As filed with the Securities and Exchange Commission on October 1, 2015

Registration No. 333-205894

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

 

 

PRE-EFFECTIVE AMENDMENT 3 TO

REGISTRATION STATEMENT ON FORM F-1
UNDER THE SECURITIES ACT OF 1933

 

 

 

FULING GLOBAL INC.

(Exact name of registrant as specified in its charter)

Not Applicable

(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)
  (I.R.S. Employer
Identification Number)

 

 

 

Southeast Industrial Zone, Songmen Town

Wenling, Zhejiang Province

People’s Republic of China 317511

+86-576-86623058 – telephone

+86-576-86623099 – facsimile

 

The Corporation Trust Company

Corporation Trust Center

1209 Orange Street

Wilmington, DE 19801

+1-800-677-3394 – telephone

     
(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)

Copies to:

Anthony W. Basch, Esq.

Xiaoqin Li, Esq.

Kaufman & Canoles, P.C.

Two James Center, 14th Floor

1021 East Cary Street

Richmond, Virginia 23219

+1-804-771-5700 – telephone

+1-888-360-9092 – facsimile

 

Mark E. Crone, Esq.

Ronniel Levy, Esq.

CKR Law

1330 Avenue of the Americas, 35th Floor

New York, New York 10019

+1-212-259-7300 – telephone

+1-212-259-8200– 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 Each Class of
Securities to be Registered
   Amount to be
Registered (1)
     Proposed
Maximum
Aggregate
Price Per
Share
    Proposed Maximum
Aggregate Offering
Price (2)
    Amount of
Registration Fee
 
Common Stock     5,750,000     $ 5.00     $  28,750,000.00     $  3,340.75 (3)
                                 

(1)Includes 750,000 shares that may be sold to investors upon the exercise of an over-subscription option.

  

(2)Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

 

(3)Previously paid.

 

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 October 1, 2015

 

5,000,000 Ordinary Shares

 

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 5,000,000 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 $5.00 per share. We have applied to list our Ordinary Shares on The Nasdaq Capital Market under the symbol “FORK.”

 

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.

 

    Per Common
Share
    Total (No
Over-subscription)
  Total (Full
Over-subscription)
 
Assumed public offering price   $ 5.00      $ 25,000,000   $ 28,750,000  
Underwriting fee and commissions (6.8%)   $ 0.34      $  1,700,000   $ 1,955,000  
Proceeds to us, before expenses   $ 4.66      $ 23,300,000    $ 26,795,000  

 

Besides the above underwriting fee and commissions, we will pay additional items of value in connection with this offering that are viewed by the Financial Industry Regulatory Authority, or FINRA, as underwriting compensation. These payments will further reduce proceeds available to us before expenses. See “Underwriting.” We expect our total cash expenses for this offering (including cash expenses payable to our underwriter for its out-of-pocket expenses and the above underwriting fee and commissions) to be approximately $2.8 million if the over-subscription option is not exercised or approximately $3.1 million if the over-subscription option is exercised in full.

 

This offering is being conducted on a best efforts, all-or-none basis and is not being firmly underwritten. The underwriter, Burnham Securities, Inc., must sell all 5,000,000 Ordinary Shares if any are sold. The underwriter is required to use only its best efforts to sell the securities offered. In addition, we have given our underwriter an over-subscription option to sell up to an aggregate of 750,000 additional Ordinary Shares. The offering will terminate upon the earlier of: (i) a date mutually acceptable to us and our underwriter after which the entire offering is sold or (ii) the close of business on  October 31, 2015 unless extended at the sole discretion of the underwriter and us to November 30, 2015. Until we sell 5,000,000 Ordinary Shares, all investor funds will be held in an escrow account at Signature Bank, located at 950 Third Avenue, 9th Floor, New York, NY 10017. If we do not sell 5,000,000 Ordinary Shares by close of business on October 31, 2015 (or November 30, 2015 if extended), 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.

 

Burnham Securities, Inc.

The date of this prospectus is            , 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

Prospectus Summary 1
   
Risk Factors 11
   
Special Note Regarding Forward-Looking Statements 27
   
Letter from Chief Executive Officer– Mr. Xinfu Hu 28
   
Use of Proceeds 30
   
Dividend Policy 31
   
Exchange Rate Information 31
   
Capitalization 32
   
Dilution 33
   
Post-Offering Ownership 33
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
   
Business 56
   
Regulations 73
   
Our Employees 78
   
Description of Property 78
   
Management 80
   
Executive Compensation 85
   
Related Party Transactions 88
   
Principal Shareholders 88
   
Description of Share Capital 90
   
Quantitative and Qualitative Disclosures about Market Risk 99
   
Shares Eligible for Future Sale 100
   
Material Tax Consequences Applicable to U.S. Holders of Our Ordinary Shares 101
   
Enforceability of Civil Liabilities 105
   
Underwriting 106
   
Expenses Relating to this Offering 109
   
Legal Matters 109
   
Experts 110
   
Interests of Named Experts and Counsel 110
   
Disclosure of Commission Position on Indemnification 110
   
Where You Can Find Additional Information 110

 

Neither we nor the underwriter has authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our Ordinary Shares only in jurisdictions where offers and sales are permitted.

 

 

Table of Contents 

 

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 underwriter named herein and no other person has been authorized by us to use this document to offer or sell any of our securities.

 

Until          , 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.

 

 

Table of Contents 

 

Prospectus Summary

 

This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our Ordinary Shares. You should carefully consider, among other things, our consolidated financial statements and the related notes and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

Company Overview

 

If you are like the average American, you have probably already used our products. According to a recent Gallup Consumption poll, more than 80% of Americans eat fast food at least once per month. Our environmentally conscious disposable plastic food service products are used by McDonald's, Subway, Wendy’s, Burger King, KFC (China only), Walmart, McKesson, Woolworths and more than one hundred other customers.

 

During the year ended December 31, 2014, we had (a) more than 100 customers that each accounted for less than 1% of our total revenues; (b) 12 customers that each accounted for 1% to 3% of our total revenues; (c) 6 customers that each accounted for 3% to 5% of our total revenues; (d) 2 customers that each accounted for 5% to 7% of our total revenues; (e) 4 customers that each accounted for 7% to 10% of our total revenues; and (f) no single customer that accounted for more than 10% of our total revenues. During the year ended December 31, 2013, we had (a) more than 100 customers that each accounted for less than 1% of our total revenues; (b) 12 customers that each accounted for 1% to 3% of our total revenues; (c) 2 customers that each accounted for 3% to 5% of our total revenues; (d) 0 customers that each accounted for 5% to 7% of our total revenues; (e) 3 customers that each accounted for 7% to 10% of our total revenues; and (f) 2 customers that each accounted for more than 10% of our total revenues.

 

Although we do not always have written contracts directly with our quick service restaurant (“QSR”) customers, when we do, we typically sign contracts with terms of between one and four years. Our expectations are from the commitments based on these contracts and past course of dealing. However, we cannot guarantee that sales in the future will be at the same rates as in the above paragraph.

 

In addition to serving these QSR customers, we also provide our products to international supermarket and retail stores, international plastic food service product dealers, manufacturers and small and medium-sized wholesale dealers.

 

Based on revenues, in 2014, we sold approximately 92.87% of our products in the United States, 2.33% in Europe, 1.46% in Australia, 1.45% in Canada, 0.92% in Central and South America, 0.82% in the Middle East, and 0.15% in China.

 

Twenty years ago, we were a small manufacturer of plastic household articles and baskets. Today, we have grown into one of China’s largest exporters of disposable serviceware. The China Chamber of Commerce for Import and Export of Light Industrial Products and Arts and Crafts has recognized Taizhou Fuling as one of China’s top three plastic kitchenware and serviceware companies for exports every year from 2011 through 2014, based on export sales amount. During this process, we have transformed our product line, entered the U.S. market, and established our brand recognition in the industry. We have grown steadily and have built trust with customers around the world with the high quality of our products.

 

As we have grown, we have continued to focus on our mission of producing environmentally-friendly products. Our customers rely on us for top quality foodservice disposable products, delivered quickly with dependable service, all at the lowest reasonable price.

 

China Operations

 

Factory

 

Currently, we have following three factories in China with more than 1,000 employees:

 

1.Wenqiao factory: 8 Shengpan Road, Guanweitong Village, Wenqiao County, Wenling City, Zhejiang Province
2.Songmen factory: South of Binhai Road, Songmen Town, Wenling City, Zhejiang Province
3.Sanmen factory: Binhai Xincheng, Sanmen County, Taizhou City, Zhejiang Province

 

We also plan to build another factory in Wenling city. For more details, please see “Business—Wenling Expansion.”

 

U.S. Operations and Expansion

 

Logistics Center

 

We have a sound and efficient sales network in the North America which we continue to invest in. Currently, we distribute our products through logistics centers in following cities:

 

1.Linden, New Jersey, U.S.
2.Los Angeles, California, U.S.
3.

Lansdale, Pennsylvania, U.S.

4.Allentown, Pennsylvania, U.S.
5.Toronto, Ontario, Canada
6.Vancouver, British Columbia, Canada

 

After the completion of this offering, we also plan to secure following additional logistics centers:

 

7.Chicago, Illinois, U.S.
8.Dallas, Texas, U.S.

 

Allentown Factory

 

In 2014, after careful consideration, we extended our network by establishing a factory in Allentown, Pennsylvania with initially 4 employees. We have already invested approximately $2.8 million into this U.S. factory, which became operational in June 2015. This modern facility is also greatly expandable, should demand require it. For more details, see “BUSINESS — Allentown Expansion.”

 

We will integrate the resources from both China and U.S. to continue to deliver our environmentally conscious plastic products to international customers promptly and efficiently.

 

Our Offering

 

This is the initial public offering of our Ordinary Shares. Although we are launching production at our newly-constructed manufacturing facility in Allentown, Pennsylvania, we currently produce all of our products in China. We anticipate that a significant percentage of our products will continue to be produced in China (particularly plastic disposable cutlery, which is more efficiently produced in China and then shipped to the United States for sale).

 

 1 
Table of Contents 

 

On the other hand, we also produce straws and drinking cups, and the economics of producing these products currently favors moving production to the United States, which led to our decision to expand into our Allentown facility. When we ship cutlery, we are able to pack it tightly, maximizing the number of pieces in a container. By contrast, when we ship straws and drinking cups, we also have to ship a lot of empty space with the product. Therefore, for these kinds of products, we can choose to manufacture them in the United States to reduce shipping costs.

 

As we have automated the process of manufacturing our disposable serviceware, we have found that higher wages paid in the United States are, in the case of straws, offset by the savings in shipping costs from China. Moreover, U.S. domestic manufacturing better meets the requirements of our American clients, allowing us to implement just-in-time delivery principles and satisfy the environmental considerations that underlie our business decisions. For this reason, we will use approximately 32% of our offering proceeds to further develop and grow our United States manufacturing and sales operations.

 

We expect to use approximately 63% this offering to expand our factories in China, which will allow us to keep up with increased demand that we foresee in the near future.

 

Finally, we believe it is important to continue to innovate so that we can leverage improvements in technology to deliver high quality, ecological products at reasonable prices. For this reason, we are also devoting approximately 5% of our offering proceeds to research and development of new technology, new environmentally-friendly materials and manufacturing process.

 

We believe that completing our public offering will position our company to compete more effectively and grow more rapidly than relying on purely internal financing and organic growth from existing facilities. Strategically, while we have expanded steadily over the last few years, by raising the profile of our company through an initial public offering in the United States, we expect to increase our U.S. production and sales and find new opportunities in our most important market. Additionally, by virtue of our adherence to the increased transparency required of public companies, we expect that our customers will have even more confidence in transacting business with our company.

 

Company Structure

 

Fuling Global Inc. (“FGI”) was incorporated in the Cayman Islands on January 19, 2015. 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 and kitchenware in the People’s Republic of China (“PRC” or “China”) and the United States (“U.S.”). Most products are exported to the U.S. and Europe and sold to major fast food chains, international supermarkets and retail stores, manufacturers, 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 China with initial registered capital of $0.51 million.

 

After several registered capital increases and capital contributions by Taizhou Fuling’s two shareholders, Wenling Fulin Plastic Products Ltd. (previously Wenling County Songmen Plastic Co., Ltd., or “Wenling Songmen”) and Total Faith Holdings Limited (“Total Faith”), and the acquisition on May 28, 2014 by Total Faith of Wenling Songmen’s 24% interest, Taizhou Fuling changed its entity type from a Sino-Foreign joint venture to a wholly foreign owned enterprise (“WFOE”). Total Faith was incorporated in the British Virgin Islands on April 26, 2004. At the completion of such increases in registered capital and purchase of Wenling Songmen’s interest by Total Faith, Taizhou Fuling had registered capital of $11,110,000.

 

Taizhou Fuling has three wholly-owned subsidiaries, (1) Zhejiang Great Plastics Technology Co., Ltd. (“Great Plastics”), (2) Direct Link USA LLC  (“Direct Link”), and (3) Fuling Plastic USA, Inc. (“Fuling USA”). Total Faith has one minority owned subsidiary, Domo Industry Inc. (“Domo”), a U.S. company established in the State of New York in October 2007. A chart of our corporate structure can be found on page 3 below.

 

Great Plastics was incorporated in China in March 2010 and principally engaged in the production of plastic straw, cup and plate items. Direct Link was incorporated in the State of Delaware in 2011 to serve as a trading entity in the U.S. for our products. Fuling USA was incorporated in the Commonwealth of Pennsylvania in 2014 to own, expand and operate our Allentown facility. Fuling USA is establishing Company’s first production factory in the U.S. and will principally engage in the production of plastic straw items.

 

Prior to the incorporation of Fuling USA, Taizhou Fuling wholly owned another subsidiary incorporated in 2009 in the State of New York, named Fuling Plastics USA Inc. (“Old Fuling USA”). Old Fuling USA served as one of the trading entities of Taizhou Fuling in the U.S. until early 2014 and its business was discontinued and transferred over to the new Fuling USA when we decided to set up the new factory in Allentown, Pennsylvania. Old Fuling USA was dissolved on April 8, 2015.

 

Total Faith also consolidates the financial statements (minus the non-controlling interest of another shareholder) of Domo, because 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 has a majority of the voting rights on the Board of Directors of Domo. Total Faith is obligated to absorb a majority of the risk of loss from Domo’s activities and to receive a 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 under Accounting Standards Codification (“ASC”) 810-10-05-08A. Accordingly, Total Faith consolidates Domo’s operating results, assets and liabilities.

 

 2 
Table of Contents 

 

Both Direct Link and Domo serve as import trading companies of Taizhou Fuling in the United States. Besides manufacturing products in the United States, Fuling USA may import certain products from our China entities and sell them to our customers in the United States.

 

On January 9, 2015, Fuling USA transferred 100% of its interest in Direct Link to Taizhou Fuling, and our co-founder, Ms. Guilan 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 100% equity interest in Total Faith to FGI. At the completion of these transactions, (i) Total Faith owns 49% of the equity of Domo but still maintains effective control of Domo; (ii) Taizhou Fuling owns 100% of the equity of Direct Link; (iii) FGI owns 100% of the equity of Total Faith; and (iv) eight shareholders own 100% of FGI.

 

Our current corporate structure is as follows prior to completion of this offering:

  

 

Industry and Market Background

 

Our company’s primary market is the United States, with approximately 92.87% of our products being sold in America in 2014. Our customers span four main groups: 

 

      Sales Percentage 
Type of Customer  Geographic Region 

Six Months
ended
June 30, 2015

    2014   2013 
Dealers(1)  USA, Europe, Central and South America, Australia, Middle East, Canada    58 %    54%   58%
QSRs  USA    31 %    33%   33%
Retailers(2)  USA, Australia    6 %    6%   7%
Manufacturers(3)  USA    5 %    7%   2%
Total       100 %    100%   100%

 

(1)Wholesalers of foodservice disposable industry buy our products and sell to other businesses. Our dealers include Imperial Bag & Paper Co., LLC and Fasho International, LLC.
(2)Retailers sell our products directly to individuals for profit, but they do not include QSRs, which typically include our products as a part of the food items they sell and do not sell our products separately.
(3)OEMs resell our products under their own name and branding.

 

Our products form part of the foodservice disposables industry. According to the 2013 forecast report of Freedonia Group, an international business research company, the entire industry in the U.S. is poised to grow to $19.7 billion in 2017, a compound annual growth rate of 3.6% from 2012 through 2017. Demand in the industry is driven by trends in consumer food expenditures. Generally speaking, the more food purchased for consumption away from home and outside traditional full-service restaurants (which are more likely to use non-disposable foodservice items), the higher the demand for foodservice disposables.

 

The foodservice disposables industry consists of three segments: (i) packaging, (ii) serviceware and (iii) napkins and other disposables. Packaging includes containers, lids, wraps, bags, packaging trays and container sleeves. Serviceware includes cups, utensils, plates, bowls, food and beverage carriers, placemats, coffee cup sleeves, coasters and doilies. Napkins and other disposables include food and beverage napkins, moist towelettes, toothpicks and skewers.

 

We produce environmentally conscious plastic products primarily in the serviceware segment and, to a lesser extent, in the packaging segment.

 

As a percentage of total U.S. foodservice disposables, the packaging segment accounted for approximately 46.2% of the revenues in the U.S. foodservice disposables industry in 2012 and is projected to grow from $7.6 billion in 2012 to $9.3 billion in 2017, a compound annual growth rate of 4.1%. Growth is anticipated to come from the trend toward limited service restaurants with expanded menu options and longer opening hours. Combined with the popularity of take-out food, these factors should cause the packaging products segment to continue to grow through 2017.

 

The serviceware segment accounted for approximately 45.5% of the revenues in the U.S. foodservice disposables industry (or $7.5 billion) in 2012 and is expected to grow at 3.2% compound annual growth rate through 2017.

 

 3 
Table of Contents 

 

Our Products

 

We manufacture environmentally-friendly plastic foodservice disposable products (“disposables”). Our historic strength is in the production of disposable cutlery, the quality and value of which has satisfied the exacting requirements of large, sophisticated, multinational purchasers that have decades of experience sourcing foodservice disposables. We have built on that strength to deliver drinking straws, cutlery and serviceware such as cups and plates to customers around the world. Our largest customer base is in the United States, which accounts for more than 90% of our revenues. We plan to systematically integrate the resources from the two countries we primarily operate in, China and the United States, and manufacture straws and potentially cups in the United States. We will be able to send large quantity, single specification orders to be produced through the high capacity automation equipment in our U.S. Allentown factory so we can deliver goods faster and reduce shipping costs. For those low-volume, multi-variety, multi-specification orders, we will continue to send them to our factories in China so we can take advantage of lower labor costs. We own our state-of-the-art factories in Zhejiang Province, China, and we have obtained ISO9001 quality management system, ISO14001 environmental management system, Hazard Analysis Critical Control Point (“HACCP”), Good Manufacturing Practice (“GMP”) and U.S. Food and Drug Administration (“FDA”) food facility registration certifications. These certifications are crucial for businesses like ours that serve some of the most sophisticated and demanding purchasers of foodservice disposables in the world: the leading multinational QSRs.

 

Cutlery

 

We manufacture forks, knives, spoons, and general, specialized and multipurpose utensils (for instance, the spork), both in single- and multi-utensil packages. More than ninety customers purchased our cutlery products in 2014. Approximately 54% ($45.211 million) and 56% ($38.828 million) of our sales in 2014 and 2013, respectively, were for cutlery products.

 

Drinking Straws

 

We have been expanding into providing straws to QSR customers. While it might initially seem like straws would be an afterthought compared to cutlery, in fact straws are extremely important in QSRs, as consumers frequently purchase a drink at a QSR but often order hamburgers or other sandwiches that do not require utensils. We believe that our straws business will become even more successful as we move production to the United States, since we will reduce our shipping costs significantly, while managing our labor costs, with our new, fully automated production lines in Allentown, Pennsylvania. More than thirty customers purchased our drinking straw products in 2014. Approximately 16% ($13.055 million) and 14% ($9.557 million) of our sales in 2014 and 2013, respectively, were for drinking straw products.

 

Cups and Plates

 

We also manufacture and sell cups and plates. We sell “courtesy cups” to QSRs. Courtesy cups are small, clear or translucent plastic cups designed to hold water and provided free of charge for patrons who do not purchase a beverage. More than fifty customers purchased our cup and plate products in 2014. Approximately 27% of our sales in 2014 ($22.699 million) and 2013 ($18.818 million) were for cup and plate products.

 

Our Opportunity and Strategy

 

Our strategy is to increase our operational advantage, continuously develop environmentally-friendly products and solutions for our leading multinational clients, and grow our packaging segment.

 

1.Increase Operational Advantage

 

Strategy: Because of our customer focus, we are very competitive in price, while maintaining high quality and environmentally responsible production. We plan to decrease our costs further by reducing labor costs and shipping costs by increasing our U.S. manufacturing operations.

 

As labor costs rise in China, we have found that we have less of an advantage over similarly situated companies producing from other countries and exporting to the U.S. 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. Although we have automated a significant proportion of our operations, we believe we still have room to continue to automate our production processes and enjoy savings in labor expenses and increased productivity.

 

For those products which normally have higher shipping costs relative to sales price or gross margin, such as straws, we can reduce our shipping costs by manufacturing them in the United States. Our decision to invest in our Allentown factory was for this purpose.

 

Risks: Our expansion into America may not be successful in decreasing our costs as anticipated. To the extent lower cost manufacturers develop abroad, they could compete with us on price, notwithstanding our reduction by moving to the United States. Moreover, if we are unable to automate our processes as much as we expect, the reduction in costs may be lower than projected.

 

2.Develop Environmentally-Friendly Solutions

  

We also have focused on developing 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.

 

Risks: These environmentally-friendly solutions may not bring us the advantage we anticipate. First of all, there is uncertainty that our customers will appreciate the value of our environmental-friendly solutions and be willing to pay a premium for, or otherwise favor purchase of, such environmentally-friendly products. Second, our competitors may have more advanced environmentally-friendly solutions than we develop. In such case, we could find we have less of an advantage than anticipated.

 

 4 
Table of Contents 

 

3.Grow Packaging Segment

 

Strategy: While we will strengthen our traditional serviceware segment, we also plan to grow our packaging segment. Our customers in this segment are mainly retailers and wholesalers. The packaging segment is only a small percentage of our sales now. We aim to achieve significant growth in this segment. Our decision is based on the following:

 

(1)   We have the same customer base as in our serviceware segment.

 

(2)   Several big cities including New York have announced regulatory bans on some level for plastic foam containers. We believe this trend will only increase. Most of these containers are made of a plastic resin known as expanded polystyrene. These polystyrene materials are difficult to recycle and do not biodegrade efficiently. As a result of increased local regulations as well as national and international mandates and socioeconomic pressures on our customers to purchase in an environmentally conscious manner, we estimate that our environmentally-friendly packaging products will see new opportunities for increased sales.

 

(3)   We have developed advanced environmentally-friendly packaging products and have the facilities to produce them.

 

Risks: Our plan to grow our packaging segment may fail, because we are competing in a segment with strongly established companies in the U.S., and we are competing in a new market with products of different materials instead of only plastic. For example, the packaging segment makes use of paper and foil products, while plastic dominates the serviceware segment. Even if we are able to produce high-quality plastic packaging products, customers may prefer to use products made from other materials.

 

Competitive Strengths

 

We believe we have the following competitive strengths. Some of our competitors may have these or other competitive strengths.

 

·Advanced technology. We use proprietary industrialized machines and processes protected by patents.

 

·Top-class equipment and facilities. Our facilities in Taizhou, Zhejiang Province and Allentown, Pennsylvania feature equipment from leading international firms, state-of-the art automated manufacturing systems and quality, health and safety records that allow us to boast an extremely low rate of customer complaints. Our Allentown facility will enable us to manufacture and ship certain products more quickly and cheaply in the U.S. than we have been able to do in the past.

 

·Strong research and development. We use cutting-edge technology and employ highly educated people with strong research backgrounds to assist us in developing new degradable products and more efficient processes to manufacture our products.

 

·Powerful sales and distribution network. We use warehouses in New Jersey, Pennsylvania, California, Toronto and Vancouver to ensure that our products are quickly available when our customers need them. While some of our U.S. competitors have equivalent or, in some cases, better distribution, we are not aware of any Chinese competitors that match our North American network.

 

·

In-house tooling facility. Most of our products consist of injection molded plastics, which rely on molds for the products. Each product requires its own specific mold. Many competitors in our industry order such molds from tooling firms, which can be expensive and time consuming. By contrast, we have our own tooling department that is responsible for creating dies from customer specifications. This allows us to save time and money compared to ordering from third parties. Moreover, it allows us to maintain a strong library of dies. At present we maintain approximately 1,100 molds for more than 600 customer products.

 

·Economies of scale. We are pleased to provide products to a variety of customers and to fill large orders for a number of those customers. These large orders allow us to increase our efficiency, reduce costs and deliver high quality products quickly and to our customers’ exacting demands.

 

·Strong reputation in foodservice disposables industry. Our customer list is filled with sophisticated, multinational purchasers of foodservice disposable products—some of the largest users of such products and some of the most recognizable consumer brands in the world. They know what they want and they trust us to manufacture it for their restaurant, supermarket, retail store, distributor and other foodservice disposable manufacturer businesses.

 

Our Challenges and Risks

 

We recommend that you consider carefully the risks discussed below and under the heading “Risk Factors” beginning on page 11 of this prospectus before purchasing our Ordinary Shares. If any of these risks occur, our business, prospects, financial condition, liquidity, results of operations and ability to make distributions to our shareholders could be materially and adversely affected. In that case, the trading price of our Ordinary Shares could decline and you could lose some or all of your investment. These risks include, among others, the following:

 

 5 
Table of Contents 

  

 

·Risk regarding our ability to use offering proceeds. Under PRC laws and regulations, we are permitted to use the proceeds from this offering to fund our PRC subsidiaries only through parent/subsidiary loans or capital contributions, subject to applicable government registration and approval requirements. We intend to initiate this process immediately upon completion of this offering. We currently anticipate using approximately two-thirds 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) China’s Ministry of Commerce (“MOFCOM”) to increase Taizhou Fuling’s registered capital, (ii) China’s State Administration for Industry and Commerce (“SAIC”) to alter Taizhou Fuling’s business certificate to reflect the increase in registered capital and (iii) China’s State Administration of Foreign Exchange (“SAFE”) to allow Taizhou Fuling’s Chinese bank to convert U.S. dollars into Chinese Renminbi (“RMB”) in order to fund such increased registered capital, or each of the foregoing agencies’ respective local counterparts. This approval process typically takes 30 to 90 days in total, and sometimes longer, from the time MOFCOM or its local branches receive all the required application documents to begin the process. The remaining approximately one-third of such gross proceeds will be used for general corporate purposes, including expenses related to this offering. 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, the total amount of such parent/subsidiary loans may not exceed the difference between Taizhou Fuling’s total investment amount as approved by the foreign investment authorities and Taizhou Fuling’s registered capital. 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. 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”.

 

·Possibility to be classified as “Resident Enterprise.” Under the Enterprise Income Tax Law, we may be classified as a “Resident Enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.

 

·Shareholder enforcement risk. Since most of our operations and assets are located in the PRC, shareholders may find it difficult to enforce a U.S. judgment against the assets of our company, directors and executive officers located in China.

 

·Reputation risk. 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 shares, especially if such matter cannot be addressed and resolved favorably.

 

·Low barrier to entry. We believe the barrier to entry in our industry is relatively low. Although we believe we distinguish our company from competitors on the basis of quality, technology and service, to the extent our customer base focuses heavily on price, many of our competitors can provide products at relatively low prices, affecting our profit margins as we seek to compete with them.

 

·Expansion risk. We have devoted significant resources to our decision to build a manufacturing and warehousing facility in the United States and commence operations in Allentown, Pennsylvania. While this decision will offer new opportunities to our company, it also is a new venture and has only recently begun to operate and exposes us to increases in labor costs. As a result, we have no guarantee that we will be successful in this new expansion. If we do not manage our expansion effectively, our business prospects could be impaired.

 

·Significantly larger U.S. competitors. The three largest U.S. suppliers of foodservice disposables account for a significant percentage of the 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 and three companies holding almost 30% of the U.S. market share. 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. 

 

·Reliance risk. 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.

 

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

 

Implications of Being an Emerging Growth Company

 

We qualify as an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

·the ability to include only two years of audited financial statements and only two years of related management’s discussion and analysis of financial condition and results of operations disclosure; and

 

 6 
Table of Contents 

 

·an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002.

 

We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenue, have more than $700 million in market value of our Ordinary Shares held by non-affiliates or issue more than $1.0 billion of non-convertible debt over a three-year period.

 

Corporate Structure

 

We are a Cayman Islands exempted company with limited liability. We currently have eight shareholders who will hold approximately 70% after completion of the offering if the over-subscription option is not exercised, or approximately 67% after completion of the offering if the over-subscription option is exercised in full. Of these shareholders, our largest shareholder is Ms. Guilin Jiang, our Chairman of the Board and Chief Operating Officer, who owns her shares through Silver Trillion Investments Limited, a British Virgin Islands company. As Silver Trillion/Ms. Jiang holds 47.5% of our Company prior to completion of this offering and approximately 33.3% after completion of the offering if the over-subscription option is not exercised or approximately 31.8% after completion of the offering if the over-subscription option is exercised in full, Ms. Jiang has significant influence on the operation of our business. Our second largest shareholder is Celestial Sun Holding Limited, a British Virgin Islands company owned by Sujuan Zhu, the sister-in-law of Ms. Jiang, with 19% of our Company prior to completion of this offering and approximately 13.3% after completion of the offering if the over-subscription option is not exercised or approximately 12.7% after completion of the offering if the over-subscription option is exercised in full. No other shareholder holds ten percent or more of our shares prior to this offering.

 

Corporate Information

 

We operate from a 17,780 square meter manufacturing facility in the Southeast Industrial Zone, Songmen Town, located on 28,073 square meters of land in Wenling, Zhejiang Province, China. We lease a 5,120 square meter manufacturing facility in the Economic Development Zone in Wenling, Zhejiang Province. We also have a 33,480 square meter manufacturing facility in Binhai Xincheng, located on 30,349 square meters of land in Sanmen County, Zhejiang Province. We have opened our fourth manufacturing facility with approximately 8,175 square meters of space which we lease in Allentown, Pennsylvania.

 

Our principal executive offices are located at the Southeast Industrial Zone, Songmen Town, Wenling, Zhejiang Province, People’s Republic of China 317511. The telephone number of our principal executive offices is +86-576-8662 3058. We maintain a website at www.fulingplastics.com, on which we will post our key corporate governance documents, including our board committee charters and our code of ethics. We do not incorporate the information on our website into this prospectus and you should not consider any information on, or that can be accessed through, our website as part of this prospectus.

 

Prospectus Conventions

 

Except where the context otherwise requires and for purposes of this prospectus only, “we,” “us,” “our company,” “Company,” “our” and “Fuling” refer to:

 

·Fuling Global Inc., a Cayman Islands company (“FGI” when individually referenced), which is the parent holding company issuing securities hereby;
·Total Faith Holdings Limited, a British Virgin Islands company (“Total Faith” when individually referenced), which is a wholly owned subsidiary of FGI;
·Taizhou Fuling Plastics Co., Ltd., a PRC company (“Taizhou Fuling”), which is a wholly owned subsidiary of Total Faith;
·Domo Industry Inc., a New York company (“Domo”), of which Total Faith owns 49% of the equity but maintains effective control;
·

Direct Link USA LLC, a Delaware company (“Direct Link”), which is a wholly owned subsidiary of Taizhou Fuling;

·Fuling Plastic USA, Inc., a Pennsylvania company (“Fuling USA”), which is a wholly owned subsidiary of Taizhou Fuling; and
·Zhejiang Great Plastics Technology Co., Ltd., a PRC company (“Great Plastics”), which is a wholly owned subsidiary of Taizhou Fuling.

 

 7 
Table of Contents 

 

This prospectus contains translations of certain RMB amounts into U.S. dollar amounts at a specified rate solely for the convenience of the reader. The exchange rates in effect as of December 31, 2014 and 2013 were US$1.00 for RMB 6.1460 and RMB 6.1140, respectively. The average exchange rates for the years ended December 31, 2014 and 2013 were US$1.00 for RMB 6.1457 and RMB 6.1958, respectively. We use period-end exchange rates for assets and liabilities and average exchange rates for revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

 

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

 

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

 

 8 
Table of Contents 

 

 

The Offering

 

Shares Offered by Us:   5,000,000 Ordinary Shares, plus up to 750,000 additional Ordinary Shares if the over-subscription option is exercised in full
     
Shares Outstanding Prior to Completion of Offering:   11,666,667 Ordinary Shares
     
Shares to be Outstanding after Offering:   16,666,667 Ordinary Shares, or up to 17,416,667 Ordinary Shares if the over-subscription option is exercised in full.
     
Assumed Offering Price per Share:   $5.00
     
Gross Proceeds to Us, Net of Underwriting Discount but before Expenses:   $22,200,000 if the over-subscription option is not exercised, or $25,695,000 if the over-subscription option is exercised in full.
     
Anticipated Nasdaq Capital Market Symbol:  

“FORK” (CUSIP No.  G3729B 102)

     
Transfer Agent:   VStock Transfer, LLC
77 Spruce Street, Suite 201
Cedarhurst, NY 11516
     
Risk Factors:   Investing in these securities involves a high degree of risk. As an investor, you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section of this prospectus beginning on page 11 before deciding to invest in our Ordinary Shares.
     
Use of Proceeds:   We plan to devote the net proceeds of this offering to (i) developing our U.S. sales network and factory in Allentown, Pennsylvania, (ii) a new factory in Wenling, China and (iii) research and development projects. See the “Use of Proceeds” section beginning on page 30.
     
Dividend Policy:   We have no present plans to declare dividends and plan to retain our earnings to continue to grow our business.

 

 

 9 
Table of Contents 

  

Summary Financial Information

 

In the table below, we provide you with historical selected financial data for the six months ended June 30, 2015 and the fiscal years ended December 31, 2014 and 2013. This information is derived from our consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results that may be expected for any future period. When you read this historical selected financial data, it is important that you read it along with the historical financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

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

 

Statement of operations data:

 

  

For the six months ended
June 30,

(unaudited)

   For the year ended 
December 31,
 
   2015   2014   2013 
Revenues  $45,745   $83,181   $69,536 
Gross profit  $16,072   $28,678   $21,233 
Operating expenses  $(10,754)  $(19,029)  $(16,388)
Income from operations  $5,318   $9,649   $4,845 
Provision for Income taxes  $(745)  $(1,369)  $(587)
Net income  $4,314   $7,728   $3,451 

 

Balance sheet data:

 

  

As of June 30,

(unaudited)

   As of December 31, 
   2015   2014   2013 
Current assets  $38,183   $34,700   $30,440 
Total assets  $62,212   $57,224   $50,603 
Current liabilities  $40,443   $39,769   $37,967 
Total liabilities  $40,443   $39,769   $37,967 
Total shareholders’ equity  $21,769   $17,455   $12,636 

 

 10 
Table of Contents 

 

Risk Factors

 

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. The overall industry consists of a small number of competitors, with approximately 50% of our market controlled by the top 10 companies in the industry.

 

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

 

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

 

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

 

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

 

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

 

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

  

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

 

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

 

In particular, we are in the midst of 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.

 

 11 
Table of Contents 

 

 

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”) which includes General Purpose Polystyrene (“GPPS”) and High Impact Polystyrene (“HIPS”)), (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, domain name and trade secret laws and non-disclosure agreements and other methods to protect our intellectual property rights. We own twenty-eight patents in China and one patent in U.S. covering our designs and production technology.

 

The process of seeking patent protection can be lengthy and expensive, our patent applications may fail to result in patents being issued, and our existing and future patents may be insufficient to provide us with meaningful protection or commercial advantage. Our patents and patent applications may also be challenged, invalidated or circumvented.

 

We also rely on trade secret rights to protect our business through non-disclosure provisions in employment agreements with employees. If our employees breach their non-disclosure obligations, we may not have adequate remedies in China, and our trade secrets may become known to our competitors.

 

Implementation of PRC intellectual property-related laws has historically been lacking, primarily because of ambiguities in the PRC laws and enforcement difficulties. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial costs and diversion of resources and management attention, which could harm our business and competitive position.

 

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

 

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

 

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

 

As of the date of the filing, we have registered one trademark (  ™) at the International Bureau of the World Intellectual Property Organization (“WIPO”) under the Madrid Agreement and Protocol. We have also applied for territorial extension by designating 15 member countries through WIPO. Currently the registration for this trademark is valid in 13 foreign member countries, including the U.S. For more details, please see the disclosure of our trademarks on page 72.

 

 12 
Table of Contents 

  

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

 

As of the date of the filing, we have registered one design patent at the United States Patent and Trademark Office. This registration is only valid in the U.S. For more details, please see the disclosure of our patents on page 71.

 

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

 

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 some of our land and property in China as the collateral for the debt. Our assets outside of China, including our Allentown assets, have not been used as collateral for the foregoing loans. While we believe we have adequate capital to repay these bank loans at present, there can be no guarantee that we will be able to pay all amounts when due or to refinance the amounts on terms that are acceptable to us or at all. If we are unable to make our payments when due or to refinance such amounts, our property could be foreclosed and our business could be negatively affected.

 

While we do not believe they will impact our liquidity, the terms of the debt agreements impose significant operating and financial restrictions on us. These restrictions could also have a negative impact on our business, financial condition and results of operations by significantly limiting or prohibiting us from engaging in certain transactions, including but not limited to: incurring or guaranteeing additional indebtedness; transferring or selling assets currently held by us; and transferring ownership interests in certain of our subsidiaries. The failure to comply with any of these covenants could cause a default under our other debt agreements. Any of these defaults, if not waived, could result in the acceleration of all of our debt, in which case the debt would become immediately due and payable. If this occurs, we may not be able to repay our debt or borrow sufficient funds to refinance it on favorable terms, if any.

  

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

 

We expect to be able to refinance its short-term loans based on past experience and our good credit history. We do not believe failure to refinance from certain banks will have significant negative impact on our normal business operations. In both 2014 and 2013, our operating cash flow was positive. In addition, our related parties including our major shareholders and affiliate companies are willing to provide us financial support. However, it is possible for us to have negative cash flow in the future, and for our related parties to be unable to provide us financial support as needed. As a result, the failure to refinance our short-term loans could potentially affect our capital expenditure and expansion of business.

 

 13 
Table of Contents 

  

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.

 

We do not currently guarantee any third party debts or intend to enter into any third party guarantees after completion of this offering. In addition, our banks do not currently require such guarantee arrangements from us. However, it is possible that we may, in the future, require bank loans to support our business or expand our operations and be unable to obtain unguaranteed loans. If this were to occur in the future, future lenders might demand unrelated third party guarantees. If we were to enter into any other guarantees for third party debts and they failed 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.

 

 14 
Table of Contents 

  

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 six months ended June 30, 2015, sales to our six largest customers amounted in the aggregate to approximately 50.4% of our total revenue. For the six months ended June 30, 2014, sales to our six largest customers amounted in the aggregate to approximately 53.7% of our total revenue. 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 that accounted for 10% or more of our revenues. During the six months ended June 30, 2015 and 2014, respectively, we had one and one customer that accounted for 10% or more of our revenues.

 

Customer Name  Six Months Ended
June 30,
2015
   Six Months Ended
June 30,
2014
   Year Ended
December 31,
2014
   Year Ended
December 31,
2013
 
Wendy’s   10.9%   14.2%   *    12.9%
Burger King   *    *    *    11.8%

 

  * 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 six months ended June 30, 2015, our five largest suppliers accounted for approximately 54.0% of our total purchases. During the six months ended June 30, 2014, our seven largest suppliers accounted for approximately 51.7% of our total purchases. 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 the years ended December 31, 2014 and 2013, respectively, we had two and one suppliers that accounted for 10% or more of our purchases. During the six months ended June 30, 2015 and 2014, respectively, we had two and two suppliers that accounted for 10% or more of our purchases. 

 

Supplier Name  Six Months Ended
June 30,
2015
   Six Months Ended
June 30,
2014
   Year Ended
December 31,
2014
   Year Ended
December 31,
2013
 
Brilliance Resources Company Limited   14.5%   13.2%   14.7%   * 
Koco Group Ltd   *    10.1%   10.2%   13.3%
Grand Chemical Group   14.5%   *    *    * 

  

  * 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.

 

 15 
Table of Contents 

  

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 reunderwriting 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.

 

 16 
Table of Contents 

  

Under the Enterprise Income Tax Law, we may be classified as a “Resident Enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.

 

China passed the Enterprise Income Tax Law, or the EIT Law, and it is implementing rules, both of which became effective on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.

 

On April 22, 2009, the State Administration of Taxation of China, or the SAT, issued the Circular Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the SAT Notice 82, further interpreting the application of the EIT Law and its implementation to offshore entities controlled by a Chinese enterprise or enterprise group. Pursuant to the SAT Notice 82, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or enterprise group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate stamps, board and shareholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management often resident in China. After SAT Notice 82, the SAT issued a bulletin, known as SAT Bulletin 45, which took effect on September 1, 2011, to provide more guidance on the implementation of SAT Notice 82 and clarify the reporting and filing obligations of such “non-domestically incorporated resident enterprise.” SAT Bulletin 45 provides procedures and administrative details for the determination of resident status and administration on post-determination matters. On January 29, 2014, the SAT issued Announcement of the State Administration of Taxation on Recognizing Resident Enterprises Based on the Criteria of de facto Management Bodies, to further clarify the reporting and filing procedure for offshore entities controlled by a Chinese enterprise or enterprise group and recognized as a resident enterprise.

 

The determining criteria set forth in SAT Notice 82 and SAT Bulletin 45 may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, PRC enterprise groups or by PRC or foreign individuals. If the PRC tax authorities determine that FGI or its subsidiaries is a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Currently, we do not have any non-China source income, as we complete our sales, including export sales, in China. Second, under the EIT Law and its implementing rules, dividends paid to us from our PRC subsidiaries would be deemed as “qualified investment income between resident enterprises” and therefore qualify as “tax-exempt income” pursuant to the clause 26 of the EIT Law. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which the dividends we pay with respect to our ordinary shares, or the gain our non-PRC stockholders may realize from the transfer of our ordinary shares, may be treated as PRC-sourced income and may therefore be subject to a 10% PRC withholding tax. If we are required under the EIT Law and its implementing regulations to withhold PRC income tax on dividends payable to our non-PRC stockholders, or if non-PRC stockholders are required to pay PRC income tax on gains on the transfer of their shares of ordinary shares, our business could be negatively impacted and the value of your investment may be materially reduced. Further, if we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both China and such countries in which we have taxable income, and our PRC tax may not be creditable against such other taxes.

 

We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption law.

 

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.

 

 17 
Table of Contents 

  

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

 

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.

 

 18 
Table of Contents 

  

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

 

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

 

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

 

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

 

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

 

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

 

 19 
Table of Contents 

  

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.

 

 20 
Table of Contents 

  

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 shares, especially if such matter cannot be addressed and resolved favorably.

 

Recently, U.S. public companies that have substantially all of their operations in China, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in some cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our company, 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 shares could be rendered worthless.

 

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to penalties and limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to distribute profits to us, or otherwise adversely affect us.

 

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

 

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

 

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

 

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

 

 21 
Table of Contents 

 

 

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

 

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

 

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

 

Risks Related to Our Corporate Structure and Operation

 

We 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 foreign private issuers. If we fail to comply with these rules and regulations, we could become the subject of a governmental enforcement action, investors may lose confidence in us and the market price of our Ordinary Shares could decline.

 

Entities controlled by our employees, officers and/or directors 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.

 

 22 
Table of Contents 

  

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.

 

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

 

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

 

The corporate governance practice in our home country, the Cayman Islands, does not require a majority of our board to consist of independent directors or the implementation of a nominating and corporate governance committee. Since a majority of our board of directors would not consist of independent directors if we relied on the foreign private issuer exemption, fewer board members would be exercising independent judgment and the level of board oversight on the management of our company might decrease as a result. In addition, we could opt to follow Cayman Islands law instead of the Nasdaq requirements that mandate that we obtain shareholder approval for certain dilutive events, such as an issuance that will result in a change of control, certain transactions other than a public offering involving issuances of 20% or greater interests in the company and certain acquisitions of the shares or assets of another company. For a description of the material corporate governance differences between the Nasdaq requirements and Cayman Islands law, see “Description of Share Capital—Differences in Corporate Law”.

 

Our directors’ and executive officers’ other business activities may pose conflicts of interest.

 

Our directors and executive officers have other business interests outside the company that could potentially give rise to conflicts of interest. For example, our Chief Operating Officer and Chair, Guilan Jiang, owns 95% of Zhejiang Special Plastics Technology Co., Ltd. (“Special Plastics”) and 50% of Wenling Fulin Plastic Products Co. Ltd. Ms. Jiang’s husband and our Chief Executive Officer, Xinfu Hu, is the legal representative of Special Plastics. While both companies are engaged or were previously 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. Wenling Fulin Plastic Products Co. Ltd. is a holding company with no investment in any competing business with us, although it has investment in a local commercial bank and leases its land to a restaurant. While the company was previously in our industry, this privately held company’s operations, but not the name, have changed. Notwithstanding the foregoing, if 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., and most of her time to matters for FGI. Mr. Hu has historically devoted very limited time to matters concerning Special Plastics, 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 export transportation, product liability and account receivable insurance, to cover certain assets and property of our business, the amounts and scope of coverage could leave our business inadequately protected from loss. For example, not all of our subsidiaries have coverage of business interruption insurance. If we were to incur substantial losses or liabilities due to fire, explosions, floods, other natural disasters or accidents or business interruption, our results of operations could be materially and adversely affected. For the scope of coverage of our insurance, see “BUSINESS - Our Insurance Coverage”.

 

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. Burnham Securities Inc. (the “Underwriter”) 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 5,000,000 shares are not received on or before close of business on October 31, 2015 (or November 30, 2015 if extended), 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 shareprice may be more volatile.

 

 23 
Table of Contents 

  

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 and current reports with respect to our business and operating results. In addition, as long as we are listed on The Nasdaq Capital Market, we are also required to file semi-annual financial statements.

 

As a result of disclosure of information in this 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 Underwriter 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:

 

 24 
Table of Contents 

  

  · 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.

 

If this offering prices above the assumed price per share or if we increase the aggregate offering size with an immediately effective post-effective amendment, we could raise more funds than currently assumed. 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. However, we will advise shareholders as required in our annual reports on Form 20-F of any changes in application of funds and will file a current report on Form 6-K to the extent we determine such changes in application must be disclosed more quickly.

 

Our management 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 Underwriter based upon a number of factors which are descried in the “Underwriting” section. The initial public offering price may not be indicative of prices that will prevail in the trading market.

 

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

 

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

 

 25 
Table of Contents 

  

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 16,666,667 shares will be outstanding immediately after this offering if the over-subscription option is not exercised, or 17,416,667 shares if the over-subscription option is exercised in full. 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.”

 

Some of our pre-IPO shareholders will be able to sell their shares upon completion of this offering.

 

Holders of 5% of our outstanding shares prior to completion of this offering will not be subject to lock-up agreements. Our net tangible book value attributable to shareholders at August 31, 2015 was $21,119,082, or approximately $1.81 per Ordinary Share outstanding as of August 31, 2015. 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 August 31, 2015, will be approximately $43,319,082 or $2.60 per Ordinary Share, if the over-subscription option is not exercised, or approximately $46,814,082 or $2.69 per Ordinary Share if the over-subscription option is exercised in full. Because these shareholders have paid a lower price per share than participants in this offering, they may be more willing to accept a lower sales price than the IPO price. This fact could impact the trading price of the stock following completion of the offering, to the detriment of participants in this offering.

 

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 and assuming no exercise of the underwriter’s over-subscription option, you will incur immediate dilution of approximately $2.40 or approximately 48% in the pro forma net tangible book value per share from the price per share that you pay for the shares; if you purchase shares in this offering and assuming full exercise of the underwriter’s over-subscription option, you will incur immediate dilution of approximately $2.31 or approximately 46% 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.”

 

 26 
Table of Contents 

  

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

 

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

 

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

 

Lastly, under the law of the Cayman Islands, there is little statutory law for the protection of minority shareholders. The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the corporation, our Memorandum and First Amended and Restated 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 First Amended and Restated Articles of Association, then the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the wrongdoers control the company; (3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders under the laws of many states in the United States.

 

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

 

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

 

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

 

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

 

Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our First Amended and Restated Articles of Association allow our shareholders holding shares representing in aggregate not less than 20% of our voting share capital in issue, to requisition an extraordinary general meeting of our shareholders, in which case our directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting. Although our First Amended and Restated Articles of Association do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such shareholders, any shareholder may submit a proposal to our Board of Directors for consideration of inclusion in a proxy statement. Advance notice of at least ten calendar days is required for the convening of our annual general shareholders’ meeting and any other general meeting of our shareholders. A quorum required for a meeting of shareholders consists of at least one shareholder present or by proxy, representing not less than one-third in nominal value of the total issued voting shares in our company.

 

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 do not undertake 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, other than required by the federal securities laws or other applicable laws.

 

 27 
Table of Contents 

 

 

Letter from Chief Executive Officer– Mr. Xinfu Hu
 

Dear investors:

 

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, some of which we are making in the United States. 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. Our environmentally conscious serviceware are used by McDonald's, Subway, Wendy’s, Burger King, KFC (China only), Walmart, McKesson, Woolworths 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.

 

The United States is our main market. We have invested approximately $2.8 million and plan to invest over $9 million in our state of the art, new Allentown facility. Our customer base includes major fast-food chains, other leading disposable serviceware companies, retail stores, and small- and medium-sized customers, including distributors. 

 

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 in the U.S. and China, encourage innovation, promote environmental protection, and push economic transformation and improvement.

 

Our Business Model

 

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 Jersey, California, Pennsylvania in U.S. and Toronto and Vancouver in Canada. 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.

 

 

 

 

 28 
Table of Contents 

 

 

 

However, we are never static. We have taken a firm step in the diversification of production and operation, and have built our first 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 each different. For example, the transportation costs for cups and straws are more expensive than for other serviceware with similar weight, due to physical attributes of these hollow products. 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 (approximately $9 million) in the development and operation of 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, a few close friends and me 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 household articles, 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 China’s largest exporters of disposable serviceware. The China Chamber of Commerce for Import and Export of Light Industrial Products and Arts and Crafts has recognized Taizhou Fuling as one of China’s top three plastic kitchenware and serviceware companies for exports every year from 2011 through 2014, based on export sales amount. Although we are in the leading position in China among exporters of disposable serviceware, 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.

 

 

 

Xinfu Hu

CEO, Fuling Global Inc.

 

 

 29 
Table of Contents 

  

Use of Proceeds

 

After deducting the estimated underwriting fee and offering expenses payable by us, we expect to receive net proceeds of approximately $22.2 million from this offering, or approximately $25.7 million if the over-subscription option is exercised in full. 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. If and to the extent the over-subscription option is exercised, we intend to use any such proceeds for our working capital needs.

 

Description of Use   Amount ($ million)     Percentage of
Net Proceeds
 
United States                
Operation of Allentown factory and development of U.S. sales network     3.9       17.57 %
Development of Allentown factory     3.3       14.86 %
                 
China                
Purchase of land for new factory in Wenling     5.0       22.52 %
Construction costs for Wenling Factory – Phase I     5.0       22.52 %
Purchase of Equipment and Machinery – Phase I     4.0       18.02 %
Research and Development – Process Automation     1.0       4.50 %
Total     22.2       100 %

  

Specifically, use of “Operation of Allentown factory and development of U.S. sales network” may entail:

 

Description of Use   Amount ($ million)  
Working capital for operation in Allentown    

3.0:

(1) 0.5 in 2015

(2) 2.5 in 2016

 
Marketing and distributor relationship development     0.5  
Sales employee recruiting and training     0.4  
Total     3.9  

 

Approximately two-thirds of the net proceeds from this offering will be remitted to China before we are able to use those funds to expand 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 (approximately $18 million) 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, but may, at any time, reallocate those of other funds via intercompany loans and contributions to our PRC subsidiaries. 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.

 

 30 
Table of Contents 

  

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.

 

Dividend Policy

 

Other than dividends of (i) $9,000 declared by Taizhou Fuling in 2004 and reinvested in Taizhou Fuling as additional paid in capital, (ii) $900,000 declared by Taizhou Fuling in 2007 and reinvested in Taizhou Fuling as additional paid in capital and (iii) $10,274,848 declared by Taizhou Fuling in 2014, of which $7,530,000 was reinvested in Taizhou Fuling as additional paid in capital, we have never declared or paid any cash dividends on our Ordinary Shares. Those dividends were paid in RMB in China. (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 BVI subsidiary, Total Faith. Current PRC regulations permit our indirect PRC subsidiaries 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:

 

   June 30, 2015   December 31, 2014   December 31, 2013 
US$1:RMB exchange rate  Period End  6.1088   Period End  6.1460   Period End  6.1140 
   Average  6.1254   Average  6.1457   Average  6.1958 

 

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

 

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

 

    Midpoint of Buy and Sell Prices for U.S. Dollar per RMB  
Period   Period-End     Average     High     Low  
2010     6.6018       6.7696       6.8344       6.6018  
2011     6.3585       6.4640       6.6357       6.3318  
2012     6.3086       6.3116       6.3862       6.2289  
2013     6.0220       6.0720       6.2195       5.9778  
2014     6.1411       6.1463       6.1758       6.0924  
2015 (through September 30, 2015)     6.3638       6.1735       6.4129       6.0933  
March     6.1206       6.1444       6.1646       6.1206  
April     6.1001       6.1081       6.1197       6.1001  
May     6.1065       6.1013       6.1098       6.0933  
June     6.1088       6.1109       6.1210       6.1036  
July     6.2097       6.1103       6.2097       6.1047  
August     6.3885       6.3279       6.4129       6.2096  
September     6.3638       6.3692       6.3836       6.3559  

 

As of September 30, 2015, the exchange rate is RMB 6.3638 to $1.00.

 

 31 
Table of Contents 

  

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 the United States (92.87% in 2014), Europe (2.33% in 2014), Australia (1.46% in 2014), Canada (1.45% in 2014), in Central and South America (0.92% in 2014), and the Middle East (0.82% in 2014), 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

 

 

 

Capitalization

 

The following table sets forth our capitalization as of August 31, 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 $5.00 per share and to reflect the application of the proceeds after deducting the estimated underwriting fees. You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Share Capital.”

 

Pre- and Post-Offering Capitalization

 

As of August 31, 2015 

 

          Pro Forma After Offering(1)  
    Actual     No Over-subscription     Full Over-subscription  
Indebtedness:                        
Short-term debt   $ 20,687,639     $ 20,687,639     $ 20,687,639  
Long-term debt     -       -       -  
Total indebtedness     20,687,639       20,687,639       20,687,639  
Shareholders’ Equity:                        
Ordinary Shares $0.001 par value per share, 70,000,000 shares authorized, 11,666,667 shares issued and outstanding; pro forma without over-subscription reflects 16,666,667 shares issued and outstanding; pro forma with over-subscription reflects 17,416,667 shares issued and outstanding     11,667       16,667       17,417  
Additional paid-in capital(2)     11,108,133       33,303,133       36,797,383  
Statutory reserves     2,397,433       2,397,433       2,397,433  
Retained earnings     8,235,478       8,235,478       8,235,478  
Accumulated other comprehensive gain     871,955       871,955       871,955  
Non-controlling interest     319,374       319,374       319,374  
Total shareholders’ equity     22,944,040       45,144,040       48,639,040  
Total capitalization   $ 43,631,679     $ 65,831,679       69,326,679  

 

  (1) Gives effect to completion of the offering of 5,000,000 shares, at an assumed public offering price of $5.00 per share and to reflect the application of the proceeds after deducting the estimated underwriting fee and our estimated offering expenses. (See note 2 below.) “No over-subscription” column does not give effect to shares sold pursuant to the exercise of the over-subscription option, if any. “Full over-subscription” column assumes 750,000 Ordinary Shares are sold pursuant to the exercise of the over-subscription option.

 

  (2) Pro forma additional paid in capital reflects the net proceeds we expect to receive, after deducting underwriting fee, Underwriter expense allowance and other expenses. We expect to receive net proceeds of (a) approximately $22,200,000 in the event the over-subscription option is not exercised ($25,000,000 offering, less underwriting fee of $1,700,000 and offering expenses of approximately $1,100,000) or (b) approximately $25,695,000 in the event the over-subscription option is exercised in full ($28,750,000 offering, less underwriting fee of $1,955,000 and offering expenses of approximately $1,110,000).

 

 

 32 
Table of Contents 

   

Dilution

 

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 August 31, 2015 was $21,119,082, or approximately $1.81 per Ordinary Share outstanding as of August 31, 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 16,666,667 Ordinary Shares outstanding with 5,000,000, or approximately 30%, in the public float. If the over-subscription option is exercised in full, we will have 17,416,667 shares outstanding and 5,750,000, or approximately 33%, in the public float. 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 August 31, 2015, will be approximately $2.60 per Ordinary Share if the over-subscription option is not exercised, or approximately $2.69 per Ordinary Share if the over-subscription option is exercised in full. This would result in dilution to investors in this offering of approximately $2.40 per Ordinary Share if the over-subscription option is not exercised or approximately $2.31 if the over-subscription option is exercised in full, from the assumed offering price of $5.00 per Ordinary Share. Net tangible book value per Ordinary Share would increase to the benefit of present shareholders by $0.79 per share if the over-subscription option is not exercised or $0.88 if the over-subscription option is exercised in full, 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.

 

    Post-Offering(1)    Post-Offering(2)
Assumed offering price per Ordinary Share   $ 5.00   $  5.00
Net tangible book value per Ordinary Share before the offering   $ 1.81   $  1.81
Increase per Ordinary Share attributable to payments by new investors   $ 0.79   $  0.88
Pro forma net tangible book value per Ordinary Share after the offering   $ 2.60   $  2.69
Dilution per Ordinary Share to new investors   $ 2.40   $  2.31

 

  (1) Assumes gross proceeds from offering of 5,000,000 Ordinary Shares.
  (2) Assumes gross proceeds from offering of 5,750,000 Ordinary Shares, if over-subscription option is exercised in full.

 

Assuming no exercise of the over-subscription option, a U.S. $1.00 increase (decrease) in the assumed public offering price of $5.00 per share would increase (decrease) our pro forma net tangible book value after giving effect to the offering by $5 million, the pro forma net tangible book value per ordinary share and per share by $0.28 per ordinary share and the dilution in pro forma net tangible book value per ordinary share to new investors in this offering by $0.72 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 underwriting fee and commissions and estimated offering expenses payable by us.

 

Post-Offering Ownership

 

The following charts illustrate 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.

 

Post-Offering Ownership Without Over-subscription

 

    Shares Purchased     Total Consideration     Average Price  
    Amount     Percent     Amount     Percent     Per Share  
Existing shareholders     11,666,667       70 %   $ 21,119,082       46 %   $ 1.81  
New investors     5,000,000       30 %   $ 25,000,000       54 %   $ 5.00  
Total     16,666,667       100 %   $ 46,119,082       100 %   $ 2.77  

 

Post-Offering Ownership With Over-subscription

 

    Shares Purchased     Total Consideration     Average Price  
    Amount     Percent     Amount     Percent     Per Share  
Existing shareholders     11,666,667       67 %   $ 21,119,082       42 %   $ 1.81  
New investors     5,750,000       33 %   $ 28,750,000       58 %   $ 5.00  
Total     17,416,667       100 %   $ 49,869,082       100 %   $ 2.86  

 

 33 
Table of Contents 

  

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 include three factories in Zhejiang Province, China and one factory in Pennsylvania, U.S., and we have obtained ISO9001 quality management system, ISO14001 environmental management system, HACCP, FDA food facility registration and GMP certifications. These certifications are crucial for businesses like ours that serve some of the most sophisticated purchasers of foodservice disposables in the world.

 

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

 

Our largest product category is disposable cutlery. It includes forks, knives, spoons, general, specialized and multipurpose utensils (for instance, the spork), both in single- and multi-utensil packages. It accounted for 60% and 54% of our revenue for the six months ended June 30, 2015 and for the year ended December 31, 2014, respectively, and we believe it will continue to be a key area for growth in the coming years. Our other product categories are (i) drinking straws, (ii) cups and plates and (iii) other plastics products. (i) Drinking straws, (ii) cups and plates and (iii) other plastics products accounted for 12%, 24% and 4% of the total sales respectively for the six months ended June 30, 2015. (i) Drinking straws, (ii) cups and plates and (iii) 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 establishing the Company’s first production factory 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 October 1, 2015, our products are sold in 22 countries. Our customers now include McDonald’s, Subway, Wendy’s, Burger King, KFC (China only), Walmart, McKesson and Woolworths.

 

In 2014, we supplied four of the five largest fast food restaurant chains in the United States, based on U.S. systemwide sales amount as published by QSR Magazine. These top five chains, in order, were 1. McDonald’s, 2. Subway, 3. Starbucks, 4. Wendy’s and 5. Burger King.

 

We estimate we supplied the following percentages of these customers’ products in the United States in 2014. These percentages are management’s best estimates, based on orders from such customers and understanding of other supplier relationships.

 

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

 

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

 

For the six months ended June 30, 2015 and 2014, sales to these four customers amounted in the aggregate to 30.6% and 35.3% of our total revenues, respectively. Only Wendy’s (10.9% and 14.2%, respectively) exceeded 10% of our total revenues in the six months ended June 30, 2015 and 2014. Sales to these four customers amounted in the aggregate to 32.7% and 32.9% of our total revenues in the years ended December 31, 2014 and 2013, respectively. None of these customers exceeded 10% in 2014, and only Wendy’s (12.99%) and Burger King (11.8%) exceeded 10% of our total revenues in 2013.

 

Revenue by Geographic Area *

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

 

    Six Months Ended June 30, 2015       Year Ended December 31, 2014  
Region   Amount   %       Amount     %  
United States   $ 43,657   95.44 %       $ 76,930       92.87 %
Europe   $ 926   2.02 %       $ 1,933       2.33 %
Australia   $ 325   0.71 %       $ 1,214       1.46 %
Canada   $ 469   1.03 %       $ 1,198       1.45 %
Central and South America   $ 35   0.08 %       $ 760       0.92 %
Middle East   $ 37   0.08 %       $ 683       0.82 %
China   $ 297   0.64 %       $ 122       0.15 %
Total   $ 45,746             $ 82,840          

 

* 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.

 

Factors Affecting Our Results of Operations

 

Government Policy May Impact our Business and Operating Results

 

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

 

 34 
Table of Contents 

  

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 (approximately 92.87% based on 2014 revenues, and approximately 95.44% based on the revenues for the six months ended June 30, 2015). Historically, we have relied on lower wages and favorable exchange rates in China to make our products sold abroad competitive in price. As China’s currency has appreciated against the U.S. dollar, our advantage in price competitiveness might be impacted. While have already begun to diversify risk by moving 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.

 

Industry Trends and Company Strategy 

 

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. We are adopting strategies accordingly.

 

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

 

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

 

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

 

Innovation and cost cutting

 

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

 

The plastic resins we primarily use are polypropylene (“PP”) and polystyrene (“PS”) which includes General Purpose Polystyrene (“GPPS”) and High Impact Polystyrene (“HIPS”)) The following chart shows their percentages of our total cost of raw materials in the six months ended June 30, 2015 and 2014, and years ended December 31, 2014 and 2013:

 

 35 
Table of Contents 

  

   Six Months Ended June 30,   Year Ended December 31, 
Raw Material  2015   2014   2014   2013 
PP   50.93%   52.70%   51.31%   41.13%
GPPS   26.55%   24.28%   25.66%   34.21%
HIPS   2.74%   2.30%   2.26%   0.80%
Total   80.22%   79.29%   79.23%   76.14%

 

 The following chart shows the monthly prices of PP, GPPS, HIPS and Brent oil (one kind of crude oil) from January 2014 to August 2015:

 

    PP ($/LB)     GPPS ($/LB)     HIPS ($/LB)     Brent Oil ($/barrel)  
2014                                
January   $ 0.960     $ 1.365     $ 1.475     $ 108.150  
February     0.950       1.325       1.435       108.860  
March     0.935       1.325       1.435       107.550  
April     0.925       1.295       1.405       107.580  
May     0.920       1.275       1.385       109.650  
June     0.890       1.265       1.375       111.620  
July     0.890       1.335       1.445       106.650  
August     0.940       1.335       1.445       101.600  
September     0.940       1.295       1.405       97.410  
October     0.980       1.275       1.385       87.540  
November     0.930       1.245       1.355       78.900  
December     0.835       1.205       1.315       62.910  
2015                                
January     0.730       0.910       1.010       47.870  
February     0.740       0.870       0.970       58.140  
March     0.725       0.870       0.970       55.930  
April     0.685       0.920       1.020       61.020  
May     0.675       0.950       1.050       65.630  
June     0.685       0.900       1.000       63.800  
July     0.670       0.960       1.060       56.690  
August   $ 0.655     $ 0.930     $ 1.030     $ 48.100  
Decreased     31.77 %     31.87 %     30.17 %     55.52 %

  

The following diagrams show the trend of the prices:

 

 

 36 
Table of Contents 

 

The following chart shows the normalized and standardized prices:

 

 

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.

 

We have consistently invested in R&D and new equipment and technology to increase our cost competitiveness. The following chart illustrates the effect:

 

   2012   2013   2014   Increase from 2012 to 2014 
Average Worker Annual Salary  $5,090   $5,705   $6,326    21%
R&D Expense  $1,669,748   $2,128,923   $2,484,566    49%
Productivity Per Worker  $80,180   $107,980   $126,990    58%

   

Proximity to key markets is a major success factor

 

Although many degradable products are imported from Asia, due to rising manufacturing costs in China, some importers of degradable foodservice disposables are in the midst of establishing U.S. production operations. For example, Trellis Earth Products, an Oregon-based manufacturer of sustainable food service products, is shifting its manufacturing of its bioplastic-based disposables from China to a facility in Rochester, New York. The trend is based on the economic logic of producing or sourcing near the consumer.

 

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 it allows manufacturers to 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. The total investment for the project will be roughly $9.9 million. The factory in Allentown became operational in June 2015.

 

Business Development Trends

 

Our prices fluctuate based on changes in our material costs. We and our long-term customers closely follow changes in such prices and adjust our product prices accordingly. As a result of decreases in oil prices in 2015, our customers reduced the price they paid for our products during the year, but we have been able to maintain our profit margins on the year. We currently anticipate that our revenues will increase by approximately 12% and that our profits will increase by approximately 18% in 2015. After completion of this offering and assuming our capacity expansion plans are met with the proceeds of this offering and our operational cash flows, we estimate that revenues and profits will both increase by approximately 18% in 2016 and 25% in 2017. These projections are based on the following assumptions; to the extent these assumptions are inaccurate, our results could vary significantly from the foregoing projections.

 

 37 
Table of Contents 

 

Projected 2015 revenue growth of 12% and net income growth of 18%

 

Our revenue growth projections assume that:

 

a)Our new QSR customer in China, KFC China, begins to generate revenues in the second half of 2015.

b)A major distributor customer, LOLLICUP USA, Inc., places substantially higher orders with us, as it has secured an additional QSR customer in the U.S.

c)Other current customers’ orders remain healthy overall. Our top ten customers’ overall order volume growth rate is 19% through July 2015.

d)The new container production lines (mainly thermoforming machine) we purchased in the first half of 2015 in China for new products in plates, cups, bowls and other categories begin to fill new orders from existing customers in October. We expect production in 2015 to be 1,000 tons or 17% of capacity.

e)We increase the capacities of our Chinese factories. Our Songmen factory currently operates at 90.9% capacity based on 24/7 operation. We estimate that we could increase capacity by 2,100 tons if we increased to 100% capacity. Our Sanmen factory currently operates at 48.5% capacity based on 24/7 operation; we estimate that we could increase capacity by 2,000 tons if we increased to 73.5% capacity. These capacity rates do not take into consideration the expansion in capacity created by the new container production lines mentioned in (d) above.

f)Our Allentown factory becomes operational as planned. Our Allentown operations began production in June 2015 with four of six current production lines fully functional (completely installed, tested, validated, certified by Underwriters Laboratories). The remaining two production lines became operational in the middle of July 2015. Although we can run all six lines at the same time, we have not yet fully staffed operations to run all six production lines at 24/7 operation. We currently run two of the six production lines most of the time. We estimate that we could have all six production lines in full operation by the end of 2015. This will provide us 1,200 tons of straw production or 25% capacity.

 

Our net income growth projections assume that:

 

a)The decrease of our raw material price decrease is not completely offset by the decrease of our sales price, as oil prices have dropped in 2015. If raw material costs increased by 10%, we estimate that approximately 80% of our clients will adjust their purchase prices accordingly. Approximately 30% of our clients adjust price automatically according to changes in raw materials prices. We expect that approximately 50% of our clients will seek to negotiate a price reduction with us. For example, when raw material price decreases by 10%, we may suffer a sales price decrease impact of 5%. Our product prices do not generally adjust price exactly as same as the change of raw material price. We expect that approximately 20% of our clients will not adjust price, whether or not raw material prices increase or decrease.

b)Our labor and shipping costs either decrease or remain stable. If our labor costs increased by 10% from our estimate, we would expect revenue growth to remain stable but net income to decrease by approximately 1%. If shipping costs (by sea) increased by 10%, we expect net income would decrease by approximately 1%.

 

Projected 2016 revenue growth of 18% and net income growth of 18%

 

Our revenue growth projections assume that:

 

a)KFC China continues to place orders of about $1 million in 2016, in line with their agreement with us.

b)We successfully secure a new distributor customer in U.S. This target customer is a buying network group with many distributor members. We estimate our sales to this new customer could approach $5 million in 2016 if we are successful in securing it as a customer and receive orders in line with our estimates.

c)Our other existing customers’ orders continue to increase in line with prior growth rates.

d)The container products capacity added in 2015 continues to provide products to current customers. It is currently impossible to estimate the timing and impact of such orders.

e)We increase the capacities of our Chinese factories (other than our Songmen factory, which we project to remain at 100% capacity in 2016). Phase I of our new Wenling factory is projected to become operational in July 2016, adding 20,000 ton capacity per annum. We expect the utilization will be 3,000 tons of production in 2016. Our Sanmen factory could increase capacity by 2,100 tons if we increased to 100% capacity in 2016.

f)We increase the capacity of our Allentown factory by 1,200 tons to 50% of designated capacity. Total output would be at 2,400 tons.

g)Our product prices remain stable.

 

 38 
Table of Contents 

 

Our net income growth projections assume that:

 

a)Our raw material prices remain stable compared to 2015 prices.

b)Our shipping costs remain stable compared to 2015 costs.

c)We expect the cost of labor in China will increase approximately 10% in 2016, but we expect our investments in automation and equipment to increase production efficiency will offset such increased labor costs.

 

Projected 2017 revenue growth of 25% and net income growth of 25%

 

Our revenue growth projections assume that:

 

a)We are able to secure a new manufacturer customer and that this customer generates an estimated $9 million in revenue for us in 2017. This target customer has annual sales of more than $1 billion. We are currently negotiating with this client but cannot guarantee that we will be successful in securing them as a customer.

b)The orders from the new distributor client we expect to add in 2016 increase our 2017 revenues by $8 million compared to 2016 revenues.

c)Our increased container products capacity continues to provide products to current customers, resulting in increased revenues of approximately $10 million in 2017.

d)Our Songmen and Sanmen factories remain at 100% capacity utilization and our Wenling factory reaches 50% utilization. In addition, we assume that Phase II of our Wenling factory completes in July 2017, bringing an additional 20,000 tons capacity annually. We expect the utilization will be 15,000 tons of production in 2017.

e)Our Allentown factory capacity utilization reaches 100% or 4,800 ton per annum.

 

Our net income growth projections assume that:

 

a)Our raw material prices remain stable compared to 2016.

b)Our shipping and labor costs remain stable compared to 2016 levels.

 

All of these forward-looking statements depend on adequate market demand for our products, maintenance of full capacity at our facilities and stable pricing for our products and raw materials. Actual results could differ materially from these projections as a result of a number of risks and uncertainties. See “Risk Factors – Our projections and assumptions underlying may be inaccurate, resulting in slower than anticipated growth”.

 

Results of Operations

 

Six Months Ended June 30, 2015 and 2014

 

The following table summarizes the results of our operations during the six months ended June 30, 2015 and 2014, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods.

 

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

 

   Six Months Ended June 30, 2015   Six Months Ended June 30, 2014         
Statement of
Operations 
Data:
  Amount   As % 
of
Sales
   Amount   As % 
of
Sales
   Amount
Increase
(Decrease)
   Percentage
Increase
(Decrease)
 
                         
Revenues  $45,746    100%  $37,915    100%  $7,831    21%
Cost of goods sold   29,673    65%   25,340    67%   4,333    17%
Gross profit   16,073    35%   12,575    33%   3,498    28%
Operating expenses                              
Selling expenses   7,143    16%   5,433    14%   1,710    31%
G&A expenses   2,679    6%   1,532    4%   1,147    75%
R&D expense   933    2%   1,120    3%   (187)   -17%
Total operating expenses   10,755    24%   8,085    21%   2,670    33%
Income from operations   5,318    12%   4,490    12%   828    18%
Other income (expenses)                              
Interest expense, net   (619)   -1%   (589)   -2%   (30)   5%
Subsidy income   60    0%   173    0%   (113)   -65%
Other income   299    1%   58    0%   241    420%
Total other income (expenses)   (260)   -1%   (358)   -1%   98    -27%
Income before income taxes   5,058    11%   4,132    11%   926    22%
Provision for income taxes   (745)   -2%   (559)   -1%   (186)   33%
Net income  $4,313    9%  $3,573    9%  $740    21%

 

 39 
Table of Contents 

 

Revenues.  Revenues increased by approximately $7.8 million, or 21%, to approximately $45.7 million for the six months ended June 30, 2015 from approximately $37.9 million for the same period in 2014. The increase in net sales was driven by higher amount of products sold.

 

Revenue by Product Type

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

 

   Six Months Ended June 30, 2015   Six Months Ended June 30, 2014   Variance 
   Amount    % of Sales   Amount    % of Sales   Amount 
Increase
(Decrease)
   Percentage
Increase
(Decrease)
 
Cutlery   $27,435    60%   $22,621    60%   $4,814    21%
Straws   5,440    12%   4,345    11%   1,095    25%
Cups and plates   11,102    24%   9,798    26%   1,304    13%
Others   1,769    4%   1,151    3%   618    54%
Total   $45,746    100%   $37,915    100%   $7,831    21%

 

Cutlery

 

Revenue from cutlery increased by $4.8 million, or 21%, from $22.6 million to $27.4 million for the six months ended June 30, 2015. We sold 2.5 million kilograms more compared to the six months ended June 30, 2014 for this product category. Sales from products made with nano-modified polypropylene material with our patented technology, increased by $2.1 million. The sales increase of cutlery was driven by the increased volume of products sold.

 

Sales of cutlery made from traditional polypropylene material and polystyrene materials in 6 months ended June 30, 2015 increased by $2.4 million or 41% from the same period of 2014. This increase was driven by the increase of total volume of products sold by 1.25 million kilograms.

 

Sales of cutlery made from cornstarch biodegradable material increased by $163,700. We expect that our sales from this type of product will continue to grow due to increasing environmental concerns about plastic products.

 

Straws

 

Sales for straws increased by $1.1 million for six months ended June 30, 2015 compared with sales for six months ended June 30, 2014. 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 volume of products sold of 262,000 kilograms, or 22% compared to the same period of 2014.

 

Cups and plates

 

Sales for cups and plates increased by $1.3 million for six months ended June 30, 2015 compared with sales for the same period in 2014. The sales increase was driven by the higher amount of products sold. The quantity sold increased by 13% or 355,000 kilograms.

 

Other products

 

Other products include products for family use, party and other entertainment purposes. Sales from these types of products increased by $618,000 for the six months ended June 30, 2015 compared with sales for the same period in 2014. The sales increase was mainly due to the new products we introduced to the market in 2015. We introduced measuring cups, the sales of which amounted $812,000 for the six months ended June 30, 2015.

 

 40 
Table of Contents 

 

 

Revenue by Geographic Area*

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

   Six Months Ended June 30, 2015   Six Months Ended June 30,  2014   Period-over Period
 Increase
 
Region  Amount   %   Amount   %   Amount   % 
United States  $43,657    95.44%  $36,016    94,99%  $7,641    21.22%
Europe   926    2.02%   712    1.88%   214    30.09%
Australia   325    0.71%   486    1.28%   (161)   -33.23%
Canada   469    1.03%   468    1.23%   1    0.29%
Central and South America   35    0.08%   63    0.17%   (28)   -44.00%
Middle East   37    0.08%   86    0.23%   (49)   -56.41%
China   297    0.64%   84    0.22%   212    253.38%
Total  $45,746        $37,915        $7,830      

  

* 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 the six months ended June 30, 2015, sales from one major new customer, which is a large beverage chain store based in California U.S., contributed $3.4 million. Sales to other new customers increased by $640,000. With more localized operation in U.S., sales to existing customers increased by $3.36 million. With the Allentown factory becoming operational 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 change for sales from other regions was primarily due to normal fluctuation of demand.

 

Cost of goods sold. Our cost of goods sold increased by approximately $4.3 million or 17% to approximately $29.7 million for the six months ended June 30, 2015 from approximately $25.4 million for the same period in 2014, which is consistent with sales growth in the six months ended June 30, 2015. As a percentage of revenues, the cost of goods sold decreased by approximately 2% to 65% in the six months ended June 30, 2015 from 67% in the same period in 2014. 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.

 

The portions of our products produced by third-party manufacturers in the six months ended June 30, 2015 and 2014 are both less than 1%. The associated impact on our gross margins is very limited considering the portion.

 

Gross profit. Our gross profit increased by approximately $3.5 million, or 28% to approximately $16.1 million in the six months ended June 30, 2015 from approximately $12.6 million in the same period in 2014. Gross profit margin was 35% in the six months ended June 30, 2015, as compared with 33% in the same period in 2014. The increase of 2% 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 profit by product types for the six months ended June 30, 2015 and 2014 are as follows:

 

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

 

   Six Months Ended June
30,2015
   Six Months Ended June
30,2014
   Variance 
   Cost $   Gross Profit %   Cost $   Gross Profit %  

Cost $

Increase (Decrease) -

  

Gross Profit %

Increase (Decrease)

 
Cutlery   17,841    35%   14,952    34%   2,889    1%
Straws   4,362    20%   3,575    18%   787    2%
Cups and plates   6,245    44%   6,007    39%   238    5%
Others   1,083    39%   777    32%   306    7%
Taxes   142    N/A    29    N/A    113    N/A 
Total   29,673    35%   25,340    33%   4,333    2%

 

Cost of revenue for cutlery products increased by approximately $2.89 million to approximately $17.8 million for the six months ended June 30, 2015 compared to $15.0 million in the same period in 2014. Gross profit margins were 35% and 34%, respectively. Cutlery represented the largest portion of sales.

   

Cost of revenue for straws was approximately $4.4 million for the six months ended June 30, 2015 compared to approximately $3.6 million in the same period in 2014. The gross profit margin was approximately 20% in the six months ended June 30, 2015 compared to 18% in the same period in 2014. The increase in gross profit margin in the six months ended June 30, 2015 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 $6.2 million and 6.0 million for the six months ended June 30, 2015 and 2014, respectively. Gross profit margin was 44% in the six months ended June 30, 2015 compared to 39% in the same period in 2014. In the second half year of 2014, 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 value added tax (“VAT”) paid for purchased inventory, which cannot be deducted to offset our sales tax. The amount of tax in costs can vary year to year depending on the timing and amount of purchases made throughout the year.

 

 41 
Table of Contents 

  

Selling expenses.  Selling expenses increased by approximately $1.7 million to approximately $7.1 million for the six months ended June 30, 2015 compared to approximately $5.4 million in the same period in 2014. As a percentage of sales, our selling expenses were 16% of revenues in the six months ended June 30, 2015 and 14% in the six months ended June 30, 2014. The increase in selling expenses is consistent with the increase of revenues and was primarily attributable to an increase of approximately $1.2 million in ocean freight charges, $261,000 in customs and inspection related expense, $165,000 in commissions.

 

General and administrative expenses.  Our general and administrative expenses increased by approximately $1.1 million or 75%, to approximately $2.7 million for the six months ended June 30, 2015 from approximately $1.5 million in the same period in 2014. As a percentage of revenues, general and administrative expenses were 6% of sales in the six months ended June 30, 2015 and 4% in the six months ended June 30, 2014. 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 $256,000 in the six months ended June 30, 2015; and

 

(b) an increase in salary and benefit related expense of $491,000 due to business expansion, especially the operation in U.S.

 

(c) an increase in bad debt expense of $144,000 due to increase of aged account receivable.

 

 Research and development expenses.  Our research and development expenses decreased approximately $187,000 to approximately $933,000 for the six months ended June 30, 2015 compared with approximately $1.1 million in the same period in 2014. We consider this to be a normal fluctuation from period to period. In the long run, we expect the R&D expense to increase as we continue 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 $33,000, to approximately $638,000 for the six months ended June 30, 2015, from approximately $605,000 in the same period in 2014. As our average outstanding loan balance is consistent in these two periods, the interest expense was consistent.

 

The average interest rates for our average outstanding loan in the six months ended June 30, 2015 and 2014 were 4.16% and 5.70%, respectively. At the time of loan application, different commercial banks determine loan interest rates based on various factors, including general economic conditions in China, internal bank lending policies, the applicant’s credit standing and relative bargaining power. In 2015, we paid off some loans with interest rates higher than 5.00% and took on new loans with interest rate lower than 5.00% from various banks. As a result of the change in loan mix, the interest rate for our average outstanding loan in the six months ended June 30, 2015 was lower than in the same period in 2014.

 

The bank loan balance as of June 30, 2015 and 2014 were $25.1 million and $20.8 million respectively. The average amounts of loan outstanding for the six months ended June 30, 2015 and 2014 were $30.1 million and $20.75 million, respectively. We borrow from commercial banks based on our working capital conditions and forecast of business needs. The average amount of loan outstanding in the six months ended June 30, 2015 was higher than the same period in 2014 due to expansion of our business.

 

There is no interest expense but only bank fee charged to notes payable. The bank charge is usually 0.05% of the notes payable issued. For the six months ended June 30, 2015 and 2014, bank charges related to notes payable were $1,199 and $1,660, respectively.

 

Subsidy income.  Our government subsidy income was approximately $60,000 for the six months ended June 30, 2015 compared to approximately $173,000 in the same period in 2014. Our government subsidy income was all granted by local governments in recognizing our achievements in various areas. All subsidies we received in 2015 and 2014 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 income was approximately $298,000 and $57,000 for the six months ended June 30, 2015 and 2014, respectively. In the six months ended June 30, 2015, due to the fluctuation of exchange rate of Chinese RMB against USD, the Company recorded $296,000 foreign currency transaction gain.

 

Income before income taxes.  Our income before income taxes was approximately $5.1 million for the six months ended June 30, 2015, an increase of approximately $927,000 compared with approximately $4.1 million in the same period in 2014. The increase was primarily attributable to increased sales and gross margin, offset by the increased other expense as discussed above.

 

Provision for income taxes.  Our provision for income taxes was approximately $745,000 for the six months ended June 30, 2015, an increase of approximately $186,000 or 33% from approximately $559,000 in the same period in 2014. The increase was consistent with the increase of income before taxes while our effective income tax rate were at 14.7% and 13.5% for the six months ended June 30, 2015 and 2014, respectively. The slight increase of the effective rate was due to the decreased percentage of income from entities which is subject to favorable income tax rate of 15%.

 

 42 
Table of Contents 

  

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)

 

   2014   2013         
Statement of
Operations 
Data:
  Amount   As % 
of
Sales
   Amount   As % 
of
Sales
   Amount
Increase
(Decrease)
   Percentage
Increase
(Decrease)
 
                         
Revenues  $83,181    100%  $69,536    100%  $13,645    20%
Cost of goods sold   54,503    66%   48,303    69%   6,200    13%
Gross profit   28,678    34%   21,233    31%   7,445    35%
Operating expenses                              
Selling expenses   12,665    15%   11,048    16%   1,617    15%
G&A expenses   3,880    5%   3,212    5%   668    21%
R&D expense   2484    3%   2129    3%   355    17%
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 expense, net   (1,157)   -1%   (647)   -1%   (510)   79%
Subsidy income   597    1%   853    1%   (256)   -30%
Loss of debt guarantee for a third party   -    0%   (1,029)   -1%   1,029    100%
Other income,  net   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%
Net income  $7,728    9%  $3,450    5%  $4,278    124%

 

 43 
Table of Contents 

 

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 prices to offset rising material cost as well as operating expenses.

 

Revenue by Product Type

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

 

   2014   2013   Variance 
   Amount   % of  Sales   Amount   % of  Sales   Amount
Increase
(Decrease)
   Percentage
Increase
(Decrease)
 
Cutlery  45,211    54%  38,828    56%  6,383    16%
Straws   13,055    16%   9,557    14%   3,498    37%
Cups and plates   22,699    27%   18,818    27%   3,881    21%
Others   2,216    3%   2,333    3%   (117)   -5%
Total  83,181    100%  69,536    100%  13,645    20%

 

Cutlery

 

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.

 

Straws

 

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

 

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 decrease 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.

 

 44 
Table of Contents 

 

Revenue by Geographic Area *

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

 

   2014   2013   Year-over Year
 Increase
 
Region  Amount   %   Amount   %   Amount   Percentage 
United States  $76,930    92.87%  $64,828    93.42%  $12,102    18.67%
Europe   1,933    2.33%   1,541    2.22%   392    25.44%
Australia   1,214    1.46%   775    1.12%   439    56.65%
Canada   1,198    1.45%   1,087    1.57%   111    10.21%
Central and South America   760    0.92%   685    0.99%   75    10.95%
Middle East   683    0.82%   374    0.54%   309    82.62%
China   122    0.15%   102    0.14%   20    19.61%
Total  $82,840        $69,392        $13,448      

 

* 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 the Allentown factory 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.

 

The portions of our products produced by third-party manufacturers in the years ended December 31, 2014 and 2013 are both less than 1%. The associated impact on our gross margins is very limited considering the portion.

  

Gross profit. Our gross profit increased by approximately $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 profit by product types are as follows:

 

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

 

   2014   2013   Variance 
   Cost    Gross Profit %   Cost    Gross Profit %  

Cost

Increase (Decrease)

  

Gross Profit

Increase (Decrease)

 
Cutlery   $30,703    32%   $26,432    32%   $4,271    0%
Straws   9,297    29%   7,147    25%   2,150    4%
Cups and plates   11,751    48%   11,799    37%   (47)   11%
Others   1,198    46%   1,180    49%   (18)   (3)%
Taxes   1,554    N/A    1,744    N/A    (191)   N/A 
Total   $54,503    34%   $48,303    31%   $6,200    3%

 

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.

 

 45 
Table of Contents 

 

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 margin was approximately 29% in 2014 compared to 25% in 2013. The increase in gross profit margin 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 margin 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 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 $140,000 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 income. Our interest income decreased by approximately $177,000 to approximately $41,000 in 2014, from approximately $218,000 in 2013. In 2013, we made loans to third parties with interest. In 2014, we ceased third-party loans.

 

Interest expense.  Our interest expense increased by approximately $333,000, to approximately $1.2 million in 2014, from approximately $865,000 in 2013. Our net interest expense (income) increased by $510,000 from 2013 to 2014, which includes an increase of interest expense of approximately $333,000 and decrease of interest income by $177,000.

 

The average interest rates for our average outstanding loan in 2014 and 2013 were 5.67% and 5.00%, respectively. At the time of loan application, different commercial banks determine loan interest rates based on various factors, including general economic conditions in China, internal bank lending policies, the applicant’s credit standing and relative bargaining power. In 2014, we paid off some loans with interest rates lower than 5.00% and took on new loans with interest rate above 5.00% from various banks. As a result of the change in loan mix, the interest rate for our average outstanding loan in 2014 was higher than in 2013.

 

The bank loan balance as of December 31, 2014 and 2013 were $19.5 million and $20.1 million respectively. The average amounts of loan outstanding for 2014 and 2013 were $19.8 million and $17.5 million, respectively. We borrow from commercial banks based on our working capital conditions and forecast of business needs. The average amount of loan outstanding in 2014 was slightly higher than 2013 due to expansion of our business.

 

There is no interest expense but only bank fee charged to notes payable. The bank charge is usually 0.05% of the notes payable issued. For the years ended December 31, 2014 and 2013, bank charges related to notes payable were $3,277 and $2,982, respectively.

 

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.

 

Commercial banks in China sometimes require third party guarantees to manage loan repayment risk of small business entities. As a result, small business entities from time to time guarantee loans for each other to facilitate bank approval. We have no obligation or requirement to provide such guarantee in future. We have no other outstanding third party loan guarantees. We have no intention to enter any third party guarantee arrangement before or when we become a public company. In addition, our banks do not require such arrangement from us anymore. However, it is possible that when we require bank loans to support our business or expand our operation, and if we are not able to obtain unguaranteed loans, we may involve unrelated third party guarantees.

 

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.

 

 46 
Table of Contents 

 

Liquidity and Capital Resources

 

We are a holding company incorporated in the Cayman Islands. Total Faith, our BVI organized wholly owned subsidiary, owns Taizhou Fuling which in turn owns our U.S. and China assets through its subsidiaries. We may need dividends and other distributions on equity from our PRC subsidiaries to satisfy our liquidity requirements. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiaries are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of their respective registered capital. Our PRC subsidiaries may also allocate a portion of its after-tax profits based on PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves are not distributable as cash dividends. We have relied on direct payments of expenses by our subsidiaries (which generate revenues), to meet our obligations to date. To the extent payments are due in U.S. dollars, we have occasionally paid such amounts in RMB to an entity controlled by our management capable of paying such amounts in U.S. dollars. Such transactions have been made at prevailing exchange rates and have resulted in immaterial losses or gains on currency exchange but no other profit.

 

As of June 30, 2015, Taizhou Fuling has outstanding loans of approximately $25.1 million from various banks in China. To secure this debt, Taizhou Fuling has pledged some of its properties and machinery, equipment, land use rights as well as other assets in China to banks. Our assets outside of China, including our Allentown assets, are not used as collateral.

 

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 June 30, 2015, we had cash and cash equivalents of approximately $1.6 million and restricted cash of approximately $3.5 million. As of June 30, 2015, we did not have any short-term investments. Our current assets were approximately $34.7 million and our current liabilities were approximately $39.8 million, which resulted in a current ratio of 0.95:1. Total shareholders’ equity as of June 30, 2015 was approximately $21.8 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. In China, long-term loans are generally available; however, short-term loans are more readily accessible sources of financing. Long-term loans in China are usually approved by banks for capital expenditures only, such as fixed asset construction or property acquisitions. Our working capital requirements are influenced by the level of our operations, the numerical 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. We expect to be able to refinance its short-term loans based on past experience and our good credit history. We do not believe failure to refinance our short term loans from certain banks will have a significant negative impact on our normal business operations. In both 2014 and 2013, our operating cash flow was positive. For the six months ended June 30, 2015, our operating cash flow was negative due to the significant increase of account receivable. Our account receivable increased 18%, consistent with 21% increase of sales. In addition, our related parties including our major shareholders and affiliate companies are willing to provide us financial support. However, we may have negative cash flow in the future, and our related parties may be unable or unwilling to provide us financial support as needed. If this happened, the failure to refinance our short-term loans could potentially affect our capital expenditure and expansion of business.

 

During the period from July 1, 2015 to August 30, 2015, we repaid approximately $13.4 million bank loans and $1.2 million in notes payable that were due in 2015. We also borrowed approximately $9.6 million under new bank loans as well as approximately $1.3 million in new notes payable from various banks in China. If we cannot refinance from commercial bank, our major shareholders and affiliate companies could provide us financial support as needed. Lack of sufficient financial support from local banks or our related parties could potentially affect our capital expenditure and expansion of business. In both 2014 and 2013, our operating cash flow is positive. We do not believe failure to refinance from certain banks will have significant negative impact on our normal business operations.

 

 47 
Table of Contents 

 

Six Months Ended June 30, 2015 and 2014

 

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

 

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

 

   For the Six Months Ended 
   2015   2014 
Net cash (used in) provided by operating activities  $(1,914)  $5,018 
Net cash used in investing activities   (2,416)   (1,368)
Net cash provided by (used in) financing activities   4,600    (4,199)
Effect of exchange rate changes on cash   (21)   3 
Net increase (decrease) in cash   249    (546)
Cash, beginning of period   1,400    2,699 
Cash, end of period  $1,649   $2,153 

 

Operating Activities

 

Net cash used in operating activities was approximately $1.9 million for the six months ended June 30, 2015, compared to cash provided by operating activities of approximately $5 million for the same period in 2014.

 

The decrease in net cash provided by operating activities was primarily attributable to the following factors:

 

·Net income increased by approximately $740,000 for the six months ended June 30,2015 compared to the same period in 2014;

·The increase in account receivable balance corresponded to the trend of increase in sales: for the six months ended June 30, 2015, the account receivable increased by $2.5 million, compared to net collection of account receivable of $3.6 million for the six months ended June 30, 2014;

·The increase in advance to vendor balance: for the six months ended June 30, 2015, the account receivable increased by $1.8 million, compared to net utilization of advance to vendor of $305,000 for the six months ended June 30, 2014;

·The decrease in accrued liabilities balance: for the six months ended June 30, 2015, the accrued liabilities paid off by $228,000, compared to increase of accrued liabilities of $4.3 million for the six months ended June 30, 2014.

 

The above decrease of cash flow was offset by the following increase of cash flow:

 

·Inventory decreased by approximately $315,000 for the six months ended June 30, 2015 compared with an increase of approximately $1.8 million for the same period in 2014. Our inventory level fluctuated based on the orders we received and the fluctuation of raw material prices;

·Other assets decreased by $285,000 for the six months ended June 30, 2015 compared with an increase of $1.3 million for the same period in 2014 due to the collection made for export tax refund from tax authority, compared to significant receivables for export tax refund in 2014.

 

Investing Activities

 

Net cash used in investing activities was approximately $2.4 million for the six months ended June 30, 2015, an increase of approximately $1.0 million from net cash used in investing activities of approximately $1.4 million for the six months ended June 30, 2014. The increase in net cash used in investing activities for the six months ended June 30, 2015 was primarily attributable to increased prepayments associated with the acquisition of property and equipment in the six months ended June 30, 2015.

 

 48 
Table of Contents 

 

Financing Activities

 

Net cash provided from financing activities was approximately $4.6 million for the six months ended June 30, 2015, compared to net cash used in financing activities of approximately $4.2 million for the six months ended June 30, 2014. The increase in net cash provided from financing activities in the six months ended June 30, 2015 was primarily attributable to (a) a cash dividend paid to shareholders in 2014 (“2014 Dividend”), net of shareholder contribution of $6.4 million for the six months ended June 30, 2014, (b) proceeds, net against repayment of short term borrowings, was $5.4 million for the six months ended June 30, 2015 compared to $854,000 for the six months ended June 30, 2014, (c) increase of proceeds from note payable by $1.9 million for the six months ended June 30, 2015 compared to the six months ended June 30, 2014. 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 from June 30, 2015 include (i) investments of approximately $1 million in the new production lines and manufacturing facilities in Pennsylvania to manufacture our products locally, (ii) purchase of equipment for approximately $4 million for our existing factories in China; and (iii) purchase of land use right for approximately $8 million and construction of property of $5 million as part of our project to build a new manufacturing facility in Wenling. 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.

 

Our primary source of cash is currently generated from the sales of our products and bank borrowings. We will be looking to other sources, such as raising additional capital by issuing shares of stock, to meet our cash needs. While facing uncertainties in regards to the size and timing of capital raises, we are confident that we can continue to meet operational needs solely by utilizing cash flows generated from our operating activities and bank borrowings, as necessary.

 

Loan Facilities

 

As of June 30, 2015, the details of all our short-term bank loans and bank acceptance notes payable are as follows:

 

(All amounts in U.S. dollars)

 

No.   Type   Contracting Party   Expiration Date   Amount     Interest rate
1   Short-term Bank Loan   Agricultural Bank of China   Various from July 2015 to May 2016   $ 1,227,737     Interest rate ranging from 6.31% to 6.79% per annum
2   Short-term Bank Loan   China Construction Bank   Various from July to November 2015   $ 2,510,529     6.30% per annum
3   Short-term Bank Loan   China Merchants Bank   Various from August to November 2015   $ 2,557,706     Interest rate ranging from 6.6% to 6.72% per annum
4   Short-term Bank Loan   PingAn Bank   Various from October 2015 to March 2016   $ 2,455,474     Interest rate ranging from 6.3% to 6.5% per annum
5   Short-term Bank Loan   China Citic Bank   Various from August 2015 to January 2016   $ 3,314,160     Three months of LIBOR
6   Short-term Bank Loan   Industrial and Commercial Bank of China   Various from August to December 2015   $ 4,697,222     Interest rates ranging from 1.36% to 6.16% per annum
7   Short-term Bank Loan   Shanghai Pudong Development Bank    July 2015   $ 1,200,943     4.8% to 5.0% per annum in excess of LIBOR
8   Short-term Bank Loan   Bank of China   Various from July to October  2015   $ 7,139,709     1.61% to 6.72% per annum
9   Bank acceptance notes payable   Industrial and Commercial Bank of China   Various dates from July to December 2015   $ 1,179,252     N/A
10   Bank acceptance notes payable   Bank of China   Due on July 27, 2015   $ 452,427     N/A
11   Bank acceptance notes payable   China Citic Bank   Various dates from September to November  2015   $ 369,898     N/A
12   Bank acceptance notes payable   Agricultural Bank of China   Due on August 13, 2015   $ 194,278     N/A
13   Bank acceptance notes payable   China Construction Bank   Due on September 30, 2015   $ 209,309     N/A

 

All loans and bank acceptance notes due as of the date of this filing have been repaid. As of the date of this filing, the Company has repaid approximately $13.4 million in bank loans and $1.2 million in notes payable that were due in 2015 and has borrowed approximately $9.6 million in bank loans and $1.3 million in notes payable from various banks in China, which are short term in nature and guaranteed by Special Plastics, its shareholders and third parties.

 

 49 
Table of Contents 

 

Although we currently do not have any material unused sources of liquidity, giving effect to the foregoing bank loans and other financing activities, including the discounting of bills/notes receivable, we believe that our currently available working capital should be adequate to sustain our operations at our current levels through at least the next twelve months. We 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 June 30, 2015, 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 year
   1 – 3 
years
   3 – 5 
years
   More than
5 years
 
Short-Term Debt Obligations  $25,103,480   $25,103,480             
Bank Acceptance Notes Payable   2,405,164    2,405,164             
Capital Lease Obligations                    
Operating Lease Obligations   3,836,295    389,494    808,618    849,472    1,788,711 
Letter of Credit   4,933,758    4,933,758                
Purchase Obligations                    
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP                    
Loans from Third Parties                    
Due to Related Parties   44,253    44,253             
Total  $36,322,950   $32,876,149   $808,618   $849,472   $1,788,711 

 

Statutory Reserves

 

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

 

Restrictions on net assets also include the conversion of local currency into foreign currencies, tax withholding obligations on dividend distributions, the need to obtain State Administration of Foreign Exchange approval for loans to a non-PRC consolidated entity. We did not have these restrictions on our net assets as of June 30, 2015 and December 31, 2014. 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 June 30, 2015 and December 31, 2014.

 

   As of
June 30,
2015
   As of
December 31,
2014
 
Statutory Reserves  $2,269,804   $1,862,365 
Total Restricted Net Assets  $2,269,804   $1,862,365 
Consolidated Net Assets  $21,768,989   $17,454,524 
Restricted Net Assets as Percentage of Consolidated Net Assets   10.4%   10.67%

 

 50 
Table of Contents 

 

 

Total restricted net assets accounted for approximately 10.4% of our consolidated net assets as of June 30, 2015. As our subsidiaries usually set aside only 10% of after-tax net profits each year to fund the statutory reserves and are not required to fund the statutory reserves when they incur losses, we believe the potential impact of such restricted net assets on our liquidity is limited.

 

Capital Expenditures

 

We had capital expenditures of approximately $1.8 million and $1.6 million for the six months ended June 30, 2015 and 2014, 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 $16.3 million, and will be primarily related to the development of Allentown manufacturing facility in the United States for $3.3 million to meet increased global demand for our products, purchase of equipment for our existing factories in China for $5 million, and purchase of land use rights in China for $8 million.

 

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.

 

Years Ended December 31, 2014 and 2013

 

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

 

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

 

   2014   2013 
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 (decrease) increase  in cash   (1,299)   1,912 
Cash, beginning of year   2,699    787 
Cash, end of year  $1,400   $2,699 

 

Operating Activities

 

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;

 

 51 
Table of Contents 

 

  · The increase in account receivable balance corresponded to the trend of increase in sales, but at a faster rate than sales. Our sales increased by 19.6% or $13.6 million in 2014 compared with 2013. A substantial amount of the growth happened in the last quarter in 2014, during which our sales increased by 33%, or $5.44 million, compared with the same period of 2013. As a result, accounts receivable at the end of 2014 increased by approximately $4.1 million, or 46.3% in 2014 compared to 2013.

  · 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.

 

Investing Activities

 

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.

 

Financing Activities

 

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) the 2014 Dividend, 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, (ii) purchase of equipment for approximately $5 million for our existing factories in China; and (iii) purchase of land use right for approximately $8 million as part of our project to build a new manufacturing facility in Wenling. 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.

 

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.

 

Loan Facilities

 

As of December 31, 2014, the details of all our short-term bank loans and bank acceptance notes payable are as follows:

 

(All amounts in U.S. dollars)

 

No.   Type   Contracting Party   Expiration Date   Amount     Interest rate
1   Short-term Bank Loan   Agricultural Bank of China   Various from January to May 2015   $ 1,220,306     6.60% per annum
2   Short-term Bank Loan   China Construction Bank   July 2015   $ 1,301,660     6.30% per annum
3   Short-term Bank Loan   China Merchants Bank   March 2015   $ 2,423,560     4.12% per annum for $800,000 and 6.6% per annum for $1,639.344
4   Short-term Bank Loan   PingAn Bank   March 2015   $ 2,440,610     Interest rate ranging from 7.0% to 7.05% per annum
5   Short-term Bank Loan   China Citic Bank   Various from January to April 2015   $ 4,507,514     Interest rates ranging from 2.5% to 6.9% per annum
6   Short-term Bank Loan   Industrial and Commercial Bank of China   Various from February to December 2015   $ 3,585,835     Interest rates ranging from 1.8% to 6.16% per annum
7   Short-term Bank Loan   Shanghai Pudong Development Bank   Various from January to March 2015   $ 1,971,302     4.5% to 5.5% per annum in excess of LIBOR
8   Short-term Bank Loan   Bank of China   Various from January to February 2015   $ 2,073,420     2.5% to 4.1% per annum in excess of LIBOR
9   Bank acceptance notes payable   Industrial and Commercial Bank of China   Various dates from January to April  2015   $ 2,678,648     N/A
10   Bank acceptance notes payable   Bank of China   Various dates from January to June 2015   $ 565,685     N/A

 

 52 
Table of Contents 

 

All loans and bank acceptance notes due as of the date of this filing have been repaid. 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 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 year
   1 – 3 
years
   3 – 5 
years
   More than
5 years
 
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 
Letter of Credit   7,846,882    7,846,882                
Purchase Obligations                    
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             
Total  $34,876,035   $31,233,672   $1,213,083   $1,306,247   $1,123,033 

 

Statutory Reserves

 

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

 

Restrictions on net assets also include the conversion of local currency into foreign currencies, tax withholding obligations on dividend distributions, the need to obtain State Administration of Foreign Exchange approval for loans to a non-PRC consolidated entity. We did not have these restrictions on our net assets as of December 31, 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.

 

 53 
Table of Contents 

 

The following table provides the amount of our statutory reserves, the amount of restricted net assets, consolidated net assets, and the amount of restricted net assets as a percentage of consolidated net assets, as of December 31, 2014 and December 31, 2013.

 

   As of
December 31,
2014
   As of
December 31,
2013
 
Statutory Reserves  $1,862,365   $1,108,393 
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.

 

Capital Expenditures

 

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 $16.3 million, and will be primarily related to the development of Allentown manufacturing facility in the United States for $3.3 million to meet increased global demand for our products, purchase of equipment for our existing factories in China for $5 million, and purchase of land use rights in China for $8 million.

 

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 recognition

 

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

 

 54 
Table of Contents 

 

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.

 

Income Tax

 

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

 

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

 

Recently Issued Accounting Pronouncements

 

In 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. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers by one year the effective date of ASU 2014-09, Revenue from Contracts with Customers. ASU 2015-14 defers the effective date of ASU 2014-09 for all entities by one year to December 15, 2017. Management is evaluating the impact, if any, of this ASU on the Company’s financial position, results of operations and cash flows.

 

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.

 

 55 
Table of Contents 

 

Business

 

Overview

 

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 household articles, baskets and other plastic products mainly in Europe. During this time, we were a relatively small company generating a few million dollars per year in revenue.

 

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

 

Many of our competitors turned away from an opportunity like this, since the production of disposable serviceware was seen as a low profit venture. Although the profit margins were lower, the revenues were significantly higher, allowing us to reach revenues of more than $10 million per year in 2003-04.

 

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 and increasing environmental sensitivities of our new industry. For example, we were initially unprepared for the audits conducted by QSR chains when the customer’s Shanghai branch first visited our factory. After failing that first inspection, we tirelessly worked to address all of the issues noted and succeeded in passing the audit just seven short days later.

 

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

 

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

 

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

 

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

 

  1. Dealers

 

  2. QSRs

 

  3. Manufacturers

 

  4. Retailers

 

Corporate Information

 

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.

 

 56 
Table of Contents 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Corporate Structure

 

Below is a chart representing our current corporate structure:

 

 

 57 
Table of Contents 

 

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.

 

Our Industry

 

Foodservice Disposables - Generally

 

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

 

Serviceware Segment

 

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

 

 

(The Freedonia Group, Inc.)

 

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

 

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

 

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.

 

 58 
Table of Contents 

 

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

 

Our Products

 

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

 

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

 

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

 

  1. PBS is crystallized biodegradable polyester. As PBS decomposes naturally into water and carbon dioxide, it is a biodegradable alternative to some common plastics. It is both a green and environmentally-friendly material. It has high mechanical performance, good toughness, good thermal stability, and a wide range of processing temperature and high heat deflection temperature. PBS can be processed by various molding ways with normal equipment. To meet the requirements of various products, it can be mixed with other biodegradable or natural materials, such as PLA, polypropylene carbonate (“PPC”), polyhydroxyalkanoates (“PHAs”), Polycaprolactone (“PCL”) and starch or wood powder.

 

  2. PLA is a biodegradable thermoplastic aliphatic polyester derived from renewable resources, such as corn starch (in the United States), tapioca roots, chips or starch (mostly in Asia), or sugarcane (in the rest of the world). In 2010, PLA had the second highest consumption volume of any bioplastic of the world.

 

  3. Cellulose is an organic compound. It is the most abundant organic polymer on Earth. Cellulose has no taste, is odorless, is insoluble in water and most organic solvents and is biodegradable. Hydroxyl bonding of cellulose in water produces a sprayable, moldable material as an alternative to the use of plastics.

 

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

 

 59 
Table of Contents 

 

Our Insurance Coverage

 

The following chart shows our current insurance coverage:

 

Insured   Insurance Type   Insurance Subject   Insured Amount   Period
Taizhou Fuling   Property insurance   Inventory   RMB 8,000,000.00   July 16, 2015 –July 15, 2016
        Fixed assets   RMB 8,000,000.00    
Taizhou Fuling   Cargo Export Transportation Insurance   Plastic Kitchen Ware   Determined by CIF (Cost Insurance and Freight) / DDP (Delivery Duty Paid) of cargo; expected to be RMB 200,000,000 per year   March 1, 2015 -March 1, 2016
Taizhou Fuling and/or its Wenling branch   Products/completed operations liability and designated vendors’ liability   Plastic cutlery (including plastic knife/fork/spoon) manufactured by the Named Insured and distributed through designated vendor(s) in Australia/New Zealand   USD 8,797,000   March 1, 2015 - March 1, 2016
General Distributors Limited (as additional insured)                
Taizhou Fuling, Great Plastics   Short-term Credit Insurance   All exportation by non-Letter of Credit and All exportation by Letter of Credit   $ 35,000,000   June 1, 2015 – May 31, 2016
Great Plastics   Cargo Export Transportation Insurance   Plastic Kitchen Ware   Determined by CIF (Cost Insurance and Freight) / DDP (Delivery Duty Paid) of cargo; expected to be RMB 100,000,000 per year   April 1, 2015 - April 1, 2016
Direct Link   Property   Business income and extra expense   12 months actual loss sustained   March 15, 2015 –March 15, 2016
        Business income and extra expense — dependent properties   $10,000    
        Employee dishonesty   $25,000    
        Forgery and alteration   $25,000    
    Liability   Liability and medical expense limit — each occurrence   $1,000,000    
        Medical expense limit- per person   $10,000    
        Personal and advertising injury   $1,000,000    
        Products/completed operations aggregate   $2,000,000    
        General aggregate   $2,000,000    
        Damage to premises rented to you   $300,000    
    Property (Containers, paper and disposable plastic   Accounts Receivable   $25,000    
        Business Personal Property   $15,918    
        Electronic Data Processing   $50,000    
        Equipment Breakdown   $15,918    
        Fine Arts   $25,000    
        Ordinance or Law — Demolition Cost, Increased Cost of Construction   $25,000    
        Seasonal Increase: 25%        
        Sewer or Drain Back Up   $25,000    
        Valuable Papers & Records   $25,000    
Direct Link   Umbrella   Each Occurrence Limit   $1,000,000   March 15, 2015 –March 15, 2016
        General Aggregate Limit   $2,000,000    
        Products/Completed Operations Aggregate Limit   $2,000,000    
        Personal and Advertising Injury Liability Limit   $1,000,000    
Fuling USA   Commercial Property       Up to $2,000,000   August 6, 2015 – August 6, 2016
        Utility Service Direct Damage   Up to $100,000    
        Greenpac Enhancement   Up to $25,000    
        Crisis Response   Up to $25,000    
        ELITEPAC Property Extension   Up to $2,000,000    
    Commercial Liability       Up to $3,000,000    
        Employee Benefits   Up to $3,000,000    
        Product Recall Expense   Up to $200,000    
        Data Compromise   Up to $50,000    
        ELITEPAC General Liability Extension   Up to $500,000    
    Business Automobile       Up to $1,000,000    
        ELITEPAC Commercial Automobile Extension   Up to $1,000 Per Day    
    Employment Practices Liability       Up to $50,000    
    Commercial Umbrella       Up to $9,000,000    

 

Our Environmental Stewardship Measures

 

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

 

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

 

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

 

Fuling Environmental Stewardship-related Certificates

 

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

 

 60 
Table of Contents 

 

Our Equipment

 

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

 

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

 

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

 

The following chart shows some of our advanced equipment.

 

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

 

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 factories and product lines.

 

 

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

 

 

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

 

 

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

 

 61 
Table of Contents 

 

Production Strategy

 

Product Mix

 

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

 

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

 

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

 

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

 

Manufacturing Location

 

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

 

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

 

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

 

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

 

  1. Labor costs. Currently the United States is much more expensive per hour for laborers, although U.S. laborers tend to be more productive in the same amount of time.

 

  2. Raw materials. The United States is slightly more expensive for raw materials that we use in production of our products than China is.

 

  3. Electricity. Electricity needed to produce our products costs more in China than in the United States.

 

  4. Shipping. If we ship the products from China to the United States for sale, shipping costs can account for up to 40% of the price of the product, depending upon the location and the product.

 

  5. Taxes. Taxes on our income are higher for sales in the United States than for sales in China.

 

As a result of analyzing these factors, we determined that it was in the best interest of our company to invest in America, hire U.S. workers and produce certain of our products in Allentown. Because we expect labor costs in China will continue to approach U.S. rates and electricity and shipping costs from China will continue to be comparatively expensive, we look forward to 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.

 

 62 
Table of Contents 

 

Allentown Expansion

 

Decision to Invest in Allentown

 

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

 

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

 

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

 

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

 

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

 

Allentown Project Plan

 

Estimate of the amount of expenditures

 

The total investment 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 $6.1 million (including $2.8 million we have already invested and $3.3 million from IPO proceeds) and long-term loans of approximately $3.8 million. We plan to obtain these long-term loans from commercial banks in China with land and building of our Songmen facility as collateral. This will bring six of the twenty-four planned manufacturing lines fully operational. If we choose to increase production capability, we will incur additional costs.

 

Schedule

 

We signed the lease of the factory and acquired property for our Allentown facility in 2013 and 2014 for $235,089.18. As of the time of this filing, we have paid approximately $455 thousand in total rental fees and approximately $839 thousand for factory renovations.

 

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

 

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

 

From January 2015 to May 2015, we have purchased and installed the initial six straw production lines at a cost of approximately $1 million. These six production lines have become operational now and enable us to manufacture on average 4 million straws per day. We have the ability to expand to twenty-four production lines.

 

From June 2015 to November 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 if all the 24 straw production lines are put into operations. According to our industry experience, market development and detailed specifications of this project, we estimate that in the second full year of the project (October 2014 to September 2015), the production load should reach 10% of total designated production capacity, 50% in the third year (October 2015 to September 2016), and 100% in the fourth year (October 2016 to September 2017), as illustrated in the following chart:

 

Production Load Estimate

 

Project  In 2nd Year   In 3rd Year   In and After 4th Year 
Production Load   10%   50%   100%
Straw Production (tons)   480    2,400    4,800 

 

 63 
Table of Contents 

 

Environmental Considerations

 

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

 

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

 

Location

 

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

 

 

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

 

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

 

 64 
Table of Contents 

 

Facility

 

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 blue figures in the left lower corner represent our first 6 straw production lines that we have installed. We next intend to build the remaining product lines.

 

 

Current Stage

 

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 6 straw production lines at a purchase and installation cost of approximately $1 million. As of October 1 2015, all of these production lines are operational.

 

 65 
Table of Contents 

 

Wenling Expansion

Decision to Build a New Factory in Wenling

 

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

 

1)    By building a new factory, we can meet the growing demand for our products. Currently the extent of utilization of our old factory in Songmen Town of Wenling is approximately 90%. Based on current growth rates, we expect utilization will reach 100% in the second half of 2015. A new factory will allow us to expand our production capacity.

 

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

 

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

 

Wenling Project Plan

 

The project construction period is budgeted for 35 months, from September 2015 to July 2018, divided into three phases.

 

We estimate the total amount of expenditures is approximately $36 million. We plan to finance the expansion with IPO proceeds, self-generated cash flow and profits from operations. We plan to install 180 injection production lines and 33 suction production lines. The 180 injection production lines will produce cutlery, plates, cups and bowls. We anticipate that 16 of the 33 suction production lines will produce cups, and 17 of the suction production lines will produce plates, cup lids and various types of containers, such as vegetable containers, fruit containers and packaging containers. We anticipate that the production capacity will be increased by 60,000 tons after completion of the build-out project.

 

The following chart shows the specific plan:

 

    Phase I   Phase II   Phase III
Estimated period   September 2015 – July 2016   January 2017 – July 2017   January 2018 – July 2018
Estimated expenditures required  

$14 million

1) Purchase of land use right: $5 million for 33.27 acres (202 mu);

2) Construction of facilities: $5 million for 107,800 square meters of manufacturing facilities;

3) Equipment purchase: $4 million

 

$11 million

1) Construction of facilities: $3 million;

2) Equipment purchase: $7 million;

3) R&D: $1 million.

 

$11 million

1) Construction of facilities: $3 million;

2) Equipment purchase: $7 million;

3) R&D: $1 million.

Financing resources   IPO proceeds and self-generated cash flow   Profit from operation in 2016   Profit from operation in 2017
Anticipated increase in production capacity   20,000 tons   20,000 tons   20,000 tons
180 injection production lines   80 (capacity of 12,000 tons)   60 (capacity of 9,000 tons)   40 (capacity of 6,000 tons)
33 suction production lines   8 (capacity of 8,000 tons)   11 (capacity of 11,000 tons)   14 (capacity of 14,000 tons)

 

Environmental Considerations

 

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

 

Location

 

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

 

 

Facility

 

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

 

 66 
Table of Contents 

 

Raw Materials

 

Our primary raw materials are (1) plastic resin (primarily polypropylene (“PP”) and polystyrene (“PS”) which includes General Purpose Polystyrene (“GPPS”) and High Impact Polystyrene (“HIPS”)), (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.

 

Distribution Channels

 

Geographic Distribution of Revenues

 

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

 

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

 

Region  2014   2013   2012 
United States  76,930   64,828   50,706 
Europe   1,933    1,541    1,732 
Australia   1,214    775    2,076 
Canada   1,198    1,087    633 
Central and South America   760    685    657 
Middle East   683    374    430 
China   122    102    74 
Total  82,840   69,392   56,308 

 

 67 
Table of Contents 

 

Markets and Customers

 

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

 

Type of
Customer
  Products
Sold
  Geographic
Region
  Estimated Sales
% in Six Months
Ended June 30,
2015
   Estimated Sales
% in 2014
   Estimated Sales %
in 2013
 
Dealers  Serviceware, Straws, Cups, Plates  USA, Europe, Central and South America, Australia, Middle East, Canada   58%   54%   58%
QSRs  Serviceware, Straws, Cups  USA   31%   33%   33%
Retailers  Serviceware, Straws, Cups, Plates  USA, Australia   6%   6%   7%
Manufacturers  Serviceware  USA   5%   7%   2%
Total         100%   100%   100%

 

Distribution Channels

 

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

 

Methods of Competition

 

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

 

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

 

Competitive Position

 

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

 

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

 

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

 

    Taizhou Fuling   Jiaxing Zhongli
Plastic Co., Ltd.
  Baohao Plastic &
Hardware
Production
(Jiangmen) Co Ltd
  Ningbo Homelink
Plastic Product
Manufacture Co.,
Ltd.
Ranking  

2012: No. 1

2013: No. 2

2014: No. 3

 

2012: No. 3

2013: No. 5

2014: No. 5

 

2012: No. 5

2013: No. 3

2014: No. 2

 

2012: No. 2

2013: No. 1

2014: No. 1

Products   Disposable plastics serviceware including cutlery, cups, containers, straws, etc.   Disposable plastic serviceware including cutlery, cups, straws, etc.     Plastic and hardware household articles and gifts.   Disposable plastics serviceware including cutlery, cups, straws, etc.  
Overseas sales, marketing  and production   Four warehouses and distribution centers in U.S. and two warehouses in and distribution centers.  The only one that has established overseas manufacturing factory.   Sales office and warehouse in U.S.   Not known.   Sales office and warehouse in U.S.
R&D and Patents   Academician Expert Workstation; 29 patents.     Not known.   Not known.   56 patents.
Customers   Dealers, QSRs including four of top five, retailers, manufacturers.     Dealers, QSRs, retailers, manufacturers.     Dealers, restaurants, retailers, manufacturers.   Dealers, restaurants, retailers, manufacturers.
Product specification standard   Participate in initiating and drafting the national standard General Requirement Of Plastic Disposable Tableware.   No participation.   No participation.   No participation.

 

 68 
Table of Contents 

 

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

 

We have invested heavily ($6,283,237 since 2012 to 2014) in research and development to increase our future competitive position, seeking to increase our use of environmentally-friendly materials, develop degradable and biodegradable materials, and reduce reliance on fossil raw materials. In addition, we have developed advanced robotics to produce our products more efficiently and at lower cost to be more competitive in the face of rising wages and higher quality demands.

 

Awards and Recognition

 

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

 

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

 

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

 

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

 

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

  

2014

 

  · Zhejiang Famous Export Brand
  · Zhejiang Famous Trademark

  · Wenling Star Enterprise

  · Taizhou Quality Enterprise Leader

 

2013

 

  · Top 10 Enterprises of Plastic Industry (Daily Plastic) in China Light Industries, 2013
  · Zhejiang Credit Grade AAA Award

  · Zhejiang Credit Management Model Enterprise

  · Zhejiang High-Tech Enterprise

  · Zhejiang High-Tech Enterprise R&D Center

  · Zhejiang Quality Management Innovation Project

 

2012

 

  · Zhejiang Academician Expert Workstation

  · Zhejiang Energy Measurement Model Entity

  · Taizhou High-Tech R&D Center

  · Wenling Government Quality Award

 

2011

 

  · Grade A Customs Enterprise

  · Zhejiang May First Labor Award, recognizing compliance with the law, contribution to society and positive workplace environment

  · Zhejiang Famous Brand Products

  · Zhejiang Credit Grade AA Award

  · Zhejiang Export Famous Brand

  · First Academician Expert Workstation in Wenling (founded with Technical Institute of Physics and Chemistry, Chinese Academy of Sciences, devoted to research and development of plastic products)

  · Taizhou Famous Brand

 

 69 
Table of Contents 

 

2010

 

  · Executive Vice Chair Entity, Committee of the Plastic Household Products of China Plastic Processing Industry Association

  · Zhejiang Hi-Tech Enterprise

  · Zhejiang Science and Technology Oriented Small and Medium Enterprise

  · Taizhou Hi-Tech Enterprise

  · Taizhou Famous Brand Product

  · Taizhou Export Famous Brand

 

2009

 

  · Taizhou Export Famous Brand

 

2008

 

  · Zhejiang Compliance Credit Export and Import Model Enterprise

· Zhejiang Credit Grade AA Award

  · Taizhou Statistics Credit Entity

 

2007

 

  · Taizhou Top 10 Export Processing Trade Enterprise

  · Wenling Star Industrial Enterprise

 

2006

 

  · AAA Credit Enterprise

  · Taizhou Famous Trademark

  · Wenling Star Industrial Enterprise

 

2005

 

  · First recipient in Wenling of Zhejiang Green Enterprise Designation

 

2004

 

  · Zhejiang Credit Grade AA Award

 

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 95 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:

 

   Six Months Ended June 30,   Year Ended December 31, 
Purpose  2015 (in millions)   2014 (in millions)   2014 (in millions)   2013 (in millions) 
Salaries  $0.27   $0.33   $0.76   $0.65 
Materials   0.54    0.60    1.30    1.25 
Other   0.12    0.19    0.42    0.23 
Total  $0.93   $1.12   $2.48   $2.13 

 

We expect to increase our R&D expenditures proportionate to our revenue increase in 2015.

 

 70 
Table of Contents 

  

The following chart shows some of our recent research projects.

 

Project   Source   Year  
PP Controlled Degradation Serviceware   Self-Developed   2014  
Melt- Grafted Polypropylene Cutlery   Self-Developed   2014  
Damping Gradient Distribution Function Package   Self-Developed   2014  
New Anti-Fog Lid   Self-Developed   2014  
Research of Serviceware Packaging Automation   Self-Developed   2013  
Application of Orientation Control in Serviceware   Self-Developed   2013  
New Antibacterial Compound Serviceware   Self-Developed   2013  
Toughening PLA Biodegradable Serviceware   Self-Developed   2013  
Mold for Folding Spork   Self-Developed   2012-2013  
PS/HIPS/SBC Plastic Alloy   Self-Developed   2012-2013  
High Temperature High Impact PET Transparent Lid   Self-Developed   2012-2013  
Starch Modified PBS Technology   Self-Developed   2012-2013  
PLA / PBS Composite Biodegradable Straws   Self-Developed   2012  
Starch-Based Full-Dissolved Material   Self-Developed   2012  
New Temperature Modified PLA Biodegradable Material   Self-Developed   2012  
New Coating Serviceware   Self-Developed   2012  
Modified Corn Starch-Based PBS Biodegradable Material   R&D cooperation with Chinese Academy of Sciences   2011  
Cellulose Inorganic Filler Modified PBS Biodegradable Materials   R&D cooperation with Chinese Academy of Sciences   2011  
Research of Biodegradable Food Packaging Material   Self-Developed   2011  
New Serviceware Coating Technology   Self-Developed   2011  
Research of Improving The Energy-Saving of Injection Molding Machine   Self-Developed   2011  
Research of Temperature Resistance of New Modified PLA Biodegradable Material   Self-Developed   2011  
Research of Toughening Polystyrene   Self-Developed   2010  
Development of Whisker Reinforced Serviceware   Self-Developed   2010  
Research of Four-Layer Coextrusion Technology   Self-Developed   2010  
Development of cup with high-transparent curled rim(1)   Self-Developed   2010  
Development of Nano-Modified Composite Serviceware(2)   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   2009  
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  

 

(1) It is protected by our utility model patent “cup with curled rim” (patent No. ZL 201120049179.1) as disclosed in the patent chart on page 71.
(2) It is protected by our patent “food grade polypropylene composite material and preparation and uses” (patent No. ZL 201010116076.2) as disclosed in the patent chart on page 71.

 

Intellectual Property

 

Our Patents

 

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

 

Proprietary name   Patent No.   Patent
type
  Application
Date
  Approval
Date
  Expiration
Date
    Authority
Improvement to water barrel   ZL 2007 2 0109209.7   Utility model   2007.05.11   2008.02.20   2017.05.10     China State Intellectual Property Office
Particulate filtering drinking straw   ZL 2007 2 0107560.2   Utility model   2007.03.27   2008.02.20   2017.03.26     China State Intellectual Property Office
Straw with a fork   ZL 2007 2 0110304.9   Utility model   2007.06.06   2008.04.30   2017.06.05     China State Intellectual Property Office
Food and beverage heater for automobiles   ZL 2007 2 0109842.6   Utility model   2007.05.25   2008.04.30   2017.05.24     China State Intellectual Property Office
Straw with a spoon   ZL 2007 2 0111006.1   Utility model   2007.07.07   2008.07.02   2017.07.06     China State Intellectual Property Office
Brewing device   ZL 2008 2 0164651.4   Utility model   2008.09.11   2009.08.12   2018.09.10     China State Intellectual Property Office
Food grade polypropylene composite material and preparation and uses   ZL 2010 1 0116076.2   Patent   2010.03.02   2013.06.05   2030.03.01     China State Intellectual Property Office
Two section straw packaging and transmission system   ZL 2007 1 0156428.5   Patent   2007.10.26   2010.12.15   2027.10.25     China State Intellectual Property Office
Split-type goblets   ZL 2010 2 0684010.9   Utility model   2010.12.28   2011.08.03   2020.12.27     China State Intellectual Property Office
Plates   ZL 2010 3 0701465.2   Design   2010.12.29   2011.08.03   2020.12.28     China State Intellectual Property Office
Cup with curled rim   ZL 2011 2 0049179.1   Utility model   2011.02.26   2011.08.24   2021.02.25     China State Intellectual Property Office
Spork   ZL 2010 2 0685416.9   Utility model   2010.12.28   2011.09.07   2020.12.27     China State Intellectual Property Office
Multipurpose fork   ZL 2010 2 0685497.2   Utility model   2010.12.28   2011.10.19   2020.12.27     China State Intellectual Property Office
Anti-counterfeit bags   ZL 2011 2 0049491.0   Utility model   2011.02.26   2011.10.19