB 10,000 per month.
Mr. Hu’s employment has no expiration date but may be terminated immediately for cause or at any time by either party upon presentation of 30 days’ prior notice in the event he is unable to perform assigned tasks or the parties are unable to agree to changes to his employment agreement.
Yue “Sam” Yu
We entered into an employment agreement with our Chief Financial Officer, Mr. Yu, effective January 1, 2015. Under the terms of Mr. Yu’s employment, he is entitled to the following:
|•||A one-time signing bonus of $32,258.|
|•||Base compensation of $180,000 per year, paid monthly before the tenth of the month.|
Mr. Yu’s employment has no expiration date but may be terminated immediately for cause or at any time by either party upon presentation of 30 days’ prior notice in the event he is unable to perform assigned tasks or the parties are unable to agree to changes to his employment agreement.
Director Compensation — Fiscal 2014
The following section presents information regarding the compensation paid during fiscal 2014 to members of our Board of Directors who are not also our employees (referred to herein as “Non-Employee Directors”). As of December 31, 2014, we had only two directors, Ms. Guilan Jiang and Ms. Sujuan Zhu. Since December 31, 2014, we have appointed three additional such directors: Jian Cao, Xiaoling Ye and Zhanfeng Ma. None of such new directors received any compensation in 2014.
Historically, we have not paid our directors, as they have consisted of our Chief Executive Officer and his spouse, our Chair and Chief Operating Officer. Upon completion of this offering, we plan to pay our independent directors an annual cash retainer of approximately $13,300. We may also provide stock option equity-based incentives to our directors for their service . We also plan to reimburse our directors for any out-of-pocket expenses incurred by them in connection with their services provided in such capacity. Pursuant to our service agreements with our directors, neither we nor our subsidiaries provide benefits to directors upon termination of employment. We did not have any non-employee directors in 2013 and 2014, and compensation for our employee directors is fully reflected in the above Summary Compensation Table.
|Related Party Transactions|
In addition to the executive officer and director compensation arrangements discussed in “Executive Compensation,” below we describe transactions since January 1, 2012, to which we have been a participant, in which the amount involved in the transactions is material to us or the related party.
Since the beginning of fiscal 2012, we have had transactions with Special Plastics, a PRC company that is 100% owned by our Chief Operating Officer and Chair, Ms. Guilan Jiang. Special Plastics has established an advanced testing center that has been certified by China’s National Accreditation Service for Conformity Assessment. Special Plastics mainly provides some pre-delivery product testing for our products in addition to the testing we conduct ourselves. Special Plastics currently provides these services without additional charge to us. We estimate that we would pay approximately $10,000 per year for these services if Special Plastics did not provide such services, and we do not anticipate that we would encounter any difficulty obtaining such services from a third party.
Since our products are exported, it is important to ensure that our products conform to standards in the different countries where they are sold. Special Plastics’ facility is equipped with industry leading testing equipment and experts. The facility includes low-high temperature test chambers, automatic density apparatus, automatic colorimeter, electronic balance, melt flow rate tester, Charpy impact strength testing machine and ATP fluorescence detector.
During the years ended December 31, 2014, 2013 and 2012, we paid Special Plastics $53,985, $94,225 and $58,319, respectively, for rental of office space.
During 2012, Special Plastics had a balance due from Great Plastics of $401,168. This amount represented a non-interest bearing business loan due on demand for Great Plastics’ general business purposes, and has been repaid in full in June 2013.
In addition, during the normal course of business, our Company, from time to time, has temporarily borrowed money from its principal shareholders or affiliated companies controlled by its major shareholder to finance its working capital as needed. The amounts are usually unsecured, non-interest bearing and due on demand. As of December 31, 2014, 2013 and 2012, the balance due to related parties was $38,272, $222,094 and $1,049,297, respectively, all of which represented personal loans from Ms. Guilan Jiang to our company and its subsidiaries for ordinary business purposes.
Future Related Party Transactions
After completion of this Offering, the Corporate Governance Committee of our Board of Directors (which we will establish and which will consist solely of independent directors) must approve all related party transactions. All related party transactions will be made or entered into on terms that are no less favorable to use than can be obtained from unaffiliated third parties. Related party transactions that we have previously entered into were not approved by independent directors, as we had no independent directors at that time.
The following table sets forth information with respect to beneficial ownership of our Ordinary Shares as of April 2, 2015 by:
|•||Each person who is known by us to beneficially own 5% or more of our outstanding Ordinary Shares;|
|•||Each of our directors and named executive officers; and|
|•||All directors and named executive officers as a group.|
The number and percentage of Ordinary Shares beneficially owned before the offering are based on 11,666,667 Ordinary Shares outstanding as of April 2, 2015. Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of 5% or more of our Ordinary Shares. Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with respect to securities. In computing the number of Ordinary Shares beneficially owned by a person listed below and the percentage ownership of such person, Ordinary Shares underlying options, warrants or convertible securities held by each such person that are exercisable or convertible within 60 days of April 2, 2015 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. Except as otherwise indicated in the footnotes to this table, or as required by applicable community property laws, all persons listed have sole voting and investment power for all Ordinary Shares shown as beneficially owned by them. Unless otherwise indicated in the footnotes, the address for each principal shareholder is in the care of our Company at Southeast Industrial Zone, Songmen Town, Wenling, Zhejiang Province, People’s Republic of China 317511. As of the date of the Prospectus, we have eight (8) shareholders of record, none of which are located in the United States.
Shares beneficially owned prior |
to this offering(1)
Shares beneficially owned |
after this offering
|Named Executive Officers and Directors||Number||Percent||Number||Percent|
|Directors and Named Executive Officers:|
|All directors and executive officers as a group (six (6) persons)||7,758,334||66.5||%||7,758,334||%|
|5% or greater Beneficial Owners:|
|(1)||Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the Ordinary Shares.|
|(2)||Ms. Jiang and Mr. Xinfu Hu are married, and Mr. Qian Hu is their adult son. Ms. Jiang holds her shares through Silver Trillion Investments Limited, a British Virgin Islands company and may be deemed to hold beneficial ownership of such shares. Mr. Qian Hu holds his shares through Zheng Hui Investments Limited, a British Virgin Islands company and may be deemed to hold beneficial ownership of such shares.|
Mr. Xinfu Hu does not, directly or indirectly, exercise or share voting or investment power of any shares held by Silver Trillion Investments Limited or Zheng Hui Investments Limited and disclaims beneficial ownership of such shares. Mr. Qian Hu does not, directly or indirectly, exercise or share voting or investment power of any shares held by Silver Trillion Investments Limited and disclaims beneficial ownership of such shares. Ms. Jiang does not, directly or indirectly, exercise or share voting or investment power of any shares held by Zheng Hui Investments Limited and disclaims beneficial ownership of such shares.
|(3)||Ms. Zhu is the mother of Mr. Jinxue Jiang. Ms. Zhu holds her shares through Celestial Sun Holding Limited, a British Virgin Islands company and may be deemed to share beneficial ownership of such shares. Mr. Jiang holds his shares through Tengyu International Limited, a British Virgin Islands company and may be deemed to hold beneficial ownership of such shares.|
Ms. Zhu does not, directly or indirectly, exercise or share voting or investment power of any shares held by Tengyu International Limited and disclaims beneficial ownership of such shares. Mr. Jiang does not, directly or indirectly, exercise or share voting or investment power of any shares held by Celestial Sun Holding Limited and disclaims beneficial ownership of such shares.
|Description of Share Capital|
We are a Cayman Islands exempted company with limited liability and our affairs are governed by our memorandum and articles of association, and the Companies Law (2013 Revision), as amended, of the Cayman Islands, which is referred to as the Companies Law below.
As of the date of this prospectus, we have authorized 70,000,000 Ordinary Shares, of $0.001 par value per share, of which 11,666,667 are Ordinary Shares are issued and outstanding. Upon the completion of this offering, we will have Ordinary Shares issued and outstanding. All of our Ordinary Shares issued and outstanding prior to the completion of the offering are and will be fully paid, and all of our shares to be issued in the offering will be issued as fully paid. Our authorized share capital post-offering will consist of Ordinary Shares with a par value of US$0.001 each. Other than the initial issuance of Ordinary Shares in connection with formation of our Cayman Islands corporate structure, there has been no change in the amount of issued capital or the number and classes of shares which it composed during the last three years.
The following are summaries of the material provisions of our memorandum and articles of association that will be in force at the time of the closing of this offering, insofar as they relate to the material terms of our Ordinary Shares. The forms of our memorandum and articles of association are filed as exhibits to the registration statement of which this prospectus is a part.
Incentive Securities Pool
We intend to establish a pool for share options for our employees following the completion of this offering. This pool will contain options to purchase our Ordinary Shares equal to % of the number of Ordinary Shares outstanding at the conclusion of this offering. This pool will contain options to purchase of our Ordinary Shares subject to outstanding share options or reserved for issuance under our share incentive plan. Subject to approval by the Compensation Committee of our Board of Directors, we may grant options in any percentage determined for a particular grant.
Any options granted will vest at a rate of 20% per year for five years and have a per share exercise price equal to the fair market value of one of our Ordinary Shares on the date of grant. We expect to grant options under this pool to certain employees as of the closing of this offering. Any options granted as of the closing of this offering will have an exercise price per Ordinary Share equal to the offering price. We have not yet determined the recipients of any such grants.
All of our outstanding ordinary shares are fully paid and non-assessable. Our ordinary shares are issued in registered form and are issued when registered in our register of members. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their ordinary shares. Our memorandum and articles of association do not permit us to issue bearer shares.
At the completion of this offering, there will be (assuming the sale of newly issued shares of our common stock) Ordinary Shares issued and outstanding. Shares sold in this offering will be delivered against payment upon the closing of the offering in New York, New York, on or about , 2015. The offering will remain open until the earlier of (i) a date mutually acceptable to us and our placement agent or (ii) close of business on , 2015, subject to extension upon agreement with the placement agent.
We plan to apply to list the Ordinary Shares on the Nasdaq Capital Market under the symbol “FUOI.”
Transfer Agent and Registrar
The transfer agent and registrar for the Ordinary Shares is expected to be VStock Transfer, LLC, 77 Spruce Street, Suite 201, Cedarhurst, NY 11516.
The holders of our Ordinary Shares are entitled to such dividends as may be declared by our shareholders or board of directors subject to the Companies Law and to the articles of association. Under Cayman Islands law, dividends may be declared and paid only out of funds legally available therefor, namely out of either profit or our share premium account, and provided further that a dividend may not be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business.
Each ordinary share is entitled to one vote on all matters upon which the ordinary shares are entitled to vote. All of our shareholders have equal voting rights based on the number of shares they hold. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by the chair of such meeting or any one shareholder present in person or by proxy.
An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of votes attached to the ordinary shares cast in a general meeting, while a special resolution requires the affirmative vote of at least two-thirds of votes cast attached to the ordinary shares in a meeting. A special resolution will be required for important matters such as a change of name or making changes to our memorandum and articles of association.
Transfer of Ordinary Shares
Subject to the restrictions contained in our articles of association, as applicable, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board of directors.
Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up to a person of whom it does not approve, or any share issued under any share incentive scheme for employees upon which a restriction on transfer imposed thereby still subsists. Our board of directors may also decline to register any transfer of any ordinary share unless:
|·||the instrument of transfer is lodged with us or such other place at which the register of members is kept in accordance with Cayman Islands law, accompanied by the certificate for the ordinary 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;|
|·||the instrument of transfer is in respect of only one class of shares;|
|·||the instrument of transfer is properly stamped, if required;|
|·||the ordinary shares transferred are fully paid and free of any lien in favor of us;|
|·||a fee of such maximum sum as the NASDAQ Capital Market may determine to be payable or such lesser sum as the board may from time to time require is paid to us in respect thereof; and|
|·||the transfer is not to more than four joint holders.|
If our directors refuse to register a transfer they are required, within three months after the date on which the instrument of transfer was lodged, to send to each of the transferor and the transferee notice of such refusal.
The registration of transfers may, after compliance with any notice requirement of the NASDAQ Capital Market, be suspended and the register closed at such times and for such periods as our 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 as our directors may determine.
On a return of capital on winding up or otherwise (other than on redemption or purchase of ordinary shares), assets available for distribution among the holders of ordinary shares will be distributed among the holders of the ordinary shares on a pro rata basis. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportionately.
Calls on Ordinary Shares and Forfeiture of Ordinary Shares
Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their ordinary shares in a notice served to such shareholders at least 14 days prior to the specified time of payment. The ordinary shares that have been called upon and remain unpaid are subject to forfeiture.
We are empowered under our memorandum of association to purchase our shares subject to the Companies Law and our articles of association. Our articles of association provide that this power is exercisable by our board of directors in such manner, upon such terms and subject to such conditions as it in its absolute discretion thinks fit subject to the Companies Law and, where applicable, the rules of the NASDAQ Capital Market and the applicable regulatory authority.
Variations of Rights of Shares
If at any time, our share capital is divided into different classes of shares, all or any of the special rights attached to any class of shares may, subject to the provisions of the Companies Law, be varied with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. Consequently, the rights of any class of shares cannot be detrimentally altered without a majority of two-thirds of the vote of all of the shares in that class. The rights conferred upon the holders of the shares of any class issued with preferred or other rights will not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu with such existing class of shares.
General Meetings of Shareholders
Shareholders’ meetings may be convened by a majority of our board of directors or our Chair. 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 articles of association allow our shareholders holding shares representing in aggregate not less than 30% 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; however, our 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. Advance notice of at least ten clear 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 two shareholders present or by proxy, representing not less than one-third in nominal value of the total issued voting shares in our company.
Retirement, Election and Removal of Directors
Unless otherwise determined by the members in the general meeting, our articles of association provide that our board will consist of not less than three directors. There are no provisions relating to retirement of directors upon reaching any age limit.
Our articles of association provide that persons standing for election as directors at a duly constituted general meeting with requisite quorum are appointed by our shareholders by a simple majority of the votes cast on the resolution. Each director shall be appointed to a term expiring at the following year’s annual shareholder meeting or at such time as such director’s successor is appointed.
Grounds for Removing a Director
A director may be removed from office if the director:
|·||resigns his office by notice in writing delivered to us or tendered at a meeting of the board of directors;|
|·||becomes of unsound mind or dies;|
|·||without special leave of absence from the board of directors, is absent from meetings of the board of directors for six consecutive months and the board of directors resolves that his office be vacated;|
becomes bankrupt or has a receiving order made against him or suspends payment with his creditors;
|·||is prohibited by law from being a director; or|
|·||ceases to be a director by virtue of any provisions of Cayman Islands law or is removed from office pursuant to the articles of association.|
Proceedings of the Board of Directors
Our articles of association provide that our business is to be managed and conducted by our board of directors. The quorum necessary for the board meeting may be fixed by the board and, unless so fixed at another number, will be a majority of the board of directors.
Inspection of Books and Records
Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will in our articles of association provide our shareholders with the right to inspect our list of shareholders and to receive annual audited financial statements. See “Where You Can Find More Information”.
Changes in Capital
We may from time to time by ordinary resolution:
|•||increase the share capital by such sum, to be divided into shares of such classes and amount, as the resolution shall prescribe;|
|•||consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares;|
|•||sub-divide our existing shares, or any of them into shares of a smaller amount; or|
|•||cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of our share capital by the amount of the shares so cancelled.|
We may by special resolution reduce our share capital or any capital redemption reserve in any manner permitted by law.
Register of Members
Under Cayman Islands law, we must keep a register of members and there should be entered therein:
|(a)||the names and addresses of the members, a statement of the shares held by each member, and of the amount paid or agreed to be considered as paid, on the shares of each member;|
|(b)||the date on which the name of any person was entered on the register as a member; and|
|(c)||the date on which any person ceased to be a member.|
Under Cayman Islands law, the register of members of our company, which will be managed by our transfer agent following completion of this offering, is prima facie evidence of the matters set out therein (i.e. the register of members will raise a presumption of fact on the matters referred to above unless rebutted) and a member registered in the register of members should be deemed as a matter of Cayman Islands law to have legal title to the shares as set against its name in the register of members. Upon the closing of this offering, the register of members should be immediately updated to record and give effect to the issue of shares by us. Once our register of members has been updated, the shareholders recorded in the register of members will be deemed to have legal title to the shares set against their name. Please note that beneficial owners who do not hold their shares directly will not be disclosed in the register of members.
If the name of any person is incorrectly entered in or omitted from our register of members, or if there is any default or unnecessary delay in entering on the register the fact of any person having ceased to be a member of our company, the person or member aggrieved (or any member of our company or our company itself) may apply to the Cayman Islands Grand Court for an order that the register be rectified, and the Court may either refuse such application or it may, if satisfied of the justice of the case, make an order for the rectification of the register.
We are an exempted company with limited liability under the Companies Law of the Cayman Islands. The Companies Law in the Cayman Islands distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except for the exemptions and privileges listed below:
|·||an exempted company does not have to file an annual return of its shareholders with the Registrar of Companies;|
|·||an exempted company’s register of members is not open to inspection;|
|·||an exempted company does not have to hold an annual general meeting;|
|·||an exempted company may issue no par value, negotiable or bearer shares;|
|·||an exempted company may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance);|
|·||an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;|
|·||an exempted company may register as a limited duration company; and|
|·||an exempted company may register as a segregated portfolio company.|
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstances in which a court may be prepared to pierce or lift the corporate veil). Upon the closing of this offering, we will be subject to reporting and other informational requirements of the Exchange Act, as applicable to foreign private issuers. Except as otherwise disclosed in this prospectus, we currently intend to comply with the NASDAQ Listing Rules in lieu of following home country practice after the closing of this offering. The NASDAQ Listing Rules require that every company listed on the NASDAQ Capital Market hold an annual general meeting of shareholders. In addition, our articles of association allow directors to call an extraordinary general meeting of shareholders pursuant to the procedures set forth in our articles of association.
Differences in Corporate Law
The Companies Law is derived, to a large extent, from the Older Companies Acts of England but does not follow recent statutory enactments in England. In addition, the Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States.
Mergers and Similar Arrangements
The Companies Law permits mergers and consolidations between Cayman Islands companies and between Cayman Islands companies and non-Cayman Islands companies. For these purposes, (a) “merger” means the merging of two or more constituent companies and the vesting of their undertaking, property and liabilities in one of such companies as the surviving company and (b) “consolidation” means the combination of two or more constituent companies into a combined company and the vesting of the undertaking, property and liabilities of such companies to the consolidated company. In order to effect such a merger or consolidation, the directors of each constituent company must approve a written plan of merger or consolidation, which must then be authorized by (a) a special resolution of the shareholders of each constituent company, and (b) such other authorization, if any, as may be specified in such constituent company’s articles of association.
The written plan of merger or consolidation must be filed with the Registrar of Companies together with a declaration as to the solvency of the consolidated or surviving company, a list of the assets and liabilities of each constituent company and an undertaking that a copy of the certificate of merger or consolidation will be given to the members and creditors of each constituent company and that notification of the merger or consolidation will be published in the Cayman Islands Gazette. Dissenting shareholders have the right to be paid the fair value of their shares (which, if not agreed between the parties, will be determined by the Cayman Islands court) if they follow the required procedures, subject to certain exceptions. Court approval is not required for a merger or consolidation which is effected in compliance with these statutory procedures.
In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must, in addition, represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the Grand Court of the Cayman Islands can be expected to approve the arrangement if it determines that:
|·||the statutory provisions as to the required majority vote have been met;|
|·||the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those of the class;|
|·||the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and|
|·||the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.|
When a takeover offer is made and accepted by holders of 90% of the shares affected within four months, the offeror may, within a two-month period commencing on the expiration of such four month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion.
If an arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
In principle, we will normally be the proper plaintiff and as a general rule a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, there are exceptions to the foregoing principle, including when:
|·||a company acts or proposes to act illegally or ultra vires;|
|·||the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple majority vote that has not been obtained; and|
|·||those who control the company are perpetrating a “fraud on the minority”.|
Indemnification of Directors and Executive Officers and Limitation of Liability
Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our memorandum and articles of association permit indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless such losses or damages arise from dishonesty or fraud which may attach to such directors or officers. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation. In addition, we intend to enter into indemnification agreements with our directors and senior executive officers that will provide such persons with additional indemnification beyond that provided in our memorandum and articles of association.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Anti-Takeover Provisions in the Memorandum and Articles of Association
Some provisions of our memorandum and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares without any further vote or action by our shareholders.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our memorandum and articles of association, as amended and restated from time to time, for what they believe in good faith to be in the best interests of our company.
Directors’ Fiduciary Duties
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered that he owes the following duties to the company—a duty to act bona fide in the best interests of the company, a duty not to make a profit based on his or her position as director (unless the company permits him to do so) and a duty not to put himself in a position where the interests of the company conflict with his or her personal interest or his or her duty to a third party. A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his or her duties a greater degree of skill than may reasonably be expected from a person of his or her knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands.
In addition, directors of a Cayman Islands company must not place themselves in a position in which there is a conflict between their duty to the company and their personal interests. However, this obligation may be varied by the company’s articles of association, which may permit a director to vote on a matter in which he has a personal interest provided that he has disclosed that nature of his interest to the board. Our memorandum and articles of association provides that a director with an interest (direct or indirect) in a contract or arrangement or proposed contract or arrangement with the company must declare the nature of his interest at the meeting of the board of directors at which the question of entering into the contract or arrangement is first considered, if he knows his interest then exists, or in any other case at the first meeting of the board of directors after he is or has become so interested.
A general notice may be given at a meeting of the board of directors to the effect that (i) the director is a member/officer of a specified company or firm and is to be regarded as interested in any contract or arrangement which may after the date of the notice in writing be made with that company or firm; or (ii) he is to be regarded as interested in any contract or arrangement which may after the date of the notice in writing to the board of directors be made with a specified person who is connected with him, will be deemed sufficient declaration of interest. Following the disclosure being made pursuant to our memorandum and articles of association and subject to any separate requirement for Audit Committee approval under applicable law or the listing rules of Nasdaq, and unless disqualified by the Chair of the relevant board meeting, a director may vote in respect of any contract or arrangement in which such director is interested and may be counted in the quorum at such meeting. However, even if a director discloses his interest and is therefore permitted to vote, he must still comply with his duty to act bona fide in the best interest of our company.
In comparison, under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he or she reasonably believes to be in the best interests of the corporation. He or she must not use his or her corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. The Delaware General Corporation Law does not provide shareholders an express right to put any proposal before the annual meeting of shareholders, but in keeping with common law, Delaware corporations generally afford shareholders an opportunity to make proposals and nominations provided that they comply with the notice provisions in the certificate of incorporation or bylaws. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
There are no statutory requirements under Cayman Islands law allowing our shareholders to requisition a shareholders’ meeting. However, under our articles of association, on the requisition of shareholders representing not less than 30% of the voting rights entitled to vote at general meetings, the board shall convene an extraordinary general meeting. As an exempted Cayman Islands company, we are not obliged by law to call shareholders’ annual general meetings. However, our articles of association require us to call such meetings every year.
Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. As permitted under Cayman Islands law, our articles of association do not provide for cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Removal of Directors
Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our articles of association, directors may be removed by an ordinary resolution of shareholders.
Transactions with Interested Shareholders
The Delaware General Corporation Law contains a business combination statute applicable to Delaware public corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation or bylaws that is approved by its shareholders, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting stock or who or which is an affiliate or associate of the corporation and owned 15% or more of the corporation’s outstanding voting stock within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and for a proper corporate purpose and not with the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding Up
Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so.
Under the Companies Law of the Cayman Islands and our articles of association, our company may be dissolved, liquidated or wound up by a special resolution of our shareholders.
Variation of Rights of Shares
Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under Cayman Islands law and our articles of association, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class only with the sanction of a special resolution passed at a separate meeting of the holders of the shares of that class.
Amendment of Governing Documents
Under the Delaware General Corporation Law, a corporation’s certificate of incorporation may be amended only if adopted and declared advisable by the board of directors and approved by a majority of the outstanding shares entitled to vote, and the bylaws may be amended with the approval of a majority of the outstanding shares entitled to vote and may, if so provided in the certificate of incorporation, also be amended by the board of directors. Under Cayman Islands law, our memorandum and articles of association may only be amended by a special resolution of our shareholders.
Rights of Non-Resident or Foreign Shareholders
There are no limitations imposed by our memorandum and articles of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our memorandum and articles of association governing the ownership threshold above which shareholder ownership must be disclosed.
Directors’ Power to Issue Shares
Subject to applicable law, our board of directors is empowered to issue or allot shares or grant options and warrants with or without preferred, deferred, qualified or other special rights or restrictions.
|Quantitative and Qualitative Disclosures about Market Risk|
Our exposure to interest rate risk primarily relates to excess cash invested in short-term instruments with original maturities of less than a year and long-term held-to-maturity securities with maturities of greater than a year. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if we have to sell securities that have declined in market value due to changes in interest rates. We have not been, and do not expect to be, exposed to material interest rate risks, and therefore have not used any derivative financial instruments to manage our interest risk exposure.
We had no short-term investments and long-term held-to-maturity investments as of December 31, 2014.
Foreign Exchange Risk
Our functional currency is the RMB, and our financial statements are presented in U.S. dollar. The RMB appreciated by 2.9% against U.S. dollar in 2013 and depreciated by 0.6% in 2014. The change in the value of RMB relative to the U.S. dollar may affect our financial results reported in the U.S, dollar terms without giving effect to any underlying change in our business or results of operation.
Currently, our assets, liabilities, revenues and costs are denominated in RMB and in U.S. dollars, and our offering proceeds will be denominated in U.S. dollars. Our exposure to foreign exchange risk will primarily relate to those financial assets denominated in U.S. dollars. Any significant revaluation of RMB against U.S. dollar may materially affect our earnings and financial position, and the value of, and any dividends payable on, our Ordinary Shares in U.S. dollars in the future. See “Risk Factors — Risks Related to Doing Business in China — Fluctuations in exchange rates could adversely affect our business and the value of our securities.”
As a developer and manufacturer of plastic products, our Company is exposed to the risk of an increase in the price of raw materials. We historically have been able to pass on price increases to customers by virtue of pricing terms that vary with changes in resin prices, but we have not entered into any contract to hedge any specific commodity risk. Moreover, our Company does not purchase or trade on commodity instruments or positions; instead, it purchases commodities for use.
|Shares Eligible for Future Sale|
Before our initial public offering, there has not been a public market for our Ordinary Shares. Future sales of substantial amounts of shares of our Ordinary Shares in the public market after our initial public offering, or the possibility of these sales occurring, could cause the prevailing market price for our Ordinary Shares to fall or impair our ability to raise equity capital in the future.
The 11,666,667 Ordinary Shares that were not offered and sold in our initial public offering are “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, which are summarized below.
In general, under Rule 144 as currently in effect, once we have been subject to public company reporting requirements for at least 90 days, a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then that person is entitled to sell those shares without complying with any of the requirements of Rule 144.
In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell within any three-month period beginning 90 days after the date of this prospectus, a number of shares that does not exceed the greater of:
|·||1% of the number of Ordinary Shares then outstanding, which will equal shares immediately after our initial public offering, or|
|·||the average weekly trading volume of the Ordinary Shares during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.|
Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
In general, under Rule 701 as currently in effect, any of our employees, consultants or advisors who purchase shares from us in connection with a compensatory stock or option plan or other written agreement in a transaction before the effective date of our initial public offering that was completed in reliance on Rule 701 and complied with the requirements of Rule 701 will be eligible to resell such shares 90 days after the date of this prospectus in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144.
Registration on Form S-8
We intend to file a registration statement on Form S-8 under the Securities Act as soon as practicable after the closing of this offering to register up to of our Ordinary Shares subject to outstanding stock options or reserved for issuance under our stock incentive plan, such amount being equal to % of the number of Ordinary Shares issued and outstanding after the closing of the offering. This registration will permit the resale of these Ordinary Shares by nonaffiliates in the public market without restriction under the Securities Act. Ordinary Shares registered pursuant to the Form S-8 held by affiliates will be subject to Rule 144 volume limitations. As of the date of this Prospectus, we have not issued any options to purchase our Ordinary Shares.
We, our directors and executive officers and existing stockholders who currently own more than ten percent (10%) of our Ordinary Shares, will enter into lock-up agreements with the placement agent prior to the commencement of this offering pursuant to which each of these persons or entities, for a period of twelve (12) months from the effective date of the registration statement of which this prospectus is a part, agree not to, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of our securities or any securities convertible into or exercisable or exchangeable for shares of our common stock owned or acquired on or prior to the closing date of this offering (including any shares of common stock acquired after the closing date of this offering upon the conversion, exercise or exchange of such securities); (2) file or caused to be filed any registration statement relating to the offering of any shares of our capital stock; or (3) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock, whether any such transaction described in clause (1), (2) or (3) above is to be settled by delivery of common stock or such other securities, in cash or otherwise.
Summary of Shares Available for Future Sale
The following table summarizes the total shares potentially available for future sale.
|Shares||Date Available for Sale|
|Currently Outstanding Ordinary Shares Subject to Lock-Up Agreements:|
After six (6) months from the date of effectiveness or commencement of sales of the public offering at least 12 to 24
|Currently Outstanding Ordinary Shares Not Subject to Lock-Up Agreements and Registered for Resale:||After the date of this prospectus, these shares will be freely tradable.|
|Ordinary Shares in Incentive Share Option Pool:||From vesting dates through expiration of grants|
|Shares Offered in this Offering:||After the date of this prospectus, these shares will be freely tradable.|
|Material Tax Consequences Applicable to U.S. Holders of Our Ordinary Shares|
The following sets forth the material Cayman Islands, Chinese and U.S. federal income tax consequences related to an investment in our Ordinary Shares. It is directed to U.S. Holders (as defined below) of our Ordinary Shares and is based upon laws and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change. This description does not deal with all possible tax consequences relating to an investment in our Ordinary Shares, such as the tax consequences under state, local and other tax laws.
The following brief description applies only to U.S. Holders (defined below) that hold Ordinary Shares as capital assets and that have the U.S. dollar as their functional currency. This brief description is based on the tax laws of the United States in effect as of the date of this prospectus and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this prospectus, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below.
The brief description below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of shares and you are, for U.S. federal income tax purposes,
|·||an individual who is a citizen or resident of the United States;|
|·||a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia;|
|·||an estate whose income is subject to U.S. federal income taxation regardless of its source; or|
|·||a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.|
WE URGE POTENTIAL PURCHASERS OF
OUR SHARES TO CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR SHARES.
People’s Republic of China Enterprise Taxation
The following brief description of Chinese enterprise laws is designed to highlight the enterprise-level taxation on our earnings, which will affect the amount of dividends, if any, we are ultimately able to pay to our shareholders. See “Dividend Policy.”
Our company pays a 17% value added tax and EIT rates of 15% for Taizhou Fuling because it has been certified as a high technology company and thus enjoys a preferable rate. Great Plastics pays EIT tax at the standard 25% rate. If Taizhou Fuling’s favorable EIT rate were to be terminated or Taizhou Fuling were to fail to qualify to receive this rate, it would be subject to taxation at the standard EIT rate of 25% for enterprise income taxes, unless we were otherwise to qualify for a decreased tax rate.
Any gain or loss recognized by you generally will be treated as United States source gain or loss. However, if we are treated as a PRC resident enterprise for PRC tax purposes and PRC tax were imposed on any gain, and if you are eligible for the benefits of the tax treaty between the United States and PRC, you may elect to treat such gain as PRC source gain under such treaty and, accordingly, you may be able to credit the PRC tax against your United States federal income tax liability.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to our company levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not a party to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.
United States Federal Income Taxation
The following does not address the tax consequences to any particular investor or to persons in special tax situations such as:
|·||regulated investment companies;|
|·||real estate investment trusts;|
|·||traders that elect to mark-to-market;|
|·||persons liable for alternative minimum tax;|
|·||persons holding our Ordinary Shares as part of a straddle, hedging, conversion or integrated transaction;|
|·||persons that actually or constructively own 10% or more of our voting shares;|
|·||persons who acquired our Ordinary Shares pursuant to the exercise of any employee share option or otherwise as consideration; or|
|·||persons holding our Ordinary Shares through partnerships or other pass-through entities.|
Prospective purchasers are urged to consult their tax advisors about the application of the U.S. Federal tax rules to their particular circumstances as well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our Ordinary Shares.
Taxation of Dividends and Other Distributions on our Ordinary Shares
Subject to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect to the Ordinary Shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.
With respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend income, provided that (1) the Ordinary Shares are readily tradable on an established securities market in the United States, or we are eligible for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange of information program, (2) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met. Under U.S. Internal Revenue Service authority, Ordinary Shares are considered for purpose of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on the NASDAQ Capital Market. You are urged to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our Ordinary Shares, including the effects of any change in law after the date of this prospectus.
Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to our Ordinary Shares will constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”
To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), it will be treated first as a tax-free return of your tax basis in your Ordinary Shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
Taxation of Dispositions of Ordinary Shares
Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the Ordinary Shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the Ordinary Shares for more than one year, you will be eligible for (a) reduced tax rates of 0% (for individuals in the 10% or 15% tax brackets), (b) higher tax rates of 20% (for individuals in the 39.6% tax bracket) or (c) 15% for all other individuals. The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as United States source income or loss for foreign tax credit limitation purposes.
Passive Foreign Investment Company
Based on our current and anticipated operations and the composition of our assets, we do not expect to be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our current taxable year ending December 31, 2014. Our actual PFIC status for the current taxable year ending December 31, 2014 will not be determinable until the close of such taxable year and, accordingly, there is no guarantee that we will not be a PFIC for the current taxable year. Because PFIC status is a factual determination for each taxable year which cannot be made until the close of the taxable year. A non-U.S. corporation is considered a PFIC for any taxable year if either:
|·||at least 75% of its gross income is passive income; or|
|·||at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”).|
We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.
We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change. In particular, because the value of our assets for purposes of the asset test will generally be determined based on the market price of our Ordinary Shares, our PFIC status will depend in large part on the market price of our Ordinary Shares. Accordingly, fluctuations in the market price of the Ordinary Shares may cause us to become a PFIC. In addition, the application of the PFIC rules is subject to uncertainty in several respects and the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise in this offering. If we are a PFIC for any year during which you hold Ordinary Shares, we will continue to be treated as a PFIC for all succeeding years during which you hold Ordinary Shares. However, if we cease to be a PFIC, you may avoid some of the adverse effects of the PFIC regime by making a “deemed sale” election with respect to the Ordinary Shares.
If we are a PFIC for any taxable year during which you hold Ordinary Shares, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the Ordinary Shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the Ordinary Shares will be treated as an excess distribution. Under these special tax rules:
|·||the excess distribution or gain will be allocated ratably over your holding period for the Ordinary Shares;|
|·||the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and|
|·||the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.|
The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the Ordinary Shares cannot be treated as capital, even if you hold the Ordinary Shares as capital assets.
A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above. If you make a mark-to-market election for the Ordinary Shares, you will include in income each year an amount equal to the excess, if any, of the fair market value of the Ordinary Shares as of the close of your taxable year over your adjusted basis in such Ordinary Shares. You are allowed a deduction for the excess, if any, of the adjusted basis of the Ordinary Shares over their fair market value as of the close of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the Ordinary Shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the Ordinary Shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the Ordinary Shares, as well as to any loss realized on the actual sale or disposition of the Ordinary Shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such Ordinary Shares. Your basis in the Ordinary Shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate for qualified dividend income discussed above under “— Taxation of Dividends and Other Distributions on our Ordinary Shares” generally would not apply.
The mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations), including the NASDAQ Capital Market. If the Ordinary Shares are regularly traded on the NASDAQ Capital Market and if you are a holder of Ordinary Shares, the mark-to-market election would be available to you were we to be or become a PFIC.
Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S. Holder with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not currently intend to prepare or provide the information that would enable you to make a qualified electing fund election. If you hold Ordinary Shares in any year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 regarding distributions received on the Ordinary Shares and any gain realized on the disposition of the Ordinary Shares.
You are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our Ordinary Shares and the elections discussed above.
Information Reporting and Backup Withholding
Dividend payments with respect to our Ordinary Shares and proceeds from the sale, exchange or redemption of our Ordinary Shares may be subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service and furnishing any required information. We do not intend to withhold taxes for individual shareholders.
|Enforceability of Civil Liabilities|
We are incorporated under the laws of the Cayman Islands with limited liability. We are incorporated in the Cayman Islands because of certain benefits associated with being a Cayman Islands corporation, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws as compared to the United States and provides protections for investors to a lesser extent. In addition, Cayman Islands companies may not have standing to sue before the federal courts of the United States.
Most of our assets are located outside the United States. In addition, all of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons’ assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or such persons or to enforce against them or against us, judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof.
We have appointed CT Corporation System (111 Eighth Avenue, New York, NY 10011) as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any State of the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.
Jingtian & Gongcheng Law Firm, our counsel as to Chinese law, has advised us that there is uncertainty as to whether the courts of China would (1) recognize or enforce judgments of United States courts obtained against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or (2) be competent to hear original actions brought in each respective jurisdiction, against us or such persons predicated upon the securities laws of the United States or any state thereof.
Jingtian & Gongcheng Law Firm has advised us that the recognition and enforcement of foreign judgments are provided for under the Chinese Civil Procedure Law. Chinese courts may recognize and enforce foreign judgments in accordance with the requirements of the Chinese Civil Procedure Law based either on treaties between China and the country where the judgment is made or in reciprocity between jurisdictions. China does not have any treaties or other agreements with the Cayman Islands or the United States that provide for the reciprocal recognition and enforcement of foreign judgments. As a result, it is uncertain whether a Chinese court would enforce a judgment rendered by a court in either of these two jurisdictions.
We have been advised by Campbells, our counsel as to Cayman Islands law, that the United States and the Cayman Islands do not have a treaty providing for reciprocal recognition and enforcement of judgments of courts of the United States in civil and commercial matters and that a final judgment for the payment of money rendered by any general or state court in the United States based on civil liability, whether or not predicated solely upon the U.S. federal securities laws, is unlikely to be enforceable in the Cayman Islands. We have also been advised by Campbells that a final and conclusive judgment obtained in U.S. federal or state courts under which a sum of money is payable as compensatory damages (i.e., not being a sum claimed by a revenue authority for taxes or other charges of a similar nature by a governmental authority, or in respect of a fine or penalty or multiple or punitive damages) may be the subject of an action on a debt in the court of the Cayman Islands under the common law doctrine of obligation. A Cayman Islands court may impose civil liability on us or our directors or officers in a suit brought in the Cayman Islands against us or these persons with respect to a violation of U.S. federal securities laws, provided that the facts surrounding any violation constitute or give rise to a cause of action under Cayman Islands law.
We have entered into a placement agreement with Burnham Securities Inc., with respect to the ordinary shares in this offering. The business address of Burnham Securities Inc. is 1325 Avenue of the Americas, 26th Floor, New York, NY 10019. Under the terms and subject to the conditions contained in the placement agreement, we have agreed to issue and sell to the public through the placement agent, and the placement agent has agreed to offer and sell, shares of our common stock, on a best efforts basis. None of our officers, directors, or current shareholders will subscribe in this offering, and we are not aware of any investor who intends to subscribe for more than 5 percent of the offering.
The placement agreement provides that the obligation of the placement agent to arrange for the offer and sale of the shares of our common stock, on a best efforts basis, is subject to certain conditions precedent, including but not limited to (1) receipt of a listing approval letter from the Nasdaq Capital Market, (2) delivery of legal opinions and (3) delivery of auditor comfort letters. The placement agent is under no obligation to purchase any shares of our common stock for their own account. As a “best efforts” offering, there can be no assurance that the offering contemplated hereby will ultimately be consummated, or even if consummated that we will in fact obtain a listing on the Nasdaq Capital Market. The placement agent may, but is not obligated to, retain other selected dealers that are qualified to offer and sell the shares and that are members of the Financial Industry Regulatory Authority, Inc. The placement agent proposes to offer the shares to investors at the public offering prices less the placement fee and commissions set forth on the cover of this prospectus. There is no arrangement for funds to be received in escrow, trust or similar arrangement.
We anticipate the shares of our common stock will be listed on the Nasdaq Capital Market under the symbol “FUOI.” In order to list, the Nasdaq Capital Market requires that, among other criteria, at least 1,000,000 publicly-held shares of our common stock be outstanding, the shares be held in the aggregate by at least 300 round lot holders, the market value of the publicly-held shares of our common stock be at least $15.0 million, our stockholders’ equity after giving effect to the sale of our shares in this offering be at least $4.0 million, the bid price per share of our common stock be $4.00 or more, and there be at least three registered and active market makers for our common stock. If the application is approved, trading of our shares on the Nasdaq Capital Market is expected to begin within five days after the date of initial issuance of the common stock.
The following table summarizes the compensation and estimated expenses we will pay:
|Public offering price||$||$|
Placement fee and commissions
|Proceeds, before expenses, to us||$||$|
We have agreed to pay a non-accountable expense allowance to the placement agent equal to % of the gross proceeds received in the offering. In addition to the % non-accountable expense allowance, we have also agreed to pay or reimburse the placement agent for certain of its expenses relating to the offering in a maximum amount of $ for such expenses, including all actual fees and expenses incurred by the placement agent in connection with basic preliminary due diligence costs in an amount not to exceed $ in the aggregate, and up to $ of the placement agent’s actual accountable “road show” expenses for the offering. In addition, we have agreed to reimburse the fees and expenses of the placement agent’s legal counsel in an amount not to exceed $ . We estimate that our share of the total expenses of this offering, excluding placement fee and reimbursement of expenses described above, will be approximately $ .
As additional compensation to the placement agent, upon consummation of this offering, we will issue to the placement agent or its designees warrants to purchase an aggregate number of shares of our common stock equal to % of the number of shares of common stock issued in this offering, at an exercise price per share equal to % of the initial public offering price (the “Placement Agent’s Warrant”). The Placement Agent’s Warrant and the underlying shares of common stock will not be exercised, sold, transferred, assigned, or hypothecated or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the Placement Agent’s Warrant by any person for a period of 180 days from the effective date of the registration statement for this offering in accordance with FINRA Rule 5110. The Placement Agent’s Warrant will be exercisable at an initial exercise price per share equal to % of the initial public offering price and expire on the fifth anniversary of the effective date of the registration statement for this offering. Ordinary shares underlying the Placement Agent’s Warrant will be subject to piggyback registration rights, but neither the Placement Agent’s Warrants nor the underlying ordinary shares are registered in this offering.
A prospectus in electronic format may be made available on the websites maintained by the placement agent, or selling group members, if any, participating in the offering. The placement agent may agree to allocate a number of shares to selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the placement agent and selling group members that may make Internet distributions on the same basis as other allocations.
We have agreed that we will not: (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of our company or any securities convertible into or exercisable or exchangeable for shares of capital stock of our company; (ii) file or cause to be filed any registration statement with the SEC relating to the offering of any shares of capital stock of our company or any securities convertible into or exercisable or exchangeable for shares of capital stock of our company; or (iii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of our company, whether any such transaction described in clause (i), (ii) or (iii) above is to be settled by delivery of shares of capital stock of our company or such other securities, in cash or otherwise, in each case without the prior consent of the placement agent for a period of 180 days after the date of this prospectus, other than (A) the shares of our common stock to be sold hereunder, (B) the issuance by us of shares of our common stock upon the exercise of a stock option or warrant or the conversion of a security outstanding on the date of this offering, hereafter issued pursuant to our currently existing or hereafter adopted equity compensation plans or employment or consulting agreements or arrangements of which the placement agent has been advised in writing or which have been filed with the Commission or (C) the issuance by us of stock options or shares of capital stock of our company under any currently existing or hereafter adopted equity compensation plan or employment/consulting agreements or arrangements of our company.
Our directors and executive officers and stockholders who currently hold more than ten percent (10%) of our outstanding shares have entered into lock-up agreements with the placement agent prior to the commencement of this offering pursuant to which each of these persons or entities, with limited exceptions, for a period of twelve (12) months after the date of this prospectus, may not, without the prior written consent of the placement agent, (i) sell, offer to sell, contract or agree to sell, hypothecate, assign, transfer, pledge, grant any option to purchase or otherwise dispose of, or announce the intention to otherwise dispose of, directly or indirectly, any shares of our common stock (including, without limitation, common stock which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations promulgated under the Securities Act, as the same may be amended or supplemented from time to time (such shares, the “Beneficially Owned Shares”)) or securities convertible into or exercisable or exchangeable for shares of our common stock, or any warrants or other rights to purchase, the foregoing (ii) enter into any swap, hedge or similar agreement or arrangement that transfers in whole or in part, the economic risk of ownership of the Beneficially Owned Shares or securities convertible into or exercisable or exchangeable for shares of our common stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or (iii) engage in any short selling of the our common stock or securities convertible into or exercisable or exchangeable for shares of our common stock, or (iv) publicly announce an intention to effect any transaction specified in clause (i) or (ii) above.
The restrictions described in the immediately preceding paragraph are subject to certain exceptions as more fully described in the lock-up agreements.
We have agreed to indemnify the placement agent against certain liabilities, including liabilities under the Securities Act.
We have applied to have our common stock approved for listing/quotation on the Nasdaq Capital Market under the symbol “FUOI.” If the application is approved, trading of our common stock on the Nasdaq Capital Market is expected to begin within five days after the date of initial issuance of the common stock. We will not consummate and close this offering without a listing approval letter from the Nasdaq Capital Market. Our receipt of a listing approval letter is not the same as an actual listing on the Nasdaq Capital Market. The listing approval letter will serve only to confirm that, if we sell a number of shares in this best efforts offering sufficient to satisfy applicable listing criteria, our common stock will in fact be listed.
Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiations between us and the placement agent. In determining the initial public offering price, we and the placement agent expect to consider a number of factors including:
|·||the information set forth in this prospectus and otherwise available to the placement agent;|
|·||our prospects and the history and prospects for the industry in which we compete;|
|·||an assessment of our management;|
|·||our prospects for future earnings;|
|·||the general condition of the securities markets at the time of this offering;|
|·||the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and|
other factors deemed relevant by the placement agent and us.
Neither we nor the placement agent can assure investors that an active trading market will develop for shares of our common stock, or that the shares will trade in the public market at or above the initial public offering price.
|Expenses Relating to this Offering|
Set forth below is an itemization of the total expenses, excluding placement fee and commissions, that we expect to incur in connection with this offering. With the exception of the SEC registration fee, the FINRA filing fee and the NASDAQ listing fee, all amounts are estimates.
|Securities and Exchange Commission Registration Fee||$||3,486|
|NASDAQ Capital Market Listing Fee||75,000|
|Legal Fees and Expenses||470,000*|
|Accounting Fees and Expenses||250,000*|
|Printing and Engraving Expenses||25,000*|
In addition, we will pay our placement agent an aggregate placement fee equal to between $1,200,000 (4% of our aggregate offering) and $2,100,000 (7% of our aggregate offering), depending on whether we have introduced the investors to our placement (4% commission) or whether the placement agent has located such investors directly (7% commission).
Kaufman & Canoles is acting as counsel to our company regarding U.S. securities law matters. The validity of the Ordinary Shares offered hereby will be passed upon for us by Campbells. CKR Law is acting as counsel to the placement agent. Certain legal matters as to PRC law will be passed upon for us by Jingtian & Gongcheng. Kaufman & Canoles, P.C. may rely upon Jingtian & Gongcheng with respect to matters governed by PRC law and Campbells with respect to matters governed by Cayman Islands law.
The current address of Kaufman & Canoles, P.C. is Two James Center, 14th Floor, 1021 E. Cary St., Richmond, Virginia 23219. The current address of Jingtian & Gongcheng is 34/F, Tower 3, China Central Place, 77 Jianguo Road, Beijing 100025, China. The current address of Campbells is Scotia Centre, PO Box 884, Grand Cayman KY1-1103, Cayman Islands.
Friedman LLP, an independent registered public accounting firm, has audited our consolidated financial statements for each of the years ended December 31, 2014 and 2013. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Friedman LLP’s report, given on their authority as experts in accounting and auditing.
The current address of Friedman LLP is 1700 Broadway, New York, New York 10019.
|Interests of Named Experts and Counsel|
No expert or counsel named in this prospectus as having prepared or certified any part of this prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the common stock was employed on a contingency basis, or had, or is to receive, in connection with the offering, a substantial interest, direct or indirect, in the registrant. Nor was any such person connected with the registrant as a promoter, managing or principal placement agent, voting trustee, director, officer, or employee.
|Disclosure of Commission Position on Indemnification|
Insofar as indemnification for liabilities arising under the Securities Act, may be permitted to our directors, officers or persons controlling us, we have been advised that it is the SEC’s opinion that such indemnification is against public policy as expressed in such act and is, therefore, unenforceable.
|Where You Can Find Additional Information|
We have filed with the SEC a registration statement on Form F-1 under the Securities Act with respect to the Ordinary Shares offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits filed therewith. For further information about us and the Ordinary Shares offered hereby, reference is made to the registration statement and the exhibits filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and in each instance we refer you to the copy of such contract or other document filed as an exhibit to the registration statement. We currently do not file periodic reports with the SEC. Upon closing of our initial public offering, we will be required to file periodic reports (including an annual report on Form 20-F, which we will be required to file within 120 days from the end of each fiscal year), and other information with the SEC pursuant to the Exchange Act. A copy of the registration statement and the exhibits filed therewith may be inspected without charge at the public reference room maintained by the SEC, located at 100 F Street, NE, Washington, DC 20549, and copies of all or any part of the registration statement may be obtained from that office. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the website is www.sec.gov.
FULING GLOBAL INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
FULING GLOBAL INC. AND SUBSIDIARIES
TABLE OF CONTENTS
|Consolidated Financial Statements|
|Report of Independent Registered Public Accounting Firm||1|
|Consolidated Balance Sheets||2|
|Consolidated Statements of Income and Comprehensive Income||3|
|Consolidated Statements of Changes in Equity||4|
|Consolidated Statements of Cash Flows||5|
|Notes to Consolidated Financial Statements||6–22|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Fuling Global Inc.
We have audited the accompanying consolidated balance sheets of Fuling Global Inc. and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2014. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant es