UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2018
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report _____
For the transition period from to
Commission file number 001-37602
Fuling Global Inc.
(Exact name of Registrant as specified in its charter)
Cayman Islands
(Jurisdiction of incorporation or organization)
Southeast Industrial Zone, Songmen Town
Wenling, Zhejiang Province
People’s Republic of China 317511
(Address of principal executive offices)
Gilbert Lee, Chief Financial Officer
+1-610-366-8070 – telephone
glee@fulingusa.com
Fuling Plastic USA, Inc.
6690 Grant Way, Allentown, PA 18106
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary Shares, par value $0.001 per share
Name of each exchange on which registered
Nasdaq
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 15,795,910
Ordinary Shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☐ Yes ☒ No
☐ Yes ☒ No
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large
accelerated filer, “accelerated filer,” and emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Emerging growth company ☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the
extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒
International Financial Reporting Standards as issued
by the International Accounting Standards Board ☐
Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
☐ Item 17 ☐ Item 18
☐ Yes ☒ No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
☐ Yes ☒ No
Table of Contents
PART I
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
PART II
Item 13.
Item 14.
Item 15.
Item 15T.
Item 16.
Item 16A.
Item 16B.
Item 16C.
Item 16D.
Item 16E.
Item 16F.
Item 16G.
Item 16H.
PART III
Item 17.
Item 18.
Item 19.
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
Information on the Company
Unresolved Staff Comments
Operating and Financial Review and Prospects
Directors, Senior Management and Employees
Major Shareholders and Related Party Transactions
Financial Information
The Offer and Listing
Additional Information
Quantitative and Qualitative Disclosures About Market Risk
Description of Securities Other than Equity Securities
Defaults, Dividend Arrearages and Delinquencies
Material Modifications to the Rights of Security Holders and Use of Proceeds
Controls and Procedures
Controls and Procedures
[Reserved]
Audit Committee Financial Expert
Code of Ethics
Principal Accountant Fees and Services
Exemptions from the Listing Standards for Audit Committees
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Change in Registrant’s Certifying Accountant
Corporate Governance
Mine Safety Disclosure
Financial Statements
Financial Statements
Exhibits
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103
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105
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Except where the context otherwise requires and for purposes of this annual report on Form 20-F only, “we,” “us,” “our company,” “Company,” “our” and “Fuling”
Conventions Used in this Annual Report
refer to:
●
●
●
Fuling Global Inc., a Cayman Islands company (“FGI” when individually referenced), which is the parent holding company;
Total Faith Holdings Limited, a British Virgin Islands company (“Total Faith” when individually referenced), which is a wholly owned subsidiary of FGI;
Taizhou Fuling Plastics Co., Ltd., a PRC company (“Taizhou Fuling”), which is a wholly owned subsidiary of Total Faith;
● Domo Industry Inc., a New York company (“Domo”), of which Total Faith owns 49% of the equity but maintains effective control;
● Direct Link USA LLC, a Delaware company (“Direct Link”), which is a wholly owned subsidiary of Taizhou Fuling;
●
●
Fuling Plastic USA, Inc., a Pennsylvania company (“Fuling USA”), which is a wholly owned subsidiary of Taizhou Fuling;
Zhejiang Great Plastics Technology Co., Ltd., a PRC company (“Great Plastics”), which is a wholly owned subsidiary of Taizhou Fuling; and
● Wenling Changli Import and Export Co., Ltd., a PRC company (“Wenling Changli”), which is a wholly owned subsidiary of Taizhou Fuling.
This annual report contains translations of certain RMB amounts into U.S. dollar amounts at a specified rate solely for the convenience of the reader. The exchange
rates in effect as of December 31, 2018, 2017 and 2016 were US $1.00 for RMB 6.8776, RMB 6.5074 and RMB 6.94477, respectively. The average exchange rates for the
years ended December 31, 2018, 2017 and 2016 were US $1.00 for RMB 6.6163, RMB 6.7578 and RMB 6.64410, respectively. We use period-end exchange rates for assets
and liabilities and average exchange rates for revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.
For the sake of clarity, this annual report follows the English naming convention of first name followed by last name, regardless of whether an individual’s name is
Chinese or English. For example, the name of the Chief Operating Officer and Chair of our board of directors will be presented as “Guilan Jiang,” even though, in Chinese, Ms.
Jiang’s name is presented as “Jiang Guilan.”
We obtained the industry and market data used in this annual report or any document incorporated by reference from industry publications, research, surveys and
studies conducted by third parties and our own internal estimates based on our management’s knowledge and experience in the markets in which we operate. We did not,
directly or indirectly, sponsor or participate in the publication of such materials, and these materials are not incorporated in this annual report other than to the extent specifically
cited in this annual report. We have sought to provide current information in this annual report and believe that the statistics provided in this p annual report remain up-to-date
and reliable, and these materials are not incorporated in this annual report other than to the extent specifically cited in this annual report.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended (the “Securities Act”), and
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and involve known and unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by such forward-looking statements.
The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and similar expressions are intended to identify such forward-looking statements. Our actual
results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation, those discussed under
“Item 3—Key Information—Risk Factors,” “Item 4—Information on the Company,” “Item 5—Operating and Financial Review and Prospects,” and elsewhere in this report, as
well as factors which may be identified from time to time in our other filings with the Securities and Exchange Commission (the “SEC”) or in the documents where such
forward-looking statements appear. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements.
The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is signed. Except as required by law, we
assume no responsibility for updating any forward-looking statements.
ii
Table of Contents
Item 1.
Identity of Directors, Senior Management and Advisers
PART I
Not applicable for annual reports on Form 20-F.
Item 2.
Offer Statistics and Expected Timetable
Not applicable for annual reports on Form 20-F.
Item 3.
Key Information
A. Selected Financial Data
The following table presents the selected consolidated financial information for our company. The selected consolidated statements of comprehensive income data for
the two years ended December 31, 2018, 2017 and 2016 and the selected consolidated balance sheets data as of December 31, 2018 and 2017 have been derived from our
audited consolidated financial statements, which are included in this annual report beginning on page F-1. The selected consolidated balance sheet data for the year ended
December 31, 2016 have been derived from our audited consolidated balance sheet as of December 31, 2016, which is not included in this annual report. The selected
consolidated statements of operations data for the years ended June 30, 2015 and 2014 and the selected consolidated balance sheet data as of ended December 31, 2015 and
2014 have been derived from our audited consolidated financial statements for the years ended December 31, 2015 and 2014, which are not included in this annual report. Our
historical results do not necessarily indicate results expected for any future periods. The selected consolidated financial data should be read in conjunction with, and are
qualified in their entirety by reference to, our audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” below.
Our audited consolidated financial statements are prepared and presented in accordance with US GAAP.
Please note that our results of operations related to Great Plastics have been reclassified as discontinued operations on a retrospective basis for all periods presented.
(All amounts in thousands of U.S. dollars, except Dividend per share in Renminbi and Shares outstanding)
Statement of operations data:
2018
For the year ended December 31,
2016
2017
2015
2014
Revenues
Gross profit
Operating expenses
Income from operations
Provision for Income taxes
Net income from continuing operations
Net loss from discontinued operations, net of tax
Net income
$
$
$
$
$
$
$
$
Net income from continuing operations per share (basic and diluted)
$
Net income from discontinued operations per share (basic and diluted) $
Dividend per share in USD
Dividend per share in Renminbi
Current assets
Total assets
Current liabilities
Total liabilities
Total shareholders’ equity (net assets)
Capital stock
Shares outstanding
$
¥
$
$
$
$
$
$
124,209 $
26,132 $
17,042 $
9,089 $
788 $
8,266 $
(1,975) $
6,291 $
0.52 $
(0.13) $
- $
- ¥
102,321 $
25,191 $
14,588 $
10,603 $
1,561 $
10,249 $
(2,306) $
7,943 $
0.65 $
(0.15) $
- $
- ¥
88,994 $
23,235 $
13,160 $
10,075 $
1,123 $
9,428 $
(1,480) $
7,948 $
0.76 $
(0.12) $
- $
- ¥
80,369
21,562
10,655
10,907
1,236
9,274
(1,546)
7,728
0.79
(0.13)
0.88
5.41
2017
As of December 31,
2016
57,013 $
116,730 $
55,562 $
58,736 $
57,994 $
16 $
15,780,205
47,830 $
94,265 $
42,281 $
44,793 $
49,472 $
16 $
15,756,500
2015
49,846 $
75,729 $
32,411 $
32,411 $
43,319 $
16 $
15,732,795
2014
34,701
57,224
39,769
39,769
17,454
12
11,666,667
138,664
29,750
19,584
10,166
1,126
9,847
$
$
$
$
$
$
(88) $
$
9,759
0.62
$
(0.01) $
-
-
$
¥
Balance sheet data:
2018
59,520
122,640
47,489
57,906
64,734
16
15,795,910
$
$
$
$
$
$
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Table of Contents
Exchange Rate Information
Our financial information is presented in U.S. dollars. Our functional currency is Renminbi (“RMB”), the currency of the PRC. Transactions denominated in
currencies other than RMB are translated into RMB at the exchange rate quoted by the People’s Bank of China at the dates of the transactions. Exchange gains and losses
resulting from transactions denominated in a currency other than the RMB are included in statements of operations as foreign currency transaction gains or losses. Our financial
statements have been translated into U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”. The financial information is first prepared in RMB and then is
translated into U.S. dollars at period-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at
their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other
comprehensive income (loss) in shareholders’ equity. The relevant exchange rates are listed below:
US $1: RMB exchange rate
Period End
Average
6.8776
6.6163
Period End
Average
6.5074 Period End
6.7578 Average
6.94477
6.64410
December 31,
2018
December 31,
2017
December 31,
2016
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).
Period-End
Midpoint of Buy and Sell Prices
for U.S. Dollar per RMB
High
Average
6.1484
6.4917
6.9448
6.5074
6.8776
6.7035
6.6876
6.7119
6.1458
6.2288
6.6441
6.7578
6.6163
6.7917
6.7401
6.7129
6.2080
6.4917
7.0672
6.9535
6.9720
6.8772
6.7790
6.7342
Low
6.0881
6.0933
6.4494
6.4686
6.2660
6.7035
6.6868
6.6912
Period
2014
2015
2016
2017
2018
2019
January
February
March
As of March 31, 2019, the exchange rate is RMB 6.7119 to $1.00.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
2
Table of Contents
Risks Related to Our Business and Industry
Changes in U.S. trade policies, including new and potential tariffs on goods and raw materials imported from China, have negatively affected us and may disrupt our
business and have a material adverse effect on our financial condition and results of operations.
Due to the trade conflicts between U.S. and China, more and more goods and raw materials imported from China are subject to higher tariffs levied by the U.S.
Previously we imported a lot of plastic straws from China to the wholesale distributors in the U.S. We also imported polypropylene materials from China to our Allentown
factory to produce plastic straws for fast food restaurants. The tariffs levied by the U.S. on these plastic straws and polypropylene materials have increased 25%. We have to
absorb most of the increased cost for the plastic straws to sell to the wholesale distributors in the U.S. We also have to purchase more expensive polypropylene materials from
other countries.
In addition, the tariff on paper cups and paper board imported from China has also increased 10%. The increased tariff on paper board which we planned to use to
produce paper cups in Allentown is the major reason that we have paused our paper cup manufacturing project in Allentown.
Although we plan to start operating a factory in Mexico to enjoy the tariff-free benefit on producing paper cups, paper straws and plastic straws and shipping them from
Mexico to U.S., the amount of the products to be produced in Mexico will not account a significant percentage of our total products in the near future. In addition, we cannot
guarantee we will be successful on this strategy.
Our U.S. competitors are significantly larger than our company.
The three largest U.S. suppliers of foodservice disposables account for a significant percentage of the industry. As of 2012, Dart Container Corporation, Reynolds
Group/Pactiv and Georgia-Pacific collectively held approximately 29% of the U.S. market share in the foodservice disposables industry. The overall industry consists of a small
number of competitors, with approximately 50% of our market controlled by the top 10 companies in the industry.
Concentration in the foodservice disposables industry varies widely within specific market segments, with some segments dominated by a small number of producers.
For example, Dart Container is the leading supplier of plastic foodservice beverage cups, followed by Pactiv and Berry Plastics. By contrast, the market for cutlery is more
fragmented, with a growing portion of the market supplied by contract manufacturers in China.
Nevertheless, we may be unable to compete effectively against such larger, better-capitalized companies, which have well-established, long-term relationships with the
large customers we serve and seek to serve.
We are subject to risks related to our dependence on the strength of restaurant, retail and commercial sectors of the economy in various parts of the world.
Our business depends on the strength of the restaurant, retail and commercial sectors of the economy in various parts of the world, primarily in North America, and to
a lesser extent Europe, Canada, Central and South America, the Middle East, Africa, and China. These sectors of the economy are affected primarily by factors such as
consumer demand and the condition of the retail industry, which, in turn, are affected by general economic conditions. Challenging economic conditions in our target markets
may exert considerable pressure on consumer demand, and the resulting impact on consumer spending may have an adverse effect on demand for our products, as well as our
financial condition and results of operations.
Our projections and assumptions underlying may be inaccurate, resulting in slower than anticipated growth.
All statements, except historical data, are forward-looking statements. Although we believe the projections in these forward-looking statements are reasonable, we
cannot guarantee these projections will happen. Our operational results in the future may be different from our estimates for many reasons, including but not limited to the oil
price (our products are by-products of oil, so we are heavily impacted by oil price), shrinking fast food industry production caused by increased production cost and changed
consumption habits of food industry, failure to grow capacity and capacity utilization as quickly as anticipated or at all, losing or failing to secure customers and customer
orders, shutdown of important clients, and replacement of plastics industry by paper and wood products industry.
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Table of Contents
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 setting up a factory in Mexico by using the maquiladora (shelter) structure. Our goal is to manufacture in this facility certain
products that are not efficient to manufacture in U.S. or are subject to high tariffs if being manufactured in and shipped from China. This project may not be completed
completely as planned, may be more costly to implement than expected, may have delays in implementation, or may not result in, in full or in part, the savings and other
benefits anticipated. In addition, such initiatives require the Company to implement a significant amount of organizational changes, which could have a negative impact on
employee engagement, divert management’s attention from other concerns, and if not properly managed, impact the Company’s ability to retain key employees, cause
disruptions in the Company’s day-to-day operations and have a negative impact on the Company’s financial results.
Price increases in raw materials and sourced products could harm the Company’s financial results.
Our primary raw materials are (1) plastic resin (primarily polypropylene (“PP”), polystyrene (“PS”) which includes General Purpose Polystyrene (“GPPS”) and High
Impact Polystyrene (“HIPS”), and polyethylene terephthalate (“PET”)), (2) plastic bags and membranes for packaging cutlery, (3) shipping cartons, (4) plastic colorants, (5)
paper board for paper straws, (6) paper napkins, salt, pepper and wet wipes for inclusion in cutlery packages and (7) 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.
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Our reliance on third party logistics providers may put us at risk of service failures for our customers.
Although some of our larger competitors have integrated logistics and delivery service companies, we rely on third parties to ship our products from China to our
customers. Even after completing installation of the production lines in our Allentown facility, we 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 patents in China and U.S. covering our designs and production technology.
The process of seeking patent protection can be lengthy and expensive, our patent applications may fail to result in patents being issued, and our existing and future
patents may be insufficient to provide us with meaningful protection or commercial advantage. Our patents and patent applications may also be challenged, invalidated or
circumvented.
We also rely on trade secret rights to protect our business through non-disclosure provisions in employment agreements with employees. If our employees breach their
non-disclosure obligations, we may not have adequate remedies in China, and our trade secrets may become known to our competitors.
Implementation of PRC intellectual property-related laws has historically been lacking, primarily because of ambiguities in the PRC laws and enforcement difficulties.
Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other western countries. Furthermore,
policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce or defend patents issued to us or to determine
the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in
substantial costs and diversion of resources and management attention, which could harm our business and competitive position.
Our Chinese patents and registered marks may not be protected outside of China due to territorial limitations on enforceability.
In general, patent and trademark rights have territorial limitations in law and are valid only within the countries in which they are registered.
At present, Chinese enterprises may register their trademarks overseas through two methods. One is to file an application for trademark registration in each single
country or region in which protection is desired, while the other is to apply via the Madrid system for international trademark registration. By the second way, under the
provisions of the Madrid Agreement concerning the International Registration of Marks (the “Madrid Agreement”) or the Protocol Relating to the Madrid Agreement
concerning the International Registration of Marks (the “Madrid Protocol”), applicants may designate their marks in one or more member countries via the Madrid system for
international registration.
As of the date of the filing, we have registered one trademark at the International Bureau of the World Intellectual Property Organization (“WIPO”) under the Madrid
Agreement and Protocol. We have also applied for territorial extension by designating 15 member countries through WIPO. Currently the registration for this trademark is valid
in 13 foreign member countries, including the U.S.
Similar with trademarks, Chinese enterprises may also register their patents overseas through two methods. One is to file an application for patent registration in each
single country or region, and the other is to file international application with the China Intellectual Property Office or the International Bureau of World Intellectual Property
Organization under the Patent Cooperation Treaty. However, such international application may relate to invention or utility model patents, but does not include industrial
design patents.
As of the date of the filing, we have registered two design patents at the United States Patent and Trademark Office. This registration is only valid in the U.S. For more
details, please see the disclosure of our patents.
Currently, most of our patents and trademarks are registered in China. If we do not register them in other jurisdictions, they may not be protected outside of China. As
a result, our business and competitive position could be harmed.
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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 $27.1 million in outstanding bank loans as of December 31, 2018. The loans are held at multiple banks and entities and are secured by some
of our land and property in China and the U.S. as the collateral for the debt. While we believe we have adequate capital to repay these bank loans at present, there can be no
guarantee that we will be able to pay all amounts when due or to refinance the amounts on terms that are acceptable to us or at all. If we are unable to make our payments when
due or to refinance such amounts, our property could be foreclosed and our business could be negatively affected.
While we do not believe they will impact our liquidity, the terms of the debt agreements impose significant operating and financial restrictions on us. These restrictions
could also have a negative impact on our business, financial condition and results of operations by significantly limiting or prohibiting us from engaging in certain transactions,
including but not limited to: incurring or guaranteeing additional indebtedness; transferring or selling assets currently held by us; and transferring ownership interests in certain
of our subsidiaries. The failure to comply with any of these covenants could cause a default under our other debt agreements. Any of these defaults, if not waived, could result
in the acceleration of all of our debt, in which case the debt would become immediately due and payable. If this occurs, we may not be able to repay our debt or borrow
sufficient funds to refinance it on favorable terms, if any.
We may be unable to refinance our short-term loans.
We expect to be able to refinance its short-term loans based on past experience and our good credit history. We do not believe failure to refinance from certain banks
will have significant negative impact on our normal business operations. Our related parties including our major shareholders and affiliate companies are willing to provide us
financial support. Although our operating cash flow was positive in 2018, 2017 and 2016, it is possible for us to have negative cash flow in the future, and for our related parties
to be unable or unwilling to provide us financial support as needed. As a result, the failure to refinance our short-term loans could potentially affect our capital expenditure and
expansion of business.
If the value of our property decreases, we may not be able to refinance our current debt.
All of our current debt is secured by either mortgages on our real and other business property or guarantees by some of our shareholders. If the value of our real
property decreases, we may find that banks are unwilling to loan money to us secured by our business property. A drop in property value could also prevent us from being able
to refinance that loan when it becomes due on acceptable terms or at all.
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We may require additional financing in the future and our operations could be curtailed if we are unable to obtain required additional financing when needed.
We may need to obtain additional debt or equity financing to fund future capital expenditures. While we do not anticipate seeking additional financing in the
immediate future, any additional equity may result in dilution to the holders of our outstanding shares of capital stock. Additional debt financing may include conditions that
would restrict our freedom to operate our business, such as conditions that:
●
●
●
limit our ability to pay dividends or require us to seek consent for the payment of dividends;
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund capital
expenditures, working capital and other general corporate purposes; and
●
limit our flexibility in planning for, or reacting to, changes in our business and our industry.
We cannot guarantee that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.
The loss of any of our key customers could reduce our revenues and our profitability.
Our key customers are principally multinational QSRs, third party distributors, and retail stores, mainly located in the U.S. For the year ended December 31, 2018,
sales to our ten largest customers amounted in the aggregate to approximately 51.9% of our total revenue. For the year ended December 31, 2017, sales to our ten largest
customers amounted in the aggregate to approximately 53.6% of our total revenue. For the year ended December 31, 2016, sales to our ten largest customers amounted in the
aggregate to approximately 54.0% of our total revenue. 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, 2018, 2017 and 2016, respectively, we had zero, one and one customer that accounted for 10% or more of our revenues.
Customer Name
Lollicup USA Inc.
* Less than 10% during the period.
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Year Ended
December 31,
2016
*%
11.6%
13.0%
If we cannot maintain long-term relationships with these major customers, the loss of our sales to them could have an adverse effect on our business, financial
condition and results of operations.
We buy our supplies from a relatively limited number of suppliers.
During the year ended December 31, 2018, our ten largest suppliers accounted for approximately 48.9% of our total purchases. During the year ended December 31,
2017, our ten largest suppliers accounted for approximately 57.9% of our total purchases. During the year ended December 31, 2016, our four largest suppliers accounted for
approximately 60% of our total purchases. During the years ended December 31, 2018, 2017 and 2016, respectively, we had one, two and three suppliers that accounted for
10% or more of our purchases.
Supplier Name
Brilliance Resources Company Limited
Koco Group Ltd
Grand Chemical Group
* Less than 10% during the period.
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Year Ended
December 31,
2016
*%
*%
12.0%
*%
11.2%
12.4%
22.0%
13.2
19.1%
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.
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Our bank accounts are not fully insured or protected against loss.
We maintain our cash with various banks located in mainland China, Hong Kong and the United States. Our cash accounts in the PRC are not insured or otherwise
protected. To the extent our U.S. and Hong Kong accounts were to exceed statutory amounts, they would also not be fully protected against loss. Should any bank or trust
company holding our cash deposits become insolvent, or if we are otherwise unable to withdraw funds, we would lose the cash on deposit with that particular bank or trust
company.
We are substantially dependent upon our senior management and key research and development personnel.
We are highly dependent on our senior management to manage our business and operations and our key research and development personnel for the development of
new products and the enhancement of our existing products and technologies. In particular, we rely substantially on our Chief Executive Officer, Mr. Xinfu Hu, and our Chief
Operating Officer and Chair, Ms. Guilan Jiang, to manage our operations. Ms. Jiang and Mr. Hu are husband and wife and have been involved in the plastic industry for more
than twenty years. Due to their experience in the industry and long relationships with our customer base, they would be difficult to replace.
While we provide the legally required personal insurance for the benefit of our employees, we do not maintain key person life insurance on any of our senior
management or key personnel. The loss of any one of them would have a material adverse effect on our business and operations. Competition for senior management and our
other key personnel is intense, and the pool of suitable candidates is limited. We may be unable to quickly locate a suitable replacement for any senior management or key
personnel that we lose. In addition, if any member of our senior management or key personnel joins a competitor or forms a competing company, they may compete with us for
customers, business partners and other key professionals and staff members of our company. Although each of our senior management and key personnel has signed a
confidentiality and non-competition agreement in connection with his employment with us, we cannot assure you that we will be able to successfully enforce these provisions in
the event of a dispute between us and any member of our senior management or key personnel.
In our efforts to develop new products and methods of manufacturing, we compete for qualified personnel with technology companies and research institutions. Intense
competition for these personnel could cause our compensation costs to increase, which could have a material adverse effect on our results of operations. Our future success and
ability to grow our business will depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we are
unable to attract and retain qualified employees, we may be unable to meet our business and financial goals.
Failure to manage our growth could strain our management, operational and other resources, which could materially and adversely affect our business and prospects.
Our growth strategy includes increasing market penetration of our existing products, developing new products and increasing the number and size of customers we
serve. Pursuing these strategies has resulted in, and will continue to result in substantial demands on management resources. In particular, the management of our growth will
require, among other things:
●
●
●
●
●
continued enhancement of our research and development capabilities;
stringent cost controls and sufficient liquidity;
strengthening of financial and management controls;
increased marketing, sales and support activities; and
hiring and training of new personnel.
If we are not able to manage our growth successfully, our business and prospects would be materially and adversely affected.
Risks Related to Doing Business in China and Mexico
We are new to the Mexican legal system and the unfamiliarity could adversely affect us.
We plan to start production in Mexico by cooperating with a local shelter services company. The production and the operation is governed by Mexican law which we
barely have any knowledge. Although the shelter service company is obligated to handle essentially all of the legal and compliance matters for us, we cannot guarantee that it
will handle those matters correctly. The lack of knowledge to the local law may cause noncompliance or breach of contracts and could adversely affect us and make us lose all
of our investment there.
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.
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Under the Enterprise Income Tax Law, we may be classified as a “Resident Enterprise” of China. Such classification will likely result in unfavorable tax consequences to
us and our non-PRC shareholders.
China passed the Enterprise Income Tax Law, or the EIT Law, and it is implementing rules, both of which became effective on January 1, 2008. Under the EIT Law,
an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner
similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management
and control over the production and operations, personnel, accounting, and properties” of the enterprise.
On April 22, 2009, the State Administration of Taxation of China, or the SAT, issued the Circular Concerning Relevant Issues Regarding Cognizance of Chinese
Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the SAT Notice 82, further
interpreting the application of the EIT Law and its implementation to offshore entities controlled by a Chinese enterprise or enterprise group. Pursuant to the SAT Notice 82, an
enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or enterprise group will be classified as a “non-domestically incorporated resident
enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or
approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate stamps, board and shareholder minutes are kept in China; and (iv)
at least half of its directors with voting rights or senior management often resident in China. After SAT Notice 82, the SAT issued a bulletin, known as SAT Bulletin 45, which
took effect on September 1, 2011, to provide more guidance on the implementation of SAT Notice 82 and clarify the reporting and filing obligations of such “non-domestically
incorporated resident enterprise.” SAT Bulletin 45 provides procedures and administrative details for the determination of resident status and administration on post-
determination matters. On January 29, 2014, the SAT issued Announcement of the State Administration of Taxation on Recognizing Resident Enterprises Based on the Criteria
of de facto Management Bodies, to further clarify the reporting and filing procedure for offshore entities controlled by a Chinese enterprise or enterprise group and recognized
as a resident enterprise.
The determining criteria set forth in SAT Notice 82 and SAT Bulletin 45 may reflect the SAT’s general position on how the “de facto management body” test should
be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, PRC enterprise groups or by PRC or
foreign individuals. If the PRC tax authorities determine that FGI or its subsidiaries is a PRC resident enterprise for PRC enterprise income tax purposes, a number of
unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC
enterprise income tax reporting obligations. In our case, this would mean that income such as non-China source income would be subject to PRC enterprise income tax at a rate
of 25%. Currently, we do not have any non-China source income, as we complete our sales, including export sales, in China. Second, under the EIT Law and its implementing
rules, dividends paid to us from our PRC subsidiaries would be deemed as “qualified investment income between resident enterprises” and therefore qualify as “tax-exempt
income” pursuant to the clause 26 of the EIT Law. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a
situation in which the dividends we pay with respect to our ordinary shares, or the gain our non-PRC stockholders may realize from the transfer of our ordinary shares, may be
treated as PRC-sourced income and may therefore be subject to a 10% PRC withholding tax. If we are required under the EIT Law and its implementing regulations to withhold
PRC income tax on dividends payable to our non-PRC stockholders, or if non-PRC stockholders are required to pay PRC income tax on gains on the transfer of their shares of
ordinary shares, our business could be negatively impacted and the value of your investment may be materially reduced. Further, if we were treated as a “resident enterprise” by
PRC tax authorities, we would be subject to taxation in both China and such countries in which we have taxable income, and our PRC tax may not be creditable against such
other taxes.
We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption law.
We are subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), and other laws that prohibit improper payments or offers of payments to foreign governments and
their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We are also subject to Chinese anti-
corruption laws, which strictly prohibit the payment of bribes to government officials. We have operations, agreements with third parties, and make sales in China, which may
experience corruption. Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees, consultants or distributors of our
company, because these parties are not always subject to our control. We are in process of implementing an anticorruption program, which prohibits the offering or giving of
anything of value to foreign officials, directly or indirectly, for the purpose of obtaining or retaining business. The anticorruption program also requires that clauses mandating
compliance with our policy be included in all contracts with foreign sales agents, sales consultants and distributors and that they certify their compliance with our policy
annually. It further requires that all hospitality involving promotion of sales to foreign governments and government-owned or controlled entities be in accordance with
specified guidelines. In the meantime, we believe to date we have complied in all material respects with the provisions of the FCPA and Chinese anti-corruption laws.
However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants or distributors of our Company
may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we
may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold our
Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
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Uncertainties with respect to the PRC legal system could adversely affect us.
We conduct a substantial amount of our business through our subsidiaries in China. Our operations in China are governed by PRC laws and regulations. Our PRC
subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to wholly foreign-owned
enterprises. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.
Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China
has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular,
because some of these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and
enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are
not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the
violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. FGI
receives revenues and purchases raw materials primarily in U.S. dollars but incurs other expenses primarily in RMB. Although our main suppliers are based in mainland China
or based in Hong Kong with Chinese operating subsidiaries, some of them provide quotations in U.S. dollars. We choose quotations based on price competitiveness. In the past,
U.S. dollars quotations were more competitive so we purchase almost all of our raw materials in U.S. dollars. However, recently several RMB quotations were more competitive
and we accepted them and paid in RMB.
Under our current corporate structure, FGI’s income is primarily derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign
currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency
denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and
expenditures from trade-related transactions can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements.
However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses
such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current
account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay
dividends in foreign currencies to our security-holders.
We are a holding company and we rely for funding on dividend payments from our subsidiaries, which are subject to restrictions under PRC laws.
We are a holding company incorporated in the Cayman Islands, and we operate our core businesses through our subsidiaries in the PRC and the United States.
Therefore, the availability of funds for us to pay dividends to our shareholders and to service our indebtedness depends upon dividends received from these PRC subsidiaries. If
our subsidiaries incur debt or losses, their ability to pay dividends or other distributions to us may be impaired. As a result, our ability to pay dividends and to repay our
indebtedness will be restricted. PRC laws require that dividends be paid only out of the after-tax profit of our PRC subsidiaries calculated according to PRC accounting
principles, which differ in many aspects from generally accepted accounting principles in other jurisdictions. PRC laws also require enterprises established in the PRC to set
aside part of their after-tax profits as statutory reserves. These statutory reserves are not available for distribution as cash dividends. In addition, restrictive covenants in bank
credit facilities or other agreements that we or our subsidiaries may enter into in the future may also restrict the ability of our subsidiaries to pay dividends to us. These
restrictions on the availability of our funding may impact our ability to pay dividends to our shareholders and to service our indebtedness.
Our business may be materially and adversely affected if any of our PRC subsidiaries declare bankruptcy or become subject to a dissolution or liquidation proceeding.
The Enterprise Bankruptcy Law of the PRC, or the Bankruptcy Law, came into effect on June 1, 2007. The Bankruptcy Law provides that an enterprise will be
liquidated if the enterprise fails to settle its debts as and when they fall due and if the enterprise’s assets are, or are demonstrably, insufficient to clear such debts.
Our PRC subsidiaries hold certain assets that are important to our business operations. If any of our PRC subsidiaries undergoes a voluntary or involuntary liquidation
proceeding, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and
adversely affect our business, financial condition and results of operations.
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.
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Fluctuations in exchange rates could adversely affect our business and the value of our securities.
Changes in the value of the RMB against the U.S. dollar, Euro and other foreign currencies are affected by, among other things, changes in China’s political and
economic conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of, and any dividends
payable on our shares in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars into RMB for our operations, appreciation of the RMB against the
U.S. dollar would have an adverse effect on RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose
of paying dividends on our Ordinary Shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar
amount available to us. In addition, fluctuations of the RMB against other currencies may increase or decrease the cost of imports and exports, and thus affect the price-
competitiveness of our products against products of foreign manufacturers or products relying on foreign inputs.
Since July 2005, the RMB is no longer pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent
significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term.
Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
We reflect the impact of currency translation adjustments in our financial statements under the heading “accumulated other comprehensive income (loss).” For year
ended December 31, 2018, we had a negative adjustment of $3,147,531 for foreign currency translations. For year ended December 31, 2017, we had a positive adjustment of
$2,172,347 for foreign currency translations. For years ended December 31, 2016, we had a negative adjustment of $1,913,200 for foreign currency translations. Very limited
hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may
enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure
at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources
to investigate and resolve the matter which could harm our business operations and our reputation and could result in a loss of your investment in our shares, especially if
such matter cannot be addressed and resolved favorably.
Recently, U.S. public companies that have substantially all of their operations in China, have been the subject of intense scrutiny, criticism and negative publicity by
investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting
irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in some cases,
allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value
and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal
and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our company and our business.
If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate
such allegations and/or defend the Company. This situation may be a major distraction to our management. If such allegations are not proven to be groundless, our company
and business operations will be severely hampered and your investment in our shares could be rendered worthless.
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to penalties and limit
our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to distribute profits to us, or otherwise adversely affect us.
The SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose
Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of
an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the
offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation
term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions.
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.
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Ms. Jiang has completed her SAFE Circular 37 registration. Ms. Sujuan Zhu, Mr. Qian Hu, Mr. Xinzhong Wang, Mr. Jinxue Jiang and Mr. Yongjun Guo have applied
to SAFE’s local branch in Taizhou for registration, but we cannot provide any assurances that such registration will be completed in a timely manner. Moreover, we may not be
fully informed of the identities of all our beneficial owners who are PRC citizens or residents, and we cannot compel our beneficial owners to comply with SAFE registration
requirements.
As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC citizens or residents have complied with, and will in the future make or
obtain any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure
by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities,
limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
We incur additional costs as a public company, which could negatively impact our net income and liquidity.
Risks Related to Our Corporate Structure and Operation
We are a public company in the United States. As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private
company. In addition, the Sarbanes-Oxley Act and rules and regulations implemented by the SEC and The Nasdaq Capital Market require significantly heightened corporate
governance practices for public companies. We expect that these rules and regulations to increase our legal, accounting and financial compliance costs and make many
corporate activities more time-consuming and costly.
We do not expect to incur materially greater costs as a public company than those incurred by similarly sized foreign private issuers. If we fail to comply with these
rules and regulations, we could become the subject of a governmental enforcement action, investors may lose confidence in us and the market price of our Ordinary Shares
could decline.
Entities controlled by our employees, officers and/or directors control a majority of our Ordinary Shares, decreasing your influence on shareholder decisions.
Entities controlled by our employees, officers and/or directors, in the aggregate, continue to own a majority of our outstanding shares. As a result, our employees,
officers and directors possess substantial ability to impact our management and affairs and the outcome of matters submitted to shareholders for approval. These shareholders,
acting individually or as a group, could exert control and substantial influence over matters such as electing directors and approving mergers or other business combination
transactions. This concentration of ownership and voting power may also discourage, delay or prevent a change in control of our company, which could deprive our
shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our Ordinary Shares. These actions may be
taken even if they are opposed by our other shareholders. See “MAJOR SHAREHOLDERS.”
The obligation to disclose information publicly may put us at a disadvantage to competitors that are private companies.
We are a publicly listed company in the United States. As a publicly listed company, we are required to file periodic reports with the Securities and Exchange
Commission upon the occurrence of matters that are material to our company and shareholders. In some cases, we need to disclose material agreements or results of financial
operations that we would not be required to disclose if we were a private company. Our competitors may have access to this information, which would otherwise be
confidential. This may give them advantages in competing with our company. Similarly, as a U.S.-listed public company, we are governed by U.S. laws that our non-publicly
traded competitors are not required to follow. To the extent compliance with U.S. laws increases our expenses or decreases our competitiveness against such companies, our
public listing could affect our results of operations.
We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same
information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance
and prospects.
We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we are subject to
reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we are not required to issue
quarterly reports or proxy statements. We are not required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers
are not required to report equity holdings under Section 16 of the Exchange Act and are not subject to the insider short-swing profit disclosure and recovery regime.
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As a foreign private issuer, we are also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of
investors are not privy to specific information about an issuer before other investors. However, we are still subject to the anti-fraud and anti-manipulation rules of the SEC, such
as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting
companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.
As a foreign private issuer, we are permitted to rely on exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, including the
requirement that a majority of an issuer’s directors consist of independent directors. If we opt to rely on such exemptions in the future, such decision might afford less
protection to holders of our ordinary shares.
Section 5605(b)(1) of the Nasdaq Listing Rules requires listed companies to have, among other things, a majority of its board members to be independent, and Section
5605(d) and 5605(e) require listed companies to have independent director oversight of executive compensation and nomination of directors. As a foreign private issuer,
however, we are permitted to follow home country practice in lieu of the above requirements. We agreed with our underwriters that we do not opt to follow home country
practice in lieu of such requirements for two years after the completion of our initial public offering. See “Item 16.G. Corporate Governance.” As this period has passed, we can
decide to follow home country practice and our board of directors could make such a decision to depart from such requirements by ordinary resolution. The remainder of this
risk factor, therefore, discusses risks to shareholders in the event the board of directors were to depart from some of such Nasdaq requirements and instead follow home country
practices.
The corporate governance practice in our home country, the Cayman Islands, does not require a majority of our board to consist of independent directors or the
implementation of a nominating and corporate governance committee. Since a majority of our board of directors would not consist of independent directors if we relied on the
foreign private issuer exemption, fewer board members would be exercising independent judgment and the level of board oversight on the management of our company might
decrease as a result. In addition, we could opt to follow Cayman Islands law instead of the Nasdaq requirements that mandate that we obtain shareholder approval for certain
dilutive events, such as an issuance that will result in a change of control, certain transactions other than a public offering involving issuances of 20% or greater interests in the
company and certain acquisitions of the shares or assets of another company. For a description of the material corporate governance differences between the Nasdaq
requirements and Cayman Islands law, see “Description of Share Capital — Differences in Corporate Law” in our registration statement on Form F-1 (File no. 333-205894),
filed with the SEC on July 28, 2015, as amended.
Our directors’ and executive officers’ other business activities may pose conflicts of interest.
Our directors and executive officers may have other business interests outside the company from time to time that could potentially give rise to conflicts of interest.
For example, our Chief Operating Officer and Chair, Guilan Jiang, previously owned 50% of Wenling Fulin Plastic Products Co. Ltd. Ms. Jiang was also its legal
representative and general manager. Wenling Fulin Plastic Products Co. Ltd. is a holding company with no investment in any competing business with us, although it has
investment in a local commercial bank and leases its land to a restaurant. While the company was previously in our industry, this privately held company’s operations, but not
the name, have changed. Notwithstanding the foregoing, if this company were to begin to operate within our industry and Ms. Jiang operates this company again, we might find
a conflict of interest.
Although her business working time at this company is flexible, Ms. Jiang historically devoted very limited time to matters concerning Wenling Fulin Plastic Products
Co. Ltd., and most of her time to matters for FGI. If Ms. Jiang devotes any significant time and effort to her other companies in the future, such business activities could both
distract her from focusing on FGI and pose a conflict of interest to the extent her activities at any other companies compete with our company.
An insufficient amount of insurance could expose us to significant costs and business disruption.
While we have purchased 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.
We may have additional tax liabilities and the recent changes to the U.S. tax law could adversely affect our tax obligations and operating results.
We are a multinational company subject to tax in several U.S. and foreign tax jurisdictions. Significant judgment is required in determining our tax provision for
income taxes and evaluating our tax positions on a consolidated basis. We believe our tax positions are consistent with the tax laws in the jurisdictions in which we conduct our
business. Should any tax authority disagree with our judgement or estimates and impose any additional tax liabilities on us, it could adversely impact our results of operations
and financial position.
On December 22, 2017, the U.S. enacted tax reform through the Tax Cuts and Jobs Act of 2017 (the “Act”), and the Act made significant changes to U.S. income tax
law including the manner in which the U.S. imposes income tax on multinational corporations. The U.S. Department of Treasury, the Internal Revenue Service and other
standard-setting bodies have authority to issue regulations or interpretative guidance that may impact how we apply the law and impact our results of operations in the period
issued and subsequently. Based on our understanding of the Act and guidance available as of the date of this filing, we have determined that there was no significant income tax
impact derived from the Act for our 2018 taxable year and on the tax amounts reported in our 2018 financial statements. As additional regulatory guidance is issued, and as we
gain better understanding of the operation of the relevant rules, our analysis and conclusion may be different from our current assessments, which could materially affect our
results of operations and financial position.
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Risks Related to Ownership of Our Ordinary Shares
We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our Ordinary
Shares less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an emerging growth
company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies,
including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in our periodic reports and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any
golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our revenues
exceed $1 billion, if we issue more than $1.07 billion in non-convertible debt in a three year period, or if the market value of our Ordinary Shares held by non-affiliates exceeds
$700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict if
investors will find our Ordinary Shares less attractive because we may rely on these exemptions. If some investors find our Ordinary Shares less attractive as a result, there may
be a less active trading market for our Ordinary Shares and our share price may be more volatile.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private
companies. We have irrevocably elected not to avail our company of this exemption from new or revised accounting standards and, therefore, are subject to the same new or
revised accounting standards as other public companies that are not emerging growth companies.
If we are unable to maintain effective internal control over financial reporting in the future, and we may fail to detect errors in reports, investors may lose confidence in
the accuracy and completeness of our financial reports and the market price of our Ordinary Shares may decline.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition,
we are required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We
have completed our design of internal controls over financial reporting; and we have improved our internal controls by performing the adjustment entries before our auditor
suggest them. However, we failed to engage our external financial consultant to conduct in-person field work for the financial reporting for the year ended December 31, 2018
and our independent auditors proposed a number of significant adjustments. Please see the material weakness in our internal controls discussed on page 96. In addition, our
independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form
20-F following the date on which we are no longer an “emerging growth company,” which may be up to five full years following the date of our initial public offering. If we
identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that
our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our
internal control over financial reporting when required, we may fail to detect errors in a timely fashion and investors may lose confidence in the accuracy and completeness of
our financial reports and the market price of our Ordinary Shares could be negatively affected, and we could become subject to investigations by the stock exchange on which
our securities are listed, the Securities and Exchange Commission, or the SEC, or other regulatory authorities, which could require additional financial and management
resources.
The requirements of being a public company may strain our resources and divert management’s attention.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act,
the Dodd-Frank Act, the listing requirements of the securities exchange on which we list, and other applicable securities rules and regulations. Despite recent reforms made
possible by the JOBS Act, compliance with these rules and regulations nonetheless increases our legal and financial compliance costs, makes some activities more difficult,
time-consuming or costly and increases demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires,
among other things, that we file annual and current reports with respect to our business and operating results. In addition, as long as we are listed on The Nasdaq Capital Market,
we are also required to file semi-annual financial statements.
As a result of disclosure of information in this annual report and in filings required of a public company, our business and financial condition will become more visible,
which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results
could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert
the resources of our management and adversely affect our business, brand and reputation and results of operations.
We also expect that being a public company and these rules and regulations make it more expensive for us to obtain director and officer liability insurance, and we
may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain
qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.
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The market price of our Ordinary Shares may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above
the price you paid.
The trading price for our Ordinary Shares has fluctuated since we first listed our Ordinary Shares. Since our Ordinary Shares became listed on the Nasdaq on
November 4, 2015, the trading price of our Ordinary Shares has ranged from US $6 to US $1.68 per common share, and the last reported trading price on April 2, 2019 was
$2.4 per Ordinary Share. The market price of our Ordinary Shares may fluctuate significantly in response to numerous factors, many of which are beyond our control,
including:
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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 do not intend to pay dividends for the foreseeable future.
We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the
foreseeable future. As a result, you may only receive a return on your investment in our Ordinary Shares if the market price of our Ordinary Shares increases.
We are subject to liability risks stemming from our foreign status, which could make it more difficult for investors to sue or enforce judgments against our company.
Most of our operations and assets are located in the PRC. In addition, most of our executive officers and directors are non-residents of the U.S., and much of the assets
of such persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S.
against us or any of these persons.
In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in
which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a
Cayman Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives
available to them if they believe that corporate wrongdoing has occurred. The Cayman Islands courts are also unlikely to recognize or enforce against us judgments of courts in
the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original actions brought in the Cayman Islands, based on
certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States,
although the courts of the Cayman Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.
Lastly, under the law of the Cayman Islands, there is little statutory law for the protection of minority shareholders. The principal protection under statutory law is that
shareholders may bring an action to enforce the constituent documents of the corporation, our First Amended and Restated Memorandum and Articles of Association.
Shareholders are entitled to have the affairs of the company conducted in accordance with the general law and the articles and memorandum.
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There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the
Cayman Islands for business companies is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse
to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the
majority or the board of directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to law and the constituent documents
of the corporation. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company’s First Amended
and Restated Memorandum and Articles of Association, then the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act
complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where
the wrongdoers control the company; (3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has not complied with
provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders under the laws of
many states in the United States.
Our board of directors may decline to register transfers of ordinary shares in certain circumstances.
Our board of directors may, in its sole discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien. Our
directors may also decline to register any transfer of any share unless (i) the instrument of transfer is lodged with us, accompanied by the certificate for the shares to which it
relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer; (ii) the instrument of transfer is in
respect of only one class of shares; (iii) the instrument of transfer is properly stamped, if required; (iv) in the case of a transfer to joint holders, the number of joint holders to
whom the share is to be transferred does not exceed four; (v) the shares conceded are free of any lien in favor of us; or (vi) a fee of such maximum sum as Nasdaq may
determine to be payable, or such lesser sum as our board of directors may from time to time require, is paid to us in respect thereof.
If our directors refuse to register a transfer they shall, within one month after the date on which the instrument of transfer was lodged, send to each of the transferor and
the transferee notice of such refusal. The registration of transfers may, on 14 days’ notice being given by advertisement in such one or more newspapers or by electronic means,
be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of
transfers shall not be suspended nor the register closed for more than 30 days in any year.
You may be unable to present proposals before general meetings or extraordinary general meetings not called by shareholders.
Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any
proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our First Amended and Restated Articles of Association allow
our shareholders holding shares representing in aggregate not less than 20% of our voting share capital in issue, to requisition an extraordinary general meeting of our
shareholders, in which case our directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting.
Although our First Amended and Restated Articles of Association do not provide our shareholders with any right to put any proposals before annual general meetings
or extraordinary general meetings not called by such shareholders, any shareholder may submit a proposal to our board of directors for consideration of inclusion in a proxy
statement. Advance notice of at least ten calendar days is required for the convening of our annual general shareholders’ meeting and any other general meeting of our
shareholders. A quorum required for a meeting of shareholders consists of at least one shareholder present or by proxy, representing not less than one-third in nominal value of
the total issued voting shares in our company.
Item 4.
Information on the Company
A. History and Development of the Company
Fuling Global Inc. (“FGI”) was incorporated in the Cayman Islands on January 19, 2015. FGI has an indefinite term. FGI, its subsidiaries and its variable interest
entity (“VIE”) (collectively the “Company”) are principally engaged in the production and distribution of environmentally-friendly plastic and paper serviceware in the People’s
Republic of China (“PRC” or “China”) and United States (“U.S.”). Most products are exported to the U.S. and Europe and sold to major fast food chains and wholesalers.
The address of FGI’s principal place of business is Southeast Industrial Zone, Songmen Town, Wenling, Zhejiang Province, People’s Republic of China 317511. FGI’s
phone number is +86-576-86623058. We have appointed C T Corporation System (The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street,
Wilmington, DE 19801) as our agent to receive service of process with respect to any action brought against us in the courts of the State of Delaware under the federal securities
laws of the United States or under the securities laws of the State of Delaware.
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Taizhou Fuling Plastics Co., Ltd. (“Taizhou Fuling”) was established on October 28, 1992 as a Sino-Foreign joint venture under the laws of the People’s Republic of
China (“China” or “PRC”) with initial registered capital of $510,000.
On April 26, 2004, Total Faith Holdings Limited (“Total Faith”) was incorporated in British Virgin Islands.
In May 2005, Total Faith became one of Taizhou Fuling’s shareholders. The other shareholder was Wenling County Songmen Plastic Co., Ltd. (“Wenling Songmen”).
In the same month, Wenling Songmen and Total Faith added $846,300 and $289,700, respectively, to the registered capital of Taizhou Fuling.
In December 2005, Taizhou Fuling changed its name to Zhejiang Fuling Plastic Co., Ltd. Wenling Songmen and Total Faith added $745,000 and $255,000,
respectively, to the registered capital.
In November 2006, Taizhou Fuling changed its name from Zhejiang Fuling Plastic Co., Ltd. to Taizhou Fuling Plastics Co., Ltd. and extended its term from 15 years
to 25 years. In July 2015, Taizhou Fuling extended its term from 25 years to 45 years. Therefore, its term is from October 28, 1992 to October 27, 2037.
In November 2007, Wenling Songmen and Total Faith added $670,500 and $229,500, respectively, to the registered capital.
On March 12, 2009, Wenling Songmen, one of Taizhou Fuling’s two investors, changed its name to Wenling Fulin Plastic Products Co. Ltd.
In May 2014, Total Faith added $7,530,000 of registered capital to Taizhou Fuling. Wenling Songmen waived its right to add registered capital. As a result, Total Faith
and Wenling Songmen held 76% and 24%, respectively, of the equity interests in Taizhou Fuling at the time. The total registered capital was increased to $11,110,000.
On May 28, 2014, Total Faith acquired Wenling Songmen’s 24% interest in Taizhou Fuling for RMB 29 million, which was funded by a loan from Wenling Songmen
for RMB 12.6 million and capital investment from Ms. Jiang for RMB 16.4 million. In compliance with Chinese business regulations, in order to update business registration
with State Administration for Industry and Commerce, the consideration should be determined based on “fair value” of the interest transferred, which was determined to be
RMB 29 million, compared to RMB 16.4 million, the registered capital owned by Wenling Songmen. Total Faith, Wenling Songmen agreed that loan would be settled
automatically after the RMB 12.6 million paid to Wenling Songmen, which is the excess to the register capital. As a result of the acquisition, Taizhou Fuling changed its entity
type from a Sino-Foreign joint venture to a wholly foreign owned enterprise (“WFOE”). Taizhou Fuling is now 100% owned by Total Faith.
Taizhou Fuling has three wholly-owned subsidiaries, Zhejiang Great Plastics Technology Co., Ltd. (“Great Plastics”), Fuling Plastic USA, Inc. (“Fuling USA”), and
Direct Link USA LLC (“Direct Link”).
Great Plastics was incorporated in China in March 2010 and principally engaged in the production of drinking straws, cup and plate items. Fuling USA was
incorporated in the Commonwealth of Pennsylvania in 2014. Fuling USA is establishing the Company’s first production factory in the U.S. and will principally engage in the
production of cutlery and straw items. Direct Link was incorporated in the State of Delaware in 2011. Great Plastics and Fuling USA serve as import trading companies of
Taizhou Fuling in the United States.
Prior to the incorporation of Fuling USA, we incorporated a similarly-named wholly-owned subsidiary in New York named Fuling Plastics USA Inc. (“Old Fuling
USA”) in 2009. (Note that Fuling USA’s name is the singular Fuling Plastic, rather than the plural Fuling Plastics.) Old Fuling USA served as a trading company that imported
certain products from our China facilities and sold them to our customers in the U.S. Since we incorporated Fuling USA in 2014 in Pennsylvania to coordinate our Allentown
project, we no longer needed to maintain Old Fuling USA and reduced its operations in January 2014. Old Fuling USA was dissolved on April 8, 2015.
Total Faith effectively controls Domo Industry Inc. (“Domo”), a U.S. company established in the State of New York in October 2007, based on the fact that Domo’s
equity at risk is not sufficient to permit it to carry on its activities without additional subordinated financial support from Total Faith. Total Faith is obligated to absorb a
majority of the risk of loss from Domo’s activities and to receive the majority of Domo’s residual returns. Based on this arrangement, Total Faith has gained effective control
over Domo and Domo is considered a Variable Interest Entity (“VIE”) under Accounting Standards Codification (“ASC”) 810-10-05-08A. Accordingly, Total Faith
consolidates Domo’s operating results, assets and liabilities.
On January 9, 2015, Fuling USA transferred 100% of its interest in Direct Link to Taizhou Fuling, and Ms. Jiang transferred her 49% interest in Domo to Total Faith,
both in connection with the reorganization of our corporate structure in preparation for our initial public offering. On February 19, 2015, Ms. Jiang transferred her interest in
Total Faith, which is 100% of the equity of Total Faith, to FGI. At the completion of these transactions, (i) Total Faith owns 49% of the equity of Domo but maintains effective
control; (ii) Taizhou Fuling owns 100% of the equity of Direct Link; (iii) FGI owns 100% of the equity of Total Faith; and (iv) eight shareholders own 100% of the equity of
FGI.
In November 2015, we completed our initial public offering, in which we offered and sold an aggregate of 4,038,423 ordinary shares. We received approximately US
$20 million in proceeds before expenses. Our ordinary shares are listed on the Nasdaq under the symbol “FORK.”
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In November 2015, Total Faith increased Taizhou Fuling’s registered capital from $11.11 million to $21.63 million.
In September 2016, Taizhou Fuling established Wenling Changli Import and Export Co., Ltd. (“Wenling Changli”) in China. Wenling Changli’s main business is to
export materials from China to our Allentown facility.
In November 2018, Great Plastics signed sales contracts (the “Contracts”) to sell the real properties previously used as one of its manufacturing factories in China the
“Sanmen Factory”) to Zhejiang Zhongye Packaging Technology Co. Ltd., an unrelated third party, for total cash consideration of RMB 40.2 million (approximately US$5.8
million). We have relocated almost all of related machines and equipment to our new Wenling Factory. We plan to dissolve Great Plastics by September 2019 when we expect
certain administrative matters will be resolved.
We are in the process of setting up manufacturing operation under the maquiladora model in Monterrey, Mexico (the “Mexico Factory”). In December 2018, we signed
a building lease with Interpuerto Industrial Park in Monterrey, Mexico and a service agreement with a local shelter service company to help with administrative, accounting,
compliance, import/export, human resources, etc., at the Mexico Factory. The local shelter service company established a shelter company which is not legally owned by us.
We signed a maquila services agreement with this shelter company in January 2019 according to which the shelter company will operate the factory. We pay for all the costs and
expenses for the operation. In exchange the shelter company manufactures the products and ship them to us for sales in the U.S. Factory renovating is expected to start in April
2019, followed by equipment installation and testing and worker recruitment in May 2019. We expect that the first phase of the Mexico Factory will have an annual design
capacity of 10,000 tons and will be primarily used for producing plastic and paper straws and paper cups serving the U.S. market. We expect to launch commercial production
at the Mexico Factory by July 2019.
We are in the process of constructing our Wenling factory and expanding our Allentown factory. Our Wenling factory is under the second phase of the construction
which is expected be completed in August 2019.
B. Business Overview
We have been in business since 1992. In the beginning, however, we did not produce the disposable serviceware products we produce today. Instead, for our first 10
years, we sold plastic household articles, baskets and other plastic products mainly in Europe. During this time, we were a relatively small company generating a few million
dollars per year in revenue.
In 2003, the focus of our company changed dramatically. We met a company from Pennsylvania at the China Import and Export Fair in 2003, and they were looking
for a supplier of disposable plastic serviceware products to serve one of their large customers. Although we had not, at that time, ever produced cutlery of any type, we saw the
opportunity to help this company, which had more than 70 years of operating history, meet its production requirements for a large customer.
Many of our competitors turned away from an opportunity like this, since the production of disposable serviceware was seen as a low profit venture. Although the
profit margins were lower, the revenues were significantly higher, allowing us to reach revenues of more than $10 million per year in 2003 and 2004.
Our customer was pleased with the quality of our products, and we began to increase our production levels to meet the new demand. There were, of course, some
challenges along the way as we learned the requirements and increasing environmental sensitivities of our new industry. For example, we were initially unprepared for the
audits conducted by QSR chains when the customer’s Shanghai branch first visited our factory. After failing that first inspection, we tirelessly worked to address all of the issues
noted and succeeded in passing the audit just seven short days later.
As we increased our business supplying our first QSR chain, other customers sought us out to provide disposable serviceware products as well. Continued growth
raised our sales to approximately $20 million per year in 2008.
In 2009, we started to work directly with U.S. customers rather than through intermediaries. Although this decision has been an important component of our long-term
success, our orders temporarily decreased, affecting our sales during the period, as some distributors sourced products from some of our competitors that lacked the ability to
compete directly with such intermediaries.
We saw these challenges as an opportunity to continue growing our business. We began our own research and development efforts to differentiate our company from
the numerous small Chinese factories that were capable of filling existing demand but lacked the ability to develop new materials and production machines. We have also
retained Mr. John Kunes, an experienced executive in the U.S. plastic foodservice disposable industry, who was instrumental in helping us build direct relationships with QSR
chains. Mr. Kunes currently serves as an Executive Vice President of Fuling USA.
As we have grown into a mature company in our industry, we have developed four main types of customers:
1. Dealers
2. QSRs
3. Manufacturers
4. Retailers
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Foodservice Disposables — Generally
Our Industry
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.
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Raw Materials in Foodservice Disposables Industry
Foodservice disposables use a variety of materials, depending on the intended use of such disposables. Approximately 7.3 billion pounds of raw materials were used in
manufacturing foodservice disposables in 2012:
(The Freedonia Group, Inc.)
Paper products are commonly used for bags, soda and coffee cups, napkins and wrapping papers. Aluminum foil products are often found in limited service restaurant
take-out containers and foil/paper laminated wraps. Plastics (including a variety of polystyrene (“PS”), polypropylene (“PP”), polyethylenes and degradable resins) are seen in
utensils, straws, clamshell containers, cups and container lids.
Plastics have an important role in the foodservice disposables industry, due to their impressive range of appropriate uses: keeping food hot, keeping food cold, low
cost, light weight, water-tightness, clarity, flavor neutrality and malleability for different uses.
While we believe we are able to produce products that can be used for a variety of uses, we also recognize that specific products may be better suited for desired uses:
for example, while we produce plastic drinking straws and are able to produce plastic wrappers for such straws, our customers typically prefer that we obtain paper wrappers for
the straws we provide to them, both for cost reasons and also for safety reasons, as wet plastic wrappers may become pose accident risks on QSR floors.
Moreover, even where plastic products are well suited to specific uses, consumer preferences may affect demand. For example, few materials are better suited to
keeping coffee warm (and avoiding burning the hands holding that coffee) than foamed polystyrene cups; however, due to environmental concerns some QSRs and other
customers have chosen paper cups and cardboard sleeves as an alternative to foamed polystyrene. Indeed, some municipalities and states in the United States have proposed
regulations that would prevent such cups from being sold.
To address these consumer requirements and to anticipate local ordinances, manufacturers like our company have researched and developed environmentally-friendly
alternatives to traditional plastic products. As of 2012, degradable products accounted for almost 2% of the total foodservice disposables revenue in the United States. Cups and
containers made up approximately 75% of that demand. Degradable plastics consist primarily of starch-based plastics and polylactic acid (“PLA”).
Our Products
While a majority of our products purchased by our customers use the above-mentioned PP, PS including General Purpose Polystyrene (“GPPS”) and High Impact
Polystyrene (“HIPS”), and PET, we focused on developing more environmentally-friendly solutions in order to continue to compete as our target markets’ environmental laws
become more stringent. We have already seen products like foamed polystyrene banned or heavily restricted in some of our target markets. We believe that by providing
biodegradable disposable food service items, we may find a competitive advantage over companies that produce only traditional, less environmentally-friendly products.
In addition to plastic serviceware, we also produce paper straws and paper cups. We have been manufacturing paper cups in our Songmen factory since 2017. In 2018,
we launched paper straw product after installing 35 paper straw production lines in our new Wenling factory.
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.
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1.
PBS is crystallized biodegradable polyester. As PBS decomposes naturally into water and carbon dioxide, it is a biodegradable alternative to some common plastics.
It is both a green and environmentally-friendly material. It has high mechanical performance, good toughness, good thermal stability, and a wide range of
processing temperature and high heat deflection temperature. PBS can be processed by various molding ways with normal equipment. To meet the requirements of
various products, it can be mixed with other biodegradable or natural materials, such as PLA, polypropylene carbonate (“PPC”), polyhydroxyalkanoates (“PHAs”),
Polycaprolactone (“PCL”) and starch or wood powder.
2.
PLA is a biodegradable thermoplastic aliphatic polyester derived from renewable resources, such as corn starch (in the United States), tapioca roots, chips or starch
(mostly in Asia), or sugarcane (in the rest of the world). In 2010, PLA had the second highest consumption volume of any bioplastic of the world.
3. Cellulose is an organic compound. It is the most abundant organic polymer on Earth. Cellulose has no taste, is odorless, is insoluble in water and most organic
solvents and is biodegradable. Hydroxyl bonding of cellulose in water produces a sprayable, moldable material as an alternative to the use of plastics.
Our advanced R&D center in Wenling, Zhejiang aims to develop five new products every year. While our ability to maximize use of biodegradable materials will
ultimately hinge on customer demand, we seek to maximize the environmental friendliness of our products. For a list of some of our recent research projects, see “BUSINESS
— Research and Development.”
Our Environmental Stewardship Measures
We endeavor to increase our production of environmentally-friendly products and reduce pollution in the production process. 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
Beijing Zhong-An-Zhi-Huan
Certificate
Environmental
Recipient
Taizhou Fuling
Certification Center
Management System
Certificate
Standard
GB/T 24001 — 2016/ISO
14001:2015
Applicable to
Plastic drinking cups and disposable plastic
tableware production and service
Valid Period
2017-09-19 until
2020-09-13
Beijing Zhong-An-Zhi-Huan
Environmental
Great Plastics
GB/T 24001 — 2016/ISO
Production and related activities of
Certification Center
Management System
Certificate
14001:2015
disposable plastic cutlery and plastic cups
2017-09-19 until
2020-09-13
Product Mix
Production Strategy
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. We launched clamshell product in 2018 after installing one clamshell production line in our new Wenling factory. 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.
In addition, we launched paper straw product in 2018 after installing 35 paper straw production lines in our new Wenling factory. Our customers for this product
involve retailers, wholesalers, QSRs and restaurants. As more and more fast food restaurants and coffee chains started using paper straws, we believe our sales on paper straws
will keep growing.
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Manufacturing Locations
Decision to Invest in Mexico
Mexico Factory
We decided to start production in Mexico for the following reasons:
1) The ongoing U.S.- China trade tensions cast uncertainties for our export business to the U.S. market, our largest market segment that accounted for 85% of our
revenues during the first half of 2018. By contrast, Mexico has free-trade agreements with over 45 countries around the world, including U.S., making Mexico a perfect launch
pad for global manufacturing. In addition, under the maquiladora (shelter) structure that we are using, we are exempt to pay taxes in Mexico because all of our products will be
shipped to U.S. for sale.
2) Mexico is only hours or at most a few days from U.S. supply outlets and market; the value chain between these two countries is very short, reducing transportation
costs and production time. Especially for the cups and straws or similar hollow products which cannot be packed as tightly as cutlery and cause shipping costs as a higher
percentage of the total cost, producing them in Mexico instead of China and shipping them to U.S., especially to the south of U.S. will save us a lot of shipping fees.
3) Mexico also has highly skilled and productive workforce. The Mexican maquiladora, which we are using now, is capable of handling skilled manufacturing
operations while maintaining a high rate of production.
4) Mexico has a large population and is a significant consumer market. In addition, it is the gateway to the markets in Latin America. Once we establish a presence in
Mexico, we can explore the opportunities of entering the Latin American markets a few years down the road.
Mexico Project Plan
Schedule
On December 11, 2018, we signed a service agreement with Disenos E Ideas Mexicanos, S.A. DE C.V. (“DIMSA”), which provides services of administration,
accounting, compliance, import/export, human resources, etc., for our Mexico operation. DIMSA is a Mexican shelter services provider that incorporates a separate shelter
company, Mayenco, S. de R.L. de C.V., (“Mayenco”) in Mexico by providing a legal representative. Mayenco is owned by DIMSA from a legal standpoint and is contracted by
Fuling USA to manufacturing products in Mexico and then ship to the U.S. for us to sell. The shelter program allows foreign companies to manufacture in Mexico without being
required to organize and operate their own subsidiary, for example, as a Mexican corporation.
On December 20, 2018, we, as a guarantor, through Mayenco as the lessee signed a lease agreement for a piece of land and a building located in Interpuerto Monterrey
Industrial Park, Mexico to use as our factory. The building is 7,804 m2 (approximately 84,002 square feet). From December 20, 2018 to June 30, 2019, we occupy 5,471 m2
while another tenant occupies the rest. On July 1, 2019, after the other tenant moves out, we will occupy the entire building. The lease has a term of 50 months, expiring in
February 2023, with an option to extend the lease for an additional two years. According to the lease, after the grace period from December 20, 2018 to February 14, 2019
during which we only needed to pay the maintenance fees, we started to pay the monthly rent from February 2019. For the first four months, the monthly rent is $20,899 plus
tax. After four months, the monthly rent will be $29,810.47 plus tax.
On January 2, 2019, we signed a maquila services agreement with Mayenco. The term of the agreement is one year and will be renewed automatically unless
terminated in advance by any party. According to the agreement, we are obligated to provide the machinery, raw materials, technology and processes to manufacture our
products and pay for all the expenses and costs. Mayenco is obligated to manufacture, assemble and deliver the products to us or to whom we appoint.
Currently we are delivering production machinery from China to Monterrey, Mexico. Factory renovating is expected to start in April 2019, followed by equipment
installation and testing and worker recruitment in May 2019. We expect to launch commercial production at the Mexico Factory by July 2019.
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Estimate of the amount of expenditures
The total investment spent for the first phase of the project will be roughly $4 million, including approximately $3.5 million of fixed asset investment, and $0.5 million
of working capital. We plan to finance the project with a capital investment of approximately $2.0 million in equipment and machinery in 2019 and internal cash flow of 2.0
million. If we choose to increase production capability, we will incur additional costs.
Production Capacity
We expect that the first phase of the Mexico Factory will have an annual design capacity of 10,000 tons and will be primarily used for producing paper straws, paper
cups and plastic straws serving the U.S. market.
Environmental Considerations
The major products that we plan to produce in the Mexico Factory are paper straws and paper cups. In the U.S., more and more fast food restaurants and coffee chains
including Starbucks announced that they are ditching plastic straws and opting for eco-friendly alternatives, such as paper.
Our company will strictly follow applicable environmental regulations and policies in Mexico.
Location
Below is a diagram of the location of our Mexico facility.
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Facility
Our Mexico facility structure consists of 84,002 square feet of building area:
Decision to Invest in U.S.
Allentown Operation
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 previously produced substantially all of our products in China and shipped 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 provides 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 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 before our Mexico factory is set up and is capable of handling a large amount of orders.
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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. However, with the increased
tariffs stemmed from the trade conflict between U.S. and China, this differential is narrowing and in some materials, we found that U.S. offers a more cost effective
sourcing.
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 for sales in the United States are different with the taxes 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. We are manufacturing drinking straws in our Allentown facility.
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 2017 total gross state product of $752 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.
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Finally, Pennsylvania has a strong trade relationship with China. Other than Canada and Mexico, China was the largest destination for exports from Pennsylvania, with
$2.7 billion in exports in 2017.
Allentown Project Plan
Estimate of the amount of expenditures
The total investment spent on the project was roughly $9.3 million, including approximately $4.3 million of fixed asset investment, and $5.0 million of working
capital. If we choose to increase production capability, we will incur additional costs.
Schedule
We signed the lease of the factory and acquired property for our Allentown facility in 2013 for approximately $235,100. For the year ended December 31, 2018, we
paid rental fees of approximately $47,000 per month, including tax and insurance. As of the time of this filing, we have paid approximately $1.9 million for factory renovations.
In addition, we rented a warehouse of 17,000 square feet nearby for approximately $11,000 per month since June 2016.
The preparatory work for the project began in the second half of 2013, and in October 2013 we committed with the Pennsylvania Department of Commerce to invest
and build the factory in Pennsylvania.
We completed preparations for the preliminary stage of the project in early 2014. From May 2014 to December 2014, we finished the construction and renovation of
the factory.
From January 2015 to May 2015, we purchased and installed the initial six straw production lines at a cost of approximately $1 million. As of June 2016, we installed
an additional six straw production lines at a total cost of about $610,000. All twelve production lines have been in full operation and running 24/7 with 4 shifts of operators
throughout the remainder of 2016.
Instead of putting in another 12 straw production lines as we originally planned, we plan to diversify our product offering in Allentown and use the space to bring in
other manufacturing processes. From March 2016 to February 2017, we successfully tested and installed six automated straw packaging machines – one machine for every two
lines. As of the end of 2016, we installed a ten-silo raw material storage and automatic distribution system was installed that is able to hold 430 metric tons of resin.
In 2017, we only made minor capital expenditures. We completed the installation of a raw material distribution system that included construction of ten silos outside
the factory building for storage of plastic materials. We focused on optimizing the utilization of our existing equipment in Allentown and increased productivity by about 30%.
At the same time, we reduced our labor cost per ton output by 40% and caused Allentown operations to become profitable in the second half of 2017.
In 2018, we planned to initiate paper cup manufacturing at the Allentown facility with a $2.5 million projected investment on machinery. The project was delayed
because our technical experts on paper cup in China did not get visas to come to the U.S. In addition, the U.S. tariff on importing paper boards, the major raw material to
produce paper cups, increased in 2018. Then we shifted the focus to starting up Mexico.
In 2019, if the demands of straws increase substantially, we will add straw production machines.
Production Capacity
The designated annual capacity is 2,400 tons of straw series products with the 12 straw production lines put into operations. We consistently reached 100% capacity in
2018 producing 2,302 tons for the year, an increase of 33.7% from 2017. The plant operates 24/7 throughout the year except on holidays and days under unusual weather
conditions. In 2019, we will strive to exceed the 2,400 ton designed capacity. However, if demands increase significantly, we will add new machines.
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.
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Location
Below is a diagram of the location of our Allentown facility.
As can be seen in the above map, the Allentown facility is located conveniently near the intersection of the Lehigh Valley Thruway (U.S. Route 22), which stretches
from Cincinnati, Ohio to Newark, New Jersey, and Pennsylvania Route 100, which runs from Pleasant Corners through Philadelphia and into Chester County, Pennsylvania. In
addition, the facility is less than 10 minutes from I-78, a major road that sees more than 4 million trucks annually and links New York City and New Jersey with western points.
In addition, its proximity to Lehigh Valley International Airport and Newark Liberty International Airport, both of which serve scheduled airlines and cargo traffic,
executive aviation as well as various logistics cargos, makes this area attractive and fitting for this facility.
Facility
Our Allentown facility structure consists of 88,000 square feet on 7.7 acres of land:
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The current build-out plan is as depicted below. The blue figures in the left lower corner represent our first 6 straw production lines that we installed in 2015. The
green figures in the middle represent the second six straw production lines we installed in 2016. The red and green figures to the right represent paper cup manufacturing and
plastic equipment we plan to install in the future.
Current Stage
We have installed (1) twelve straw production lines, (2) six automated straw packaging machines – one machine for every two lines; and (3) a ten-silo raw material
storage and automatic distribution system. Our total investment in manufacturing equipment has reached approximately $2.3 million.
Decision to Build a New Factory in Wenling
We decided to invest in building a new factory in Wenling for the following reasons:
Wenling Expansion
1) By building a new factory, we can meet the growing demand for our products. Currently the extent of utilization of our old factory in Songmen Town of Wenling
has reached 100% as expected. A new factory will allow us to expand our production capacity.
2) The location of this new factory is in the Eastern New District of Wenling, only 5 km from our Songmen factory, so it is easy for us to integrate the new factory into
our business operations and leverage our existing resources to grow the new facility.
3) The location of our new factory is only 15 km from the Longmen sea port, which is convenient for us to ship our products.
Wenling Project Plan
The project construction period is budgeted from April 2016 to December 2019, divided into three phases.
We estimate the total amount of expenditures is approximately $63 million. We have financed the expansion with IPO proceeds, self-generated cash flow and profits
from operations, and will keep financing it with self-generated cash flow and profits from operations. We have spent approximately $50 million on purchase of land use right,
construction of facilities and equipment purchase. The major equipment we plan to install includes 141 injection molding production lines and 26 vacuum thermoforming
production lines in total. The 141 injection molding production lines will produce cutlery, plates, cups and bowls. We anticipate that 8 of the 26 vacuum thermoforming
production lines will produce cups, and 18 of the vacuum thermoforming production lines will produce plates, cup lids and various types of containers, such as vegetable
containers, fruit containers and packaging containers. Currently we have installed 129 injection molding production lines and 23 vacuum thermoforming production lines. We
anticipate that the production capacity will be increased by 47,150 tons after completion of the project.
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The following chart shows the specific status/plan:
Period
April 2016 – May 2017
August 2017 – August 2019
September 2019– December 2019
Phase I
Phase II
Phase III
Actual/estimated expenditures required
$31 million
1) Purchase of land use right: $10 million
for 32.45 acres (197 mu);
2) Construction of
facilities: $13 million for 54,450 square
meters of manufacturing facilities;
3) Equipment purchase:
$8 million.
$26.1 million
1) Construction of
facilities: $13.1 million;
2) Equipment purchase:
$7 million;
3) R&D: $6 million.
$5.5 million
1) Equipment purchase:
$1.5 million;
2) R&D: $4 million.
Financing resources
IPO proceeds and
self-generated cash flow
Profit from operation in 2016, 2017 and
2018
Profit from operation in 2018
Actual/Anticipated increase in production
24,250 tons
13,000 tons
2,900 tons
capacity
141 injection molding production lines
95 (capacity of 14,250 tons)
40 (capacity of 6,000 tons)
6 (capacity of 900 tons)
26 vacuum thermoforming production lines 10 (capacity of 10,000 tons)
14 (capacity of 14,000 tons)
2 (capacity of 2,000 tons)
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Environmental Considerations
The production lines that we plan to install are capable of producing biodegradable products.
This new factory is located in the Eastern New District of Wenling. Below is a diagram of the planned location of our Wenling facility and the location of Longmen
sea port which our facility will use. The star represents the proposed location of the factory, and the triangle represents the newly-built Longmen sea port.
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Table of Contents
Facility
Our new Wenling facility structure consists of 107,800 square meters on 33.27 acres of land. The plan includes four workshop buildings, one warehouse, two
dormitory buildings and one office building. We have built three workshop buildings and one warehouse which occupy 54,000 square meters in total. Another workshop
building of 20,700 square meters is under construction. The two dormitory buildings consist of 380 rooms and can accommodate 1,520 workers. Workers have moved into these
dormitory buildings. The office building occupying 7,000 square meters is under construction. We expect it will be ready in August 2019.
Our New Workshop Building in Wenling
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Our main business does not have significant seasonality.
Seasonality
Raw Materials
Our primary raw materials are (1) PP, PS which includes GPPS and HIPS, and PET, (2) plastic bags and membranes for packaging cutlery, (3) shipping cartons, (4)
plastic colorants, (5) paper board for paper straws, (6) paper napkins, salt, pepper and wet wipes for inclusion in cutlery packages and (7) 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 75.5% of our raw material purchases in 2018. 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.
We mainly rely on our sales team to market our products. In addition, we attend trade fairs both in China and in U.S. frequently. We also market our products through
Marketing Channels
our websites.
Geographic Distribution of Revenues
Distribution Channels
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
Amount
%
Amount
%
Amount
Percentage
2018
2017
Year-over Year
Increase
United States
Europe
Canada
China
Others
Total
$
$
118,308
6,622
1,636
8,286
3,812
138,664
85.32% $
4.78%
1.18%
5.98%
2.75%
$
32
106,564
6,101
1,944
7,741
1,859
124,209
85.79% $
4.91%
1.57%
6.23%
1.50%
$
11,744
521
(308)
545
1,953
14,455
11%
9%
-15.84%
7.04%
105.06%
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
Dealers
QSRs
Retailers
Manufacturers
Total
Distribution Channels
Products Sold
Serviceware,
Straws,
Cups, Plates
Serviceware,
Straws,
Cups
Serviceware,
Straws,
Cups, Plates
Serviceware
Geographic Region
Estimated
Sales % In 2018
Estimated
Sales %
In 2017
Estimated
Sales%
in 2016
USA, Europe,
Canada, others
46%
46%
USA, China
27%
29%
USA, others
USA
7%
20%
100%
4%
21%
100%
67%
27%
1%
5%
100%
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, 2018, 2017 and 2016, approximately 34%, 33% and 28% of our
sales were made directly to end-users and retailers, respectively, and approximately 46%, 46% and 67% 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.
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.
Methods of Competition
Type of Customer
Dealers
QSRs
Retailers
Manufacturers
Quality
**
***
***
****
Delivery
***
****
****
**
R&D
***
*
***
**
Service
****
****
***
**
Price
****
**
***
***
Competitive Position
The largest producers of foodservice disposables in the United States are significantly larger than our company. A recent report by Freedonia estimates that three
companies control approximately 29% of the foodservice disposable market in the United States, and the top ten companies accounted for approximately 50% of the market in
2012. Because the entire foodservice disposable market in the United States consists of packaging, serviceware and napkins, and other foodservice disposables — while we only
compete in the serviceware segment — we occupy a relatively small competitive position in the market as a whole.
Concentration in the foodservice disposables industry varies widely within specific market segments, with some segments dominated by a small number of producers.
For example, Dart Container is the leading supplier of plastic foodservice beverage cups, followed by Pactiv and Berry Plastics. By contrast, the market for cutlery is more
fragmented, with a growing portion of the market supplied by contract manufacturers in China. Among U.S.-based suppliers of foodservice disposable cutlery are Berry
Plastics, D&W Fine Pack, Dart Container (including Solo Cup), Georgia-Pacific, Maryland Plastics, Pactiv, and Waddington Group. Most of these firms offer a number of
different cutlery lines and are diversified into the production of straws and other foodservice disposables. In April 2012, D&W Fine Pack expanded its cutlery and straw
offerings through its acquisition of Jet Plastica Industries. Prior to the acquisition, Jet Plastica claimed to be the largest manufacturer of straws in the U.S. Other suppliers of
foodservice straws include Cell-O-Core, Earth Straws, New WinCup, Pactiv (via Spirit Foodservice), Rockline Industries, Royer, Stalk Market Products, and Stone Straw
(Wentworth Technologies).
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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.
Ranking
Products
Taizhou Fuling
2015: No. 3
2016: No. 2
2017: No. 2
Jiaxing Zhongli
Plastic Co., Ltd.
2015: No. 6
2016: No. 8
2017: No. 6
Baohao Plastic &
Hardware
Production
(Jiangmen) Co Ltd
Ningbo Homelink
Plastic Product
Manufacture Co.,
Ltd.
2015: No. 2
2016: No. 6
2017: No. 3
2015: No. 1
2016: No. 1
2017: No. 1
Disposable plastics
Disposable plastic
serviceware including cutlery,
cups, containers,
straws, etc.
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
Not known.
Not known.
56 patents.
Customers
Product specification standard
Workstation;
over 40 patents.
Dealers, QSRs
including four of top
five, retailers,
manufacturers.
Participate in
initiating and
drafting the national
standard
General Requirement
Of Plastic Disposable
Tableware.
Dealers, QSRs,
retailers, manufacturers.
Dealers, restaurants,
retailers, manufacturers.
Dealers,
restaurants,
retailers, manufacturers.
No participation.
No participation.
No participation.
Nevertheless, we have been one of China’s largest exporters of disposable serviceware. The China Chamber of Commerce for Import and Export of Light Industrial
Products and Arts and Crafts has recognized Taizhou Fuling as Number 2 out of 12,013 plastic kitchenware and serviceware companies for exports from China in 2017,
Number 2 out of 10,113 in 2016 and Number 3 out of 9,162 in 2015. In addition, we were rated one of top 10 enterprises of plastic industry (daily plastic household products) in
China light industries in 2017 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 ($15,653,364 since 2013 to 2018) 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.
The Company is fully ISO 9001 and 14001 certified and, importantly, has obtained HACCP, GMP and FDA food facility registration certifications.
Awards and Recognition
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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:
2018
●
Top 10 Enterprises of Plastic Industry (Daily Plastic) in China Light Industries, 2018
● Outstanding Technology Innovative Enterprise in Chinese Plastic Processing Industry
Leading Export Enterprise, Zhejiang Province
Famous Export Brand in Zhejiang (2018-2020)
●
●
2017
●
Top 10 Enterprises of Plastic Industry (Daily Plastic) in China Light Industries, 2017
● Key supporting Zhejiang Enterprise
●
●
Top 20 Zhejiang Enterprise with Offshore Investment Bolstering Export Sales
Zhejiang Famous Trademark
● Outstanding Returned Project of Zhejiang Enterprise, 2016
●
FSSC 22000 Certificate of Registration for Food Safety Management System
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2016
2015
2014
●
●
●
●
Top 10 Enterprises of Plastic Industry (Daily Plastic) in China Light Industries, 2016
China Credible Enterprise published by State Administration for Industry and Commerce of China)
Province Level Enterprise Research Institute – Zhejiang Fuling New Materials Research Institute (three years)
Taizhou Top 20 Growing Enterprise
● Deputy Chair of Zhejiang Plastics Industry Association
● Wenling Top 10 Industrial Enterprise
●
Taizhou Export and Import Credit Enterprise (Grade A)
●
●
Zhejiang Famous Export Brand
Zhejiang Famous Trademark
● Wenling Star Enterprise
●
Taizhou Quality Enterprise Leader
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Regulations
We are subject to a variety of PRC and foreign laws, rules and regulations across a number of aspects of our business. This section summarizes the principal PRC laws,
rules and regulations relevant to our business and operations. Areas in which we are subject to laws, rules and regulations outside of the PRC include intellectual property,
competition, taxation, anti-money laundering and anti-corruption.
Foreign Investment Restrictions Regulations
Historically, the principal regulation governing foreign ownership of businesses in the PRC was the Guidance Catalogue for Industrial Structure Adjustments (the
“Guidance Catalogue”). The Guidance Catalogue classified various industries into three categories: encouraged, restricted and prohibited. The Guidance Catalogue has been
replaced by the Special Administrative Measures (Negative List) for Foreign Investment Access (2018), effective July 28, 2018 (the ” Negative List”). The Negative List
specifies the prohibited and non-prohibited (similar to the restricted in the Guidance Catalogue) industries for foreign investment. For the industries not covered by the Negative
List, the foreign investment and the domestic investment have equal access. Foreign investors may not invest in the prohibited industries specified by the Negative List. For the
non-prohibited industries on the Negative List, a foreign investor must obtain an investment permit. There are certain requirements on the equity ownership and the executive
officers of the foreign invested enterprises. If PRC has certain equity requirements in certain investment fields, no foreign-invested partnership may be established. For
example, pursuant to the latest Negative List, the provision of telecommunications services and value-added telecommunications services fall in the prohibited industry and the
percentage of foreign ownership cannot exceed 50% (except for e-commence).
According to the Negative List, our products are not prohibited. Therefore, our proportion of the foreign investment may be up to 100%. As a result, FGI’s investment
in our Chinese subsidiaries is in compliance with the Negative List.
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Intellectual Property Rights Regulations
The Trademark Law of the PRC was adopted by the Standing Committee of the National People’s Congress (“NPC”) on August 23, 1982 and was amended on
February 2, 1993 and October 27, 2001. The PRC Trademark Law Implementation Rules, or the Implementation Rules, were promulgated by the State Council on August 2,
2002 and became effective on September 15, 2002. The PRC is a signatory country to the Madrid Agreement and the Madrid Protocol. These agreements provide a mechanism
whereby an international registration produces the same effects as an application for registration of the trademark made in each of the countries designated by the applicant.
According to the Trademark Law, the National Trademark Bureau under the SAIC is responsible for the registration and administration of trademarks throughout the
country. A “first-to-file” principle with respect to trademarks has been adopted. If trademark owners deem an infringement to their trademarks constituted, they can file the
dispute with the competent court or the relevant administrative department. Should the case be so serious as to constitute a crime, trademark owners may lodge a complaint with
the relevant public security organization.
If the registered trademark owners intend to assign their registered trademark, a registered trademark transfer agreement shall be entered into between the owner and
the assignee. The owner and assignee shall together apply to the National Trademark Bureau for registration of such assignment as prescribed under the Trademark Law.
Registered trademark owners may license other to use their registered trademark by concluding the registered trademark license agreement and such license agreements
shall be subject to filing recordation with the National Trademark Bureau according to the Trademark Law. The licensor shall supervise the quality of the commodities on which
such registered trademark is used, and the licensee shall guarantee the quality of such commodities.
The Measures for the Administration of Domain Names for the Chinese Internet, or the Domain Names Measures, were promulgated by the Ministry of Information
Industry on November 5, 2004 and became effective on December 20, 2004. The Domain Names Measures govern registration of domain names with the internet country code
“.cn” and domain names in Chinese. We have one website (www.fulingplastics.com.cn) governed by the Domain Names Measures.
The Measures on Domain Names Dispute Resolution, or the Domain Names Dispute Resolution Measures, were promulgated by the China Internet Infrastructure
Center on February 14, 2006 and became effective on March 17, 2006. The Domain Names Dispute Resolution Measures require domain name disputes to be submitted to
institutions authorized by the China Internet Network Information Center for resolution.
Regulations on Tax
The Law of the People’s Republic of China on Enterprise Income Tax (the “EIT Law”), promulgated by NPC on March 16, 2007 and put into force on January 1,
2008, imposes a uniform enterprise income tax rate of 25% on all resident enterprises in China, including foreign-invested enterprises, on all their income and a tax rate of 10%
on non-resident enterprises on their income from the jurisdiction of PRC.
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Attention shall be paid to the fact that non-resident enterprises may be considered resident enterprises for the purpose of EIT if their de facto management bodies are
located within the PRC territory and therefore their global income is subject to a tax rate of 25%. The Notice of the State Administration of Taxation on Issues Relevant to
Foreign-registered Chinese-invested Holding Enterprises Determined as Resident Enterprises in Accordance with Actual Management Organization Standard (“Circular 82”),
promulgated by the State Administration of Taxation (“SAT”), provides that, a foreign Chinese-invested enterprise, if it concurrently satisfies the following conditions, for the
purpose of the EIT, shall be determined to be a non-domestically-registered resident enterprise when: (1) The places where the top managers and the top management
departments that are responsible for implementing the routine production, management and operation of the enterprise, perform their duties within the territory of China; (2) The
financial decisions (such as borrowing, lending, financing, financial risk management, etc.) and the personnel decisions (such as appointment, dismissal, remuneration payment,
etc.) of the enterprise shall be made or be approved by the organization or the persons within the territory of China; (3) The primary properties, accounting books, company
seals, summaries and archives of the board meetings and shareholders meetings shall be placed or kept within the territory of China; and (4) One half or more of the enterprise’s
directors or top managers having rights to vote shall frequently reside within the territory of China. Our PRC counsel, Jingtian&Gongcheng Attorneys at Law advised that
because we (“FGI”) are incorporated in Cayman Islands, we do not meet the conditions outlined in Circular 82, however, our tax residency status is subject to the discretion of
the PRC tax authorities whose determination is hard to predict, so we will continue to monitor our tax residency status.
The implementation rules of the EIT Law provide that, (i) if the enterprise that distributes dividends is domiciled in the PRC or (ii) if gains are realized from
transferring equity interests of enterprises domiciled in the PRC, then such dividends or capital gains are treated as China-sourced income. It is not clear how “domicile” may
be interpreted under the EIT Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we are considered as a PRC tax resident
enterprise for PRC tax purposes, any dividends we pay to our overseas shareholders which are non-resident enterprises as well as gains realized by such shareholders from the
transfer of our shares may be regarded as China-sourced income and as a result become subject to PRC withholding tax at a rate of up to 10% unless any such non-resident
individuals’ jurisdiction has a tax treaty with China that provides for a preferential tax rate or a tax exemption.
The Interim Regulations of the People’s Republic of China on Value-added Tax, promulgated by State Council on November 10, 2008 came into force on January 1,
2009, impose a Value-Added Tax at the rate of 17% on the revenues from sales of goods. According to the Notice of the Ministry of Finance and the State Administration of
Taxation on Raising the Export Tax Rebate Rates for Certain Commodities, promulgated by the Ministry of Finance and SAT on June 3, 2009, the export tax rebate rate is 13%
for certain plastic products. In 2014, 99.6% of our products benefitted from the 13% export tax rebate.
In April 2018, the Ministry of Finance and the State Administration of Taxation jointly issued the Notice on Adjusting the Tax Rate of Value-added Tax (Circular 32
of Finance and Taxation, 2018). The Notice clearly stipulates that, from May 1, 2018, for all taxpayers who have engaged in taxable sales of VAT or imported goods, where the
original 17% and 11% tax rates were applied, the tax rates shall be adjusted to 16% and 10%, respectively. This can lighten the operation burden of enterprises to a certain
extent.
Foreign Exchange Regulation
The Regulations of the People’s Republic of China on Foreign Exchange Control, promulgated by State Council on August 5, 2008, lays the legal framework for
foreign exchange control in PRC. A number of notices, implementing rules, replies and circulars are promulgated thereunder to clarify the regulations on the foreign exchange.
Under these regulations, payments of current account items, such as profit distributions, may be made in foreign currencies without prior approval from SAFE provided that
certain procedure is complied with. Where, however, payments of capital account is involved, such as RMB is to be converted into foreign currency for the purpose of remitting
out of China to retire foreign currency-denominated loans, approval from or registration with appropriate government authorities is required. According to the SAFE Circular
142 i.e., Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the Improvement of the
Administration of Payment and Settlement of Foreign Currency Capital of Foreign-funded Enterprises, promulgated by SAFE on August 29, 2008 and SAFE Circular 45,
promulgated by SAFE on November 9, 2011, the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes
falling within the business scope approved by the relevant authority and may not be used for equity investments within the PRC. The use of such RMB capital may not be
altered without SAFE’s approval, and such RMB capital may not in any way be used to retire RMB loans where the proceeds of such loans have not been used.
The Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, promulgated by SAFE on November 19,
2012, materially amends and, therefore, simplifies the foreign exchange procedure then existing. Various special purpose foreign exchange accounts may be opened in different
provinces, which was prohibited previously. The Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by
Foreign Investors and the Supporting Documents, promulgated by SAFE in May 2013, provides for that the administration by SAFE or its local branches over direct investment
by foreign investors in the PRC shall be conducted through registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on
the registration information provided by SAFE and its branches.
We have obtained all material approvals and permits necessary for our operation in the PRC from SAFE and other PRC government authorities.
SAFE Circular 37
The Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through
Special Purpose Vehicles, promulgated by SAFE on October 21, 2005 and designed to replace the former circular commonly known as “SAFE Circular 75”, requires
registration of PRC residents with local branches of SAFE with respect to their direct establishment or indirect control of an offshore entity (referred to in SAFE Circular 37 as
“special purpose vehicle”), where such offshore entity are established for the purpose of overseas investment or financing, provided that PRC residents contribute their legally
owned assets or equity into such entity.
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SAFE Circular 37 further requires amendment to the registration where any significant changes with respect to the special purpose vehicle, such as increase or decrease
of capital contributed by PRC individuals, share transfer or exchange, merger, divestiture or other material event.
Any violation of these registration requirements may, among other liabilities that may be imposed under PRC laws governing evasion of foreign exchange controls,
cause the PRC subsidiaries of the special purpose vehicle be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border
foreign exchange activities, and may cause the special purpose vehicle’s ability to contribute additional capital into its PRC subsidiary be restricted.
Regulation of Dividend Distribution
The Company Law of the People’s Republic of China, promulgated by Standing Committee of the NPC on December 28, 2013 and came into force on March 1, 2014,
and the Wholly Foreign-owned Enterprise Law, promulgated and came into force on October 31, 2000 by Standing Committee of the NPC, provide that dividend may only be
paid out of accumulated profits as determined in accordance with applicable accounting standards provided that: (1) all losses from prior fiscal years have been offset; and (2) a
general reserve has been established and which shall amount to the 50% of the registered capital.
Labor Laws and Social Insurance
The Labor Contract Law was promulgated by the Standing Committee of the NPC on June 29, 2007 and became effective on January 1, 2008.
The Labor Contract Law requires employers to enter into written contracts with their employees, restricts the use of temporary workers and aims to give employees
long-term job security. Pursuant to the Labor Contract Law, employment contracts lawfully executed prior to the implementation of the Labor Contract Law and continuing as
of the date of its implementation shall continue to be performed. If an employment relationship was established prior to the implementation of the Labor Contract Law with no
written employment contract executed, a contract must be executed within one month after the implementation of the Labor Contract Law.
In addition, according to the PRC Social Insurance Law, social insurance in China includes basic pension insurance, basic medical insurance, work-related injury
insurance, unemployment insurance and maternity insurance. Both employers and employees must pay basic pension insurance contributions based on the employee’s wage
category, as required by the relevant regulations. Employees participating in basic pension insurance schemes are entitled to receive monthly basic pensions if their accumulated
contribution period has reached or exceeded 15 years when they reach the statutory retirement age. A notice issued by the Social Assurance Authority provides that retirement
is permitted at age of 60 for male employees and between 50 and 55 for female employees. Social insurance (including pension insurance) payment obligations end at such
voluntary retirement ages.
In July 2018, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council issued the Reform Plan for the
Taxation and Administration System of State Taxes and Local Taxes (hereinafter referred to as the Reform Plan). The Reform Plan clearly stipulates that from January 1, 2019,
all social insurance premiums, such as basic old-age insurance premium, basic medical insurance premium, unemployment insurance premium, industrial injury insurance
premium and maternity insurance premium, will be levied by the tax authorities. The Reform Plan makes the collection of social insurance fees more transparent and
standardized, and reduces a certain degree of flexibility that enterprises can enjoy before. For enterprises that have not paid all the related fees before, the Reform Plan will
increase the financial burden of enterprises, which may even face administrative penalties and illegal risks. The details of how to levy social insurance fees need to be clarified.
Company Law
The Company Law of the PRC, adopted at the Fifth Session of the Standing Committee of the Eighth National People’s Congress on December 29, 1993, was
amended for the first time at the 13th Session of the Standing Committee of the Ninth National People’s Congress on December 25, 1999; amended for the second time at the
11th Session of the Standing Committee of the Tenth National People’s Congress on August 28, 2004; revised at the 18th Session of the Standing Committee of the Tenth
National People’s Congress on October 27, 2005; and Revised at the 6th Session of the Standing Committee of the Twelfth National People’s Congress on December 28, 2013,
takes effect on March 1, 2014 (the “Company Law”).
Pursuant to the Company Law, (1) the term “company” shall refer to a limited liability company or a Company Limited by Shares; (2) the shareholders of both Limited
Liability Company and Company Limited by Shares shall only be subject to the liability of the company to the extent of the capital contributions they have subscribed; (3) the
minimum amount of registered capital of a limited liability company and the minimum percent of cash contribution by shareholders have been eliminated by revision in 2014.
Wholly Foreign-Owned Enterprise Law
The Law of the PRC on Wholly Foreign-owned Enterprises, or the WFOE Law, was adopted by the NPC on April 12, 1986 and was amended on October 31, 2000.
Moreover, the Implementation Regulation of the WFOE Law was promulgated on December 12, 1990 and amended on April 12, 2001.
The ratio between its registered capital and total amount of investment shall be in conformity with the relevant regulations of the PRC, and the difference between its
registered capital and total amount of investment equal to the amount of foreign exchange loans that the WFOE is permitted to borrow from its foreign investor.
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Environmental Protection
The Environmental Protection Law, promulgated by the Standing Committee of NPC on December 26, 1989 and came into force on December 26, 1989, lays the
foundation of the legal framework for environmental protection in the PRC. The Ministry of Environmental Protection under the State Council is charged with the administration
of The Environmental Protection Law.
The Law on Prevention and Control of Environmental Pollution by Solid Wastes (“the Solid Wastes Law”), promulgated by the NPC on December 29, 2004 and came
into force on April 1, 2005, provides that any disposition of hazardous wastes shall be in compliance with relevant provisions promulgated by the State. Moreover, it is
forbidden to supply or entrust hazardous wastes to entities that do not have business licenses and qualifications for the collection, storage, utilization and disposition of solid
wastes. The Air Pollution Prevention Law, promulgated by the Standing Committee of the NPC on April 29, 2000 and came into force on September 1, 2000, The Water
Pollution Prevention Law, promulgated by the Standing Committee of the NPC on May 11, 1984 and came into force on November 1, 1984 as amended on March 15, 1996 and
February 28, 2008 are also important laws in this area.
Under these regulations, a number of requirements for handling, storage, treatment, transportation and disposal of regulated substances and wastes must be complied
with and enterprise that discharge wastes into air or waters must obtain a permit and pay the waste treatment fees. Violation of these regulations may cause the violator to be
subject to injunction and/or fine. We have obtained all material approvals necessary for our business operations.
Property
The Law of the PRC on Property, or the Property Law, was promulgated by the Standing Committee of the NPC on March 16, 2007 and became effective on October
1, 2007. Under the Property Law, any creation, modification, transfer or termination of property rights shall only become effective upon registration with the relevant
government authorities. All lawful property of the State, collective organization and individual are protected by the Property Law against embezzlement and encroachment.
The Law of the PRC on Land Administration, or the Land Administration Law, was promulgated by the Standing Committee of the NPC on June 25, 1986 and became
effective on January 1, 1987 and as amended on December 29, 1988 and August 28, 2004. According to the Land Administration Law, the lands within territory of the PRC are
classified into two categories, state-owned land and collective-owned land. The use right of state-owned land can be obtained through either government allocation or grant with
grant fees paid.
It further prescribes that any entity who intends to conduct construction must construct on the state-owned land except as otherwise provided under the Land
Administration Law. The collective-owned land shall not be granted, assigned or leased for use of agriculture-unrelated-construction unless it otherwise falls in the scope
permitted under the Land Administration Law. Violation of such provisions under the Administration Law may result in fines and confiscation of the buildings constructed on
the land.
The Urban Real Estate Administration Law was promulgated by the Standing Committee of the NRC on July 5, 1994 and became effective on January 1, 1995 and as
amended on August 30, 2007. According to the Urban Real Estate Administration Law, if the real estate is mortgaged to third party the land where such real estate occupies
shall also be mortgaged together.
Product Liability
Under the current PRC laws, manufacturers and/or vendors of defective products in the PRC may incur liability for loss and injury caused by such defective products.
Pursuant to the General Principles of the Civil Law of the PRC, or the PRC Civil Law, promulgated by the NPC on April 12, 1986, a defective product which causes property
damage and/or physical injury to any person may subject the manufacturer and/or vendor of such defective product to civil liability for such damage and/or injury caused
therefrom.
The Product Quality Law of the PRC, or the Product Quality Law, was promulgated by the Standing Committee of the NPC on February 22, 1993, to supplement the
PRC Civil Law aiming to protect the legitimate rights and interests of the end-users and consumers and to strengthen the supervision and control over the quality of products.
The Product Quality Law was revised on July 8, 2000. Pursuant to the revised Product Quality Law, manufacturers who produce defective products may be subject to civil or
criminal liability and have their business licenses revoked.
The Law of Protection of the Rights and Interests of Consumers, or the Consumers Protection Law, was promulgated by the Standing Committee of the NPC on
October 31, 1993, and became effective on January 1, 1994. The Consumers Protection Law provides further protection to the legal rights and interests of consumers in
connection with the purchase or use of goods and services. At present, all business operations must observe and comply with the Consumers Protection Law when they provide
their goods and/or services.
The Tort Law of the PRC, or the Tort Law, was adopted by the Standing Committee of the NPC and promulgated on December 26, 2009 and will become effective on
July 1, 2010. The Tort Law establishes a separate chapter regarding product liability. Compared to previous laws and regulations in relation to product liability, the provisions of
the Tort Law expressly provide that, in the event that any entity is clearly aware of the defects existing in the products but notwithstanding manufactures and distributes such
defective products which finally cause others’ death or serious injury, those so infringed upon are entitled to claim punitive damages.
U.S. Regulations
Federal, state and local governments mandate a variety of laws and regulations aimed at serviceware products and packaging products. At the federal level, the Food
and Drug Administration (“FDA”), the Consumer Product Safety Commission and the Environmental Protection Agency (“EPA”), among other federal agencies, have
promulgated regulations that directly or indirectly affect the products we produce.
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For example, the FDA is charged with, among other responsibilities, regulating industry to ensure that food contact substances are safe, approving materials for use in
foodservice disposables, and setting safety standards for products made with recycled content. Unlike many other industrialized nations, the U.S. does not currently have
national packaging recycling laws in place; such laws, where they exist, are at the state level.
The Affordable Care Act (“Obamacare”) requires restaurant chains with over 20 locations to display the calorie content of each food and drink item it serves on signs
and printed menus. Such regulation may indirectly affect our product usage as the intention of such regulation is to encourage healthier eating and better food choices, including
a decrease in consumption of food from fast food restaurants and quick service restaurants.
State and local governments regulate restaurant cleanliness standards, with which foodservice disposables must comply. And a number of states, including large states
such as California and Florida, as well as cities and counties have passed regulations governing consumer packaging materials. Polystyrene foam bans are particularly
widespread among local governmental regulations, particularly in California, which has more than 50 cities and counties that have restricted or banned foamed polystyrene
containers. Although no state has yet to impose a statewide ban on polystyrene, numerous bills that would accomplish such ban have been promoted in various state
legislatures.
C. Organizational Structure
Below is a chart representing our current corporate structure:
Our registered office in the Cayman Islands is at Vistra (Cayman) Limited, P.O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman,
KY1-1205, Cayman Islands, telephone +1.345.769.9372.
D. Property, Plant and Equipment
Property
There is no private land ownership in China. Individuals and entities are permitted to acquire land use rights for specific purposes. We, including our wholly owned
subsidiary Great Plastics, were granted land use rights for our facilities in Sanmen County and Songmen Town, which extend until between 2053 and 2060.
In the U.S., in October 2013, we committed with the Pennsylvania Department of Commerce to invest and build a factory in Allentown, Pennsylvania. On February
27, 2014, Fuling signed a lease of premises in Allentown, Pennsylvania for general office, manufacturing and warehousing purposes. The Allentown project contemplates
construction of the factory, renovation of the rented premises in Allentown and the purchase and installation of 12 production lines of manufacturing equipment.
On December 20, 2018, we, as a guarantor, through Mayenco as the lessee, signed a lease agreement for certain property located in Interpuerto Monterrey Industrial
Park, Mexico to use as our factory. The building is 7,804 m2 (approximately 84,002 square feet).
42
Table of Contents
Following is a list of our properties, including the first four, which we lease:
Transferee/
Lessee/Owner
Fuling USA
Fuling USA
Fuling USA
Taizhou Fuling
Taizhou Fuling
Taizhou Fuling
Taizhou Fuling
Taizhou Fuling
Taizhou Fuling
Property
Land/Building
Use Term
Space
(m2)
Ground
Floor Area
(m2)
Productive
Capacity
(ton)
Extent of
Utilization
Products
Produced
Commercial/industrial space
at 6690 Grant Way, Suite 1,
Allentown, PA 18106
2014-03-01 until
2024-05-31
Warehouse at 6370
Hedgewood Drive, Suite
120, Allentown, PA 18106
2016-06-01 until
2021-05-31
Industrial unit at Ave.
Gomez Morin No. 955 L-
317, Col. Montebello, San
Pedro Garza García, C.P.
66279.
Factory building at 8
Shengpan Road,
Guanweitong Village,
Wenqiao County
2018-12-20 until
202023-02-20
2019-01-01 until
2020-12-31
Land at 88 Jintang S Rd,
Eastern New District,
Wenling City
2016-04-14 until
2066-04-06
8,175.47
1,579
2,400
100%
Straws
5,470.92
10,000
100%
N/A
0%
Expect to be paper
straws, paper cups
and plastic straws
5,120.00
6,000
100%
Knives and forks
95,833.00
N/A
N/A
N/A
Factory buildings and
warehouse at 88 Jintang S
Rd, Eastern New District,,
Wenling City
Until 2066-04-06
54,000.00
51,700
90%
Mainly cups,
knives, straws,
forks, plates and
bowls
Non-residential building in
Ximen Village, Songmen
Town
No expiration
(rights acquired
2000-04-27)
Non-residential building in
Ximen Village, Songmen
Town
No expiration
(rights acquired
2000-04-27)
Land in South of Binhai
Road, Songmen Town
2007-03-27 until
2053-03-10
177.58
668.89
(rent out)
N/A
N/A
(rent out)
N/A
N/A
13,996.79
13,970
100%
Taizhou Fuling
Land in South of Binhai
Road, Songmen Town
2007-03-27 until
2055-01-14
14,076.80
Taizhou Fuling
Taizhou Fuling
Non-residential building in
South of Binhai Road,
Songmen Town
2013-07-25 until
2053-03-10
Non-residential building in
South of Binhai Road,
Songmen Town
2013-07-25 until
2053-03-10
491.05
1,471.22
43
Mainly knives,
forks, paper cups,
plates and bowls
Same as above
Same as above
Same as above
Table of Contents
Taizhou Fuling
Taizhou Fuling
Taizhou Fuling
Taizhou Fuling
Non-residential building in
South of Binhai Road,
Songmen Town
2013-07-25 until
2053-03-10
Non-residential building in
South of Binhai Road,
Songmen Town
2013-07-25 until
2053-03-10
Non-residential building in
South of Binhai Road,
Songmen Town
2013-07-25 until
2053-03-10
Non-residential building in
South of Binhai Road,
Songmen Town
2013-07-25 until
2055-01-14
2,559.28
1,847.10
3,694.20
7,717.56
Same as above
Same as above
Same as above
Same as above
Taizhou Fuling
Land in Southeast Industrial
Zone, Songmen Town
2015-01-29 until
2065-01-15
2,576.00
N/A
N/A
N/A
(1) The dormitory has 130 rooms, and is able to accommodate 350 employees. Currently 90 rooms are occupied by 212 employees.
Fixed assets at our properties consist of office equipment, buildings, structures, ancillary facilities, and equipment for production and packaging of plastic foodservice
disposals including plastic food containers, drinking straws, cutlery, cups and plates, and others.
Some of our real property and fixed assets are encumbered by secured loans from our creditors. For example, Agricultural Bank of China Taizhou Branch has
encumbrances on Taizhou Fuling’s land use right and building ownership right in the property located at 88 Jintang S Rd, Eastern New District, Wenling City, to guarantee all
of our loans with Agricultural Bank of China from June 27, 2018 to September 28. Bank of China Wenling Branch has encumbrances on Taizhou Fuling’s land use right and
building ownership right in the property located at South of Binhai Road, Songmen town. The term of our loan with Bank of China is from March 26, 2018 to March 26, 2023.
None of our property is affected by any environmental issues that may affect our use of the property. At present, our plans to further develop, expand or improve these
properties are funded through proceeds from our initial public offering and through our operating cash flows. Regarding details of our Allentown expansion and Wenling
expansion, please see “Item 4. Information on the Company – B. Business review.”
In addition to our property rights, we also currently have agreements to warehouse our products for delivery to customers. We pay storage and handling fees based on
the quantity of goods we are warehousing at most of such facilities. We expect to devote part of such facility to warehousing our products prior to delivering to our customers.
We may, from time to time, enter into new agreements to meet our warehousing needs.
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Table of Contents
Plant
Currently, we have the following factories, three in China, one in U.S., and one in Mexico.
1. Wenqiao factory: 8 Shengpan Road, Guanweitong Village, Wenqiao County, Wenling City, Zhejiang Province, China
2.
Songmen factory: South of Binhai Road, Songmen Town, Wenling City, Zhejiang Province, China
3. Wenling factory: 88 Jintang S Rd, Eastern New District, Wenling City, Zhejiang Province, China
4. Allentown factory: 6690 Grant Way, Allentown, PA, USA
5. Mexico factory: Ave. Gomez Morin No. 955 L-317, Col. Montebello, San Pedro Garza García, C.P. 66279
We are in the process of constructing our Wenling factory and renovating our Mexico factory. Regarding details to our material plans to these projects, please see
“Item 4. Information on the Company —B. Business Review”.
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
Our injection molding machine is also called an injection machine. It is our main molding equipment using plastic molding to make thermoplastic or
Machine
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
Our four-layer co-extrusion sheet machine is mainly suitable for PP, PS and other raw materials, production of various high-grade thermalformed
Sheet Machine
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.
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Table of Contents
From 2013 to 2018, we invested approximately $26.8 million on advanced equipment and technology to increase our productivity levels, increasing our annual per-
production worker output from approximately $102,562 in 2013 to approximately $141,920 in 2018, an important 38% performance improvement.
We have established an automation department in 2015 to work on research and development for that aspect of our manufacturing process. We believe we still have
room to continue to automate our production processes and enjoy additional savings in labor expenses and increased productivity.
The following pictures show some of the automation in our factories and product lines.
Injection Molding Machine (including robotic arm) in our Songmen factory.
46
Table of Contents
High-Speed Plastic Molding Machines (Computer Controlled) in our Sanmen factory.
47
Table of Contents
Four-Layer Co-Extruded Sheet Machine in our Sanmen factory.
Item 4A.
Unresolved Staff Comments
None.
48
Table of Contents
Item 5.
Operating and Financial Review and Prospects
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and
related notes that appear in this annual report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that
reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or
contribute to these differences include those discussed below and elsewhere in this annual report, particularly in “Risk Factors.”
A. Operating Results
Overview of Company
We are a specialized production and distribution company for environmentally-friendly plastic and paper 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 and paper serviceware products are made from environmentally-friendly material. Our products include disposable cutlery, drinking straws, cups and plates
and other plastic products. Our largest customer base is in the United States. Our production facilities include four factories in Zhejiang Province, China and one factory in
Pennsylvania, U.S., and we have obtained ISO9001 quality management system, ISO14001 environmental management system, HACCP, FDA food facility registration and
GMP certifications. These certifications are crucial for businesses like ours that serve some of the most sophisticated purchasers of foodservice disposables in the world.
Our primary raw materials in production of our products include PP, GPPS, HIPS and PET, which are extracted from crude oil. Thus, our cost of raw material is
highly impacted by fluctuations in the price of oil. Cost of revenues mainly includes costs of raw materials, costs of direct labor, utilities, depreciation expenses and other
overhead.
Our largest product category is disposable cutlery. It includes forks, knives, spoons, general, specialized and multipurpose utensils (for instance, the spork), both in
single- and multi-utensil packages. It accounted for 48%, 50% and 52% of our revenue for the years ended December 31, 2018, 2017 and 2016, respectively, and we believe it
will continue to be a key area for growth in the coming years. Our other product categories are (i) drinking straws, (ii) cups and plates and (iii) other plastics products, which
accounted for 17%, 27% and 8% of the total sales respectively for the year ended December 31, 2018, 15%, 27% and 8% of the total sales respectively for the year ended
December 31, 2017 and 14%, 27% and 7% of the total sales respectively in the year ended December 31, 2016.
Direct Link, one of our subsidiaries was incorporated in the United States in 2011 and is engaged in the distribution of our products in the U.S. In May 2014, Fuling
Plastic USA, Inc. (“Fuling USA”) was incorporated in the Commonwealth of Pennsylvania as a wholly-owned subsidiary of Taizhou Fuling. Fuling USA has established the
Company’s first production factory in the U.S. and principally engages in the production of plastic drinking straw items. We have not established any subsidiaries in Europe and
we rely on the sales forces located in China to export our products to European countries. In September 2016, Wenling Changli Import and Export Co., Ltd (“Wenling Changli”)
was established in Wenling, China as a wholly-owned subsidiary of Taizhou Fuling. Wenling Changli principally engages in the export of materials to our Allentown facility.
On November 22, 2018, Great Plastics signed sales contracts with a third party to sell the land and buildings previously used as one of its manufacturing factories in
China (aka, the “Sanmen Factory”) for total cash consideration of RMB 40.2 million (approximately US$5.8 million). We sold all related machines and equipments to Taizhou
Fuling and Zhejiang Great New Materials Co., Ltd. (“Great NM”). Great NM is a company owned by direct relatives of Taizhou Fuling’s officials. We plan to dissolve Great
Plastics in the third quarter of 2019.
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Table of Contents
In December 2018, the Company announced its plan to set up a manufacturing factory (the “Mexico Factory”) in Monterrey, Mexico. In December 2018, the
Company signed a building lease with Interpuerto Industrial Park in Monterrey, Mexico and a service agreement with a local shelter service company to help with
administrative, accounting, compliance, import/export, human resources, etc., at the Mexico Factory. Factory remodeling is expected to start in April 2019, followed by
equipment installation and testing and worker recruitment in May. We expect that the first phase of the Mexico Factory will have an annual design capacity of 10,000 tons and
will be primarily used for producing paper straws and plastic straws and paper cups serving the U.S. market. We expect to launch commercial production at the Mexico Factory
around July 2019.
As of March 10, 2019, our products are sold in 22 countries. Our customers now include Subway, Wendy’s, Burger King, Taco Bell, KFC (China only), Wal-Mart,
and McKesson.
In 2018, we supplied five of the six largest fast food restaurant chains in the United States, based on U.S. system-wide sales amount as published by QSR Magazine.
We estimate we supplied the following percentages of these customers’ products in the United States in 2018. These percentages are management’s best estimates, based on
orders from such customers and understanding of other supplier relationships. Sales to these five customers amounted in the aggregate to 21.5% of our total revenues in the year
ended December 31, 2018.
Customer
A
B
C
D
E
Cutlery
Straws
100%
60%
30%
*
*
Courtesy Cups
*
*
*
*
*
100%
35%
33%
100%
15%
*
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.
In 2017, we supplied five of the six largest fast food restaurant chains in the United States, based on U.S. system-wide sales amount as published by QSR Magazine.
We estimate we supplied the following percentages of these customers’ products in the United States in 2017. These percentages are management’s best estimates, based on
orders from such customers and understanding of other supplier relationships. Sales to these five customers amounted in the aggregate to 23.6% of our total revenues in the year
ended December 31, 2017.
Customer
A
B
C
D
E
Cutlery
Straws
100%
60%
30%
*
*
Courtesy Cups
*
*
*
*
*
100%
35%
33%
100%
15%
*
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.
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Table of Contents
In 2016, we supplied five of the six largest fast food restaurant chains in the United States, based on U.S. system-wide sales amount as published by QSR Magazine.
We estimate we supplied the following percentages of these customers’ products in the United States in 2016. These percentages are management’s best estimates, based on
orders from such customers and understanding of other supplier relationships. Sales to these five customers amounted in the aggregate to 23.5% of our total revenues in the year
ended December 31, 2016.
Customer
A
B
C
D
E
Cutlery
Straws
100%
45%
24%
*
*
Courtesy Cups
*
*
*
*
*
70%
45%
*
100%
15%
*
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.
Region
United States
Europe
Canada
China
Other Countries
Total
Revenue by Geographic Area
(All amounts, other than percentages, in thousands of U.S. dollars)
Year Ended
December 31, 2018
Year Ended
December 31, 2017
Year Ended
December 31, 2016
Amount
Amount
Amount
$
$
$
$
$
$
118,308
6,622
1,636
8,286
3,812
138,664
85.32% $
4.78% $
1.18% $
5.98% $
2.75% $
$
51
106,564
6,101
1,944
7,741
1,859
124,209
85.79% $
4.91% $
1.57% $
6.23% $
1.50% $
$
92,730
3,173
982
3,839
1,597
102,321
90.63%
3.10%
0.96%
3.75%
1.56%
Table of Contents
Government Policy May Impact our Business and Operating Results.
Factors Affecting Our Results of Operations
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, such as the tariff policies.
World crude oil prices may impact our profitability.
The price of our products’ main raw material is closely associated with that of crude oil. Fluctuating oil prices impact not only the cost of plastic resin, but also
transportation costs. Normally, our customers and we mutually agree to adjust our price according to raw material price fluctuation. However, if we are unable to do that in the
future, oil price fluctuation will impact our profitability.
The fast food industry is expected to grow slowly.
Our major customers operate in fast food industry in the U.S. The industry is expected to perform marginally better over the next five years as the U.S. economy
improves and consumers continue to seek convenient meal options. While no severe revenue declines are expected, fast food restaurants will continue to operate in a slow-
growth environment. Successful operators will need to adapt to changing consumer preferences as the traditional concept of fast food evolves to include a wider variety of
options. As plenty of opportunities remain for new fast food concepts and products, the industry’s long era of growth is far from over. Over the past five years, the Fast Food
Restaurants in the US industry has grown by 3.8% to reach revenue of $256 billion in 2018. Over the past five years, the Global Fast Food Restaurants industry has grown by
3.5% to reach revenue of $668 billion in 2018. In addition, the demand for foodservice disposables in the U.S. is projected to increase 3.9% per year to $21.9 billion in
2019. Global foodservice disposables market is expected to reach $82.1 billion by 2025.
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. In addition, larger companies tend to have more
resources and opportunities to deal with the higher tariffs on products and/or raw materials exported from China to U.S. 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.
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Table of Contents
Exchange rate fluctuations may significantly impact our business and profitability.
We sell a majority of our products in the United States (approximately 85.3%, 85.8% and 90.5% based on the revenues for the year ended December 31, 2018, 2017,
and 2016). Historically, we have relied on lower wages and favorable exchange rates in China to make our products sold abroad competitive in price. As China’s currency has
fluctuated significantly against the U.S. dollar in the past year, our advantage in price competitiveness might be impacted. While having already begun to diversify risk by
moving some of our manufacturing to the United States, we anticipate continuously producing the majority of our products in China. To the extent the Chinese RMB
appreciates, our products could become more expensive and, as a result, less attractive to potential customers in other countries. Currently we do not have any foreign currency
net investments which are hedged by currency borrowings and other hedging instruments.
The following table summarizes the results of our operations during the fiscal years ended December 31, 2018 and 2017, respectively, and provides information
regarding the dollar and percentage increase or (decrease) during such years.
Results of Operations
Statement of Operations Data:
Amount
As % of Sales
Amount
As % of Sales
(All amounts, other than percentages, in thousands of U.S. dollars)
2018
2017
Amount
Increase
(Decrease)
Percentage
Increase
(Decrease)
$
Revenues
Cost of goods sold
Gross profit
Operating expenses
Selling expenses
G&A expenses
R&D expenses
Total operating expenses
Income from operations
Interest expense, net
Subsidy income
Investment income
Foreign currency transaction gain (loss)
Other income, net
Total other income (expenses)
Income before income taxes
Provision for income taxes
Net income from continuing operations
$
Net loss from discontinued operations, net of tax
$
Net income
138,664
108,914
29,750
7,830
8,323
3,431
19,584
10,166
(1,736)
1,706
(9)
781
66
808
10,974
1,127
9,847
(88)
9,759
100% $
79%
21%
124,209
98,077
26,132
100% $
79%
21%
14,455
10,837
3,618
6,835
7,254
2,953
17,042
9,090
(924)
1,012
-
(175)
51
(36)
9,054
788
8,266
(1,974)
6,291
6%
6%
2%
14%
7%
(1)%
1%
0%
1%
0%
1%
8%
1%
7% $
0%
7% $
53
6%
6%
2%
14%
7%
(1)%
1%
-%
0%
0%
0%
7%
1%
7% $
2%
5% $
995
1,069
478
2,542
1,076
(812)
694
(9)
956
15
844
1,920
339
1,581
1,886
3,468
11.6%
11.0%
13.8%
14.6%
14.7%
16.2%
14.9%
11.84%
87.9%
68.6%
-
(546.3)%
29.4%
(2,344.4)%
21.2%
43.0%
19.1%
95.5%
55.1%
Table of Contents
The following table summarizes the results of our operations during the fiscal years ended December 31, 2017 and 2016, respectively, and provides information
regarding the dollar and percentage increase or (decrease) during such years.
Statement of Operations Data:
Amount
As % of Sales
Amount
As % of Sales
(All amounts, other than percentages, in thousands of U.S. dollars)
2017
2016
Amount
Increase
(Decrease)
Percentage
Increase
(Decrease)
$
Revenues
Cost of goods sold
Gross profit
Operating expenses
Selling expenses
G&A expenses
R&D expenses
Total operating expenses
Income from operations
Interest expense, net
Subsidy income
Foreign currency transaction gain (loss)
Other income, net
Total other income (expenses)
Income before income taxes
Provision for income taxes
$
Net income from continuing operations
Net loss from discontinued operations, net of tax
$
Net income
Revenues.
124,209
98,077
26,132
6,835
7,254
2,953
17,042
9,090
(924)
1,012
(175)
51
(36)
9,054
788
8,266
(1,974)
6,291
100% $
79%
21%
102,321
77,130
25,191
6%
6%
2%
14%
7%
(1)%
1%
0%
0%
0%
7%
1%
7% $
2%
5% $
5,955
6,277
2,356
14,588
10,603
(562)
1,647
57
65
1,207
11,810
1,561
10,249
(2,306)
7,943
100% $
75%
25%
6%
6%
2%
14%
10%
(1)%
2%
0%
0%
1%
12%
2%
10% $
2%
8% $
21,888
20,947
941
880
977
597
2,454
(1,513)
(362)
(635)
(232)
(14)
(1,243)
(2,756)
(773)
(1,983)
332
(1,652)
21.4%
27.2%
3.7%
14.8%
15.6%
25.3%
16.8%
(14.3)%
64.4%
(38.6)%
(407.0)%
(21.5)%
(103.0)%
(23.3)%
(49.5)%
(19.3)%
13.4%
(20.8)%
Revenues increased by approximately $14.5 million, or 11.6%, to approximately $138.7 million in 2018 from approximately $124.2 million in 2017. The increase in
revenues was primarily driven by a 8.8% increase of sales volume and a 2.6% increase in blended average selling price.
Revenues increased by approximately $21.9 million, or 21.4%, to approximately $124.2 million in 2017 from approximately $102.3 million in 2016. The increase in
revenues was primarily driven by a 15.4% increase of sales volume and a 5.1% increase in blended average selling price.
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Table of Contents
Revenues from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016 were approximately $5.6 million, $3.0 million, and
$2.6 million, respectively and were included in net loss from discontinued operations.
Revenue by Product Type in 2018 and 2017
(All amounts, other than percentages, in thousands of U.S. dollars)
2018
2017
Amount
% of
Sales
Amount
% of
Sales
Variance
Amount
Increase
(Decrease)
Percentage
Increase
(Decrease)
66,559
23,573
37,439
11,093
138,664
48% $
17%
27%
8%
100% $
62,104
18,631
33,537
9,937
124,209
50% $
15%
27%
8%
100% $
4,455
4,942
3,902
1,156
14,455
Revenue by Product Type in 2017 and 2016
(All amounts, other than percentages, in thousands of U.S. dollars)
2017
2016
Amount
% of
Sales
Amount
% of
Sales
Variance
Amount
Increase
(Decrease)
Percentage
Increase
(Decrease)
62,104
18,631
33,537
9,937
124,209
50% $
15%
27%
8%
100% $
53,207
14,325
27,627
7,162
102,321
52% $
14%
27%
7%
100% $
8,897
4,306
5,910
2,775
21,888
7%
27%
12%
12%
12%
17%
30%
21%
39%
21%
$
$
$
$
Cutlery
Straws
Cups and plates
Others
Total
Cutlery
Straws
Cups and plates
Others
Total
Cutlery
Revenue from cutlery increased by $4.5 million, or 7%, from $62.1 million in 2017 to $66.6 million in 2018. Sales volume of cutlery increased 3.0% or 0.9 million
kilograms to 30.3 million kilograms. Average selling price for cutlery increased 4.1% or $0.09 per kilogram, to $2.20 per kilogram for the year of 2018.
Revenue from cutlery increased by $8.9 million, or 17%, from $53.2 million in 2016 to $62.1 million in 2017. Sales volume of cutlery increased 10.6% or 2.8 million
kilograms to 29.4 million kilograms. Average selling price for cutlery increased 5.6% or $0.11 per kilogram, to $2.11 per kilogram for the year of 2017.
Straws
Revenue for straws increased by $4.9 million, or 27% in 2018 to $23.6 million compared with revenue of $18.6 million in 2017. In 2018, the quantity sold increased by
1.6 million kilograms or 86.7% compared to that in 2017. The average selling price of straws decreased by $3.23 per kilogram, or 32.2% to $6.80 per kilogram in 2018. By
shifting more of our straw production from China to U.S. and Mexico, we continued to improve our competitiveness and large QSR customers are looking to increase their
purchases of straws from us. We expect our sales volume will continue to increase in this category.
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Revenue for straws increased by $4.3 million, or 30% in 2017 to $18.6 million compared with revenue of $14.3 million in 2016. In 2017, the quantity sold decreased
by 0.3 million kilograms or 15.2% compared to that in 2016. The average selling price of straws increased by $3.49 per kilogram, or 53.3% to $10.03 per kilogram in 2017. By
shifting more of our straw production from China to U.S., we continued to improve our competitiveness and large QSR customers are looking to increase their purchases of
straws from us.
Our Allentown factory began operation in 2015 and has been 100% devoted solely to straw manufacturing. In 2018, 2017 and 2016, the Allentown factory
manufactured 2,302,230 kilograms, 1,736,530 kilograms and 1,326,699 kilograms of straws respectively.
Great Plastics specialized in straws production. The production that Great Plastics performed will be completely absorbed by Taizhou Fuling and some may flow over
to Mexico when it starts up.
Cups and plates
Revenue for cups and plates increased by $3.9 million, or 12% in 2018 to $37.4 million compared with revenue of $33.5 million in 2017. Sales volume increased by
10.7% compared to 2017. The average selling price increased from $3.16 to $3.19 per kilogram. We will continue to experience higher growth in this category as the market
looks for substitutes for Styrofoam cups and plates which we don’t make. Our more environmentally friendly products in paper and biodegradable plastic materials are the most
popular alternatives.
Revenue for cups and plates increased by $5.9 million, or 21% in 2017 to $33.5 million compared with revenue of $27.6 million in 2016. Sales volume increased by
31.1% compared to 2016. The average selling price decreased from $3.42 to $3.16 per kilogram. Growth in this product category continues to look promising now that we have
our fourth Chinese factory fully operational and there are no more capacity constraints.
Other products
Other products include products for family use, party and other entertainment purposes.
Revenue from other products increased by $1.2 million, or 12% in 2018 to $11.1 million compared with revenue of $9.9 million in 2017. The revenue increase was
mainly due to an increase of 9.7% in sales volume and a 1.7% increase in average selling price.
Revenue from other products increased by $2.8 million, or 39% in 2017 to $9.9 million compared with revenue of $7.2 million in 2016. The revenue increase was
mainly due to an increase of 39.8% in sales volume and a 0.8% decrease in average selling price.
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Region
United States
Europe
China
Canada
Others
Total
Region
United States
Europe
China
Canada
Others
Total
Revenue by Geographic Area in 2018 and 2017
(All amounts, other than percentages, in thousands of U.S. dollars)
2018
2017
Year-over Year Increase
Amount
%
Amount
%
118,308
6,622
8,286
1,636
3,812
138,664
85.3% $
4.8%
6.0%
1.2%
2.7%
100.0% $
106,564
6,101
7,741
1,944
1,859
124,209
Revenue by Geographic Area in 2017 and 2016
(All amounts, other than percentages, in thousands of U.S. dollars)
Amount
Increase
(Decrease)
Percentage
Increase
(Decrease)
85.8% $
4.9%
6.2%
1.6%
1.5%
100.0% $
11,744
521
545
(308)
1,953
14,455
11.0%
8.5%
7.0%
(15.8)%
105.1%
11.6%
2017
2016
Year-over Year Increase
Amount
%
Amount
%
106,564
6,101
7,741
1,944
1,859
124,209
85.8% $
4.9%
6.2%
1.6%
1.5%
100.0% $
92,730
3,173
3,839
982
1,597
102,321
Amount
Increase
(Decrease)
Percentage
Increase
(Decrease)
90.6% $
3.1%
3.8%
1.0%
1.6%
100.0% $
13,834
2,928
3,902
962
262
21,888
14.9%
92.3%
101.6%
98.0%
16.4%
21.4%
$
$
$
$
Our sales from the United States market grew significantly in 2018. It increased $11.7 million or 11.0% from $106.6 million in 2017 to $118.3 million in 2018. While
this demonstrated steady growth in the U.S. market, we continued to encounter strong competition especially in the wholesale distribution channel where everyone shops for
lower prices from Chinese importers. Our business with QSR customers continued to experience strong growth due to our U.S. manufacturing capability.
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Our sales from the United States market grew significantly in 2017. It increased $13.8 million or 14.9% from $92.7 million in 2016 to $106.6 million in 2017. While
this demonstrated steady growth in the U.S. market, we continued to encounter strong competition especially in the wholesale distribution channel where everyone shops for
lower prices from Chinese importers. Our business with QSR customers continued to experience strong growth due to our U.S. manufacturing capability.
Europe, China, and others markets all grew more than 7% in 2018. The Chinese market overtook the European market and became our second largest market in 2016.
Sales from the Chinese market increased by $0.5 million, or 7.0% from 2017 to 2018, and by $3.9 million, or 101.6% from 2016 to 2017 due to the significant increase of the
fast food market in China. As the Chinese fast food industry and consumer dining out behavior are catching up with the U.S. standards, our type of higher quality plastic and
paper disposable serviceware products will be in increasing demand.
Cost of goods sold.
Our cost of goods sold increased by approximately $10.8 million or 11.0% to approximately $108.9 million in 2018 from approximately $98.1 million in 2017, which
is consistent with sales growth in 2018. As a percentage of revenues, the cost of goods sold kept stable as 79.0% in 2018.
Our cost of goods sold increased by approximately $20.9 million or 27.2% to approximately $98.1 million in 2017 from approximately $77.1 million in 2016, which is
consistent with sales growth in 2017. As a percentage of revenues, the cost of goods sold increased by approximately 3.6% point to 79.0% in 2018 from 75.4% in 2017. Higher
oil prices led to increased raw material cost in the early part of 2017 and we were not able to completely pass on the increase to customers as the U.S. market is very competitive.
By the time the market reacted to the increase and willing to accept it, oil prices declined back down and took away our rationale to increase. In addition, labor cost continued to
rise in China putting pressure on gross margin. Our new factory should help us alleviate that going forward due to its advanced automation and higher efficiency, thus relying
less on manual labor.
Cost of goods sold from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016 were approximately $7.6 million, $3.1
million, and $2.5 million, respectively and were included in net loss from discontinued operations.
The portion of our products produced by third-party manufacturers in the years ended December 31, 2018, 2017 and 2016 were less than 1%. The associated impact
on our gross margins is very limited considering the portion.
Gross profit.
Our gross profit increased by approximately $3.6 million, or 13.8%, to approximately $29.8 million in 2018 from approximately $26.1 million in 2017. Gross profit
margin was 21.5% in 2018, as compared with 21.0% in 2017. The increase of 0.5% point was primarily attributable to lowered raw material unit cost, and higher average selling
price, offset by increased labor cost. Oil prices started to decrease from middle 2018 and decreased oil prices led to decreased raw material cost in 2018.
Our gross profit increased by approximately $0.9 million, or 3.7%, to approximately $26.1 million in 2017 from approximately $25.2 million in 2016. Gross profit
margin was 21.0% in 2017, as compared with 24.6% in 2016. The decrease of 3.6% point was primarily attributable to higher raw material cost and labor cost, partially offset by
higher average selling price. Continued from the oil price increase at the end of 2016, raw material prices in the first quarter of 2017 remained high, as well as transportation
costs. We were unable to implement a price increase until deep into the second quarter but by that time, oil prices went back down. We had less support to raise prices while
plastic resin prices remain higher for the most part of the year. Our price increases were not sufficient to offset our increase in costs.
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Our gross profit from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016 were approximately $(2.0) million, $(0.08)
million, and $0.05 million, respectively and were included in net loss from discontinued operations.
Our cost and gross profit by product types for fiscal year 2018 and 2017 are as follows:
(All amounts, other than percentages, in thousands of U.S. dollars)
Cutlery
Straws
Cups and plates
Others
Tax
Total
2018
2017
Variance
Cost
Gross Profit %
Cost
Gross Profit %
Cost Increase
(Decrease)
Gross Profit %
Increase
(Decrease)
$
$
55,546
19,605
25,050
8,277
436
108,914
16.5% $
16.8%
33.1%
25.4%
N/A
21.5% $
52,291
15,670
22,355
7,290
471
98,077
15.8% $
15.9%
33.3%
26.6%
N/A
21.0% $
3,255
3,935
2,695
987
(35)
10,837
6.2%
25.1%
12.1%
13.5%
N/A
11.1%
Cost of revenue for cutlery products increased by approximately $3.3 million to approximately $55.5 million in 2018 compared to $52.3 million in 2017. Gross profit
margin was 16.5% and 15.8%, respectively in 2018 and 2017. Gross margin increased due to a 4.1% increase in average selling price offset by a 0.3% increase in unit cost.
Cutlery represented the largest portion of sales at 48%.
Cost of revenue for straws was approximately $19.6 million in 2018 compared to approximately $15.7 million in 2017. The gross profit margin was approximately
16.8% in 2018 compared to 15.9% in 2017. The gross margin increased because average selling price declined 32% while unit cost declined 35%. Straw is a low margin product
but we are gaining market share especially in the Quick Service Restaurants (“QSR”) segment due to our manufacturing in the U.S. and price competitiveness. We are
improving efficiency at our U.S. operation and lowering manufacturing unit cost. It is an important product to lead into selling other product categories in the QSR segment.
Cost of revenue for cups and plates was around $25.1 million and $22.4 million in 2018 and 2017, respectively. Gross profit margin was 33.1% in 2018 compared to
33.3% in 2017. Average selling price increased 1% and unit cost declined 2% in 2018. Cups and plates remained our highest gross margin product category and we plan to
focus on growing this category by engineering new product designs and developing new materials that would improve profit margin.
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Our cost and gross profit by product types for fiscal year 2017 and 2016 are as follows:
(All amounts, other than percentages, in thousands of U.S. dollars)
Cutlery
Straws
Cups and plates
Others
Tax
Total
2017
2016
Variance
Cost
Gross Profit %
Cost
Gross Profit %
Cost Increase
(Decrease)
Gross Profit %
Increase
(Decrease)
$
$
52,291
15,670
22,355
7,290
471
98,077
15.8% $
15.9%
33.3%
26.6%
N/A
21.0% $
43,729
11,204
16,818
5,043
335
77,129
17.8% $
21.8%
39.1%
29.6%
N/A
24.6% $
8,562
4,466
5,537
2,247
136
20,948
(2.0)%
(5.9)%
(5.8)%
(3.0)%
N/A
(3.6)%
Cost of revenue for cutlery products increased by approximately $8.6 million to approximately $52.3 million in 2017 compared to $43.7 million in 2016. Gross profit
margin was 15.8% and 17.8%, respectively in 2017 and 2016. Gross margin decreased due to a 8% increase in unit cost partially offset by a 6% increase in average selling
price. Price increases were delayed due to market competition and the magnitude was not sufficient to offset increase in material costs. Cutlery represented the largest portion of
sales at 50%.
Cost of revenue for straws was approximately $15.7 million in 2017 compared to approximately $11.2 million in 2016. The gross profit margin was approximately
15.9% in 2017 compared to 21.8% in 2016. The gross margin decreased because average selling price increased 53% while unit cost rose 65%. Straw is a low margin product
but we are gaining market share especially in the QSR segment due to our manufacturing in the U.S. and price competitiveness. We are improving efficiency at our U.S.
operation and lowering manufacturing unit cost. It is an important product to lead into selling other product categories in the QSR segment.
Cost of revenue for cups and plates was around $22.4 million and $16.8 million in 2017 and 2016, respectively. Gross profit margin was 33.3% in 2017 compared to
39.1% in 2016. Average selling price declined 7% and unit cost increased 1% in 2017. Cups and plates remained our highest gross margin product category and we plan to
focus on growing this category by engineering new product designs and developing new materials that would improve profit margin.
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 $995,000, or 14.6% to approximately $7.8 million in 2018 compared to approximately $6.8 million in 2017. As a
percentage of sales, our selling expenses were 5.6% and 5.5% in 2018 and 2017, respectively. The increase in selling expenses is consistent with the increase of revenues.
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Selling expenses increased by approximately $880,000, or 14.8% to approximately $6.8 million in 2017 compared to approximately $6.0 million in 2016. As a
percentage of sales, our selling expenses were 5.5% and 5.8% in 2017 and 2016, respectively. The increase in selling expenses is consistent with the increase of revenues.
Selling expenses from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016 were approximately $496,000, $786,000, and
$902,000, respectively and were included in net loss from discontinued operations.
General and administrative expenses.
Our general and administrative expenses increased by approximately $1.1 million or 14.7%, to approximately $8.3 million in 2018 from approximately $7.3 million in
2017. As a percentage of revenues, general and administrative expenses were 6.0% and 5.8% in 2018 and 2017, respectively. The level of general and administrative expenses
increase was normal based on our substantial increase in business. We were able to keep administrative expense increase to a minimum to generate more operating profits.
Our general and administrative expenses increased by approximately $1.0 million or 15.6%, to approximately $7.3 million in 2017 from approximately $6.3 million in
2016. As a percentage of revenues, general and administrative expenses were 5.8% and 6.1% in 2017 and 2016, respectively. The level of general and administrative expenses
increase was normal based on our substantial increase in business. We were able to keep administrative expense increase to a minimum to generate more operating profits.
Our general and administrative expenses from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016 were approximately
$750,000, $627,000, and $1,234,000, respectively and were included in net loss from discontinued operations.
Research and development expenses.
Our research and development expenses increased approximately $478,000, or 16.2% to approximately $3.4 million in 2018 compared with approximately $3.0 million
in 2017. We expect to increase our R&D expenditures proportionate to our revenue increase, as we continue to conduct research and development activities, especially seeking
to increase the use of environmentally-friendly materials, develop biodegradable materials and reduce reliance on fossil-based raw materials.
Our research and development expenses increased approximately $598,000, or 25.4% to approximately $3.0 million in 2017 compared with approximately $2.4 million
in 2016. We expect to increase our R&D expenditures proportionate to our revenue increase, as we continue to conduct research and development activities, especially seeking
to increase the use of environmentally-friendly materials, develop biodegradable materials and reduce reliance on fossil-based raw materials.
Our research and development expense from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016 were approximately
$0, $ 0, and $0, respectively and were included in net loss from discontinued operations.
Interest income (expense).
Our net interest expense increased by approximately $0.8 million to approximately $1.7 million in 2018, from approximately $0.9 million in 2017.
Our net interest expense increased by approximately $0.3 million to approximately $0.9 million in 2017, from approximately $0.6 million in 2016.
Our net interest expense from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016 were approximately $105,000,
$183,000, and $211,000, respectively and were included in net loss from discontinued operations.
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The average interest rates for our average outstanding loans in 2018, 2017 and 2016 were 4.89%, 5.07% and 4.37%, respectively. At the time of an initial loan
application, different commercial banks determine loan interest rates based on various factors, including general economic conditions in China, internal bank lending policies,
the applicant’s credit standing and relative bargaining power. For the year ended December 31, 2018, 2017 and 2016, People’s Bank of China has kept its prevailing interest
rate at 4.3%
The bank loan balances as of December 31, 2018, 2017 and 2016 were $19.9 million, $27.4 million and $15.1 million respectively. The average amounts of loan
outstanding for 2018, 2017 and 2016 were $23.7 million, $21.3 million and $13.0 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 2018 was higher than 2017 due to expansion of our business. The average amount of loan
outstanding in 2017 was higher than 2016 due to expansion of our business.
There is no interest expense associated with notes payable but we are subject to a bank charge. The bank charge is usually 0.05% of the notes payable issued. For the
years ended December 31, 2018, 2017 and 2016, bank charges related to notes payable were immaterial.
Subsidy income. Our government subsidy income was approximately $1.7 million in 2018 compared to approximately $1.0 million in 2017. Our government subsidy
income was approximately $1.0 million in 2017 compared to approximately $1.6 million in 2016. Our government subsidy income was all granted by local governments in
recognizing our achievements in various areas. All subsidies we received in 2018, 2017 and 2016 were one-time grants and may not occur again in the future. We cannot predict
the likelihood or amount of any future subsidies.
Our government subsidy income from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016 were approximately $39,000,
$31,000, and $217,000, respectively and were included in net loss from discontinued operations.
Other income (expense).
Other income was approximately $66,000 and $52,000 in 2018 and 2017, respectively. The significant increase is attributed to increased income from disposal of
property, plant, and equipment in 2018.
Other income was approximately $52,000 and $65,000 in 2017 and 2016, respectively. The significant decrease is attributed to increased loss from disposal of
property, plant, and equipment in 2017.
Other expense from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016 were approximately $407,000, $(71,000), and
$218, respectively and were included in net loss from discontinued operations.
Foreign currency translation gain (loss). The Company recorded $0.8 million, $(0.2) million and $0.1 million of foreign currency translation gain in 2018, 2017 and
2016, respectively.
Income before income taxes.
Our income before income taxes was approximately $10.9 million in 2018, an increase of approximately $1.9 million or 21.2% compared with approximately $9.1
million in 2017. The increase was primarily attributable to increased sales, increased gross margin, increased subsidy income, offset by increased cost of goods sold, increased
operating expense, and increased interest expenses as discussed above.
Our income before income taxes was approximately $9.1 million in 2017, a decrease of approximately $2.7 million or 23.3% compared with approximately $11.8
million in 2016. The decrease was primarily attributable to increased sales and gross margin offset by increased cost of goods sold, increased operating expense, and decreased
subsidy income as discussed above.
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Our income before income taxes from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016 were approximately $(2.8)
million, $(1.9) million, and $(1.8) million, respectively and were included in net loss from discontinued operations.
Provision for income taxes.
Our provision for income taxes was approximately $1.1 million in 2018, an increase of approximately $0.3 million or 42.9% from approximately $0.8 million in 2017.
The increase was due to the fact that more taxable income was generated from our Chinese subsidiaries compared to 2017. In 2018, taxable income generated from China was
$13.3 million compared to $8.7 million in 2017.
Our provision for income taxes was approximately $0.8 million in 2017, a decrease of approximately $1.2 million or 49.5% from approximately $1.6 million in 2016.
The decrease was due to the fact that less taxable income was generated from our Chinese subsidiaries compared to 2016. In 2017, taxable income generated from China was
$8.7 million compared to $15.1 million in 2016.
Our provision for income taxes from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016 were approximately $221,000,
$36,000, and $469,000, respectively and were included in net loss from discontinued operations.
B. Liquidity and Capital Resources
We are a holding company incorporated in the Cayman Islands. Total Faith, our BVI organized wholly owned subsidiary, owns Taizhou Fuling which in turn owns our
U.S. and China assets through its subsidiaries. We may need dividends and other distributions on equity from our PRC subsidiaries to satisfy our liquidity requirements.
Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, our PRC subsidiaries are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain
reserve funds until the total amount set aside reaches 50% of their respective registered capital. Our PRC subsidiaries may also allocate a portion of its after-tax profits based on
PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves are not distributable as cash dividends. We have relied on direct payments of
expenses by our subsidiaries (which generate revenues), to meet our obligations to date. To the extent payments are due in U.S. dollars, we have occasionally paid such amounts
in RMB to an entity controlled by our management capable of paying such amounts in U.S. dollars. Such transactions have been made at prevailing exchange rates and have
resulted in immaterial losses or gains on currency exchange but no other profit.
Construction in progress represents costs of construction incurred for the Company’s new plant and equipment. The Company started the first phase of the construction
for its facility expansion in China (“Phase I”) in April 2016 in China. For the year ended December 31, 2017, construction in progress of approximately $19.3 million was
completed and was transferred to property, plant and equipment for Phase I.
In the beginning of August 2017, the Company started its second phase of the construction for its facility expansion in China (“Phase II”). Phase II includes
construction of a new plant, an office building and two dormitory buildings. The construction is expected to be completed before the end of 2019 and the total construction cost
of Phase II is expected to be $13.1 million. For the year ended December 31, 2018, construction in progress of approximately $9.9 million was completed and was transferred to
property, plant and equipment for Phase II. The Company expects to fulfill the payments using cash generated from operating activities and additional loans borrowed from
local banks in case any shortage of cash on hand in the future. As of December 31, 2018, we had no purchase commitments for construction and machinery purchase. These
commitments represent the amount of agreements signed but not yet paid.
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As of December 31, 2018 and 2017, we had outstanding loans of approximately $27.1 million and $29.2 million from various banks and entities, respectively. To
secure this debt, we have pledged some of its properties and machinery, equipment, land use rights as well as other assets in China to several banks. Approximately $1.7 million
and $1.7 million worth of equipment was used as collateral for the loan from Pennsylvania Industrial Development Authority as of December 31, 2018 and 2017, respectively.
Further, although instruments governing the current debts incurred by our PRC subsidiaries do not have restrictions on their abilities to pay dividend or make other
payments to us, the lender may impose such restriction in the future. As a result, our ability to distribute dividends largely depends on earnings from our PRC subsidiaries and
their ability to pay dividends out of their earnings. We cannot assure you that our PRC subsidiaries will generate sufficient earnings and cash flows in the near future to pay
dividends or otherwise distribute sufficient funds to enable us to meet our obligations, pay interest and expenses or declare dividends.
As of December 31, 2018 and 2017, we had cash and cash equivalents of approximately $4.4 million and $4.1 million, respectively and restricted cash of
approximately $2.4 million and $3.8 million, respectively. As of December 31, 2018, we also had certificates of deposits of $0 million which will mature in December 2018. As
of December 31, 2017, we had certificates of deposits of $0.1 million which matured in December 2018. We did not have any other short-term investments. As of December
31, 2018, Our current assets were approximately $59.5 million, and our current liabilities were approximately $47.5 million, which resulted in a current ratio of 1.25:1. Total
FGI’s equity as of December 31, 2018 was approximately $64.7 million. As of December 31, 2017, our current assets were approximately $57.0 million, and our current
liabilities were approximately $55.56 million, which resulted in a current ratio of 1.03:1. Total FGI’s equity as of December 31, 2017 was approximately $57.8 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, proceeds from our initial public offering and loans from commercial banks. In China, long-term
loans are generally available; however, short-term loans are a more readily accessible source of financing. Long-term loans in China are usually approved by banks for capital
expenditures only, such as fixed asset construction or property acquisitions. Our working capital requirements are influenced by the level of our operations, the numerical
volume and dollar value of our sales contracts, the progress of execution on our customer contracts, and the timing of accounts receivable collections.
Based on our current operating plan, we believe that our existing resources, including cash generated from operations, proceeds from our initial public offering, bank
loans, bank notes payable, and advances from suppliers will be sufficient to meet our working capital requirement for our current operations over the next twelve months. We
expect to be able to refinance our short-term loans based on past experience and our good credit history. We do not believe failure to refinance our short term loans from
certain banks will have a significant negative impact on our normal business operations. Our related parties including our major shareholders and affiliate companies are willing
to provide us financial support. Although our operating cash flow was positive in 2018, 2017 and 2016, it is possible for us to have negative cash flow in the future, and for our
related parties to be unable or unwilling to provide us financial support as needed. If this happened, the failure to refinance our short-term loans could potentially affect our
capital expenditure and expansion of business.
During the period from January 1, 2019 to March 30, 2019, we repaid approximately $5.2 million bank loans and $1.8 million notes payable that become due. We also
borrowed approximately $7.4 million bank loans as well as approximately $2.0 million notes payable from various banks in China. All the loans and notes payable are short
term in nature and guaranteed by its shareholders, related parties and third parties. If we cannot refinance from commercial banks, our major shareholders and affiliate
companies could provide us financial support as needed. Lack of sufficient financial support from local banks or our related parties could potentially affect our capital
expenditure and expansion of business. We do not believe failure to refinance from certain banks will have significant negative impact on our normal business operations.
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The following table sets forth summary of our cash flows from continuing operations for the periods indicated:
(All amounts in thousands of U.S. dollars)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash
Cash, beginning of year
Cash, end of year
Operating Activities
2018
2017
2016
11,577
$
(8,732)
(2,772)
(1,147)
(1,074)
7,871
6,797
$
2,474 $
(14,346)
13,838
(356)
1,610
6,261
7,871 $
5,145
(23,648)
7,980
(401)
(10,924)
17,185
6,261
$
$
Net cash provided by operating activities was approximately $11.6 million in 2018, an increase of $9.1 million compared to cash provided by operating activities of
approximately $2.5 million in 2017. The increase in net cash provided by operating activities was primarily attributable to the following factors:
● Accounts receivable increased $5.5 million in 2018, compared with increase of $2.4 million in 2017. The increase in account receivable balance corresponded to the
trend of increase in sales. Our sales increased by 11.6% or $14.5 million in 2018 compared with 2017.
● Accounts payable increased by $5.2 million in 2018, compared with a decrease of $2.3 million in 2017. The increase was primarily financed by increase in long
term borrowings and increased purchase of inventory during 2018 for locking a lower purchase price of raw material.
Net cash provided by operating activities was approximately $2.5 million in 2017, a decrease of $2.7 million compared to cash provided by operating activities of
approximately $5.2 million in 2016. The decrease in net cash provided by operating activities was primarily attributable to the following factors:
● Accounts receivable increased $2.4 million in 2017, compared with increase of $6.7 million in 2016. The increase in account receivable balance corresponded to the
trend of increase in sales. Our sales increased by 31.3% or $27.1 million in 2017 compared with 2016.
● Accounts payable decreased by $2.3 million in 2017, compared with an increase of $5.5 million in 2016. The decrease was primarily due to more inventory
purchase in 2016.
Investing Activities
Net cash used in investing activities was approximately $8.7 million in 2018, a decrease of approximately $5.6 million from net cash used in investing activities of
approximately $14.3 million in 2017. The decrease in net cash used in investing activities in 2018 was primarily attributable to less spending associated with the construction in
progress in 2018 compared to 2017 because the Phase II construction is expected to be completed soon, and the cash receipt from disposal of Great Plastics property and
equipment in 2018.
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Net cash used in investing activities was approximately $14.3 million in 2017, a decrease of approximately $9.3 million from net cash used in investing activities of
approximately $23.6 million in 2016. The decrease in net cash used in investing activities in 2017 was primarily attributable to less spending associated with the construction in
progress in 2017 compared to 2016, as well as a payment made in 2016 for land use rights for $8.3 million that didn’t recur in 2017.
Financing Activities
Net cash used in financing activities was approximately $2.8 million in 2018, compared to approximately $13.9 million net cash provided from financing activities in
2017. The decrease in net cash provided from financing activities in 2018 was primarily attributable to in 2018 the Company made repayments from short term borrowings of
$39.6 million and in 2017 the Company made repayments of short term borrowings of $20.3 million. The Company repaid all outstanding borrowings and bank notes payable of
Great Plastics in 2018 as the Company plans to dissolve Great before the end of 2019.
Net cash provided from financing activities was approximately $13.9 million in 2017, compared to approximately $8.0 million in 2016. The increase in net cash
provided from financing activities in 2017 was primarily attributable to more proceeds from short term borrowings in 2017 compared with 2016. In 2017 the Company had
proceeds from short term borrowings of $31.2 million and in 2016 the Company has proceeds from short term borrowings of $23.7 million.
In 2016, we used capital expenditures primarily to develop a new factory in Wenling and continue to equip our Allentown facility. In 2017 and 2018, we continued our
capital expenditures in constructing Phase II of our new Wenling factory including purchasing machinery and equipment. Our material cash requirements in 2019 may include
(i) investments of approximately $5.8 million in the new production lines and the construction of manufacturing facilities in our new factory in China; (ii) purchase of
equipment and renovation of the factory for approximately $3.0 million for the Mexico factory. If the demand for our products is expected to grow in the coming years, we may
need to add additional manufacturing capacity in Wenling, China and in Allentown factory.
Our primary source of cash is currently generated from the sales of our products and bank borrowings in addition to proceeds from our initial public offering. In the
coming years, we will be looking to other sources, such as raising additional capital by issuing shares of stock, to meet our cash needs. While facing uncertainties in regards to
the size and timing of capital raises, we are confident that we can continue to meet operational needs solely by utilizing cash flows generated from our operating activities and
bank borrowings, as necessary.
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Loan Facilities
Short-term Borrowings
As of December 31, 2018, the details of all our short-term bank loans are as follows:
(All amounts in U.S. dollars)
Agricultural Bank of China (“ABC”)
China Merchants Bank (“CMB”)
Industrial and Commercial Bank of China (“ICBC”)
Bank of China (“BOC”)
East West Bank (“EWB”)
Postal Savings Bank of China (“PSBC”)
Pennsylvania Industrial Development Authority – current portion of long-term borrowing (see “long-term borrowing” below)
East West Bank loan – current portion of long-term borrowing (see “long-term borrowing” below)
Total
As of
December 31,
(1)
(2)
(3)
(4)
(5)
(6)
$
$
2018
8,622,194
1,696,441
4,557,315
2,724,793
2,000,000
-
89,898
200,000
19,890,641
(1) During the year ended December 31, 2018, Taizhou Fuling entered into a series of short-term bank loan agreements with ABC for a total amount of $8,622,194. The terms
of these loans are six months with variable interest rates based on the prevailing interest rates, respectively. The effective rates are from 4.57% to 5.15% per annum.
These loans were guaranteed by the assets of a third party guaranty company and a shareholder of the Company. The third party guaranty company charges 2% of total loan
amount.
(2) During year ended December 31, 2018, Taizhou Fuling entered into a series of short-term bank borrowing agreements with CMB for a total amount of approximately $6.3
million (RMB 43.4 million). The terms of these loans are five to twelve months with variable interest rates based on the prevailing interest rates. The effective rates were
from 2.40% to 6.09% per annum. The loans are guaranteed by Special Plastics and Taizhou Fuling’s general manager and Chair of the Board. As of December 31, 2018,
$4,586,234 had been repaid in full upon maturity.
(3) During the year ended December 31, 2018, Taizhou Fuling entered into a series of short-term loan agreements with ICBC for a total amount of $4,557,315. The terms of
these loans are five to twelve months with the interest rates ranged from 3.47% to 5.44% per annum.
(4) During the year ended December 31, 2018, Taizhou Fuling entered into a series of short-term bank borrowing agreements and other financing agreements with BOC. The
terms of the loans are three to twelve months, with fixed interest rates based on London InterBank Offered Rate (“LIBOR”) (for loans dominated in USD) or prime loan rates
issued by People’s Bank of China (for loans dominated in RMB), plus certain base points. The effective interest rates vary from 3.30% to 5.01% per annum. The loans to
Taizhou Fuling are guaranteed by the Chief Executive Officer (“CEO”).
(5) On March 9, 2017, Direct Link entered into a line of credit agreement with East West Bank for $2,000,000 for one year. The annual interest rate is equivalent to LIBOR rate
plus 2.75%. Direct Link was required to make restricted deposit of $41,900 for one year (which was released in June 2018) with an initial interest rate of 3.76% per annum.
The line of credit is guaranteed by FGI. The agreements require Direct Link to comply with certain financial covenants and ratios, including maintaining but not limited to
minimum debt service coverage ratio of 1.40 times and to maintain maximum total debt to equity ratio of 3.0 times. Direct Link will be measured semi-annually at June 30th
and December 31st. Direct Link was not in compliance as of December 31, 2018. On April 7, 2017, Direct Link drew down $1,500,000 with the effective rate of 3.86% per
annum. On December 1, 2017, Direct Link drew down another $500,000 with the effective rate of 4.45% per annum. Interest expense incurred on this loan for the year ended
December 31, 2018 and 2017 were $47,955 and $14,942, respectively. On March 14, 2018, East West Bank approved to extend the loan to June 9, 2018. On June 26, 2018,
East West Bank again approved to extend the loan to June 9, 2019. East West Bank waived financial covenant violations as at December 31, 2018.
(6)
In January 2018, Taizhou Fuling entered into a short-term bank loan agreement with PSBC for $987,881. The terms of the loan are twelve months. The effective rates are
2.95% per annum. As of December 31, 2018, this loan had been repaid prior to its maturity.
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As of December 31, 2018, land use rights in the amount of $7,821,842 and property and buildings in the amount of $14,071,515 were pledged for all the above loans.
As of December 31, 2017, the details of all our short-term bank loans are as follows:
(All amounts in U.S. dollars)
Agricultural Bank of China (“ABC”)
China Merchants Bank (“CMB”)
Industrial and Commercial Bank of China (“ICBC”)
Bank of China (“BOC”)
East West Bank (“EWB”)
Postal Savings Bank of China (“PSBC”)
Pennsylvania Industrial Development Authority – current portion of long-term borrowing (see “long-term borrowing” below)
East West Bank loan – current portion of long-term borrowing (see “long-term borrowing” below)
Total
As of
December 31,
(1)
(2)
(3)
(4)
(5)
(6)
$
$
2017
11,831,148
3,073,424
4,019,908
2,274,333
2,000,000
4,046,597
88,339
83,333
27,417,082
(1) During fiscal year 2017, Taizhou Fuling entered into a series of short-term bank loan agreements with ABC for a total amount of $11,831,148. The terms of these loans are
six to twelve months with variable interest rates based on the prevailing interest rates, respectively. The effective rates are from 4.57% to 4.90% per annum.
These loans were guaranteed by the assets of a third party guaranty company and a shareholder of the Company. The third party guaranty company charges 2% of total loan
amount.
(2)
In January, March, July and December 2017, Taizhou Fuling entered into four short-term bank borrowing agreements for approximately $4.5 million (RMB 29.4 million)
with CMB for twelve, six, six and twelve months, respectively. The effective rates were 6.09%, 2.67%, 1.99% and 6.09% per annum, respectively. The loans are guaranteed
by Special Plastics and Taizhou Fuling’s general manager and Chair of the Board. As of December 31, 2017, $1,398,970 had been repaid in full upon maturity.
(3) During fiscal year 2017, Taizhou Fuling entered into a series of short-term loan agreements with ICBC for a total amount of $7,092,174. The terms of these loans are five to
twelve months with the interest rates ranged from 2.14% to 5.00% per annum. As of December 31, 2017, $3,024,902 of them had been repaid upon maturity.
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(4) During fiscal year 2017, Taizhou Fuling entered into a series of short-term bank borrowing agreements and other financing agreements with BOC. The terms of the loans are
three to twelve months, with fixed interest rates based on London InterBank Offered Rate (“LIBOR”) (for loans dominated in USD) or prime loan rates issued by People’s
Bank of China (for loans dominated in RMB), plus certain base points. The effective interest rates vary from 1.97% to 5.57% per annum. The loans to Taizhou Fuling are
guaranteed by the Chief Executive Officer (“CEO”). The loans to Great Plastics are guaranteed by the CEO and Chair of the Board.
(5) On March 9, 2017, Direct Link entered into a line of credit agreement with East West Bank for $2,000,000 for one year. The annual interest rate is equivalent to LIBOR rate
plus 2.75%. Direct Link is required to make restricted deposit of $73,336 for one year with an initial interest rate of 3.76% per annum. The line of credit is guaranteed by
FGI. The agreements require Direct Link to comply with certain financial covenants and ratios, including maintaining but not limited to minimum debt service coverage ratio
of 1.25 times and to maintain maximum total debt to equity ratio of 3.0 times. Direct Link will be measured semi-annually at June 30th and December 31st. Direct Link was
not in compliance as of December 31, 2017. On April 7, 2017, Direct Link drew down $1,500,000 with the effective rate of 3.86% per annum. On December 1, 2017, Direct
Link drew down another $500,000 with the effective rate of 4.45% per annum. Interest expense incurred on this loan for the year ended December 31, 2017 was $46,182. On
March 14, 2018, East West Bank approved to extend the loan to June 9, 2018. Also East West Bank waived financial covenant violations as at December 31, 2017.
(6)
In November and December 2017, Taizhou Fuling entered into a series of short-term bank loan agreements with PSBC for $2,975,004 and $1,071,593, respectively. The
terms of these loans are twelve and five months, respectively. The effective rates are 2.65% and 4.15% per annum, respectively.
As of December 31, 2017, land use rights in the amount of $8,442,532 and property and buildings in the amount of $15,620,048 were pledged for all the above loans.
As of December 31, 2016, the details of all our short-term bank loans are as follows:
(All amounts in U.S. dollars)
China Merchants Bank (“CMB”)
Industrial and Commercial Bank of China (“ICBC”)
Bank of China (“BOC”)
Zhejiang Mintai Commercial Bank (“MTB”)
Pennsylvania Industrial Development Authority – current portion of long-term borrowing (see “Long-term Borrowing” below)
Total
As of
December 31,
(1)
(2)
(3)
(4)
$
2016
2,759,227
3,239,848
3,241,042
5,759,730
86,808
15,086,655
(1) During fiscal year 2016, Taizhou Fuling entered into a series of seven short-term bank loan agreements with CMB for five to twelve months. The interest rates ranged from
1.10% to 6.09% per annum. $1,440,000 of them had been repaid subsequent after December 31, 2016.
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(2)
In February 2016, Taizhou Fuling entered into a loan agreement with ICBC for $593,000 for five months, with fixed interest rate of 3.5%. This loan had been repaid upon
maturity.
In April 2016, Taizhou Fuling entered into a loan agreement with ICBC for $647,970 for five months, bearing a variable interest rate based on the prevailing interest rate set
by the People’s Bank of China at the time of borrowing, plus 161.6 base points. The effective rate was 5.92% per annum. This loan had been repaid upon maturity.
In July 2016, Taizhou Fuling entered into two loan agreements with ICBC for $575,973 and $575,973 respectively for twelve and five months, bearing a variable interest
rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 161.6 base points. The effective rate was 5.00% per annum.
$575,973 of them had been repaid subsequently.
In August 2016, Taizhou Fuling entered into a loan agreement with ICBC for $647,970 for five months, bearing a variable interest rate based on the prevailing interest rate
set by the People’s Bank of China at the time of borrowing, plus 113.75 base points. The effective rate was 5.44% per annum.
In October 2016, Taizhou Fuling entered into a loan agreement with ICBC for $791,963 for twelve months, bearing a variable interest rate based on the prevailing interest
rate set by the People’s Bank of China at the time of borrowing, plus 70.25 base points. The effective rate was 5.00% per annum.
In December 2016, Taizhou Fuling entered into two loan agreements with ICBC for $719,966 and $503,976 respectively for twelve and twelve months, bearing a variable
interest rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 70.25 base points. The effective rate was 5.00% per
annum.
(3) During fiscal year 2016, Taizhou Fuling entered into a series of short-term bank borrowing agreements and other financing agreements with BOC. The terms of the loans are
three to twelve months, with fixed interest rates based on LIBOR (for loans dominated in USD) or prime loan rates issued by People’s Bank of China (for loans dominated in
RMB), plus certain base points. The effective interest rates vary from 1.56% to 5.9% per annum. The loans to Taizhou Fuling are guaranteed by Great Plastics and Taizhou
Fuling’s general manager. The loans to Great Plastics are guaranteed by Taizhou Fuling’s general manager and Chair of the Board.
(4)
In October and December in 2016, Taizhou Fuling entered into two loan agreements with MTB for $5,759,730 respectively for six and six months. The effective rates were
6.41% per annum, respectively. The loan is guaranteed by Taizhou Fuling’s general manager.
As of December 31, 2016, land use rights in the amount of $8,047,726 and property and buildings in the amount of $131,971 and equipment in the amount of $0,
respectively, were pledged for the above loans.
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Long-term Borrowing
Long-term borrowings consisted of the following:
Pennsylvania Industrial Development Authority
Agricultural Bank of China (“ABC”)
East West Bank (“EWB”)
Total
As of
December 31,
2018
As of
December 31,
2017
As of
December 31,
2016
(1)
(2)
(3)
$
$
658,234 $
5,815,982
729,141
7,203,357 $
748,132 $
137,088
916,667
1,801,887 $
836,471
-
-
836,471
(1) On September 28, 2016, Fuling USA entered into a ten-year Machinery and Equipment Loan Agreement with the Pennsylvania Industrial Development Authority for
$937,600, with fixed interest rate of 1.75%. This loan has been collateralized by the machinery and equipment, worth approximately $1.72 million. As of December 31,
2018, the amount of long-term borrowing was $748,132, and it consists of $89,898 of which is due within a year and $658,234 that is due over a year.
Future obligations for payments of this long-term loan are as below:
Twelve months ended December 31,
2019
2020
2021
2022
2023
Thereafter
Total
$
$
89,898
91,484
93,098
94,740
96,411
282,501
748,132
(2)
In June 2018, Taizhou Fuling entered into two buyer’s credit Loan Agreements with Agriculture Bank of China Limited for total of $2,471,792 (RMB 17 million) for 36
months. In July 2018, Taizhou Fuling entered into three buyer’s credit Loan Agreements with Agriculture Bank of China Limited for total of $3,344,190 (RMB 23 million)
for 36 months. The loan bear variable interest rates based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 13% of the
prevailing interest rate. As of December 31, 2018, the amount of long-term borrowing was $5,815,982, and the effective rates were 5.37% and 5.23% per annum. The line
of credit’s purpose is for inventory purchase. The line of credit is effective for the period from first day of loan to 36 months after the first day of loan.
On October 31, 2016, Fuling USA entered into a buyer’s credit Loan Agreement with Agricultural Bank of China Limited for a line of credit in the amount of $5,903,723
(RMB 41 million) for 18 months. The loan bears a variable interest rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing,
plus 6% of the prevailing interest rate. As of December 31, 2017, the amount of long-term borrowing was $137,088, and the effective rate was 5.30% per annum. The line
of credit’s purpose is to acquire equipment. China Export & Credit Insurance Corporation provides insurance for the line of credit. The line of credit is effective for the
period from first day of loan to 18 months after the first day of loan. As of December 31, 2018, this loan was fully repaid in full upon maturity.
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(3) On March 9, 2017, Fuling USA entered into a Delayed Draw Term Loan agreement with East West Bank for $1,000,000. The amount drawn will be turned into a 5-year term
loan at LIBOR rate plus 3.00%. The loan is guaranteed by Fuling Global. Fuling USA is required to make a restricted deposit of $73,336 for one year with an initial interest
rate of 4.19% per annum. The restricted deposit was increased to $121,639 in June 2018. The agreement requires Fuling USA to comply with certain financial covenants and
ratios, including to maintain minimum debt service coverage ratio of 1.25 times and to maintain maximum total debt to equity ratio of 3.0 times etc. Fuling USA’s
compliance with these covenants will be reviewed semi-annually at December 31th and December 31th. Fuling USA was in compliance as of December 31, 2018. On April
7 and December 1, 2017, Fuling USA drew down $500,000 (April 2017 Loan) and $500,000 (December 2017 Loan), respectively. April 2017 loan will expire April 7, 2023
and December 2017 loan will expire on December 1, 2023. Both April 2017 loan and December 2017 loan require interest only payment for the first year and require interest
and principal payments for years from second year to sixth year. The effective rate was 4.11% per annum. As of December 31, 2018, the amount of long-term borrowing was
$929,141, and it consists of $200,000 of which is due within a year and $729,141 which is due over a year.
Future obligations for payments of this long-term loan are as below:
Twelve months ended December 31,
2019
2020
2021
2022
2023
Thereafter
Total
Bank Notes Payable
The Company had the following bank notes payable as of December 31, 2018:
ICBC, due May 5, 2019
ABC, due various dates from January 4, 2019 to June 27, 2019
Total
72
$
$
200,000
200,000
200,000
200,000
129,141
-
929,141
December 31,
2018
286,902
2,601,151
2,888,053
$
$
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The Company had the following bank notes payable as of December 31, 2017:
ICBC, due various dates from January 28, 2018 to May 27, 2018
ABC, due various dates from February 10, 2018 to April 30, 2018
Total
The Company had the following bank notes payable as of December 31, 2016:
ICBC, due various dates from January 12, 2017 to June 29, 2017
CMBC, due April 8, 2017 and April 24, 2017
CITIC, due various dates from February 5, 2017 to June 27, 2017
Total
December 31,
$
2017
3,052,664
1,384,016
$
4,436,680
December 31,
2016
$
$
1,564,479
345,584
172,792
2,082,855
As of December 31, 2018, 2017 and 2016, $1,439,063, $3,053,622 and $987,719 cash deposits were held by banks as a guaranty for the notes payable, respectively.
All loans and bank acceptance notes due as of the date of this filing have been repaid. From January to March 2019, the Company repaid approximately $5.2 million
bank loans and $1.8 million notes payable that become due. The Company also borrowed approximately $7.4 million bank loans as well as approximately $2.0 million notes
payable from various banks in China. All the loans and notes payable are short term in nature and guaranteed by its shareholders, related parties and third parties.
Although we currently do not have any material unused sources of liquidity, giving effect to the foregoing bank loans and other financing activities, including the
discounting of bills/notes receivable, we believe that our currently available working capital should be adequate to sustain our operations at our current levels through at least
the next twelve months. We will consider additional borrowing based on our working capital needs and capital expenditure requirements. There is no seasonality of our
borrowing activities.
Statutory Reserves
Under PRC regulations, all of our subsidiaries in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with accounting
principles generally of the PRC (“PRC GAAP”). In addition, these companies are required to set aside at least 10% of their after-tax net profits each year, if any, to fund the
statutory reserves until the balance of the reserves reaches 50% of their registered capital. The statutory reserves are not distributable in the form of cash dividends to the
Company and can be used to make up cumulative prior year losses.
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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, 2018,
December 31, 2017 and December 31, 2016. We are also a party to certain debt agreements that are secured with collateral on our real property, but such debt agreements do
not restrict our net assets and instead only impose restrictions on the pledged property. To the extent we wish to transfer pledged property, we are able to do so subject to the
obligation that we settle the loan obligation.
The following table provides the amount of our statutory reserves, the amount of restricted net assets, consolidated net assets, and the amount of restricted net assets as
a percentage of consolidated net assets, as of December 31, 2018, 2017 and 2016.
Statutory Reserves
Total Restricted Net Assets
Consolidated Net Assets
Restricted Net Assets as Percentage of Consolidated Net Assets
2018
As of December 31,
2017
$
$
$
5,532,945
5,532,945
64,688,467
$
$
$
8.55%
4,617,039
4,617,039
57,843,550
$
$
$
7.98%
2016
4,017,957
4,017,957
49,334,539
8.14%
Total restricted net assets accounted for approximately 8.55% and 7.98% of our consolidated net assets as of December 31, 2018 and 2017, respectively. As our
subsidiaries usually set aside only 10% of after-tax net profits each year to fund the statutory reserves and are not required to fund the statutory reserves when they incur losses,
we believe the potential impact of such restricted net assets on our liquidity is limited.
Capital Expenditures
We had capital expenditures of approximately $4.0 million, $6.5 million and $4.0 million for the years ended December 31, 2018, 2017 and 2016, respectively for
additions to and renovations of our workshops and office buildings; and purchases of equipment in connection with our business activities.
In 2019, our capital expenditures for China are expected to be approximately $5.8 million, and will be primarily related to investments of approximately $2.9 million
in the phase II construction of manufacturing facilities and $2.9 million in machinery and equipment, in our new factory in China.
In 2019, our capital expenditures for U.S. are expected to be approximately $0.5 million and will be primarily related to adding machinery and miscellaneous
leasehold improvement at the Allentown factory.
In 2019, our capital expenditures for Mexico are expected to be approximately $3.0 million, and will be primarily related to investment of machinery and leasehold
improvements to start up the first phase of the Mexico factory.
For more information regarding our material commitments for capital expenditure, please see “Item 4. Information on the Company.” We expect that our capital
expenditures will increase in the future as our business continues to develop and expand. We have used cash generated from our subsidiaries’ operations and proceeds received
from our initial public offering to fund our capital commitments in the past and anticipate using cash generated from our subsidiaries’ operations to fund capital expenditure
commitments in the future.
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Critical Accounting Policies and Estimates
We prepare our financial statements in conformity with accounting principles generally accepted by the United States of America (“U.S. GAAP”), which requires us to
make judgments, estimates and assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any related disclosures. Although there were
no material changes made to the accounting estimates and assumptions in the past three years, we continually evaluate these estimates and assumptions based on the most
recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of
estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.
We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant
accounting estimates. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of
operations.
Revenue recognition
The Company follows paragraph 606 of the FASB Accounting Standards Codification for revenue recognition and ASU 2014-09. On January 1, 2018, the
Company adopted ASU 2014-09, which is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or
services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The Company considers revenue realized or
realizable and earned when all the five following criteria are met: (1) Identify the Contract with a Customer, (2) Identify the Performance Obligations in the Contract, (3)
Determine the Transaction Price, (4) Allocate the Transaction Price to the Performance Obligations in the Contract, and (5) Recognize Revenue When (or As) the Entity
Satisfies a Performance Obligation. Results for reporting periods beginning after January 1, 2018 are presented under ASU 2014-09, while prior period amounts are not
adjusted and continue to be reported under the previous accounting standards. The Company has assessed the impact of the guidance by reviewing its existing customer
contracts and current accounting policies and practices to identify differences that will result from applying the new requirements, including the evaluation of its performance
obligations, transaction price, customer payments, transfer of control and principal versus agent considerations. Based on the assessment, the Company concluded that there was
no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes to the Company’s
financial statements upon adoption of ASC 606, and there have not been any significant changes to our business processes, systems, or internal controls as a result of
implementing the standard.
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.
75
Table of Contents
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
New Accounting Pronouncements Recently Adopted
On April 1, 2018, we adopted ASU 2016-18, Restricted Cash – A Consensus of the FASB Emerging Issues Task Force, (“ASU 2016-18”), which amends ASC 230,
Statement of Cash Flows, to clarify guidance on the classification and presentation of restricted cash in the statement of cash flows using the full retrospective method. Adoption
of this standard did not have a material impact on our consolidated financial statements. See our unaudited condensed consolidated statements of cash flows for the
reconciliation of cash presented in the statements of cash flows to the cash presented on the balance sheet.
The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) effective April 1, 2018 using the retrospective transition method. The core
principle of the new accounting standard is to recognize revenue to depict 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. In addition, the adoption of this new accounting standard resulted in increased disclosure,
including qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Adoption of
this standard did not result in significant changes to the Company’s accounting policies, business processes, systems or controls, or have a material impact on the Company’s
financial position, results of operations and cash flows or related disclosures. As such, prior period financial statements were not recast.
New Accounting Pronouncements Not Yet Adopted
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation, which simplifies the accounting for share-based payments granted to
nonemployees for goods and services. Under this ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based
payments granted to employees. This ASU is effective for annual reporting periods beginning after December 15, 2018. Early adoption of this ASU is permitted. The Company
does not expect adoption of this ASU to have a material impact on its Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2018-20, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing leases assets
and lease liabilities on the balance sheet and disclosing key information about lease transactions. This ASU is effective for annual reporting periods beginning after December
15, 2018. Early adoption of this ASU is permitted. The Company is evaluating the effect of the pronouncement on the financial statements.
C. Research and Development, Patents and Licenses, etc.
Research and Development
We are committed to researching and developing better ways to make our products more environmentally-friendly and cost effective and better ways to make our
production methods more efficient. We believe scientific and technological innovations are integral to our operations and the mainstay of our competitive advantage and
differentiation strategy. The barrier to entry to produce plastic foodservice disposables is relatively low; we believe that by devoting resources to finding new solutions to
challenges facing our customers, we are able to improve our competitiveness, even where we are not the lowest cost provider of products, because we compensate with quality
and service.
76
Table of Contents
The R&D team has 165 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, 2018, 2017 and 2016, we spent $3.43 million, $2.95 million and $2.36 million, respectively, on R&D. The increase of the amount
spent on R&D was due to more R&D projects in 2018 and 2017 than 2016. R&D expenditures in each year were for the following purposes:
Purpose
Salaries
Materials
Other
Total
We expect to increase our R&D expenditures proportionate to our revenue increase in 2019.
77
2018
(in millions)
Year Ended December 31,
2017
(in millions)
2016
(in millions)
$
$
0.94 $
1.98
0.51
3.43 $
0.70 $
1.97
0.28
2.95 $
0.60
1.36
0.40
2.36
Table of Contents
The following chart shows some of our recent research projects.
Project
Fully biodegradable food grade straw
Light PET cups
PET tableware modified with surface coating
High transparency cup lid with high efficiency manufacturing
New GPPS material with HDPE/SBS/mineral modification
One-step production of high-filled tableware
Functional straw development
High anti-stick PP film production
PP Continuous physical foaming tableware production
Storage tray with new barrier to preserve freshness
Recrystallization heat-resistant full-degradable tableware
Study of automatic packaging of tableware
Melt grafted modified polypropylene cutlery
Controllable bio-degradable polypropylene cutlery
Highly transparent quick injection molding cutlery
Natural antibacterial material composite tableware
Food grade antistatic BOPP Straw wrapping film
High strength cutlery development
Light weight PET cup
High heat resistent crystallization CPET oven plate
Disposable Paper-Like Cups
High Quality Printing Paper
Paper Cup
PET Cups with/without Printing
PET Salad Bowl
Injection Deli with Printing
Thermoforming Deli with Printing
PP School Tray
78
Source
R&D cooperation with Beijing Technology and
Business University
Self-Developed
Self-Developed
Self-Developed
Self-Developed
Self-Developed
Self-Developed
Self-Developed
Self-Developed
Self-Developed
Self-Developed
Self-Developed
Self-Developed
Self-Developed
Self-Developed
Self-Developed
Self-Developed
Self-Developed
R&D cooperation with
Chinese Academy of Sciences
Self-Developed
R&D cooperation with
Chinese Academy of Sciences
R&D cooperation with
Chinese Academy of Sciences
Self-Developed
Self-Developed
Self-Developed
Self-Developed
Self-Developed
Self-Developed
Year
2018
2018
2018
2018
2018
2018
2018
2018
2018
2018
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2016
2016
2016
2016
2016
2016
2016
2016
Table of Contents
Our Patents
Intellectual Property
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. The following chart represents the selected patents issued to us:
Proprietary name
Patent No.
Patent
type
Application
Date
Approval
Date
Expiration
Date
Authority
Clamshell to go box
To go container
Medicine cup
Automatic cup stacking machine
Vacuum suction equipment for
knife, fork and spoon
manufacturing
zL 2017 3 0523546.X
zL 2017 3 0523428.9
zL 2017 3 0520989.3
zL 2017 2 1448271.9 Utility model
zL 2017 2 1674225.0 Utility model
Design
Design
Design
2017.10.28
2017.10.28
2017.10.30
2017.11.02
2017.12.05
2018.03.02
2018.05.08
2018.05.08
2018.05.11
2018.06.12
2028.03.02 China State Intellectual Property Office
2028.05.08 China State Intellectual Property Office
2028.05.08 China State Intellectual Property Office
2028.05.11 China State Intellectual Property Office
2028.06.12 China State Intellectual Property Office
Multifunction intelligent packaging
zL 2016 1 0792046.0
Patent
2016.08.31
2018.07.06
2028.07.06 China State Intellectual Property Office
zL 2017 2 1807920.X Utility model
zL 2017 2 1810110.X Utility model
zL 2017 2 1807849.5 Utility model
zL 2017 2 1920786.4 Utility model
2017.12.21
2017.12.21
2017.12.21
2017.12.29
2018.07.10
2018.07.17
2018.07.31
2018.07.31
2028.07.10 China State Intellectual Property Office
2028.07.17 China State Intellectual Property Office
2028.07.31 China State Intellectual Property Office
2028.07.31 China State Intellectual Property Office
equipment
Cup lid hole punching machine
Cup lid molding machine
PET sheet coating machine
Single screw Extrusion foaming
machine
Cup
US D724,426 S
Design
2014.07.24
2015.03.17
2029.03.17
Set of Clamshell containers
A type of disposable spoon
US D793,225 S
Design
Z1 2016 2 0406977.8 Utility model
2016.02.02
2016.05.05
2017.08.01
2016.11.16
2026.06.22
2026.05.05
A type of disposable cutlery
Z1 2016 2 0401916.2 Utility model
2016.05.05
2016.11.16
2026.05.05
A cup with
measuring cup
Z1 2016 2 0640630.X Utility model
2016.06.22
2017.07.21
2026.06.22
A type of cup combination
Z1 2016 2 0634342.3 Utility model
2016.06.22
2017.01.18
2025.5.24
A type of multi-function smart
Z1 2016 2 1002052.3 Utility model
2016.08.31
2017.03.29
2025.5.24
packaging machine
Food grade
polypropylene
composite
material and
preparation and
uses
Two section straw
packaging and
transmission
system
Split-type goblets
ZL 2010 1 0116076.2
Patent
2010.03.02
2013.06.05
2030.03.01
ZL 2007 1 0156428.5
Patent
2007.10.26
2010.12.15
2027.10.25
ZL 2010 2 0684010.9 Utility model
2010.12.28
2011.08.03
2020.12.27
79
United States Patent and
Trademark Office
US Patent and Trademark Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
Table of Contents
Proprietary name
Plates
Patent No.
ZL 2010 3 0701465.2
Patent
type
Design
Application
Date
Approval
Date
Expiration
Date
2010.12.29
2011.08.03
2020.12.28
Cup with curled rim
ZL 2011 2 0049179.1 Utility model
2011.02.26
2011.08.24
2021.02.25
Spork
ZL 2010 2 0685416.9 Utility model
2010.12.28
2011.09.07
2020.12.27
Multipurpose fork
ZL 2010 2 0685497.2 Utility model
2010.12.28
2011.10.19
2020.12.27
Anti-counterfeit bags
ZL 2011 2 0049491.0 Utility model
2011.02.26
2011.10.19
2021.02.25
Combined serviceware package
ZL 2010 2 0684440.0 Utility model
2010.12.28
2011.11.09
2020.12.27
Hollow-handle cutlery
ZL 2010 2 0684221.2 Utility model
2010.12.28
2011.11.30
2020.12.27
Serviceware kit (toughened)
ZL 2011 3 0402067.5
Design
2011.11.07
2012.05.16
2021.11.06
Ice cream cup
Cover/lid
Cover remover
ZL 2011 2 0561621.9 Utility model
2011.12.29
2012.10.03
2021.12.28
ZL 2012 3 0240031.6
Design
2012.06.11
2012.10.31
2022.06.10
ZL 2012 2 0285999.5 Utility model
2012.06.16
2013.01.09
2022.06.15
Packaging barrel
ZL 2012 2 0288697.3 Utility model
2012.06.16
2013.01.09
2022.06.15
Bowls
ZL 2012 3 0542829.6
Design
2012.11.09
2013.04.10
2022.11.08
Plates (honeycomb design)
ZL 2012 3 0543240.8
Design
2012.11.09
2013.04.10
2022.11.08
Cutlery with removable structure
ZL 2012 2 0591687.7 Utility model
2012.11.09
2013.05.01
2022.11.08
Bowl for noodles
ZL 2010 3 0701464.8
Design
2010.12.29
2011.06.08
2020.12.28
Combined fork and cutlery
ZL 2010 2 0683337.4 Utility model
2010.12.28
2011.10.19
2020.12.27
Multipurpose clip
ZL 2011 2 0048688.2 Utility model
2011.02.26
2011.10.19
2021.02.25
Water dispenser bucket with handle
ZL 2011 2 0219976.X Utility model
2011.06.27
2012.01.25
2021.06.26
Plate
ZL 2015 3 0165070.8
Design
2015.05.27
2015.09.02
2025.05.26
Serviceware distribution
ZL 2015 2 0307980. X Utility model
2015.05.13
2015.09.09
2025.05.12
organization
High luminous suction cup
ZL 2015 2 0332164.4 Utility model
2015.05.21
2015.09.23
2025.05.20
High transparent children plate
ZL 2015 2 0343466.1 Utility model
2015.05.25
2015.09.23
2025.05.24
High transparent antiskid
ZL 2015 2 0343446.4 Utility model
2015.5.25
2015.9.23
2025.5.24
serviceware
80
Authority
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
China State Intellectual
Property Office
Table of Contents
Our Trademarks
In addition to our patents, we also rely on trademarks and service marks to protect our intellectual property and branding. Below is a selected list of our registered
marks.
Mark
Owner
Taizhou Fuling
Classification
Number(1)
8 – #4712944
Registration
Date
2008.3.28
Expiration Date
2028.3.27
Taizhou Fuling
21 – #4712943
2008.12.28
2028.12.27
Taizhou Fuling
8 – #4712945
2008.3.28
2028.3.27
Taizhou Fuling
21 – #4712946
2008.12.28
2028.12.27
Taizhou Fuling
21 – #1032903(2)
2009.11.16
2019.11.16(3)
Taizhou Fuling
8 – #11235808
2013.12.14
2023.12.13
Taizhou Fuling
21 – #11235777
2013.12.14
2023.12.13
Taizhou Fuling
21 – #8441442
2011.7.14
2021.7.13
Taizhou Fuling
21 – #11235865
2013.12.14
2023.12.13
Taizhou Fuling
8 – #11236889
2013.12.14
2023.12.13
Great Plastics
Great Plastics
8 – #9966708
2012.11.21
2022.11.20
21 – #9966694
2013.3.7
2023.3.6
Great Plastics
8 – #9966716
2012.11.21
2022.11.20
Great Plastics
Great Plastics
8-# 12489484
2014.9.28
21-# 12489468
2014.9.28
2024.9.27
2024.9.27
Fuling USA
8 – #4291028
2013.2.19
—(4)
81
Authority
China State
Administration
for Industry and
Commerce
China State
Administration
for Industry and
Commerce
Intellectual
Office Property
Register
China State
Administration
for Industry and
Commerce
China State
Administration
for Industry and
Commerce
China State
Administration
for Industry and
Commerce
China State
Administration
for Industry and
Commerce
China State
Administration
for Industry and
Commerce
China State
Administration
for Industry and
Commerce
China State
Administration
for Industry and
Commerce
United States
Patent and
Trademark
Office
Table of Contents
(1) Classification 8 products consist of serviceware (knife, fork and spoon); knife and fork set serviceware; steel knives; chopping knives; ice hammers; spoons; wine ladles;
long handle spoons and tongs for sugar cubes. Classification 21 products consist of non-precious metal serviceware (except knives, forks and spoons); enamel and plastic
ware for everyday use (including basins, bowls, plates, kettles and cups); ice cream sticks; lunch boxes; utensils for household uses; covers for dishes; paper or plastic cups;
ice creams spoons; non-precious serviceware and picnic baskets (including plates and dishes).
(2) Basing on #4712946 registration in China, we have registered the trademark at the International Bureau of the World Intellectual Property Organization (WIPO) under the
Madrid Agreement and Protocol.
(3) We plan to extend the registration before it expires.
(4) The registration is valid as long as Fuling USA timely files all post registration maintenance documents.
Our Domain Names
We have registered 6 domain names, including fulingplastics.com.cn, fulingusa.com, fulingplasticusa.com, domoplastics.com , directlinkusallc.com and
domoindustry.com, while only the first two websites are active. We also have the authorization from Ms. Guilan Jiang to use fulingplastics.com, We do not incorporate the
information on our websites into this annual report and you should not consider any information on, or that can be accessed through, our websites as part of this annual report.
D. Trend Information
Industry Trends and Company Strategy
We have noted the existence of the following trends since the beginning of 2016, all of which are likely to affect our business to the extent they continue in the future.
We are adopting strategies accordingly.
Industry operators will need to cater to environmental concerns in order to succeed
Business and consumer concerns over the environmental impact of plastic will gain importance as an industry trend over the next five years. Consumers will likely be
more conscious of the environmental impact of paper and plastic products and look to purchase recycled and eco-friendly products. As a result, industry operators will need to
cater to environmental concerns in order to succeed in the industry. For instance, according to Freedonia, McDonald’s reports that its corrugated clamshells contain at least 37
percent recycled content.
Our management believes companies that provide eco-friendly products can charge higher prices which usually offset more than the cost increase and thus achieve
higher profit margins. On average, our eco-friendly products have 10% higher gross margin compared to our conventional products.
Innovation and cost cutting
The main material used to produce plastic products is plastic resin, a petroleum-based product. For this reason, fluctuations in global crude oil prices lead to changes in
the input costs for plastic manufacturers. Crude oil prices are generally volatile.
The plastic resins we primarily use are polypropylene (“PP”), polystyrene (“PS”) which includes General Purpose Polystyrene (“GPPS”), High Impact Polystyrene
(“HIPS”), and Polyethylene Terephthalate (“PET”). We began to use PET in 2016 to produce and fulfill orders of PET cups and cup lids. The following chart shows their
percentages of our total cost of raw materials for the years ended December 31, 2018, 2017 and 2016:
Raw Material
PP
GPPS
HIPS
PET
Total
2018
Year Ended December 31,
2017
2016
44.93%
17.98%
2.15%
9.42%
74.48%
44.27%
21.24%
2.46%
8.84%
76.81%
49.05%
21.01%
2.62%
6.71%
79.39%
82
Table of Contents
The following chart shows the monthly prices of PP, GPPS, HIPS, PET and Brent oil (one kind of crude oil) from January 2016 to March 2019:
PP ($/LB)
GPPS ($/LB)
HIPS ($/LB)
PET ($/LB)
Brent Oil
($/barrel)
2016
January
February
March
April
May
June
July
August
September
October
November
December
2017
January
February
March
April
May
June
July
August
September
October
November
December
2018
January
February
March
April
May
June
July
August
September
October
November
December
2019
January
February
Increased
$
0.607
0.580
0.720
0.720
0.730
0.740
0.929
0.753
0.886
0.886
0.910
0.920
0.900
0.919
0.916
0.910
0.914
0.906
0.894
0.886
0.893
0.883
0.892
0.912
0.946
0.965
0.940
0.941
0.947
0.946
0.954
1.119
1.115
1.110
1.051
0.965
0.815
0.805
0.886
0.891
0.879
0.858
0.974
0.884
0.898
0.896
0.920
0.970
0.970
1.063
1.017
0.976
0.932
0.923
0.934
0.953
0.964
0.964
0.960
0.963
1.011
1.043
1.013
1.011
1.017
1.035
1.049
1.047
1.057
1.066
1.043
1.007
0.914
0.914
1.100
0.988
0.976
0.949
1.062
0.962
1.039
1.030
1.050
1.130
1.160
1.169
1.182
1.144
1.101
1.092
1.112
1.115
1.131
1.126
1.129
1.132
1.160
1.183
1.178
1.179
1.197
1.198
1.200
1.051
1.078
1.033
0.960
0.947
-
-
-
0.830
0.810
0.760
0.820
0.810
0.820
0.830
0.840
0.820
0.840
0.830
0.830
0.840
0.820
0.840
0.860
0.870
0.890
0.869
0.873
0.887
0.940
0.950
0.941
0.957
1.011
1.066
0.993
0.965
0.969
1.006
0.983
0.969
30.700
32.180
38.031
41.583
46.757
48.247
47.250
47.310
46.900
49.710
47.310
56.140
53.200
56.620
53.14
51.15
51.84
47.80
52.63
50.67
56.63
57.93
62.69
66.17
68.00
68.90
63.860
73.860
77.180
77.550
75.350
77.750
81.300
76.870
59.730
53.580
$
0.915
0.983
61.91%
0.979
0.993
21.83%
0.933
0.974
6.54%
0.937
0.915
(2.70)%
61.11
66.55
116.78%
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.
83
Table of Contents
We have consistently invested in R&D and new equipment and technology to increase our cost competitiveness. The following chart illustrates the effect:
Average Worker Annual Salary
R&D Expense
Productivity Per Employee
Proximity to key markets is a major success factor
2016
2017
2018
Increase
(decrease) from
2016 to 2018
$
$
$
7,719 $
2,355,539 $
145,058 $
8,628 $
2,953,477 $
121,572 $
9,570
3,432,188
111,920
24.0%
45.7%
-2.2%
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 provides us a platform to manufacture drinking straws in the
United States. The total investment for the project will be roughly $10.1 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. Oil prices remained high in the first half of 2018 putting pressure on our profit margin as the market remained competitive and it was difficult to implement price
increases. As oil prices declined in the second half of 2018, we regained some of the profits with lower raw material costs. However, the higher tariffs stemmed from the trade
conflict between China and U.S. created another problem for us and we had to make adjustments in sourcing raw materials for the production in our Allentown factory.
E. Off-Balance Sheet Arrangements
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.
F. Tabular Disclosure of Contractual Obligations
Below is a table setting forth all of our contractual obligations as of December 31, 2018, which consists of our short-term loan agreements, loans from third parties
and due to related parties:
Less than
1 year
Payment Due by Period
1 – 3
years
3 – 5
years
More than
5 years
$
Contractual Obligations
Short-Term Debt Obligations
Long-Term Debt Obligations
Bank Acceptance Notes Payable
Capital Lease Obligations
Operating Lease Obligations
Letter of Credit
Short-Term Debt Interest Obligations
Long-Term Debt Interest Obligations
Purchase Obligations
Other Long-Term Liabilities Reflected on the Registrant’s
$
Total
19,890,641
7,203,357
2,888,053
5,483,426
4,184,632
5,147,960
1,185,168
973,208
0
$
19,890,641
0
2,888,053
2,847,859
866,971
5,147,960
1,185,168
313,673
0
0 $
6,400,563
0
2,635,567
1,777,282
0
0
573,865
0
Balance Sheet under GAAP
Loans from Third Parties
Total
G. Safe Harbor
0
0
46,956,445
$
0
0
33,140,325
$
0
0
11,387,277 $
$
See “SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS.”
84
0 $
520,293
0
0
1,343,448
0
0
78,403
0
0
0
1,942,144 $
0
282,501
0
0
196,931
0
0
7,267
0
0
0
486,699
Table of Contents
Item 6.
Directors, Senior Management and Employees
A. Directors and Senior Management
The following table provides information regarding our senior management ,directors and a key U.S. executive as of April 5, 2019:
Name
Xinfu Hu
Guilan Jiang
Gilbert Lee
Sujuan Zhu
Jian Cao
Hong (Simon) He
Fuyou Cai
John C. Kunes
Age
58
55
61
47
68
50
53
69
Position(s)
Chief Executive Officer
Chair of Board of Directors and Chief Operating Officer
Chief Financial Officer
Director
Director (Independent)
Director (Independent)
Director (Independent)
Executive Vice President of Fuling USA
The business address of all such senior management and directors is Southeast Industrial Zone, Songmen Town, Wenling, Zhejiang Province, People’s Republic of
China 317511.
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Directors
Guilan Jiang. Ms. Jiang has served as the Chief Operating Officer and Chair of the Company since September 2015. Ms. Jiang co-founded Taizhou Fuling in October
of 1992 with her husband, Mr. Xinfu Hu, our CEO, and serves as the legal representative and the Chair. Ms. Jiang co-founded Great Plastics in March 2010 with Mr. Xinfu Hu
and Ms. Sujuan Zhu, and serves as the legal representative, the general manager and a director. Ms. Jiang previously owned 95% of Zhejiang Special Plastics Technology Co.,
Ltd. (“Special Plastics”) from September 2006 through 2015 and acts as a supervisor. Ms. Jiang is the general manager and a shareholder of Wenling Wantong Investment Co.,
Ltd. Ms. Jiang has been certified by Zhejiang Province as a senior economist in 2012. This qualification certifies her qualification and experience in business management, and
understanding of the global economic marketplace in which we operate and shows that she has passed certain qualification tests in business field. Currently Ms. Jiang is Deputy
Chair of the China Plastics Processing Industry Association, Deputy Chair of the Zhejiang Female Entrepreneur Association, and Chair of the Wenling Plastics Association. Ms.
Jiang has acted as a representative of the local People’s Congress several times, most recently, in March 2017. Ms. Jiang has received an award as an Outstanding Female in
China, as a Top 10 Outstanding Female in Zhejiang, and as an Excellent Entrepreneur in Taizhou and Wenling. Ms. Jiang received her associate degree in accounting from
China University of Geosciences in 2006. We have chosen Ms. Jiang to serve as the Chair of our board of directors because of her more than twenty years of experience in our
industry, and leadership at the national level.
Sujuan Zhu. Ms. Zhu has been a member of our board of directors since January 19, 2015. She co-founded Taizhou Fuling in October 1992, is a director and has
worked in its financial department. Ms. Zhu also co-founded Great Plastics in March 2010. Ms. Zhu is also a director and the general manager of Wenling Hongkun Investment
Co., Ltd. We have chosen Ms. Zhu to serve on our board of directors because of her more than twenty years of experience advising and assisting our company on finance and
management as it has grown.
Jian Cao. Mr. Cao has been an independent member of our board of directors since July 2015. Mr. Cao has been the Executive Vice President at the China Plastics
Processing Industry Association since May 1995 and legal representative since May 2011. In this capacity, Mr. Cao manages the daily operations of the association. Mr. Cao
has helped the Association participate in the development of the national standards applicable to the plastics industry. Prior to working with the China Plastics Processing
Industry Association, Mr. Cao served a plastic industry association in Liaoning Province, including as general manager, since 1978. Since August 2013, Mr. Cao has also served
as a director at Xinjiang Tianye Water Saving Irrigation System Company Limited, a public company in China. Mr. Cao is also a director at Jiangsu Cenmen Equipment Co.,
Ltd., another public company in China. Mr. Cao has also been a director at the China Light Industry Federation since May 2012. Since May 2013, Mr. Cao has been chief of the
national standardization technical committee for the plastics industry. Mr. Cao earned his bachelor degree in October 1978 from Dalian University of Technology. We believe
Mr. Cao’s qualifications to serve on our board of directors include his knowledge of our industry, with almost 40 years’ experience in the plastics industry.
Hong (Simon) He. Mr. He has been an independent member of our board of directors since July 2015. Since August 2014, Mr. He has been the finance director of
SciClone Pharmaceuticals, Inc., which is a Nasdaq-listed company with main operations in China. He manages corporate financial analysis, SEC reporting and SOX
compliance. Mr. He was Vice President of Finance and the controller of Augmedix, Inc. from January 2014 to June 2014, where he developed financial accounting and
reporting process in compliance with U.S. GAAP. From October 2011 to December 2013, Mr. He was the Vice President of Finance at Baidu Leho.com, which is backed by
Baidu, a Nasdaq-listed company. He established financial accounting infrastructure and ensured the financial statements were prepared in line with the U.S. GAAP. From March
2010 to October 2011, Mr. He was the CFO of Sunity Online Entertainment Ltd., a pre-IPO company. He coordinated the IPO application for Nasdaq listing and ensured the
U.S. GAAP compliance for its financial statements. Mr. He is a U.S. Certified Management Accountant and a China Certified Public Accountant. Mr. He earned his Bachelor of
Science degree in accounting from Beijing University of Technology in July 1992 and his MBA degree from University of Chicago Booth School of Business in December
2006. We have selected Mr. He to serve on our board of directors and as the Chair of our Audit Committee because of his rich accounting and finance experience.
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Fuyou Cai. Mr. Cai has been an independent member of our board of directors since January 2019. Mr. Cai is a partner of Zhejiang Mingquan Law Firm. He has been
working at Zhejiang Mingquan Law Firm since May 1995 and received his lawyer’s license in 2010. Mr. Cai has been providing legal services to various companies and
governmental agencies. Mr. Cai is also a part-time professor of China University of Political Science and Law and a guest professor of Zhejiang Agricultural University. Mr.
Cai earned his Bachelor of Laws degree in 2002 from Zhejiang University and a Master of Laws from Southwest University of Political Science & Law in 2008. We have
selected Mr. Cai to serve on our board of directors because of his rich compliance experience.
Executive Officers
Xinfu Hu. Mr. Hu has served as the Chief Executive Officer of the Company since September 2015 . Mr. Hu co-founded Taizhou Fuling in October of 1992 with his
wife, Ms. Guilan Jiang, and serves as the general manager. Mr. Hu co-founded Great Plastics in March 2010 with his wife, Ms. Guilan Jiang, and Ms. Sujuan Zhu and has
served as a supervisor. Mr. Hu is also the legal representative, the general manager and a director of Wenling Yuanheng Real Estate Development Co., Ltd. Mr. Hu is a
shareholder of Sanmen Decoration City Market Development Co., Ltd and Hangzhou YaJiu Investment Co., Ltd. Mr. Hu has been certified by Zhejiang Province as a senior
economist in 2013. This qualification certifies his qualification and experience in business management, and understanding of the global economic marketplace in which we
operate and shows that he has passed certain qualification tests in business field. Mr. Hu is also an engineer. Currently Mr. Hu is Deputy Chair of the China Chamber of
Commerce for Import and Export of Light Industrial Products and Arts and Crafts, and a member of Committee of the People’s Political Consultative Conference of Sanmen
County. Mr. Hu received his associate degree in business management from Southwest University of Science and Technology in 2006. Our board of directors has chosen Mr.
Hu to serve as Chief Executive Officer because of his more than twenty years of experience in our industry.
Gilbert Lee. Mr. Lee has been our Chief Financial Officer since August 2015. Mr. Lee was the Vice President of Operations of Fuling USA from May 2015 to August
2015. Prior to joining our company, from October 2013 through May 2015, Mr. Lee was Vice President of Business Development and prior to that, from August 2011 to
October 2013, the U.S. based Chief Financial Officer at Tanke Biosciences Corporation, a Chinese manufacturer listed on OTCQB, where he was responsible for SEC
reporting, investor relations, capital-raising, GAAP conversion, annual audits, and corporate finance. From 2010 through 2011, Mr. Lee was the Finance Executive in Planning
& Analysis for Dimensional Merchandising Inc., at which he developed strategies to turn around sales and profit, and oversaw accounting and payroll functions. Mr. Lee also
held various executive positions in finance, marketing, and business analysis at a Paris CAC 40 company and a NYSE listed company. Mr. Lee is a CPA and a CMA. Mr. Lee
earned his MBA from University of Texas at Austin in 1995, his MPA (Master of Professional Accounting) from University of Texas at Arlington in 1987 and his BBA
(Bachelor of Business Administration) in Marketing from University of Texas at Arlington in 1982.
Key U.S. Executive
John C. Kunes. Mr. Kunes has served as Executive Vice President at Fuling USA/Old Fuling USA since January 2013 and was the Chief Marketing Officer at Old
Fuling USA from July 2009, responsible for developing customer relationships, negotiating distribution logistics, and marketing our products in the United States. Mr. Kunes
has been an independent contractor for Fuling USA/Old Fuling USA since January 2013 through JCK Enterprises. Prior to joining our company, Mr. Kunes was Director of
Operations for Jet Plastica Industries, a plastic foodservice disposables company, from 1998 through 2008. At Jet Plastica he managed more than 600 employees, and
implemented projects to enhance efficiency such as automating production lines and matching cutlery production to orders. Mr. Kunes worked as the Director of Finance for
Tenneco Packaging from 1995 through 1998 and in a variety of operations and finance roles. He was plant manager and business unit controller for Mobil Chemical Company
from 1988 through 1995. Mr. Kunes earned his B.S. and MBA from the Rochester Institute of Technology.
B. Compensation
Compensation of Directors and Executive Officers
In 2018, we paid an aggregate of approximately US $370,000 in cash as salaries and fees to our senior executives, officers and directors named in this annual report,
and granted an aggregate of 15,705 Ordinary Shares to our CFO. We do not separately set aside any amounts for pensions, retirement or other benefits for our executive
officers, other than pursuant to relevant statutory requirements.
Share Incentive Plan
For information regarding the share incentive plan, see “Item 6. Directors, Senior Management and Employees — Share and Share Options.”
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C. Board Practices
Terms of Directors and Executive Officers
All directors hold office until the next annual meeting of shareholders at which they are re-elected and until their successors have been duly elected and qualified.
Officers are elected by and serve at the discretion of the board of directors. See “Item 6.A Directors and Senior Management” as to current directors and officers. In addition,
the service agreements between us and the directors do not provide benefits upon termination of their services.
Election of Officers
Our executive officers are elected by, and serve at the discretion of, our board of directors. Our Chief Operating Officer and Chair of our board of directors, Guilan
Jiang is married to the Chief Executive Officer, Xinfu Hu. Sujuan Zhu, one of our board directors, is Guilan Jiang’s sister-in-law. Other than these relationships, there are no
familial relationships among any members of the executive officers.
Board of Directors and Board Committees
Our board of directors currently consists of five (5) directors. A majority of our board of directors (namely, Messrs. Cao, He and Cunningham) are independent, as
such term is defined by the Nasdaq Capital Market.
A director may vote in respect of any contract or transaction in which he is interested, provided, however that the nature of the interest of any director in any such
contract or transaction shall be disclosed by him at or prior to its consideration and any vote on that matter. A general notice or disclosure to the directors or otherwise
contained in the minutes of a meeting or a written resolution of the directors or any committee thereof of the nature of a director’s interest shall be sufficient disclosure and after
such general notice it shall not be necessary to give special notice relating to any particular transaction. A director may be counted for a quorum upon a motion in respect of any
contract or arrangement which he shall make with our company, or in which he is so interested and may vote on such motion.
We do not have a lead independent director, and we do not anticipate having a lead independent director because we will encourage our independent directors to freely
voice their opinions on a relatively small company board. We believe this leadership structure is appropriate because we are a relatively small. Our board of directors plays a
key role in our risk oversight. The board of directors makes all relevant Company decisions. As a smaller company with a small board of directors, we believe it is appropriate to
have the involvement and input of all of our directors in risk oversight matters.
Board Committees
We have established three standing committees under the board: the audit committee, the compensation committee and the nominating committee. Each committee has
three members, and each member is independent, as such term is defined by The Nasdaq Capital Market. The audit committee is responsible for overseeing the accounting and
financial reporting processes of our company and audits of the financial statements of our company, including the appointment, compensation and oversight of the work of our
independent auditors. The compensation committee of the board of directors reviews and makes recommendations to the board regarding our compensation policies for our
officers and all forms of compensation, and also administers and has authority to make grants under our incentive compensation plans and equity-based plans (but our board
will retain the authority to interpret those plans). The nominating committee of the board of directors is responsible for the assessment of the performance of the board,
considering and making recommendations to the board with respect to the nominations or elections of directors and other governance issues. The nominating committee
considers diversity of opinion and experience when nominating directors.
The members of the audit committee, the compensation committee and the nominating committee as of December 31, 2018 are set forth below. All such members
qualify as independent under the rules of The Nasdaq Capital Market.
Director
Jian Cao
Hong (Simon) He
Donald T. Cunningham, Jr.
(1)
(2)
(3)
Committee member
Committee chair
Audit committee financial expert
88
Audit
Committee
Compensation
Committee
Nominating
Committee
(1)
(1)(2)(3)
(1)
(1)(2)
(1)
(1)
(1)
(1)
(1)(2)
Table of Contents
Duties of Directors
Under Cayman Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. The directors of a company occupy a fiduciary
relationship to the Company, which means that they owe heightened duties of good faith and responsibility. Our directors have a duty to exercise the care, skill and diligence
that would be exercised by a reasonably diligent person having the general knowledge, skill and experience reasonably to be expected of a person acting as a director and must
exercise the knowledge, skill and experience which they actually possess. See “Description of Share Capital — Differences in Corporate Law” for additional information on our
directors’ fiduciary duties under Cayman Islands law. In fulfilling their duty of care to us, our directors must ensure compliance with our First Amended and Restated
Memorandum and Articles of Association. We have the right to seek damages if a duty owed by our directors is breached.
Interested Transactions
A director may vote, attend a board meeting or, presuming that the director is an officer and that it has been approved, sign a document on our behalf with respect to
any contract or transaction in which he or she is interested. We require directors to promptly disclose the interest to all other directors after becoming aware of the fact that he or
she is interested in a transaction we have entered into or are to enter into. A general notice or disclosure to the board or otherwise contained in the minutes of a meeting or a
written resolution of the board or any committee of the board that a director is a shareholder, director, officer or trustee of any specified firm or company and is to be regarded
as interested in any transaction with such firm or company will be sufficient disclosure, and, after such general notice, it will not be necessary to give special notice relating to
any particular transaction.
Remuneration and Borrowing
The directors may receive such remuneration as our board of directors may determine or change from time to time. The compensation committee will assist the
directors in reviewing and approving the compensation structure for the directors. Our board of directors may exercise all the powers of the company to borrow money and to
mortgage or charge our undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for
any debt, liability or obligation of the company or of any third party.
Qualification
A majority of our board of directors is required to be independent. There are no membership qualifications for directors. Further, there are no share ownership
qualifications for directors unless so fixed by us in a general meeting. There are no other arrangements or understandings pursuant to which our directors are selected or
nominated.
Director Compensation
All directors hold office until the next annual meeting of shareholders at which they are re-elected and until their successors have been duly elected and qualified. Our
Chief Operating Officer and Chair of our Board of Directors, Guilan Jiang is married to the CEO, Xinfu Hu. Officers are elected by and serve at the discretion of the Board of
Directors. Employee directors do not receive any compensation for their services. Non-employee directors will be entitled to receive such remuneration as our board of
directors may determine or change from time to time for serving as directors and may receive incentive option grants from our company. In addition, each non-employee
director is entitled to be repaid or prepaid all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending meetings of our board of
directors or committees of our board of directors or shareholder meetings or otherwise in connection with the discharge of his or her duties as a director.
Limitation of Director and Officer Liability
Under Cayman Islands law, each of our directors and officers, in performing his or her functions, is required to act honestly and in good faith with a view to our best
interests and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Cayman Islands law does not limit the extent
to which a company’s First Amended and Restated Memorandum and Articles of Association may provide for indemnification of officers and directors, except to the extent any
such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of
committing a crime.
Under our First Amended and Restated Memorandum and Articles of Association, we may indemnify our directors, officers and liquidators against all expenses,
including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with civil, criminal, administrative or investigative
proceedings to which they are party or are threatened to be made a party by reason of their acting as our director, officer or liquidator. To be entitled to indemnification, these
persons must have acted honestly and in good faith with a view to the best interest of the company and, in the case of criminal proceedings, they must have had no reasonable
cause to believe their conduct was unlawful. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. These
provisions will not limit the liability of directors under United States federal securities laws.
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The decision of our board of directors as to whether the director acted honestly and in good faith with a view to our best interests and as to whether the director had no
reasonable cause to believe that his or her conduct was unlawful, is in the absence of fraud sufficient for the purposes of indemnification, unless a question of law is involved.
The termination of any proceedings by any judgment, order, settlement, conviction or the entry of no plea does not, by itself, create a presumption that a director did not act
honestly and in good faith and with a view to our best interests or that the director had reasonable cause to believe that his or her conduct was unlawful. If a director to be
indemnified has been successful in defense of any proceedings referred to above, the director is entitled to be indemnified against all expenses, including legal fees, and against
all judgments, fines and amounts paid in settlement and reasonably incurred by the director or officer in connection with the proceedings.
We may purchase and maintain insurance in relation to any of our directors or officers against any liability asserted against the directors or officers and incurred by the
directors or officers in that capacity, whether or not we have or would have had the power to indemnify the directors or officers against the liability as provided in our First
Amended and Restated Memorandum and Articles of Association.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors, officers or persons controlling our company under the
foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore
unenforceable.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, nor
has been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future
violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were
dismissed without sanction or settlement. Except as set forth in our discussion below in “Related Party Transactions,” our directors and officers have not been involved in any
transactions with us or any of our affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
D. Employees
As of December 31, 2018, we employed a total of 1,476 full-time and no part time employees in the following functions:
Department
Senior Management
Human Resource & Administration
Finance
Research & Development
Material Management
Quality Control
Production
Sales & Marketing
Total
December 31,
2018
Number of Employees
December 31,
2017
December 31,
2016
23
61
17
230
18
90
1017
20
1,476
23
71
18
230
15
90
1396
19
1,862
23
54
19
180
15
80
970
18
1359
Production employees decreased in 2018 because we used more machines to replace workers and also decreased the number of production managers to control our
managing costs.
Of our total employees on December 31, 2018, 1,423 were employed in China and 62 were employed in the United States (not including John Kunes, our U.S. - based
Executive Vice President who is an independent contractor).
Our employees are not represented by a labor organization or covered by a collective bargaining agreement. We have not experienced any work stoppages.
We are required under PRC law to make contributions to employee benefit plans at specified percentages of our after-tax profit. In addition, we are required by PRC
law to cover employees in China with various types of social insurance. In 2018, we contributed approximately $998,140 and $1,788,473 to the employee benefit plans and
social insurance, respectively. In 2017, we contributed approximately $802,443 and $1,652,495 to the employee benefit plans and social insurance, respectively. In 2016, we
contributed approximately $657,074 and $1,183,373 to the employee benefit plans and social insurance, respectively. The effect on our liquidity by the payments for these
contributions is immaterial. We believe that we are in material compliance with the relevant PRC employment laws.
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Employment Agreements
In accordance with the PRC National Labor Law, which became effective in January 1995, and the PRC Labor Contract Law, which became effective in January
2008, as amended subsequently in 2012, employers must execute written labor contracts with full-time employees of the Chinese entity in order to establish an employment
relationship. However, as Mr. Hu and Ms. Jiang are retained by FGI, a Cayman Islands entity, and as Mr. Lee and Mr. Kunes are retained by a U.S. entity, they are not governed
by this requirement. Nevertheless, Mr. Kunes has an independent contractor agreement through JCK Enterprises and each of Mr. Hu, Ms. Jiang and Mr. Lee has an employment
agreement.
In China, all employers must compensate their employees equal to at least the local minimum wage standards. All employers are required to establish a system for
labor safety and sanitation, strictly abide by state rules and standards and provide employees with appropriate workplace safety training. In addition, employers in China are
obliged to pay contributions to the social insurance plan and the housing fund plan for employees. Accordingly, all of our employees, including management, have executed
their employment agreements. Our employment agreements with our executives provide the amount of each executive officer’s salary and establish their eligibility to receive a
bonus. We believe our labor relationships are good.
Our employment agreements with our executive officers generally provide for a salary to be paid monthly. The agreements also provide that executive officers are to
work full time for our company and are entitled to all legal holidays as well as other paid leave in accordance with PRC laws and regulations and our internal work policies. The
employment agreements also provide that we will pay for all mandatory social insurance programs for our executive officers in accordance with PRC regulations. In addition,
our employment agreements with our executive officers prevent them from rendering services for our competitors for so long as they are employed.
Other than the salary, bonuses, equity grants and necessary social benefits required by the government, which are defined in the employment agreements, we currently
do not provide other benefits to the officers. Our executive officers are not entitled to severance payments upon the termination of their employment agreement or following a
change in control. We are not aware of any arrangement that may at a subsequent date, result in a change of control of our company.
We have not provided retirement benefits (other than a state pension scheme in which all of our employees in China participate) or severance or change of control
benefits to our named executive officers.
Under Chinese law, we may terminate an employment agreement without penalty by providing the employee thirty days’ prior written notice or one month’s wages in
lieu of notice if the employee is incompetent or remains incompetent after training or adjustment of the employee’s position in other limited cases. If we wish to terminate an
employment agreement in the absence of cause, then we are obligated to pay the employee one month’s salary for each year we have employed the employee. We are, however,
permitted to terminate an employee for cause without penalty to our company, where the employee has committed a crime or the employee’s actions or inactions have resulted
in a material adverse effect to us.
Guilan Jiang
We entered into an employment agreement with our Chief Operating Officer and Chair, Ms. Guilan Jiang, effective September 12, 2015. Under the terms of Ms.
Jiang’s employment, she is entitled to base compensation of $100,000 per year.
Ms. Jiang’s employment has no expiration date but may be terminated immediately for cause or at any time by either party upon presentation of 30 days’ prior notice
in the event she is unable to perform assigned tasks or the parties are unable to agree to changes to her employment agreement.
Xinfu Hu
We entered into an employment agreement with our Chief Executive Officer, Mr. Xinfu Hu, effective September 12, 2015. Under the terms of Mr. Hu’s employment,
he is entitled to base compensation of $100,000 per year.
Mr. Hu’s employment has no expiration date but may be terminated immediately for cause or at any time by either party upon presentation of 30 days’ prior notice in
the event he is unable to perform assigned tasks or the parties are unable to agree to changes to his employment agreement.
Gilbert Lee
We entered into an employment agreement with our Chief Financial Officer, Mr. Lee, effective August 17, 2015. Under the terms of Mr. Lee’s employment, he is
entitled to the following:
●
Base compensation of $120,000 per year.
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● An incentive grant equal to one-half percent (0.5%) of the final outstanding shares after FGI’s initial public offering; twenty percent (20%) of such shares will be
granted upon the conclusion of the initial public offering of FGI and each anniversary of the conclusion of the initial public offering of FGI, until all such shares
have been issued, provided Mr. Lee remains employed with us at such time.
Mr. Lee’s employment has no expiration date but may be terminated immediately for cause or at any time by either party upon presentation of 30 days’ prior notice in
the event he is unable to perform assigned tasks or the parties are unable to agree to changes to his employment agreement.
E. Share Ownership
For information regarding the share ownership of our directors and senior management, see “Item 7. Major Shareholders and Related Party Transactions — A. Major
Shareholders.”
Incentive Securities Pool
Share and Share Options
We have established a pool for shares and share options for our employees. As of the date of this report, this pool contains shares and options to purchase 1,570,509 of
our Ordinary Shares, equal to 10% of the number of Ordinary Shares outstanding at the conclusion of our initial public offering. Subject to approval by the Compensation
Committee of our board of directors, we may grant options in any percentage determined for a particular grant. We may grant the award of options to existing employees,
officers and consultants. We may also grant the award of restricted stock as a hiring incentive to employees, officers and directors and to non-employee directors on an ongoing
basis.
Any options granted will vest at a rate of 20% per year for five years and have a per share exercise price equal to the fair market value of one of our common shares on
the date of grant. We expect to grant shares and/or options under this pool to certain employees. We have not yet determined the recipients of any such grants.
Item 7.
Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth information with respect to beneficial ownership of our Ordinary Shares as of April 5, 2019 by:
●
●
Each person who is known by us to beneficially own 5% or more of our outstanding Ordinary Shares;
Each of our directors and named executive officers; and
● All directors and named executive officers as a group.
The number and percentage of Ordinary Shares beneficially owned before the offering are based on 15,795,910 Ordinary Shares outstanding as of April 5, 2019.
Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of 5% or more of our Ordinary Shares. Beneficial ownership is
determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with respect to securities. In computing the number
of Ordinary Shares beneficially owned by a person listed below and the percentage ownership of such person, Ordinary Shares underlying options, warrants or convertible
securities held by each such person that are exercisable or convertible within 60 days of April 5, 2019 are deemed outstanding, but are not deemed outstanding for computing
the percentage ownership of any other person. Except as otherwise indicated in the footnotes to this table, or as required by applicable community property laws, all persons
listed have sole voting and investment power for all Ordinary Shares shown as beneficially owned by them. Unless otherwise indicated in the footnotes, the address for each
principal shareholder is in the care of our Company at Southeast Industrial Zone, Songmen Town, Wenling, Zhejiang Province, People’s Republic of China 317511.
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Directors and Senior Management:
Guilan Jiang (2)
Xinfu Hu (2)
Gilbert Lee
Jian Cao
Hong (Simon) He
Fuyou Cai
Sujuan Zhu (3)
John C. Kunes
All directors and executive officers as a group (eight (8) persons)
5% or greater Beneficial Owners:
Qian Hu (2)
Xinzhong Wang
Jinxue Jiang (3)
* Less than 1%
Ordinary Shares beneficially
owned(1)
Number
Percent
5,541,668
0
62,820
12,000
12,000
0
2,216,667
0
7,845,155
1,154,104
1,108,333
1,108,333
35.1%
-
*
*
*
-
14.0%
-
49.7%
7.3%
7.0%
7.0%
(1) Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the Ordinary Shares.
(2) Ms. Jiang and Mr. Xinfu Hu are married, and Mr. Qian Hu is their adult son. Ms. Jiang holds her shares through Silver Trillion Investments Limited, a British Virgin Islands
company which she owns and controls and may be deemed to hold beneficial ownership of such shares. Mr. Qian Hu holds 45,771 shares by himself and 1,108,333 shares
through Zheng Hui Investments Limited, a British Virgin Islands company which he owns and controls and may be deemed to hold beneficial ownership of such shares.
Mr. Xinfu Hu does not, directly or indirectly, exercise or share voting or investment power of any shares held by Silver Trillion Investments Limited or Zheng Hui
Investments Limited and disclaims beneficial ownership of such shares. Mr. Qian Hu does not, directly or indirectly, exercise or share voting or investment power of any
shares held by Silver Trillion Investments Limited and disclaims beneficial ownership of such shares. Ms. Jiang does not, directly or indirectly, exercise or share voting or
investment power of any shares held by Zheng Hui Investments Limited and disclaims beneficial ownership of such shares.
(3) Ms. Zhu is the mother of Mr. Jinxue Jiang. Ms. Zhu holds her shares through Celestial Sun Holding Limited, a British Virgin Islands company and may be deemed to share
beneficial ownership of such shares. Mr. Jiang holds 1,108,333 shares through Tengyu International Limited, a British Virgin Islands company and may be deemed to hold
beneficial ownership of such shares.
Ms. Zhu does not, directly or indirectly, exercise or share voting or investment power of any shares held by Tengyu International Limited and disclaims beneficial ownership
of such shares. Mr. Jiang does not, directly or indirectly, exercise or share voting or investment power of any shares held by Celestial Sun Holding Limited and disclaims
beneficial ownership of such shares.
B. Related party transactions
In addition to the executive officer and director arrangements discussed in “Item 6. Directors, Senior Management And Employees,” below we describe transactions
since January 1, 2012, to which we have been a participant, in which the amount involved in the transactions is material to us or the related party.
Special Plastics; Ms. Guilan Jiang and Mr. Qian Hu
Since the beginning of fiscal 2012, we have had transactions with Special Plastics, a PRC company that was previously 95% owned by our Chief Operating Officer and
Chair, Ms. Guilan Jiang, and 5% owned by Mr. Qian Hu, a shareholder of FGI and Ms. Jiang’s and Mr. Xinfu Hu’s son. Mr. Qian Hu currently owns 100% of Special Plastics.
Special Plastics has established an advanced testing center that has been certified by China’s National Accreditation Service for Conformity Assessment. Special Plastics
mainly provides some pre-delivery product testing for our products in addition to the testing we conduct ourselves. Special Plastics currently provides these services without
additional charge to us. We estimate that we would pay approximately $10,000 per year for these services if Special Plastics did not provide such services, and we do not
anticipate that we would encounter any difficulty obtaining such services from a third party. None of Ms. Jiang, Mr. Qian Hu or Special Plastics receives any material benefit
from third parties for providing these testing services.
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Since our products are exported, it is important to ensure that our products conform to standards in the different countries where they are sold. Special Plastics’ facility
is equipped with industry leading testing equipment and experts. The facility includes low-high temperature test chambers, automatic density apparatus, automatic colorimeter,
electronic balance, melt flow rate tester, Charpy impact strength testing machine and ATP fluorescence detector.
Rental Payments to Special Plastics
During the years ended December 31, 2018, 2017 and 2016, we paid Special Plastics $55,715, $54,550 and $55,484, respectively, for rental of a factory building at 8
Shengpan Road, Guanweitong Village, Wenqiao County.
Future Related Party Transactions
Our Corporate Governance Committee of our board of directors (which consists solely of independent directors) have approved all related party transactions. All
material related party transactions are made or entered into on terms that are no less favorable to use than can be obtained from unaffiliated third parties.
C. Interests of experts and counsel
Not applicable for annual reports on Form 20-F.
Item 8.
Financial Information
A. Consolidated Statements and Other Financial Information
Please refer to Item 18.
Legal and Administrative Proceedings
We are currently not a party to any material legal or administrative proceedings and are not aware of any pending or threatened material legal or administrative
proceedings against us. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.
Dividend Policy
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. 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.)
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.
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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.
B. Significant Changes
We have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
Item 9.
The Offer and Listing
A. Offer and listing details
Our Ordinary Shares have been listed on the Nasdaq Capital Market since November 4, 2015 under the symbol “FORK.” The table below shows, for the periods
indicated, the high and low market prices for our shares.
Yearly:
2015 (from November 4, 2015)
2016
2017
2018
2019 (through April 2, 2019)
Quarterly:
First quarter 2017
Second quarter 2017
Third quarter 2017
Fourth quarter 2017
First quarter 2018
Second quarter 2018
Third quarter 2018
Fourth quarter 2018
First quarter 2019
Monthly:
October 2018
November 2018
December 2018
January 2019
February 2019
March 2019
95
Market Price Per Share
Low
High
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
5.27
3.45
3.70
5.20
3.89
3.70
3.75
6.00
6.00
5.20
4.35
4.00
4.29
3.89
4.29
3.77
4.29
3.89
3.89
3.14
2.24
1.68
2.30
2.35
2.12
2.30
2.65
3.10
3.55
3.75
3.75
2.35
3.01
2.12
3.42
3.01
3.40
3.50
2.32
2.12
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B. Plan of distribution
Not applicable for annual reports on Form 20-F.
C. Markets
Our Ordinary Shares are listed on the Nasdaq Capital Market under the symbol “FORK.”
D. Selling shareholders
Not applicable for annual reports on Form 20-F.
E. Dilution
Not applicable for annual reports on Form 20-F.
F. Expenses of the issue
Not applicable for annual reports on Form 20-F.
Item 10.
Additional Information
A. Share capital
Not applicable for annual reports on Form 20-F.
B. Memorandum and articles of association
The information required by this item is incorporated by reference to the material headed “Description of Share Capital” in our Registration Statement on Form F-1,
File no. 333-205894, filed with the SEC on July 28, 2015, as amended.
C. Material contracts
We have not entered into any material contracts other than in the ordinary course of business and otherwise described elsewhere in this annual report.
D. Exchange controls
Foreign Currency Exchange
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations. Under the PRC foreign exchange
regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, may be made in foreign currencies
without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with 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 foreign currency-denominated loans or
foreign currency is to be remitted into China under the capital account, such as a capital increase or foreign currency loans to our PRC subsidiaries.
In August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of
Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency-registered
capital into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45 on November 9, 2011 in order to clarify the application of
SAFE Circular 142. Under SAFE Circular 142 and Circular 45, the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be
used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within the PRC. In addition, SAFE
strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB
capital may not be changed without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used.
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In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment,
which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts,
such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds by foreign investors in the PRC, and
remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and
multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated the Circular on Printing
and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which
specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall
process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches.
We typically do not need to use our offshore foreign currency to fund our PRC operations. In the event we need to do so, we will apply to obtain the relevant approvals
of SAFE and other PRC government authorities as necessary.
SAFE Circular 75
Under the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special
Purpose Vehicles, or SAFE Circular 75, issued by SAFE on October 21, 2005 and its implementation rules, a PRC resident (whether a natural or legal person) is required to
complete an initial registration with its local SAFE branch before incorporating or acquiring control of an offshore special purpose vehicle, or SPV, with assets or equity
interests in a PRC company, for the purpose of offshore equity financing. The PRC resident is also required to amend the registration or make a filing upon (1) the injection of
any assets or equity interests in an onshore company or undertaking of offshore financing, or (2) the occurrence of a material change that may affect the capital structure of a
SPV. SAFE also subsequently issued various guidance and rules regarding the implementation of SAFE Circular 75, which imposed obligations on PRC subsidiaries of
offshore companies to coordinate with and supervise any PRC-resident beneficial owners of offshore entities in relation to the SAFE registration process.
Regulation of Dividend Distribution
The principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in the PRC are the Company Law of the PRC, as amended, the
Wholly Foreign-owned Enterprise Law and its implementation regulations and the Equity Joint Venture Law and its implementation regulations. Under these laws, rules and
regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if any, as determined in accordance with PRC accounting standards and
regulations. Both PRC domestic companies and wholly-foreign owned PRC enterprises are required to set aside as general reserves at least 10% of their after-tax profit, until
the cumulative amount of such reserves reaches 50% of their registered capital. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years
have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.
E .. Taxation
The following sets forth the material Cayman Islands, Chinese and U.S. federal income tax consequences related to an investment in our Ordinary Shares. It is directed
to U.S. Holders (as defined below) of our Ordinary Shares and is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which
are subject to change. This description does not deal with all possible tax consequences relating to an investment in our Ordinary Shares, such as the tax consequences under
state, local and other tax laws.
The following brief description applies only to U.S. Holders (defined below) that hold Ordinary Shares as capital assets and that have the U.S. dollar as their functional
currency. This brief description is based on the tax laws of the United States in effect as of the date of this annual report and on U.S. Treasury regulations in effect or, in some
cases, proposed, as of the date of this annual report, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities
are subject to change, which change could apply retroactively and could affect the tax consequences described below.
The brief description below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of shares and you are, for
U.S. federal income tax purposes,
●
●
●
●
an individual who is a citizen or resident of the United States;
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the
District of Columbia;
an estate whose income is subject to U.S. federal income taxation regardless of its source; or
a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2)
has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
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WE URGE HOLDERS OF OUR SHARES TO CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR SHARES.
People’s Republic of China Enterprise Taxation
The following brief description of Chinese enterprise laws is designed to highlight the enterprise-level taxation on our earnings, which will affect the amount of
dividends, if any, we are ultimately able to pay to our shareholders. See “Dividend Policy.”
We are a holding company incorporated in the Cayman Islands and we gain substantial income by way of dividends paid to us from our PRC subsidiaries. The EIT
Law and its implementation rules provide that China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its equity holders that are non-
resident enterprises, will normally be subject to PRC withholding tax at a rate of 10%, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China
that provides for a preferential tax rate or a tax exemption.
Under the EIT Law, an enterprise established outside of China with a “de facto management body” within China is considered a “resident enterprise,” which means
that it is treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Although the implementation rules of the EIT Law define “de facto management
body” as a managing body that actually, comprehensively manage and control the production and operation, staff, accounting, property and other aspects of an enterprise, the
only official guidance for this definition currently available is set forth in SAT Notice 82, which provides guidance on the determination of the tax residence status of a Chinese-
controlled offshore incorporated enterprise, defined as an enterprise that is incorporated under the laws of a foreign country or territory and that has a PRC enterprise or
enterprise group as its primary controlling shareholder. Although FGI does not have a PRC enterprise or enterprise group as our primary controlling shareholder and is therefore
not a Chinese-controlled offshore incorporated enterprise within the meaning of SAT Notice 82, in the absence of guidance specifically applicable to us, we have applied the
guidance set forth in SAT Notice 82 to evaluate the tax residence status of FGI and its subsidiaries organized outside the PRC.
According to SAT Notice 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto management
body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met: (i) the places where senior management
and senior management departments that are responsible for daily production, operation and management of the enterprise perform their duties are mainly located within the
territory of China; (ii) financial decisions (such as money borrowing, lending, financing and financial risk management) and personnel decisions (such as appointment,
dismissal and salary and wages) are decided or need to be decided by organizations or persons located within the territory of China; (iii) main property, accounting books,
corporate seal, the board of directors and files of the minutes of shareholders’ meetings of the enterprise are located or preserved within the territory of China; and (iv) one half
(or more) of the directors or senior management staff having the right to vote habitually reside within the territory of China.
We believe that we do not meet some of the conditions outlined in the immediately preceding paragraph. For example, as a holding company, the key assets and
records of FGI, including the resolutions and meeting minutes of our board of directors and the resolutions and meeting minutes of our shareholders, are located and maintained
outside the PRC. In addition, we are not aware of any offshore holding companies with a corporate structure similar to ours that has been deemed a PRC “resident enterprise”
by the PRC tax authorities. Accordingly, we believe that FGI and its offshore subsidiaries should not be treated as a “resident enterprise” for PRC tax purposes if the criteria for
“de facto management body” as set forth in SAT Notice 82 were deemed applicable to us. However, as the tax residency status of an enterprise is subject to determination by the
PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body” as applicable to our offshore entities, we will continue to
monitor our tax status.
The implementation rules of the EIT Law provide that, (i) if the enterprise that distributes dividends is domiciled in the PRC or (ii) if gains are realized from
transferring equity interests of enterprises domiciled in the PRC, then such dividends or gains are treated as China-sourced income. It is not clear how “domicile” may be
interpreted under the EIT Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we are considered as a PRC tax resident
enterprise for PRC tax purposes, any dividends we pay to our overseas shareholders which are non-resident enterprises as well as gains realized by such shareholders from the
transfer of our shares may be regarded as China-sourced income and as a result become subject to PRC withholding tax at a rate of up to 10%.
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See “Risk Factors — Risks Related to Doing Business in China — Under the Enterprise Income Tax Law, we may be classified as a “Resident Enterprise” of China.”
Our company pays a 17% value added tax and EIT rates of 15% for Taizhou Fuling (or $1,111,784 in 2018) because it has been certified as a high technology company
and thus enjoys a preferable rate. Great Plastics pays EIT tax at the standard 25% rate (or $221,226 in 2018). If Taizhou Fuling’s favorable EIT rate were to be terminated or
Taizhou Fuling were to fail to qualify to receive this rate, it would be subject to taxation at the standard EIT rate of 25% for enterprise income taxes, unless we were otherwise to
qualify for a decreased tax rate.
Any gain or loss recognized by you generally will be treated as United States source gain or loss. However, if we are treated as a PRC resident enterprise for PRC tax
purposes and PRC tax were imposed on any gain, and if you are eligible for the benefits of the tax treaty between the United States and PRC, you may elect to treat such gain as
PRC source gain under such treaty and, accordingly, you may be able to credit the PRC tax against your United States federal income tax liability.
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of
inheritance tax or estate duty. There are no other taxes likely to be material to our company levied by the Government of the Cayman Islands except for stamp duties which may
be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not a party to any double tax treaties.
There are no exchange control regulations or currency restrictions in the Cayman Islands.
Cayman Islands Taxation
The following does not address the tax consequences to any particular investor or to persons in special tax situations such as:
United States Federal Income Taxation
●
●
●
●
●
●
●
banks;
financial institutions;
insurance companies;
regulated investment companies;
real estate investment trusts;
broker-dealers;
traders that elect to mark-to-market;
● U.S. expatriates;
●
●
●
●
●
●
tax-exempt entities;
persons liable for alternative minimum tax;
persons holding our Ordinary Shares as part of a straddle, hedging, conversion or integrated transaction;
persons that actually or constructively own 10% or more of our voting shares;
persons who acquired our Ordinary Shares pursuant to the exercise of any employee share option or otherwise as consideration; or
persons holding our Ordinary Shares through partnerships or other pass-through entities.
You are urged to consult your own tax advisors about the application of the U.S. federal income tax rules to your particular circumstances as well as the state, local,
foreign income and other tax consequences of the purchase, ownership and disposition of our Ordinary Shares.
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Taxation of Dividends and Other Distributions on our Ordinary Shares
Subject to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect to the Ordinary Shares
(including the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of receipt by you, but only to the
extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). With respect to corporate
U.S. Holders, the dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.
With respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend
income, provided that (1) the Ordinary Shares are readily tradable on an established securities market in the United States, or we are eligible for the benefits of an approved
qualifying income tax treaty with the United States that includes an exchange of information program, (2) we are not a passive foreign investment company (as discussed
below) for either our taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met. Under U.S. Internal Revenue
Service authority, Ordinary Shares are considered for purpose of clause (1) above to be readily tradable on an established securities market in the United States if they are listed
on the Nasdaq Capital Market. You are urged to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our Ordinary Shares,
including the effects of any change in law after the date of this annual report.
Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above),
the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to the gross amount of the dividend, multiplied by the
reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific
classes of income. For this purpose, dividends distributed by us with respect to our Ordinary Shares will constitute “passive category income” but could, in the case of certain
U.S. Holders, constitute “general category income.”
To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), it
will be treated first as a tax-free return of your tax basis in your Ordinary Shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed
as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will be
treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
Taxation of Dispositions of Ordinary Shares
Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of
a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the Ordinary Shares. The gain or loss will
generally be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the Ordinary Shares for more than one year, you
will generally be eligible for reduced tax rates. The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as
United States source income or loss for foreign tax credit limitation purposes.
Passive Foreign Investment Company
A non-U.S. corporation is considered a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable year if either:
●
●
at least 75% of its gross income is passive income; or
at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are
held for the production of passive income (the “asset test”).
We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own,
directly or indirectly, at least 25% (by value) of the stock.
Based on the market price of our Ordinary Shares, the value of our assets and the composition of our assets and income, we believe that we were not a PFIC for our
taxable year ended December 31, 2017, 2016 or 2015. However, given the factual nature of the analyses and the lack of guidance, no assurance can be given. We do not expect
to be a PFIC for our taxable year ending December 31, 2018. However, because PFIC status is a factual determination for each taxable year which cannot be made until the
close of the taxable year, our actual PFIC status will not be determinable until the close of the taxable year and, accordingly, there is no guarantee that we will not be a PFIC for
the current taxable year or any future taxable year.
We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change from year to year. In particular, because the
value of our assets for purposes of the asset test will generally be determined based on the market price of our Ordinary Shares, our PFIC status will depend in large part on the
market price of our Ordinary Shares. Accordingly, fluctuations in the market price of the Ordinary Shares may cause us to become a PFIC. In addition, the application of the
PFIC rules is subject to uncertainty in several respects includingthe composition of our income and assets in a given year. If we are a PFIC for any year during which you hold
Ordinary Shares, we will continue to be treated as a PFIC for all succeeding years during which you hold Ordinary Shares. However, if we cease to be a PFIC, you may avoid
some of the adverse effects of the PFIC regime by making a “deemed sale” election with respect to the Ordinary Shares.
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If we are a PFIC for any taxable year during which you hold Ordinary Shares, you will be subject to special tax rules with respect to any “excess distribution” that you
receive and any gain you realize from a sale or other disposition (including a pledge) of the Ordinary Shares, unless you make a “mark-to-market” election as discussed below.
Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or
your holding period for the Ordinary Shares will be treated as an excess distribution. Under these special tax rules:
●
●
●
the excess distribution or gain will be allocated ratably over your holding period for the Ordinary Shares;
the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income,
and
the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of
tax will be imposed on the resulting tax attributable to each such year.
The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and
gains (but not losses) realized on the sale of the Ordinary Shares cannot be treated as capital, even if you hold the Ordinary Shares as capital assets.
A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above.
If you make a mark-to-market election for the Ordinary Shares, you will include in income each year an amount equal to the excess, if any, of the fair market value of the
Ordinary Shares as of the close of your taxable year over your adjusted basis in such Ordinary Shares. You are allowed a deduction for the excess, if any, of the adjusted basis of
the Ordinary Shares over their fair market value as of the close of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the
Ordinary Shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other
disposition of the Ordinary Shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the Ordinary
Shares, as well as to any loss realized on the actual sale or disposition of the Ordinary Shares, to the extent that the amount of such loss does not exceed the net mark-to-market
gains previously included for such Ordinary Shares. Your basis in the Ordinary Shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-
market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except that the lower applicable capital gains
rate for qualified dividend income discussed above under “— Taxation of Dividends and Other Distributions on our Ordinary Shares” generally would not apply.
The mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least 15 days during each
calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations), including the Nasdaq Capital Market. If the
Ordinary Shares are regularly traded on the Nasdaq Capital Market and if you are a holder of Ordinary Shares, the mark-to-market election would be available to you were we to
be or become a PFIC.
Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax treatment discussed
above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross income for a taxable year such holder’s pro rata
share of the corporation’s earnings and profits for the taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S. Holder with
certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not currently intend to prepare or provide the information
that would enable you to make a qualified electing fund election. If you hold Ordinary Shares in any year in which we are a PFIC, you will be required to file U.S. Internal
Revenue Service Form 8621 regarding distributions received on the Ordinary Shares and any gain realized on the disposition of the Ordinary Shares.
You are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our Ordinary Shares and the elections discussed above.
Information Reporting and Backup Withholding
Dividend payments with respect to our Ordinary Shares and proceeds from the sale, exchange or redemption of our Ordinary Shares may be subject to information
reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct
taxpayer identification number and makes any other required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding.
U.S. Holders who are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. You are urged to consult
their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
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Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may
obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service and
furnishing any required information. We do not intend to withhold taxes for individual shareholders.
Under the Hiring Incentives to Restore Employment Act of 2010, certain United States Holders are required to report information relating to ordinary shares, subject to
certain exceptions (including an exception for ordinary shares held in accounts maintained by certain financial institutions), by attaching a complete Internal Revenue Service
Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in which they hold ordinary shares. U.S. Holders are urged to consult their tax
advisors regarding the application of the U.S. information reporting and backup withholding rules.
F. Dividends and paying agents
Not applicable for annual reports on Form 20-F.
G. Statement by experts
Not applicable for annual reports on Form 20-F.
H. Documents on display
We are subject to the information requirements of the Exchange Act. In accordance with these requirements, the Company files reports and other information with the
SEC. You may read and copy any materials filed with the SEC at the Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that contains reports and other
information regarding registrants that file electronically with the SEC.
I. Subsidiary Information
Not applicable.
Item 11.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to interest rate risk primarily relates to excess cash invested in short-term instruments with original maturities of less than a year and long-term held-to-
maturity securities with maturities of greater than a year. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed
rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if we
have to sell securities that have declined in market value due to changes in interest rates. We have not been, and do not expect to be, exposed to material interest rate risks, and
therefore have not used any derivative financial instruments to manage our interest risk exposure.
In 2018, 2017 and 2016, we had $28.2 million, $22.2 million and $16.5 million weighted outstanding bank loans, with weighted average effective interest rate of
4.89%, 5.07% and 4.37% respectively.
As of December 31, 2018, if interest rates increased/decreased by 1%, with all other variables having remained constant, and assuming the amount of bank borrowings
outstanding at the end of the year was outstanding for the entire year, profit attributable to equity owners of our company would have been RMB 2.1 million (0.3
million) lower/higher, respectively, mainly as a result of higher/lower interest income from our cash and cash equivalents and loan receivables.
As of December 31, 2018, we had short-term certificates of deposit of $0 million.
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Foreign Exchange Risk
Our functional currency is the RMB, and our financial statements are presented in U.S. dollar. The RMB depreciated by 1.4% in 2015 and 6.7% in 2016 and
appreciated by 6.3% in 2017. The change in the value of RMB relative to the U.S. dollar may affect our financial results reported in the U.S., dollar terms without giving effect
to any underlying change in our business or results of operation.
Currently, our assets, liabilities, revenues and costs are denominated in RMB and in U.S. dollars, and our offering proceeds will be denominated in U.S. dollars. Our
exposure to foreign exchange risk will primarily relate to those financial assets denominated in U.S. dollars. Any significant revaluation of RMB against U.S. dollar may
materially affect our earnings and financial position, and the value of, and any dividends payable on, our Ordinary Shares in U.S. dollars in the future. See “Risk Factors —
Risks Related to Doing Business in China — Fluctuations in exchange rates could adversely affect our business and the value of our securities.”
Commodity Risk
As a developer and manufacturer of plastic and paper products, our Company is exposed to the risk of an increase in the price of raw materials. We historically have
been able to pass on price increases to customers by virtue of pricing terms that vary with changes in resin prices, but we have not entered into any contract to hedge any
specific commodity risk. Moreover, our Company does not purchase or trade on commodity instruments or positions; instead, it purchases commodities for use.
Item 12.
Description of Securities Other than Equity Securities
With the exception of Items 12.D.3 and 12.D.4, this Item 12 is not applicable for annual reports on Form 20-F. As to Items 12.D.3 and 12.D.4, this Item 12 is not
applicable, as the Company does not have any American Depositary Shares.
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Item 13.
Defaults, Dividend Arrearages and Delinquencies
PART II
We do not have any material defaults in the payment of principal, interest, or any installments under a sinking or purchase fund.
Item 14.
Material Modifications to the Rights of Securities Holders and Use of Proceeds
Material Modifications to the Rights of Security Holders
The information required here is incorporated by reference to the material headed “Description of Share Capital-Ordinary Shares” in our Registration Statement on
Form F-1, File No. 333-205894, filed with the SEC on July 28, 2015, as amended.
Use of Proceeds
Not applicable as we disclosed application of all the offering proceeds in our Annual Report on Form 20-F, File 001-37602, filed with the SEC on March 15, 2017.
Item 15.
Controls and Procedures
(a)
Disclosure Controls and Procedures.
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) that are designed to ensure
that information required to be disclosed in our reports that we file or submit under the Security Exchange Act of 1934 is recorded, processed, summarized and reported, within
the time period specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial
officers, or persons performing similar functions, as appropriate, to allow for timely decisions regarding disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of December 31, 2018, the end of the fiscal year covered by this report, our management, under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures. Based on the evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that, as of December 31, 2018, our disclosure controls and procedures were ineffective. Such conclusion is due to the presence of
material weakness in internal control over financial reporting as described below.
(b)
Management’s annual report on internal control over financial reporting.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. We used the 2013 Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “2013 COSO Framework”) in performing the assessment of the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. Based on the assessment, management determined that, as of December 31,
2018, we did not maintain effective internal control over financial reporting as our accounting staff continues to lack sufficient U.S. GAAP experience and requires further
substantial training. In addition, there was a lack of sufficient documented financial closing procedures.
(c)
Attestation report of the registered public accounting firm.
Not applicable.
(d)
Changes in internal control over financial reporting.
There have been no changes in our internal controls over financial reporting occurred during the twelve months ended December 31, 2018, that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Item 15T.
Controls and Procedures
Not applicable.
Item 16.
[Reserved]
Item 16A.
Audit Committee Financial Expert
The Company’s board of directors has determined that Mr. Hong (Simon) He qualifies as an “audit committee financial expert” in accordance with applicable Nasdaq
Capital Market standards. The Company’s board of directors has also determined that Mr. He and the other members of the Audit Committee are all “independent” in
accordance with the applicable Nasdaq Capital Market standards.
Item 16B.
Code of Ethics
The Company has adopted a Code of Business Conduct and Ethics that applies to the Company’s directors, officers, employees and advisors. The Code of Ethics is
attached it as an exhibit to this annual report. We have also posted a copy of our code of business conduct and ethics on our website at http://ir.fulingglobal.com/.
Item 16C.
Principal Accountant Fees and Services
Friedman LLP was appointed by the Company to serve as its independent registered public accounting firm for fiscal 2018. Audit services provided by Friedman LLP
for fiscal 2018 included the examination of the consolidated financial statements of the Company; and services related to periodic filings made with the SEC.
Fees Paid To Independent Registered Public Accounting Firm
Audit Fees
During fiscal 2018, 2017 and 2016, Friedman LLP’s fees for the annual audit of our financial statements and the quarterly reviews of the financial statements were
$170,000, $195,000 and $201,000, respectively.
Audit-Related Fees
The Company has not paid Friedman LLP for audit-related services in fiscal 2018, 2017 and 2016.
Tax Fees
The Company has not paid Friedman LLP for tax services in fiscal 2018, 2017 and 2016.
All Other Fees
The Company has not paid Friedman LLP for any other services in fiscal 2018, 2017 and 2016.
Audit Committee Pre-Approval Policies
Before Friedman LLP was engaged by the Company to render audit or non-audit services, the engagement was approved by the Company’s audit committee. All
services rendered by Friedman LLP have been so approved.
Percentage of Hours
The percentage of hours expended on the principal accountants’ engagement to audit our consolidated financial statements for 2018 that were attributed to work
performed by persons other than Friedman LLP’s full-time permanent employees was less than 50%.
Item 16D.
Exemptions from the Listing Standards for Audit Committees
Not applicable.
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Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Neither the Company nor any affiliated purchaser has purchased any shares or other units of any class of the Company’s equity securities registered by the Company
pursuant to Section 12 of the Securities Exchange Act during the fiscal year ended December 31, 2018.
Item 16F.
Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G.
Corporate Governance
We are incorporated in the Cayman Islands and our corporate governance practices are governed by applicable Cayman Islands law. In addition, because our ordinary
shares are listed on The Nasdaq Capital Market, we are subject to Nasdaq’s corporate governance requirements.
As noted above in the risk factor titled “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”, The Nasdaq Capital Market allows foreign private issuers like our Company to opt to follow rules
that apply in the issuer’s home country instead of a given Nasdaq rule. For example, there are circumstances in which Nasdaq requires a company to obtain Nasdaq-listed
companies to get shareholder approval prior to issuing stock, but a foreign private issuer may not need such shareholder approval if their home country does not require it.
agreed not to rely on any home country rules during the period of two years after the completion of our initial public offering (“Voluntary Reporting Period”). As a result,
during the Voluntary Reporting Period, we were bound by all of the same Nasdaq rules that a U.S. domestic company listed on The Nasdaq Capital Market would be required to
follow. As this period has passed, we can decide to follow home country practice and our board of directors could make such a decision to depart from such requirements by
ordinary resolution.
Item 16H.
Mine Safety Disclosure
Not applicable.
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Table of Contents
Item 17.
Financial Statements
See Item 18.
Item 18.
Financial Statements
PART III
Our consolidated financial statements are included at the end of this annual report, beginning with page F-1.
Item 19.
Exhibits
Exhibit No.
Description of Exhibit
Included
Form
Filing Date
1.1.1
1.1.2
2.1
2.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
8.1
11.1
12.1
12.2
13.1
Form of Amended and Restated Articles of Association of the Registrant as currently in effect
By Reference
F-1/A October 20, 2015
Form of Amended and Restated Memorandum of Association of the Registrant as currently in effect
By Reference
F-1/A October 20, 2015
Registrant’s Form of Ordinary Share Certificate
By Reference
F-1/A
October 2, 2015
Registrant’s Incentive Securities Plan
Employment Agreement with Xinfu Hu
Employment Agreement with Guilan Jiang
Employment Agreement with Gilbert Lee
By Reference
F-1/A
October 2, 2015
By Reference
F-1/A September 14, 2015
By Reference
F-1/A September 14, 2015
By Reference
F-1/A September 14, 2015
First Amendment of Standard Industrial/Commercial Multi-Tenant Lease, by and between CAM 6690
By Reference
F-1
July 28, 2015
Grant Way, LLC and Fuling Plastic USA, Inc.
Translation of Factory Lease Agreement by and between Zhejiang Special Plastics Technology Co., Ltd.
Herewith
and Taizhou Fuling Plastics Co., Ltd.
Summary Translation of State-Owned Construction Land Use Right Transfer Contract by and between
By Reference
F-1
July 28, 2015
Land Resources Bureau of Sanmen County of Zhejiang Province and Zhejiang Great Plastics Technology
Co., Ltd.
Lease Agreement by and among Servicios Interpuerto, S.A. de C.V., Mayenco, S. de R.L. de C.V. and
Herewith
Fuling Plastic USA, Inc.
Instrument of Transfer by and between Guilan Jiang and Fuling Global Inc.
By Reference
F-1
July 28, 2015
List of Subsidiaries of the Registrant
Code of Business Conduct and Ethics
By Reference
20-F
March 15, 2017
By Reference
20-F
March 30, 2016
Certification of Chief Executive Officer Required by Rule 13a-14(a)
Certification of Chief Financial Officer Required by Rule 13a-14(a)
Herewith
Herewith
Certification of Chief Executive Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of
Herewith
Title 18 of the United States Code
13.2
Certification of Chief Financial Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of
Herewith
Title 18 of the United States Code
99.1
Press release dated April 5, 2019 titled “Fuling Global Inc. Reports Full Year 2018 Financial Results”
Herewith
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Extension Calculation Linkbase Document.
XBRL Taxonomy Extension Definition Linkbase Document.
XBRL Taxonomy Extension Labels Linkbase Document.
XBRL Taxonomy Extension Presentation Linkbase Document.
107
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The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this
SIGNATURES
annual report on its behalf.
Date: April 5, 2019
Fuling Global Inc.
By:
/s/ Xinfu Hu
Name: Xinfu Hu
Title:
Chief Executive Officer
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Table of Contents
FULING GLOBAL INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 and 2016
Table of Contents
FULING GLOBAL INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
F-7 – F-27
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Fuling Global Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Fuling Global Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2018 and 2017,
and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statement. We believe that our audits provide a reasonable basis for our opinion.
/s/ Friedman LLP
We have served as the Company’s auditor since 2015.
New York, New York
April 5, 2019
F-2
FULING GLOBAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Table of Contents
Current Assets:
Cash and cash equivalents
Restricted cash
Certificates of deposit
Accounts receivable, net
Advances to supplier, net
Inventories, net
Security deposits for sale leaseback
Prepaid expenses and other current assets
Current assets from discontinued operation
Total Current Assets
Property, plant and equipment, net
Intangible assets, net
Prepayments for construction and equipment purchases
Security deposits for sale leaseback - long term
Other assets
Non-current assets from discontinued operations
Total Assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Short term borrowings
Bank notes payable
Advances from customers
Accounts payable
Accounts Payable-related party
Accrued and other liabilities
Other payable - sale leaseback
Taxes payable
Deferred gains
Due to Related party
Current liabilities from discontinued operation
Total Current Liabilities
Deferred tax liability
Long term payable - sale leaseback
Long term borrowings
Total Liabilities
Commitments and contingencies
Shareholders’ Equity
Common stock: $0.001 par value, 70,000,000 shares authorized, 15,795,910 and 15,780,205 shares issued and outstanding as of
December 31, 2018 and December 31, 2017, respectively
Additional paid in capital
Statutory reserve
Retained earnings
Accumulated other comprehensive income
Total Fuling Global Inc.’s equity
Non-controlling interest
Total Shareholders’ Equity
December 31,
December 31,
2018
2017
$
$
$
4,400,402 $
2,396,993
-
27,760,956
1,255,420
22,274,613
-
1,394,234
37,761
59,520,379
51,836,633
8,157,916
1,222,888
1,590,671
297,906
13,697
122,640,090 $
4,103,797
3,767,081
105,707
22,935,245
509,770
19,320,066
771,814
2,185,961
3,313,681
57,013,122
43,680,372
8,797,581
527,568
543,996
282,195
5,884,799
116,729,633
19,890,641 $
2,888,053
393,749
18,186,400
82,014
2,121,304
2,847,859
247,635
291,170
12,200
528,263
47,489,288
577,826
2,635,567
7,203,357
57,906,038
27,417,082
4,436,680
543,675
12,797,853
-
2,794,584
2,755,931
262,828
87,605
-
4,466,481
55,562,719
-
1,371,359
1,801,887
58,735,965
15,797
30,009,545
5,532,945
31,602,434
(2,472,254)
64,688,467
15,781
29,904,285
4,617,039
22,654,848
651,597
57,843,550
45,585
64,734,052
150,118
57,993,668
Total Liabilities and Shareholders’ Equity
$
122,640,090 $
116,729,633
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
FULING GLOBAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Revenues
Cost of goods sold
Gross Profit
Operating Expenses
Selling expenses
General and administrative expenses
Research and development expenses
Total operating expenses
Income from Operations
Other Income (Expense):
Interest income
Interest expense
Subsidy income
Investment loss
Foreign currency transaction gain (loss)
Other income, net
Total other income (expense), net
Income Before Income Taxes
Provision for Income Taxes
Net income from continuing operations
Discontinued operation:
Net loss from discontinued operations, net of tax
Net income
For the Years Ended December 31,
2017
2016
2018
$
$
138,664,272
108,914,256
29,750,016
124,208,506 $
98,077,100
26,131,406
102,320,689
77,129,454
25,191,235
7,830,280
8,323,207
3,430,529
19,584,016
6,834,645
7,254,270
2,953,477
17,042,392
5,955,391
6,277,018
2,355,449
14,587,858
10,166,000
9,089,014
10,603,377
32,810
(1,768,434)
1,705,956
(8,667)
780,406
65,926
807,997
57,477
(981,061)
1,012,128
-
(175,271)
51,607
(35,120)
27,870
(589,758)
1,646,774
-
56,970
65,260
1,207,116
10,973,997
9,053,894
11,810,493
1,126,736
788,370
1,561,404
$
9,847,261
$
8,265,524 $
10,249,089
(88,302)
9,758,959
(1,974,852)
6,290,672
(2,306,036)
7,943,053
Less: net income (loss) attributable to non-controlling interest from continuing operations
(104,533)
12,875
20
Net income attributable to Fuling Global Inc.
$
9,863,492
$
6,277,797 $
7,943,033
Other Comprehensive Income
Foreign currency translation income (loss)
Comprehensive income attributable to Fuling Global Inc.
Earnings per share - Basic and diluted
Continuing operations
Discontinued operations
Weighted average number of shares - Basic and diluted
Continuing operations and discontinued operations
(3,123,851)
$
6,739,641
2,172,347
8,450,144 $
(1,913,200)
6,029,833
$
0.62
(0.01) $
0.52 $
(0.13) $
0.65
(0.15)
$
$
$
15,782,055
15,759,293
15,735,588
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
FULING GLOBAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
Common Stock
Shares
Amount
Additional
Paid in
Capital
Balance at December 31, 2015 15,732,795 $
15,733 $ 29,722,127 $
Statutory Retained
Reserve
2,868,844 $ 10,182,213 $
Earnings
23,705
-
24
-
123,315
-
-
-
-
7,943,033
Issuance of common stock
Net income
Appropriations to statutory
reserve
Foreign currency translation
loss
-
-
-
-
-
1,149,113
(1,149,113)
-
-
-
(1,913,200)
-
(1,913,200)
Accumulated
Other
Comprehensive
Income
(loss)
Noncontrolling
Interest
Total
shareholders’
Equity
392,450 $
137,223 $ 43,318,590
-
-
-
-
20
123,339
7,943,053
-
-
Balance at December 31, 2016 15,756,500
15,757 29,845,442
4,017,957 16,976,133
(1,520,750)
137,243
49,471,782
Issuance of common stock
Net income
Appropriations to statutory
reserve
Foreign currency translation
gain
23,705
-
-
-
24
-
-
-
58,843
-
-
-
-
6,277,797
-
599,082
(599,082)
-
-
-
-
12,875
58,867
6,290,672
-
-
-
-
-
2,172,347
-
2,172,347
Balance at December 31, 2017 15,780,205
15,781 29,904,285
4,617,039 22,654,848
651,597
150,118
57,993,668
Issuance of common stock
Net income
Appropriations to statutory
reserve
Foreign currency translation
loss
15,705
-
16
-
105,260
-
-
-
-
9,863,492
-
-
-
-
(104,533)
105,276
9,758,959
-
-
-
-
-
-
-
915,906
(915,906)
-
-
-
(3,123,851)
-
(3,123,851)
Balance at December 31, 2018 15,795,910 $
15,797 $ 30,009,545 $
5,532,945 $ 31,602,434 $
(2,472,254) $
45,585 $ 64,734,052
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
FULING GLOBAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Net (loss) from discontinued operations
Net income from continuing operations
Adjustments to reconcile net income to net cash provided by operating activities:
Stock based compensation
Deferred tax expense
Depreciation and amortization
Bad debt provisions (recovery)
Unrealized (gains) losses
Inventory reserve
(Gain) loss on disposal of fixed assets
Changes in operating assets:
Accounts receivable
Advances to suppliers
Inventories
Other assets
Security deposit for sale leaseback
Changes in operating liabilities:
Accounts payable
Accounts Payable-related party
Advance from customers
Deferred gains
Deferred tax liability
Taxes payable
Accrued and other liabilities
Net cash provided by operating activities from continuing operations
Net cash provided by operating activities from discontinuing operations
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment
Additions to construction in progress
Cash receipts from disposal property and equipment
Cash increase in certificates of deposit
Payments of construction and equipment purchase
Repayments of deposit and prepayments for construction and equipment purchase
Purchase of intangible assets
Cash from discontinued business
Net cash (used in) investing activities from continuing operations
Net cash provided by (used in) investing activities from discontinuing operations
Net cash (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings
Repayments of short-term borrowings
Proceeds from long-term borrowings
Proceeds from bank notes payable
Repayments of bank notes payable
Repayment of third party borrowing
Proceeds from loans from related parties
Repayments of loans from related parties
Proceeds from other payable - sales lease back
Repayments of other payable - sales lease back
Net cash provided by (used in) financing activities from continuing operations
Net cash (used in) financing activities from discontinuing operations
Net cash provided by (used in) financing activities
For the Years Ended December 31,
2017
2016
2018
$
9,758,959
$
(88,302)
9,847,261
6,290,672 $
(1,974,852)
8,265,524
7,943,053
(2,306,036)
10,249,089
105,276
-
4,406,888
(3,372)
(4,849)
38,716
(30,981)
(5,547,070)
(733,643)
(3,805,026)
704,459
(359,340)
5,195,799
85,253
(301,971)
216,506
600,646
(40,248)
(566,821)
9,807,483
1,770,101
11,577,584
(4,171,367)
(9,878,241)
272,055
103,967
(752,299)
-
(6,589)
(18,684)
(14,451,158)
5,719,074
(8,732,084)
33,213,599
(39,629,404)
5,631,163
5,947,885
(7,309,428)
-
-
(24,930)
5,784,874
(4,144,246)
(530,487)
(2,241,606)
58,867
-
3,611,510
154,051
34,417
22,818
43,172
(2,414,707)
(40,504)
(3,408,394)
(1,969,564)
(523,839)
(2,285,276)
-
(43,339)
(583,978)
-
(258,589)
1,270,299
1,932,468
542,170
2,474,638
(6,388,069)
(10,231,413)
13,352
1,479,874
(480,689)
1,358,566
(2,602)
64,208
(14,186,773)
(159,086)
(14,345,859)
31,239,350
(20,342,692)
1,048,749
7,002,823
(4,871,021)
-
-
(57,148)
2,906,977
(2,638,787)
14,288,251
(450,272)
123,339
319,252
2,354,193
(1,645)
(60,225)
23,932
(12,687)
(6,742,328)
(251,704)
(3,262,302)
(5,159,033)
(755,934)
5,525,688
-
34,729
679,774
-
(558,864)
1,446,220
3,951,494
1,193,663
5,145,157
(3,838,709)
(12,679,337)
19,296
1,505,061
(1,996,510)
1,354,585
(8,298,564)
435,085
(23,499,093)
(149,403)
(23,648,496)
23,677,701
(18,538,408)
836,471
5,255,076
(5,431,761)
(180,611)
55,484
-
3,941,746
(172,154)
9,443,544
(1,463,718)
(2,772,093)
13,837,979
7,979,826
EFFECT OF EXCHANGE RATES CHANGES ON CASH AND CASH EQUIVALENTS
(1,146,890)
(356,466)
(400,727)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
(1,073,483)
1,610,292
(10,924,240)
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR
7,870,878
6,260,586
17,184,826
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR
LESS: RESTRICTED CASH
CASH AND CASH EQUIVALENTS, END OF YEAR
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
$
$
$
6,797,395
$
7,870,878 $
6,260,586
6,797,395
2,396,993
4,400,402
$
$
7,870,878 $
3,767,081
4,103,797 $
6,260,586
2,333,608
3,926,978
Cash paid during the year for:
Interest paid
Income tax paid
Non-cash investing activities:
Transfer from construction in progress to fixed assets
Transfer from accounts payable to fixed assets
Transfer from advance payments to fixed assets
$
$
$
$
$
1,329,377
331,997
$
$
836,401 $
1,433,998 $
762,868
2,331,173
9,918,862
851,966
170,281
$
$
$
15,545,784 $
1,162,202 $
191,868 $
1,209,221
-
296,853
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
FULING GLOBAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Fuling Global Inc. (“Fuling Global”) is a Cayman Islands corporation established on January 19, 2015.
Total Faith Holdings Limited (“Total Faith”) is a wholly-owned subsidiary of Fuling Global formed in accordance with laws and regulations of the British Virgin Islands in
April 2004.
Fuling Global and its subsidiary Total Faith are holding companies whose only asset, held through a subsidiary, is 100% of the registered capital of Taizhou Fuling Plastics Co.,
Ltd. (“Taizhou Fuling”), as well as 49% ownership of Domo Industry Inc. (“Domo”).
Taizhou Fuling was established in October 1992 under the laws of the People’s Republic of China (“China” or “PRC”) with initial capital of $0.51 million. After several
registered capital increases and capital contributions, the registered capital of Taizhou Fuling was increased to $21.36 million in November 2015.
Taizhou Fuling has four wholly-owned subsidiaries, Zhejiang Great Plastics Technology Co., Ltd. (“Great Plastics”), Direct Link USA LLC (“Direct Link”), Fuling Plastic
USA, Inc. (“Fuling USA”) and Wenling Changli Import and Export Co., Ltd (“Wenling Changli”), which was established in September 2016 in China.
Great Plastics was incorporated in China in March 2010 and principally engaged in the production of straw items. Direct Link was incorporated in the State of Delaware in
December 2011 and serves as an import trading company of Taizhou Fuling in the United States (“U.S.”). Fuling USA was incorporated in the Commonwealth of Pennsylvania
in May 2014, as a wholly-owned subsidiary of Taizhou Fuling. In 2015 Fuling USA established the Company’s first production factory in the U.S., which principally engages
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 the Company decided to set up the new factory in Allentown, Pennsylvania. Old Fuling USA was dissolved
on April 8, 2015.
Domo is a U.S. company established in the State of New York in October 2007. Total Faith owns 49% of its equity interest. However, Total Faith holds 2 out of 3 seats and has
a majority of the voting rights on the board of directors. The Board of Directors of Domo is the controlling decision-making body with respect to Domo instead of the equity
holders. The number of seats in the Board empowers Total Faith the ability to control Domo’s daily operations and financial affairs, appoint its senior executives and approve all
matters requiring shareholders’ approval. In addition, Domo’s equity at risk is not sufficient to permit it to carry on its activities without additional subordinated financial
support from Total Faith and Domo is highly relying on the financial support from the Company. Total Faith is obligated to absorb a majority of the risk of loss from Domo’s
activities and to receive majority of Domo’s residual returns. Based on these facts, 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.
Fuling Global, Total Faith, Domo, Taizhou Fuling and Taizhou Fuling’s subsidiaries (herein collectively referred to as the “Company”) are engaged in the production and
distribution of plastic and paper serviceware in China, Europe and U.S. Products exported to the U.S. and Europe are primarily sold to major fast food restaurant chains and
wholesalers.
On November 22, 2018, Great Plastics signed sales contracts with a third party to sell the land and buildings previously used as one of its manufacturing factories in China (aka,
the “Sanmen Factory”) for total cash consideration of RMB 40.2 million (approximately US$5.8 million) (see Note 5 and 6). The Company sold all related machines and
equipment to Taizhou Fuling and Zhejiang Great New Materials Co., Ltd. (“Great NM”). Great NM is a company owned by direct relatives of Taizhou Fuling’s officials. The
Company plans to dissolve Great Plastics in 2019. Certain prior period amounts of Great Plastics have been reclassified to conform to the current period presentation as
discontinued operation. Such reclassifications had no effect on net income or cash flows as previously reported.
F-7
Table of Contents
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). The
consolidated financial statements include the financial statements of Fuling Global, Total Faith, Taizhou Fuling and its subsidiaries and VIE. All significant intercompany
balances and transactions have been eliminated in consolidation.
In accordance with accounting standards regarding consolidation of variable interest entities, VIEs are generally entities that lack sufficient equity to finance their activities
without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company is involved must be
evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
The Company has concluded that Domo is a VIE, based on the facts that Total Faith has a majority of voting rights on the board of directors and is obligated to absorb a
majority of the risk of loss from Domo’s economic performance. Based on our evaluation of the VIE, we are the primary beneficiary of its risks and rewards; therefore, we
consolidate Domo for financial reporting purposes.
The following tables set forth the assets, liabilities, results of operations and changes in cash and cash equivalents of the VIE, which were included in the Company’s
consolidated balance sheets, statements of income and comprehensive income and cash flows:
Current assets
Non-current assets
Total assets
Third-party liabilities
Intercompany payables*
Total liabilities
Net assets
*
Payables to Taizhou Fuling are eliminated upon consolidation.
F-8
December 31,
2018
December 31,
2017
$
$
4,395,466 $
-
4,395,466
(635,845)
(3,664,964)
(4,300,809)
94,657 $
3,053,731
-
3,053,731
(575,935)
(2,189,169)
(2,765,104)
288,627
Table of Contents
Revenue
Net income (loss)
Net cash provided by (used in) operating activities
Net cash (used in) provided by financing activities*
Net (decrease) increase in cash and cash equivalents
*
Intercompany financing activities are eliminated upon consolidation.
December 31,
2018
For the years ended
December 31,
2017
December 31,
2016
$
$
10,858,274
$
(204,967) $
9,744,914 $
25,246 $
7,928,478
39
December 31,
2018
For the years ended
December 31,
2017
December 31,
2016
$
$
$
(1,021,593) $
$
1,475,795
$
454,202
296,037 $
(376,338) $
(80,301) $
(1,006,413)
1,153,126
146,713
The Company has the power to direct activities of the VIE and can have assets transferred freely out of the VIE without restrictions. Therefore, the Company considers that
there is no asset of the VIE that can only be used to settle obligations of the VIE. The creditors of the VIE’s third-party liabilities do not have recourse to the general credit of the
primary beneficiary in normal course of business.
Non-controlling interests
Non-controlling interests represents the individual shareholder’s proportionate share of 51% of equity interest in Domo.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. These estimates are based on information as of the date of the financial statements.
Significant estimates required to be made by management include, but are not limited to, the valuation of accounts receivable, inventories, advances to suppliers, useful lives of
property, plant and equipment, intangible assets, and the recoverability of long-lived assets. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investment instruments with an original maturity of three months or less from the date of purchase to be cash equivalents.
F-9
Table of Contents
Restricted Cash
Restricted cash consists of cash equivalents used as collateral to secure short-term bank notes payable and bank borrowings. The Company is required to keep certain amounts
on deposit that are subject to withdrawal restrictions. Upon the maturity of the bank acceptance notes and bank borrowings, the Company is required to deposit the remainder to
the escrow account to settle the bank notes payable and bank borrowings. The notes payable and bank borrowings with security deposits are generally short term in nature due
to their short maturity period of three months to one year; thus, restricted cash is classified as a current asset.
As of December 31, 2018 and 2017, the Company had restricted cash of $2,396,993 and $3,767,081, respectively, of which $1,439,064 and $3,053,622, respectively, was
related to the bank acceptance notes payable (see Note 8), and $649,675 and $565,821, respectively, was related to the letters of credit (see Note 11). The remaining $308,254
and $147,638, respectively, were related to other miscellaneous deposits made in bank.
Certificates of Deposit
As of December 31, 2018 and 2017, certificates of deposit with original maturities of more than three months amounted to $0 and $105,707, respectively.
Accounts Receivable
Accounts receivable are recognized and carried at original invoiced amount less an estimated allowance for uncollectible accounts. The Company usually grants credit to
customers with good credit standing with a maximum of 90 days and determines the adequacy of reserves for doubtful accounts based on individual account analysis and
historical collection trends. The Company establishes a provision for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts
due. The allowance is based on management’s best estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. The provision
is recorded against accounts receivables balances, with a corresponding charge recorded in the consolidated statements of income and comprehensive income. Actual amounts
received may differ from management’s estimate of credit worthiness and the economic environment. Delinquent account balances are written-off against the allowance for
doubtful accounts after management has determined that the likelihood of collection is not probable.
Inventories
Inventories are stated at the lower of cost or net realizable value. Costs include the cost of raw materials, freight, direct labor and related production overhead. The cost of
inventories is calculated using the weighted average method. Any excess of the cost over the net realizable value of each item of inventories is recognized as a provision for
diminution in the value of inventories.
Net realizable value is the estimated selling price in the normal course of business less any costs to complete and sell products.
Property, Plant and Equipment
Property and equipment are stated at cost. The straight-line depreciation method is used to compute depreciation over the estimated useful lives of the assets, as follows:
Items
Property and buildings
Leasehold improvements
Machinery equipment
Transportation vehicles
Office equipment and furniture
F-10
Useful life
10–20 years
Lesser of useful life and
lease term
3–10 years
4–10 years
3–5 years
Table of Contents
Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and
betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation of assets retired or sold are removed from the
respective accounts, and any gain or loss is recognized in the statement of income in other income and expenses.
Intangible Assets
Intangible assets consist primarily of land use rights, trademark and patents. Under the PRC law, all land in the PRC is owned by the government and cannot be sold to an
individual or company. The government grants individuals and companies the right to use parcels of land for specified periods of time. These land use rights are sometimes
referred to informally as “ownership.” Land use rights are stated at cost less accumulated amortization. Intangible assets are amortized using the straight-line method with the
following estimated useful lives:
Items
Land use rights
Trademarks
Patents
Impairment of Long-lived Assets
Useful life
50 years
10 years
7-10 years
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If
the estimated cash flows from the use of the asset and its eventual disposition are below the asset’s carrying value, then the asset is deemed to be impaired and written down to
its fair value. There were no impairments of these assets as of December 31, 2018 and 2017.
Revenue Recognition
The Company follows paragraph 606 of the FASB Accounting Standards Codification for revenue recognition and ASU 2014-09. On January 1, 2018, the Company adopted
ASU 2014-09, which is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a
customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The Company considers revenue realized or realizable and
earned when all the five following criteria are met: (1) Identify the Contract with a Customer, (2) Identify the Performance Obligations in the Contract, (3) Determine the
Transaction Price, (4) Allocate the Transaction Price to the Performance Obligations in the Contract, and (5) Recognize Revenue When (or As) the Entity Satisfies a
Performance Obligation. Results for reporting periods beginning after January 1, 2018 are presented under ASU 2014-09, while prior period amounts are not adjusted and
continue to be reported under the previous accounting standards. The Company has assessed the impact of the guidance by reviewing its existing customer contracts and current
accounting policies and practices to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction
price, customer payments, transfer of control and principal versus agent considerations. Based on the assessment, the Company concluded that there was no change to the timing
and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes to the Company’s consolidated financial
statements upon adoption of ASC 606, and there have not been any significant changes to our business processes, systems, or internal controls as a result of implementing the
standard.
F-11
Table of Contents
Income Taxes
The Company accounts for income taxes under ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The provisions of ASC 740-10-25, “Accounting for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial statement recognition
and measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on the recognition of income tax assets and
liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and related disclosures. The
Company does not believe that there was any uncertain tax position at December 31, 2018 and 2017.
To the extent applicable, the Company records interest and penalties as general and administrative expenses. The statute of limitations for the Company’s U.S. federal income
tax returns and certain state income tax returns subject to examination by tax authorities for three years from the date of filing. As of December 31, 2018, the tax years ended
December 31, 2014 through December 31, 2017 for the Company’s PRC subsidiaries remain open for statutory examination by PRC tax authorities. As of December 31, 2018,
the tax years ended December 31, 2011 through December 31, 2017 for the Company’s U.S. subsidiaries remain open for statutory examination by U.S. tax authorities.
Value Added Tax (“VAT”)
Sales revenue represents the invoiced value of goods, net of VAT. The VAT is based on gross sales price and VAT rates range up to 17%, depending on the type of products
sold. The VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing or acquiring its finished products. Further,
when exporting goods, the exporter is entitled to some or all of the refund of the VAT paid or assess. Since a majority of the Company’s products are exported to the U.S. and
Europe, the Company is eligible for VAT refunds when the Company completes all the required tax filing procedures.
All of the VAT returns of the Company have been and remain subject to examination by the tax authorities for five years from the date of filing.
Foreign Currency Translation
The Company’s principal country of operations is the PRC. The financial position and results of its operations are determined using RMB, the local currency, as the functional
currency. Our financial statements are reported using U.S. Dollars. The results of operations and the statement of cash flows denominated in foreign currency are translated at
the average rate of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates
of exchange in effect at that date. The equity denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. Because
cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with
changes in the corresponding balances on the balance sheet. Translation adjustments arising from the use of different exchange rates from period to period are included as a
separate component of accumulated other comprehensive income included in statement of changes in equity. Gains and losses from foreign currency transactions are included
in the consolidated statement of income and comprehensive income.
F-12
Table of Contents
The value of RMB against US$ and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any
significant revaluation of RMB may materially affect the Company’s financial condition in terms of US$ reporting. The following table outlines the currency exchange rates
that were used in creating the consolidated financial statements in this report:
Period-end spot rate
Average rate
Fair Value of Financial Instruments
December 31,
2018
December 31,
2017
December 31,
2016
US $1=RMB
6.8776
US $1=RMB
6.5074
US $1=RMB
6.94477
US $1=RMB
6.6163
US $1=RMB
6.7578
US $1=RMB
6.64410
ASC 825-10 requires certain disclosures regarding the fair value of financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair
value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair
value are as follows:
●
●
●
Level 1 - Quoted prices in active markets for identical assets and liabilities.
Level 2 - Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain
pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The Company considers the recorded value of its financial assets and liabilities, which consist primarily of cash and cash equivalents, restricted cash, accounts receivable,
advance to vendors, accounts payable, accrued expenses, advances from customers, notes payable to approximate the fair value of the respective assets and liabilities at
December 31, 2018 and 2017 based upon the short-term nature of the assets and liabilities.
The Company believes that the carrying amount of the short-term borrowings approximates fair value at December 31, 2018 and 2017 based on the terms of the borrowings and
current market rates as the rate is reflective of the current market rate.
Concentrations and Credit Risk
A majority of the Company’s expense transactions are denominated in RMB and a significant portion of the Company and its subsidiaries’ assets and liabilities are denominated
in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized
financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be processed
through the PBOC or other China foreign exchange regulatory bodies that require certain supporting documentation in order to affect the remittance.
F-13
Table of Contents
As of December 31, 2018 and 2017, $4,116,684 and $7,027,894, respectively, of the Company’s cash and cash equivalents, certificates of deposit and restricted cash were on
deposit at financial institutions in the PRC where there currently is no rule or regulation requiring such financial institutions to maintain insurance to cover bank deposits in the
event of bank failure.
Substantially all of the Company’s sales are made to customers that are located primarily in the USA and Europe. The Company’s operating results could be adversely affected
by the government policy on exporting business, foreign exchange rate fluctuation, and local market condition change. The Company has a concentration of its revenues and
receivables with specific customers. For the year ended December 31, 2018, no customer accounted for more than 10% of total revenue. For the year ended December 31, 2017,
one customer accounted for 12% of total revenue. As of December 31, 2018, one customer’s account receivable accounted for 14% of the total outstanding accounts receivable
balance. As of December 31, 2017, one customer’ account receivable accounted for 18% of the total outstanding accounts receivable balance.
For the year ended December 31, 2018, the Company purchased approximately 12% of its raw materials from its one largest supplier. For the year ended December 31, 2017,
the Company purchased approximately 12% and 11% of its raw materials from its two largest suppliers, respectively. As of December 31, 2018, advanced payments to two
major suppliers accounted for 20% and 15% of the total advance payments outstanding. As of December 31, 2017, no supplier accounted for more than 10% of the total
advance payments outstanding.
A loss of either of these customers or suppliers could adversely affect the operating results or cash flows of the Company.
Risks and Uncertainties
The major operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by
political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s operations in the PRC are subject to special
considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political, regulatory and social
conditions in the PRC. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws and regulations including
its organization and structure disclosed in Note 1, this may not be indicative of future results.
Recent Accounting Pronouncements
New Accounting Pronouncements Recently Adopted
On April 1, 2018, we adopted ASU 2016-18, Restricted Cash – A Consensus of the FASB Emerging Issues Task Force, (“ASU 2016-18”), which amends ASC 230, Statement
of Cash Flows, to clarify guidance on the classification and presentation of restricted cash in the statement of cash flows using the full retrospective method. Adoption of this
standard did not have a material impact on our consolidated financial statements. See our consolidated statements of cash flows for the reconciliation of cash presented in the
statements of cash flows to the cash presented on the balance sheet.
The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) effective April 1, 2018 using the retrospective transition method. The core principle
of the new accounting standard is to recognize revenue to depict 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. In addition, the adoption of this new accounting standard resulted in increased disclosure, including
qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Adoption of this
standard did not result in significant changes to the Company’s accounting policies, business processes, systems or controls, or have a material impact on the Company’s
financial position, results of operations and cash flows or related disclosures. As such, prior period financial statements were not recast.
New Accounting Pronouncements Not Yet Adopted
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation, which simplifies the accounting for share-based payments granted to nonemployees for
goods and services. Under this ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to
employees. This ASU is effective for annual reporting periods beginning after December 15, 2018. Early adoption of this ASU is permitted. The Company does not expect
adoption of this ASU to have a material impact on its Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2018-20, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing leases assets and lease
liabilities on the balance sheet and disclosing key information about lease transactions. This ASU is effective for annual reporting periods beginning after December 15, 2018.
Early adoption of this ASU is permitted. The Company is evaluating the effect of the pronouncement on the financial statements.
F-14
Table of Contents
NOTE 3 – ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
Trade accounts receivable
Less: allowance for doubtful accounts
Accounts receivable, net
NOTE 4 – INVENTORY, NET
Inventories consisted of the following:
Raw materials
Work-in-progress
Finished goods
Less: inventory valuation allowance
Total inventory
As of
December 31,
2018
27,984,656 $
(223,700)
27,760,956 $
As of
December 31,
2017
23,127,679
(192,434)
22,935,245
$
$
As of
December 31,
2018
As of
December 31,
2017
$
$
7,011,718 $
1,387,111
14,047,720
(171,936)
22,274,613 $
4,587,519
1,594,096
13, 277,742
(139,291)
19,320,066
F-15
Table of Contents
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following:
Property and Buildings
Leasehold improvement
Machinery and equipment (1)
Automobiles
Office and electric equipment
Subtotal
Construction in progress
Less: accumulated depreciation
Property and equipment, net
As of
December 31,
2018
26,766,432 $
2,376,165
34,006,697
1,006,032
948,090
65,103,416
2,393,006
(15,659,789)
51,836,633 $
As of
December 31,
2017
18,251,057
1,862,388
31,985,871
1,021,208
813,073
53,933,597
2,570,443
(12,823,668)
43,680,372
$
$
(1) A total amount of $11,787,174 machinery was related to the sale leaseback transaction (see Note 10).
Depreciation expense was $4,227,620, $3,437,207 and $2,217,994 for the years ended December 31, 2018, 2017 and 2016, respectively.
Construction in progress represents costs of construction incurred for the Company’s new plant and equipment. The Company started the first phase of the construction for its
facility expansion in China (“Phase I”) in April 2016 in China. For the year ended December 31, 2017, construction in progress of approximately $19.3 million was completed
and was transferred to property, plant and equipment for Phase I.
In the beginning of August 2017, the Company started its second phase of the construction for its facility expansion in China (“Phase II”). Phase II includes construction of a
new plant, an office building and two dormitory buildings. The construction is expected to be completed before the end of 2019 and the total construction cost of Phase II is
expected to be $13.1 million. For the year ended December 31, 2018, construction in progress of approximately $9.9 million was completed and was transferred to property,
plant and equipment for Phase II. The Company expects to fulfill the payments using cash generated from operating activities and additional loans borrowed from local banks in
case any shortage of cash on hand in the future.
On November 22, 2018, Great Plastics sold its manufacturing factories to an unrelated third party for total cash consideration of RMB 40.2 million (approximately US$5.8
million). The net book value of the plant and properties disposed in the transaction amounted to RMB 25.7 million (approximately US$3.7 million), and the net book value of
the intangible assets disposed in the transaction amounted to RMB 8.1 million (approximately US$1.2 million). Tax payable related to this transaction amounted RMB 3.7
million (approximately US$0.5 million). Total net value disposed and tax amounted RMB 35.7 million (approximately US$5.4 million). Gain from disposal of plant and
properties and of intangible assets amounted to approximately RMB 2.7 million (approximately US$0.4 million).
F-16
Table of Contents
NOTE 6 – INTANGIBLE ASSETS, NET
Intangible assets, net consisted of the following:
Land use rights
Trademarks
Patents
Total
Less: accumulated amortization
Intangible assets, net
Amortization expense was $179,268, $174,303 and $136,199 for the years ended December 31, 2018, 2017 and 2016, respectively.
Land use right of Great was disposed by Great on November 22, 2018 (See Note 5).
Estimated future amortization expense for intangible assets is as follows:
Periods ending December 31,
2019
2020
2021
2022
2023
Thereafter
F-17
As of
December 31,
2018
As of
December 31,
2017
$
$
8,731,398 $
13,718
7,365
8,752,481
(594,565)
8,157,916 $
9,228,119
9,802
5,782
9,243,703
(446,122)
8,797,581
Amortization
expense
$
$
176,191
176,191
175,991
175,766
175,331
7,278,446
8,157,916
Table of Contents
NOTE 7 – SHORT-TERM AND LONG-TERM BORROWINGS
Short-term Borrowings
Short-term borrowings represent amounts due to various banks and other companies normally maturing within one year. The principal of the borrowings is due at maturity.
Accrued interest is due either monthly or quarterly.
Short-term borrowings consisted of the following:
Agricultural Bank of China (“ABC”)
China Merchants Bank (“CMB”)
Industrial and Commercial Bank of China (“ICBC”)
Bank of China (“BOC”)
East West Bank (“EWB”)
Postal Savings Bank of China (“PSBC”)
Pennsylvania Industrial Development Authority – current portion of long-term borrowing (see “long-term borrowing”
below)
East West Bank loan – current portion of long-term borrowing (see “long-term borrowing” below)
Total
As of
December 31,
2018
$
(1)
(2)
(3)
(4)
(5)
(6)
8,622,194 $
1,696,441
4,557,315
2,724,793
2,000,000
-
As of
December 31,
2017
11,831,148
3,073,424
4,019,908
2,274,333
2,000,000
4,046,597
89,898
200,000
19,890,641 $
88,339
83,333
27,417,082
$
(1) During the year ended December 31, 2018, Taizhou Fuling entered into a series of short-term bank loan agreements with ABC for a total amount of $8,622,194. The terms of
these loans are six months with variable interest rates based on the prevailing interest rates, respectively. The effective rates are from 4.57% to 5.15% per annum.
During fiscal year 2017, Taizhou Fuling entered into a series of short-term bank loan agreements with ABC for a total amount of $11,831,148. The terms of these loans are
six to twelve months with variable interest rates based on the prevailing interest rates. The effective rates were from 4.57% to 4.90% per annum. As of December 31, 2018,
$11,831,148 of them had been repaid upon maturity.
In February 2017, Great Plastics entered into a short-term bank loan agreement with ABC for $691,520. The terms of the loan are twelve months with a variable interest rate
based on the prevailing interest rate. The effective rates are 5.66% per annum. This loan was fully repaid in July 2017 prior to its maturity.
These loans were guaranteed by the assets of a third party guaranty company and a shareholder of the Company. The third party guaranty company charges 2% of total loan
amount.
(2) During year ended December 31, 2018, Taizhou Fuling entered into a series of short-term bank borrowing agreements with CMB for a total amount of approximately $6.3
million (RMB 43.4 million). The terms of these loans are five to twelve months with variable interest rates based on the prevailing interest rates. The effective rates were
from 2.40% to 6.09% per annum. The loans are guaranteed by Special Plastics and Taizhou Fuling’s general manager and Chair of the Board. As of December 31, 2018,
$4,586,234 had been repaid in full upon maturity.
In January, March, July and December 2017, Taizhou Fuling entered into four short-term bank borrowing agreements for approximately $4.5 million (RMB 29.4 million)
with CMB for twelve, six, six and twelve months, respectively. The effective rates were 6.09%, 2.67%, 1.99% and 6.09% per annum, respectively. The loans are guaranteed
by Special Plastics and Taizhou Fuling’s general manager and Chair of the Board. As of December 31, 2018, these loans had been repaid in full upon maturity.
(3) During the year ended December 31, 2018, Taizhou Fuling entered into a series of short-term loan agreements with ICBC for a total amount of $4,557,315. The terms of
these loans are five to twelve months with the interest rates ranged from 3.47% to 5.44% per annum.
During 2017, Taizhou Fuling entered into a series of short-term loan agreements with ICBC for a total amount of $7,092,174. The terms of these loans are five to twelve
months with the interest rates ranged from 2.14% to 5.00% per annum. As of December 31, 2018, these loans had been repaid upon maturity.
(4) During the year ended December 31, 2018 and the year ended December 31, 2017, Taizhou Fuling entered into a series of short-term bank borrowing agreements and other
financing agreements with BOC. The terms of the loans are three to twelve months, with fixed interest rates based on London InterBank Offered Rate (“LIBOR”) (for loans
dominated in USD) or prime loan rates issued by People’s Bank of China (for loans dominated in RMB), plus certain base points. The effective interest rates vary from
3.30% to 5.01% per annum. The loans to Taizhou Fuling are guaranteed by the Chief Executive Officer (“CEO”).
F-18
Table of Contents
(5) On March 9, 2017, Direct Link entered into a line of credit agreement with East West Bank for $2,000,000 for one year. The annual interest rate is equivalent to LIBOR rate
plus 2.75%. Direct Link was required to make restricted deposit of $41,900 for one year (which was released in June 2018) with an initial interest rate of 3.76% per annum.
The line of credit is guaranteed by Fuling Global. The agreements require Direct Link to comply with certain financial covenants and ratios, including to maintain minimum
debt service coverage ratio of 1.40 times and to maintain maximum total debt to equity ratio of 3.0 times etc. Direct Link will be measured semi-annually at December 31th
and December 31st. Direct Link was not in compliance as of December 31, 2018. On April 7, 2017, Direct Link drew down $1,500,000 with the effective rate of 3.86% per
annum. On December 1, 2017, Direct Link drew down another $500,000 with the effective rate of 4.45% per annum. Interest expense incurred on this loan for the year ended
December 31, 2018 and 2017 were $47,955 and $14,942, respectively. On March 14, 2018, East West Bank approved to extend the loan to June 9, 2018. On June 26, 2018,
East West Bank again approved to extend the loan to June 9, 2019. East West Bank had waived financial covenant violations as of December 31, 2018.
(6)
In January 2018, Taizhou Fuling entered into a short-term bank loan agreement with PSBC for $987,881. The terms of the loan are twelve months. The effective rates are
2.95% per annum. As of December 31, 2018, this loan had been repaid prior to its maturity.
In November and December 2017, Taizhou Fuling entered into a series of short-term bank loan agreements with PSBC for $2,975,004 and $1,071,593, respectively. The
terms of these loans are twelve and five months, respectively. The effective rates are 2.65% and 4.15% per annum, respectively. As of December 31, 2018, these loans had
been repaid upon maturity.
Long-term Borrowings
Long-term borrowings represent amounts due to various banks and other companies normally maturing over one year. The principal of the borrowings is due at maturity.
Accrued interest is due either monthly or quarterly.
Long-term borrowings consisted of the following:
Pennsylvania Industrial Development Authority – long term
Agricultural Bank of China (“ABC”)
East West Bank (“EWB”) – long term
Total
As of
December 31,
2018
As of
December 31,
2017
(1)
(2)
(3)
$
$
658,234 $
5,815,982
729,141
7,203,357 $
748,132
137,088
916,667
1,801,887
(1) On September 28, 2016, Fuling USA entered into a ten-year Machinery and Equipment Loan Agreement with the Pennsylvania Industrial Development Authority for
$937,600, with fixed interest rate of 1.75%. This loan has been collateralized by the machinery and equipment, worth approximately $1.72 million. As of December 31,
2018, the amount of long-term borrowing was $748,132, and it consists of $89,898 of which is due within a year and $658,234 that is due over a year.
Future obligations for payments of this long-term loan are as below:
Twelve months ended December 31,
2019
2020
2021
2022
2023
Thereafter
Total
$
$
89,898
91,484
93,098
94,740
96,411
282,501
748,132
(2)
In June 2018, Taizhou Fuling entered into two buyer’s credit Loan Agreements with Agriculture Bank of China Limited for total of $2,471,792 (RMB 17 million) for 36
months. In July 2018, Taizhou Fuling entered into three buyer’s credit Loan Agreements with Agriculture Bank of China Limited for total of $3,344,190 (RMB 23 million)
for 36 months. The loan bears variable interest rates based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 13% of the
prevailing interest rate. As of December 31, 2018, the amount of long-term borrowing was $5,815,982, and the effective rates were 5.37% and 5.23% per annum. The line of
credit’s purpose is for inventory purchase. The line of credit is effective for the period from first day of loan to 36 months after the first day of loan.
On October 31, 2016, Fuling USA entered into a buyer’s credit Loan Agreement with Agricultural Bank of China Limited for a line of credit in the amount of $5,903,723
(RMB 41 million) for 18 months. The loan bears a variable interest rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus
6% of the prevailing interest rate. As of December 31, 2017, the amount of long-term borrowing was $137,088, and the effective rate was 5.30% per annum. The line of
credit’s purpose is to acquire equipment. China Export & Credit Insurance Corporation provides insurance for the line of credit. The line of credit is effective for the period
from first day of loan to 18 months after the first day of loan. As of December 31, 2018, this loan was fully repaid in full upon maturity.
F-19
Table of Contents
(3) On March 9, 2017, Fuling USA entered into a Delayed Draw Term Loan agreement with East West Bank for $1,000,000. The amount drawn will be turned into a 5-year term
loan at LIBOR rate plus 3.00%. The loan is guaranteed by Fuling Global. Fuling USA is required to make a restricted deposit of $73,336 for one year with an initial interest
rate of 4.19% per annum. The restricted deposit was increased to $121,639 in June 2018. The agreement requires Fuling USA to comply with certain financial covenants and
ratios, including to maintain minimum debt service coverage ratio of 1.25 times and to maintain maximum total debt to equity ratio of 3.0 times etc. Fuling USA’s
compliance with these covenants will be reviewed semi-annually at December 31th and December 31th. Fuling USA was in compliance as of December 31, 2018. On April
7 and December 1, 2017, Fuling USA drew down $500,000 (April 2017 Loan) and $500,000 (December 2017 Loan), respectively. April 2017 loan will expire April 7, 2023
and December 2017 loan will expire on December 1, 2023. Both April 2017 loan and December 2017 loan require interest only payment for the first year and require interest
and principal payments for years from second year to sixth year. The effective rate was 4.11% per annum. As of December 31, 2018, the amount of long-term borrowing was
$929,141, and it consists of $200,000 of which is due within a year and $729,141 which is due over a year.
Future obligations for payments of this long-term loan are as below:
Twelve months ended December 31,
2019
2020
2021
2022
2023
Thereafter
Total
$
$
200,000
200,000
200,000
200,000
129,141
-
929,141
As of December 31, 2018 and 2017, land use rights in the amount of $7,821,842 and $8,442,532, and property and buildings in the amount of $14,071,515 and $15,620,048,
respectively, were pledged for all the above short-term and long-term borrowings.
F-20
Table of Contents
NOTE 8 – BANK NOTES PAYABLE
Short-term bank notes payables are lines of credit extended by banks that can be endorsed and assigned to vendors as payments for purchases. The notes payable are generally
payable within six months. These short-term notes payable are guaranteed by the bank for their full face value. In addition, the banks usually require the Company to deposit a
certain amount of cash (usually range from 30% to 100% of the face value of the notes) at the bank as a guarantee deposit, which is classified on the balance sheet as restricted
cash.
The Company had the following bank notes payable as of December 31, 2018:
ICBC, due May 5, 2019
ABC, due various dates from January 4, 2019 to June 27, 2019
Total
The Company had the following bank notes payable as of December 31, 2017:
ICBC, due various dates from January 28, 2018 to May 27, 2018
ABC, due various dates from February 10, 2018 to April 30, 2018
Total
December 31,
2018
286,902
2,601,151
2,888,053
December 31,
2017
3,052,664
1,384,016
4,436,680
$
$
$
$
As of December 31, 2018 and 2017, $1,439,063 and $3,053,622 cash deposits were held by banks as a guaranty for the notes payable, respectively. In addition, as of December
31, 2018 and 2017, notes payable totaling $1,448,990 and $1,383,058 were secured by the personal properties of the Company’s principal shareholders and third party
individuals, respectively.
NOTE 9 – INCOME TAXES
The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.
Fuling Global and Total Faith are both offshore holding companies and are not subject to tax on income or capital gains under the laws of the Cayman Islands and British
Virgin Islands, respectively.
Taizhou Fuling and Great Plastics are incorporated in the PRC and are subject to PRC income tax, which is computed according to the relevant laws and regulations in the PRC.
Under the Corporate Income Tax Law of the People’s Republic of China, corporate income tax rate applicable to all companies, including both domestic and foreign-invested
companies, is 25%. Taizhou Fuling was recognized as a High-technology Company by Chinese government and subject to a favorable income tax rate of 15% from year 2012
to 2018. $1,343,322, $715,087 and $231,733 income tax expenses were exempted for the years ended December 31, 2018, 2017 and 2016, respectively. Per share effect of the
tax exemption was $0.09, $0.05 and $0.01 for the years ended December 31, 2018, 2017 and 2016, respectively.
Domo, Fuling USA and Direct Link are incorporated in the United States and subject to the U.S. federal and state income tax.
F-21
Table of Contents
The following table summarizes income (loss) before income taxes and non-controlling interest allocation:
United States
Foreign
Total
Significant components of the income tax provision were as follows:
Current tax provision:
United States
Foreign
Deferred tax provision:
Foreign
Total
For the year
ended
December 31,
2018
For the year
ended
December 31,
2017
$
$
599,898
10,374,099
10,973,997
$
$
90,466 $
8,963,428
9,053,894 $
For the year
ended
December 31,
2016
(2,381,347)
14,191,840
11,810,493
For the year
ended
December 31,
2018
For the year
ended
December 31,
2017
For the year
ended
December 31,
2016
- $
595,461
4,455 $
783,915
-
1,561,404
531,275
1,126,736 $
-
788,370 $
-
1,561,404
$
$
The deferred tax expense (benefit) is the change of deferred tax assets and deferred tax liabilities resulting from the temporary difference between tax and U.S. GAAP. Our
operations in the U.S. have incurred a cumulative net operating loss of approximately $2,868,000, 3,468,000 and $3,554,000, respectively, as of December 31, 2018, 2017 and
2016. This carry-forward will expire if is not utilized by 2036. The Company periodically evaluates the likelihood of the realization of deferred tax assets, and reduces the
carrying amount of the deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized.
For the years ended December 31, 2018, 2017 and 2016, management believes that the realization of the benefit arising from the losses of certain U.S. subsidiaries appears to
be uncertain and may not be realizable in the near future. Therefore, 100% valuation allowances of $420,056, $605,081 and $625,742 have been provided against the deferred
tax assets of these subsidiaries, respectively.
A new tax regulation under the Provisional Regulations of The People’s Republic of China Concerning Income Tax on Enterprises promulgated by the PRC took effect on May
7, 2018. The new tax regulation allows companies to expense in full all machinery and equipment acquired between January 1, 2018 to December 31, 2020 instead of depreciate
over depreciation period, except for any asset with unit price over $0.7 million (RMB 5 million). Thus, deferred tax liabilities resulted from the temporary difference. Until the
end of 2018, the Company acquired new machinery and equipment of $3,852,713 (RMB 26.5 million) in total, which were qualified to be fully deducted from taxable income
in 2018, and incurred the deferred tax liabilities of $577,826 as of December 31, 2018.
On December 22, 2017, the U.S. enacted the “Tax Cuts and Jobs Act” (the “Act”). Under the provisions of the Act, the U.S. corporate tax rate decreased from 35% to 21%.
Since the Company has a December 31 fiscal year-end, a U.S. statutory federal rate of 21% rate is applied to the provision for income tax from the fiscal year of 2018.
F-22
Table of Contents
The following table reconciles the statutory rates to the Company’s effective tax rate:
U.S. Statutory rates
Foreign income not recognized in the U.S.
Foreign income tax rate
Effect of favorable income tax rate in certain entity in PRC
R&D tax credit (1)
Change in valuation allowance
Non-taxable permanent difference (2)
Effective tax rate
For the year
ended
December 31,
2018
For the year
ended
December 31,
2017
For the year
ended
December 31,
2016
21.0%
(19.4)
25.0
(10.5)
(3.5)
(1.7)
(0.6)
10.3%
34.0%
(32.5)
25.0
(8.1)
(2.4)
(0.3)
(7.0)
8.7%
34.0%
(33.8)
25.0
(11.5)
(1.5)
8.0
7.0
13.2%
(1) From 1 January 2018 to 31 December 2020, for R&D expenses incurred for new technology, new products, or new craftsmanship, an extra 75% of the actual expenses
incurred are also tax-deductible as an incentive.
(2)
It represents expenses incurred by the Company that were not deductible for PRC income tax and income (loss) generated in countries with no income tax obligations.
NOTE 10 – SALE LEASEBACK
(1)
In October 2016, The Company has entered into a sale leaseback arrangement and sold certain machinery located in China to an unrelated third party for approximately
$3,651,346 (RMB 25,112,500), and subsequently leased back the machinery for 24 months for a total amount of approximately $3,804,092 (RMB 26,163,022). The Company
was required to make a security deposit of approximately $730,269 (RMB 5,022,500) for the leaseback. The leaseback has been accounted for as a capital lease. The title of
the machinery will be transferred back to the Company upon the last payment from the Company. A one-time processing fee of $23,223 (RMB 159,716) was paid by the
Company related to this lease. Since the machinery was sold exceeding its carrying value, the Company also recognized a deferred gain of $180,849 (RMB 1,243,810) on
this transaction, which will be amortized over 24 months as an income. In addition, unrecognized financing charge of $177,853 (RMB 1,223,203) was recognized for the
capital lease, which will be amortized over 24 months as an interest expense. The Company repaid the lease as of December 31, 2018. All deferred gain and unrecognized
financing charge were fully amortized as of December 31, 2018.
The lease was fully repaid in June 2018 prior to its maturity:
Total lease payment
Less: imputed interest and principal
Total current portion of sale leaseback obligation as of December 31, 2018
$
$
3,804,106
(3,804,106)
-
Interest expense incurred for the years ended December 31, 2018, 2017 and 2016 amounted to $39,148, 128,069 and $14,858, respectively.
F-23
Table of Contents
(2)
In May 2017, the Company has entered into another sale leaseback arrangement and sold certain machinery located in China to an unrelated third party for
approximately $2,573,572 (RMB 17,700,000), and subsequently leased back the machinery for 36 months for a total amount of approximately
$2,750,504 (RMB 18,916,864). The Company was required to make a security deposit of approximately $514,714 (RMB 3,540,000) for the leaseback. The leaseback has
been accounted for as a capital lease. The title of the machinery will be transferred back to the Company upon the last payment from the Company. A one-time processing fee
of $15,441 (RMB 106,200) was paid by the Company related to this lease. Since the machinery was sold under its carrying value, the Company also recognized a deferred
loss of $241,206 (RMB 1,658,918) on this transaction, which will be amortized over 36 months as an expense. In addition, unrecognized financing charge of $96,954 (RMB
666,811) was recognized for the capital lease, which will be amortized over 36 months as an interest expense.
The minimum payments for the remaining lease term of 17 months from December 31, 2018 to May 18, 2020 are as follows:
Total lease payment
Less: imputed interest and principal
Total sale leaseback obligation as of December 31, 2018
Less: current portion of sale leaseback obligation
Long term payable - sale leaseback as of December 31, 2018
According to the sale leaseback agreement, future obligations for payments of sale leaseback are as below:
Twelve months ended December 31, 2018
2019
2020
Total
$
$
$
$
2,750,504
(1,452,961)
1,297,543
(915,912)
381,631
915,912
381,631
1,297,543
Interest expense incurred for the years ended December 31, 2018, 2017 and 2016 amounted to $76,700, $64,231 and $0, respectively.
(3)
In February 2018, the Company has entered into another sale leaseback arrangement and sold certain machinery located in China to an unrelated third party for
approximately $5,379,784 (RMB 37,000,000), and subsequently leased back the machinery for 36 months for a total amount of approximately
$5,784,874 (RMB 39,786,052). The Company was required to make a security deposit of approximately $1,075,957 (RMB 7,400,000) for the leaseback. The leaseback has
been accounted for as a capital lease. The title of the machinery will be transferred back to the Company upon the last payment from the Company. A one-time processing fee
of $32,279 (RMB 222,000) was paid by the Company related to this lease. Since the machinery was sold under its carrying value, the Company also recognized a deferred
gain of $403,158 (RMB 2,772,759) on this transaction, which will be amortized over 36 months as an expense. In addition, unrecognized financing charge of $277,503 (RMB
1,908,556) was recognized for the capital lease, which will be amortized over 36 months as an interest expense.
F-24
Table of Contents
The minimum payments for the remaining lease term of 26 months from December 31, 2018 to February 18, 2021 are as follows:
Total lease payment
Less: imputed interest and principal
Total sale leaseback obligation as of December 31, 2018
Less: current portion of sale leaseback obligation
Long term payable - sale leaseback as of December 31, 2018
According to the sale leaseback agreement, future obligations for payments of sale leaseback are as below:
Twelve months ended December 31,
2019
2020
2021
Total
$
$
$
$
5,784,874
(1,598,991)
4,185,883
(1,931,947)
2,253,936
1,931,946
1,931,946
321,991
4,185,883
Interest expense incurred for the years ended December 31, 2018, 2017 and 2016 amounted to $206,803, $0 and $0, respectively.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Rent Commitment
The Company’s subsidiary Fuling USA leases manufacturing facility under operating leases. Operating lease expense amounted to $534,589, $534,077 and $454,223 for the
years ended December 31, 2018, 2017 and 2016, respectively.
On December 20, 2018, the Company entered into a five year lease agreement with a third party for its manufacturing facility in Mexico (see Note 15). in Mexico. The rent
expense is $10,514 for the year ended December 31, 2018.
Future minimum lease payments under non-cancelable operating leases are as follows:
Twelve months ended December 31,
2019
2020
2021
2022
2023
Thereafter
Total
F-25
$
$
866,971
913,242
864,040
815,053
528,395
196,931
4,184,632
Table of Contents
Letters of Credit
As of December 31, 2018 and 2017, the Company had $5,147,960 and $6,546,920 outstanding in trade letters of credit, respectively.
Purchase Commitment
As of December 31, 2018, the Company had no purchase commitments for construction. These commitments represent the amount of agreements signed but yet not paid.
Pursuant to the signed agreement, the payment is not due until the construction is completed, and there is no a fixed deadline for the completion of construction.
Litigation
The Company’s subsidiary Fuling USA is a defendant-counterclaimant in pending litigation in the District Court for the District of Connecticut in the U.S. The plaintiff asserted
causes of action for breach of contract, trademark infringement and related unfair competition claims under the Lanham Act, trade secret misappropriation, interference with a
business opportunity, breach of fiduciary duty, and violation of the Connecticut Unfair Trade Practices Act. Fuling USA filed an answer and counterclaims seeking declaratory
judgment of non-infringement of the trademark, cancellation of the trademark registration, breach of contract, and unjust enrichment. Until the date of this filing, the litigation
has not been closed but no material contingent liability was expected.
NOTE 12 – RELATED PARTY TRANSACTIONS
The Company rents space from one of its related parties. For the years ended December 31, 2018, 2017 and 2016, the total rent expense was $55,715, $54,550 and $55,484,
respectively.
Due from a related party amounted to $28,242 and $0 as of December 31, 2018 and 2017, respectively. It is outstanding rent from Great NM.
Accounts payable to Great NM amount to $82,014 and $0 as of December 31, 2018 and 2017, respectively.
NOTE 13 – EQUITY
Statutory Reserve
The Company is required to make appropriations to certain reserve funds, comprising the statutory surplus reserve and the discretionary surplus reserve, based on after-tax net
income determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”). Appropriations to the statutory surplus reserve are required to be
at least 10% of the after-tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entity’s registered capital. Appropriations to the
surplus reserve are made at the discretion of the Board of Directors. As of December 31, 2018 and 2017, the balance of statutory reserve was $5,532,945 and $4,617,039,
respectively.
Share Issuance
On November 18, 2018, the Company granted 15,705 shares to its Chief Financial Officer. On November 18, 2017, the Company granted 15,705 shares and 8,000 shares
collectively to its Chief Financial Officer and two directors, respectively. On November 18, 2016, the Company granted 15,705 shares and 8,000 shares collectively to its Chief
Financial Officer and two directors, respectively. On November 2, 2015, the Company granted 15,667 shares and 12,000 shares collectively to its Chief Financial Officer and
three directors, respectively. On November 18, 2015, the Company granted 38 shares to its Chief Financial Officer. The Company recorded $105,276, $58,867 and $123,339 as
stock based compensation expense for the years ended December 31, 2018, 2017 and 2016, respectively.
F-26
Table of Contents
NOTE 14 – SEGMENT REPORTING
ASC 280, “Segment Reporting”, establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational
structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s business segments. The
Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by
the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments.
Management, including the chief operating decision maker, reviews operation results by the revenue of different products. Based on management’s assessment, the Company
has determined that it has only one operating segment as defined by ASC 280.
The following table presents revenue by major products for the years ended December 31, 2018, 2017 and 2016, respectively.
Cutlery
Straws
Cups and plates
Others
Total
December 31,
2018
For the years ended
December 31,
2017
December 31,
2016
$
$
66,558,851
23,572,926
37,439,353
11,093,142
138,664,272
$
$
62,104,253 $
18,631,276
33,536,297
9,936,680
124,208,506 $
53,206,758
14,324,897
27,626,586
7,162,448
102,320,689
The following table presents revenue by geographic areas for the years ended December 31, 2018, 2017 and 2016, respectively.
Revenue from United States
Revenue from Europe
Revenue from Canada
Revenue from China
Revenue from other foreign countries
Total
December 31,
2018
118,307,987
6,621,940
1,635,667
8,286,146
3,812,532
138,664,272
$
$
$
For the years ended
December 31,
2017
106,563,934 $
6,101,139
1,943,946
7,740,720
1,858,767
124,208,506 $
$
December 31,
2016
92,729,983
3,172,868
982,106
3,839,176
1,596,556
102,320,689
Long-lived assets of $58,848,571 and $4,271,140 were located in China and the United States, respectively, as of December 31, 2018. Long-lived assets of $56,808,223 and
$3,136,106 were located in China and the United States, respectively, as of December 31, 2017.
NOTE 15 – SUBSEQUENT EVENTS
In January to March 2019, the Company repaid approximately $5.2 million short term bank loans and $1.8 million notes payable that become due. The Company also borrowed
approximately $7.4 million short term bank loans as well as approximately $2.0 million notes payable from various banks in China. All the loans and notes payable are
guaranteed by its shareholders, related parties and third parties.
In December 2018, the Company announced its plan to set up a manufacturing factory (the “Mexico Factory”) in Monterrey, Mexico. In December 2018, the Company signed
a building lease with Interpuerto Industrial Park in Monterrey, Mexico and a service agreement with a local shelter service company to help with administrative, accounting,
compliance, import/export, human resources, etc., at the Mexico Factory. Factory remodeling is expected to start in April 2019, followed by equipment installation and testing
and worker recruitment in May. We expect that the first phase of the Mexico Factory will have an annual design capacity of 10,000 tons and will be primarily used for
producing paper straws and plastic straws and paper cups serving the U.S. market. The Company expects to launch commercial production at the Mexico Factory around July
2019.
F-27
Translation of Factory Lease Agreement
Exhibit 4.5
Landlord (Party A): Zhejiang Special Plastics Technology Co., Ltd.
Tenant (Party B): Taizhou Fuling Plastics Co., Ltd.
According to relevant regulations, Party and Party B agree upon the matters regarding leasing the factory legally owned by Party A to Party B and sign this agreement as below.
I.
Factory Situation
The factory is located at 8 Shengpan Road, Guanweitong Village, Wenqiao Village. The leased construction floor is 5,120 square meters.
II.
Lease period
1. Total lease period is 3 years, from January 1, 2017 to December 31, 2018.
2. Upon the expiration of the lease, Party A has the right to collect the factory, and Party B shall return it timely. If Party B needs to continue renting it, it shall send a
written request to Party A three months before the end of the lease, and resign a lease after Party A’s approval.
III.
Rent and Way of Payment
1. The rent is RMB 6 per month per square meter. The annual rent is RMB 368,640 which shall be paid at the end of every year one time.
IV. Other fees
1. During the lease period, the fees of water, electricity, gas, telecommunication including phone incurred by using this factory shall be paid by Party B.
V.
Usage Requirement and Repair Responsibility
1. During the lease period, if Party B discovers any damage or malfunction, it shall timely notify Party A for repair. Party A shall repair it within 3 days after receipt of
Party B’s notice. If Party A does not repair it timely, Party B could repair on its behalf and the fee shall be paid by Party A.
2. During the lease period, Party B shall reasonably use and protect the factory and its fixtures. For any damage or malfunction due to unsuitable or unreasonable usage,
Party B shall be responsible for the repair. If Party B refuses to repair, Party A could repair on its behalf and the fee shall be paid by Party B.
3. During the lease period, Party A shall ensure the factory and its fixtures to be in the normally usable and safe status. If Party A conducts check or maintenance of the
factory, it shall notify Party B three days in advance. Party B shall cooperate at the time of the check and maintenance. Party A shall reduce the implication on the
usage of the factory by Party B.
4.
If Party B needs to decorate or add fixtures and equipment, it shall get written approval of Party A in advance. If this action needs to be approved by relevant
governmental agencies according to relevant regulations, it can only conduct this action after Party A applies and obtains the approval from relevant governmental
agency.
VI.
Factory Sublease and Return
1. During the lease period, if Party B subleases the factory, it shall get written approval of Party A in advance. If it subleases or transfers the factory without
authorization, Party A will not return the rent and deposit.
2. At the end of the lease period, when the factory is returned, it should be in the status that it could be normally used.
VII. Other Arrangements during the Lease Period
1. During the lease period, Party A and Party B shall both comply with national laws and regulations, and shall not use the factory to conduct illegal activities.
2. During the lease period, Party A has the right to monitor and assist Party B to accomplish matters about fire control, security and hygiene.
3. During the lease period, if this agreement can’t be performed due to force majeure or municipal renewal and relocation, both parties do not bear responsibilities.
4. During the lease period, Party B can decorate according to its own operating characteristics, but principally it shall not break the original building structure. Party B
shall pay for the decoration fee by itself. At the end of lease period, if Party B does not renew the lease, Party A does not pay for any compensation.
5. When the lease period ends, if Party A continues to lease the factory, Party B has the priority to rent. If Party A does not lease the factory, Party B shall move out
timely, otherwise it shall be responsible for all the damages and results occurred.
VIII. Other Provisions
1. During the lease period, if Party A breaches this agreement by terminating it in advance, it shall compensate Party B for the damage of three months’ rent. During the
lease period, if Party B breaches this agreement by terminating it in advance, it shall compensate Party A for the damage of three months’ rent.
2. During the lease period, for any loss incurred to Party B’s normal operation by the property ownership issue, Party A shall be responsible for all damages.
3. After this agreement is signed, if any party’s enterprise name is changed, it could be confirmed by seal and signatures of both parties. The original terms of the
agreement keep the same and shall be performed until the end of the agreement.
4. When the electric power supply bureau charges electricity fee from Party A, it will charge contribution fee based on the planned usage and the actual fee of electricity
used. Therefore, Party A will charge Party B in the same way.
IX. Any matter not mentioned herein shall be agreed by both parties according to the law.
X.
This agreement has four originals. Party A and Party B each have two copies. This agreement is effective after seal and signatures.
Landlord : /s/ Zhejiang Special Plastics Technology Co., Ltd.
January 2, 2017
Tenant: /s/ Taizhou Fuling Plastics Co., Ltd.
January 2, 2017
Exhibit 4.7
CONTRATO DE ARRENDAMIENTO
LEASE AGREEMENT
Contrato de arrendamiento (el “Contrato”), que celebran por una parte Servicios
Interpuerto, S.A. de C.V. , representada en este acto por El Ing. Mauricio Garza
Kalifa (a quien en lo sucesivo se le denominará como “LA ARRENDADORA”); y
por otra la empresa Mayenco, S. de R.L. de C.V., representada por Moisés Chavez
Alvarado , y (a quién en lo sucesivo se le denominará como “LA
ARRENDATARIA”); (iii) comparece además Fuling Plastic USA, Inc., representada
por Xinfu Hu, (a quién en lo sucesivo se le denominará “EL OBLIGADO
SOLIDARIO”), y en conjunto con LA ARRENDADORA y LA ARRENDATARIA
se les denominará “LAS PARTES”, de conformidad con las siguientes declaraciones
y cláusulas:
Lease Agreement (the “Agreement”), which is entered into by Servicios Interpuerto,
S.A. de C.V., represented in this act by Mauricio Garza Kalifa (hereinafter referred to
as “THE LESSOR”); and the company Mayenco, S. de R.L. de C.V., represented by
Moisés Chávez Alvarado (who in the future shall be called “THE LESSEE”); and
Fuling Plastic USA, Inc., represented by Xinfu Hu (who in the future shall be called
“THE GUARANTOR”), and together with THE LESSOR and THE LESSEE shall
be called “THE PARTIES”, in accordance with the following recitals and clauses:
DECLARACIONES
RECITALS
I. Declara LA ARRENDADORA:
I. The LESSOR states that:
a) Que su representada, es una Sociedad Mercantil de las denominadas Anónimas de
Capital Variable, constituida conforme a las leyes mexicanas vigentes, mediante
Escritura Pública No. 31,190 de fecha 07 de mayo del 2008, otorgada ante la fe del
Lic. Fernando Méndez Zorrilla Titular de la Notaría No. 12 de Monterrey, N.L.,
cuyo primer testimonio se encuentra debidamente inscrito en el Registro Público de la
Propiedad y del Comercio de Monterrey, Nuevo León bajo el folio mercantil
electrónico No. 108867*1 de fecha 14 de mayo del 2008.
b) Que justifican su personalidad con la Escritura Pública No. 28,947 de fecha 18 de
marzo del 2015, otorgada ante la fe del Lic. Gustavo Escamilla Flores Titular de la
Notaría No. 26 de Monterrey, N.L., cuyo primer testimonio se encuentra debidamente
inscrito en el Registro Público de la Propiedad y del Comercio de Monterrey, Nuevo
León bajo el folio mercantil electrónico No. 108867*1 de fecha 16 de abril del 2015,
mismas que a la fecha no les han sido revocadas ni limitadas de forma alguna y bajo
ningún título.
a) It is a commercial company with so-called Variable Capital, constituted in
accordance with the Mexican laws in force, by means of Public Deed No. 31,190 dated
as of May 07, 2008, granted before the faith of the Mr. Fernando Méndez Zorrilla
holder of the Notary No.12 of Monterrey, NL, whose first testimony is duly registered
in the Public Registry of Property and Commerce of Monterrey, Nuevo León under
the electronic mercantile folio No. 108867*1 dated as of May 14, of 2008.
b) Its personality is justified with the Public Deed No. 28,947 dated as of March 18,
2015, granted before the faith of the Mr. Gustavo Escamilla Flores, holder of the
Notary No. 26 of Monterrey, NL, whose first testimony is duly registered in the Public
Registry of Property and of the Commerce of Monterrey, Nuevo León under the
commercial electronic folio No. 108867*1 dated as of April 16, 2015, which to date
have not been revoked or limited in any way and under no title.
1
c) Que para los efectos que más adelante se detallan, señala como su domicilio el
ubicado en Ave. Gomez Morin No. 955 L-317, Col. Montebello, San Pedro Garza
García, C.P. 66279.
c) That for the effects that are detailed below, it indicates as its address the one located
in Ave. Gomez Morin No. 955 L-317, Col. Montebello, San Pedro Garza García,
C.P. 66279.
d) Que es propietario, o se encuentra autorizado por el propietario, de un inmueble que
se ubica en el Parque Industrial Interpuerto Monterrey, así como la nave construida
sobre el mismo con una superficie de aproximadamente 5,470.92 m2 cinco mil
cuatrocientos setenta punto noventa y dos metros cuadrados, con clave catastral
número 29007002 (ambos, tanto el inmueble como la nave serán en los sucesivo
referidos conjuntamente como el “INMUEBLE ARRENDADO”) Ubicado en: Parque
Industrial Interpuerto Monterrey en Salinas Victoria, N.L.-
d) It is the owner, or is authorized by the owner, of a property that is located in
Interpuerto Monterrey Industrial Park, as well as the industrial unit built on it with
an area of 5,470.92m2 Five thousand four hundred seventy point ninety two square
meters, with cadastral key number 29007002 (both the property and the industrial
building will be in the referred together as the “LEASED PROPERTY”) located at:
Parque Industrial Interpuerto Monterrey in Salinas Victoria, N.L.-
LA ARRENDADORA ha proporcionado a LA ARRENDATARIA, una propuesta de
incremento de superficie la cual se encuentra contemplada en el Anexo 1, como fase 2.
THE LESSOR has provided to THE LESSEE a proposal for an increase of the area,
which is included in Exhibit 1, phase 2
LA ARRENDADORA está de acuerdo de entregar el INMUEBLE ARRENDADO
con el siguiente equipo y mejoras:
THE LESSOR agrees to deliver the LEASED PROPERTY with the following
equipment and improvements:
e) Que INMUEBLE ARRENDADO objeto de este contrato se encuentra ubicado en
Boulevard Interpuerto Monterrey, Numero 203, dentro de un desarrollo denominado
Parque Interpuerto Monterrey, y del cual se agrega el Plano correspondiente al presente
como Anexo 2.
e) The LEASED PROPERTY object of this agreement is located in Boulevard
Interpuerto Monterrey, number 203, within an industrial development named
Interpuerto Monterrey Industrial Park, and from which the corresponding Plan is
added to the present as Exhibit 2.
f) Que es su voluntad otorgar a LA ARRENDATARIA en calidad de arrendamiento,
el uso temporal del INMUEBLE ARRENDADO bajo los términos y condiciones de
este Contrato para que lo destine al giro de plasticos y papel.
f) It is its will to grant to THE LESSEE as a lease, the temporary use of the LEASED
PROPERTY under the terms and conditions of this Agreement so that it may be used
for the production of plastics and paper.
g) Que el INMUEBLE ARRENDADO cuenta con uso de suelo industrial autorizado
compatible con el giro comercial que tiene LA ARRENDATARIA”.
g) The LEASED PROPERTY has authorized industrial land use compatible with the
commercial business of THE LESSEE.
2
II. Declara LA ARRENDATARIA:
II. THE LESSEE states that:
a) Que su representada Mayenco, S. de R.L. de C.V., es una Sociedad Mercantil de las
denominadas Sociedad de Responsabilidad Limitada de Capital Variable, constituida
conforme a las leyes mexicanas vigentes, mediante Escritura Pública No. 103,616 de
fecha 03 de Septiembre de 2015, otorgada ante la fe del Lic. Juan Manuel García
García Titular de la Notaría No. 129, De Monterrey, N.L., cuyo primer testimonio se
encuentra debidamente inscrito en el Registro Público de la Propiedad y del Comercio
de Monterrey, Nuevo León bajo el folio mercantil electrónico No. 155773*1, de fecha
10 de Octubre de 2018.
a) It is a commercial company with Limited Liability Variable Capital, constituted in
accordance with the Mexican laws in force, by means of Public Deed No.103,616,
dated as of September 03, 2015, of granted before the faith of the Mr. Juan Manuel
García García , holder of the Notary No. 129 of Monterrey, NL, whose first testimony
is duly registered in the Public Registry of Property and Commerce of Monterrey,
Nuevo León under the commercial electronic folio No. 155773*1 dated as of October
10, 2018.
b) Que justifica su personalidad con la misma escritura descrita en el inciso anterior,
misma que a la fecha no les han sido revocadas ni limitadas de forma alguna y bajo
ningún título.
b) Its personality is justified with the same Public Deed described in the previous
paragraph. same which to date have not been revoked or limited in any way and under
no title.
c) Que conoce las condiciones en que se encuentra actualmente el desarrollo y que es
su voluntad recibir de LA ARRENDADORA el uso y goce temporal del INMUEBLE
ARRENDADO en calidad de arrendamiento, bajo los términos y condiciones de este
Contrato.
c) It is aware of the conditions in which the development currently is and that it is its
will to receive from THE LESSOR the use and temporary enjoyment of the LEASED
PROPERTY as a lease, under the terms and conditions of this Agreement.
d) Que para efectos de las notificaciones y avisos que procedan conforme al presente
Contrato señala como domicilio Calzada del Valle 400 Oriente. Local 63, Col. Del
Valle, San Pedro Garza García.
d) For purposes of the notifications and warnings that proceed in accordance with this
Agreement it indicates as domicile Calzada del Valle 400 Oriente. Local 63, Col. Del
Valle, San Pedro Garza García.
e) Que conoce y está de acuerdo con el estado físico del INMUEBLE ARRENDADO
y haber constatado la existencia y perfecto estado físico y de funcionamiento de todas
sus mejorar así como los demás bienes y áreas de uso común.
e) It is aware and agrees with the physical state of the LEASED PROPERTY and has
verified the existence and perfect physical condition and functioning of all its
improvements as well as other assets and areas of common use.
f) Tiene conocimiento del Reglamento del Parque Industrial Interpuerto Monterrey el
cual se adjunta al presente como Anexo 4. y demás leyes, normas y reglamentos
aplicables al INMUEBLE ARRENDADO, y manifiesta que está conforme y se
compromete a cumplir y obligarse con todas las disposiciones que se prevean en este
Contrato.
f) It is aware of the Regulations of the Interpuerto Monterrey Industrial Park attached
hereto as Exhibit 4, and other laws, rules and regulations applicable to the LEASED
PROPERTY, and declares that it is in agreement and undertakes to comply and be
bound by all the provisions set forth in this Agreement.
3
g) Es su deseo celebrar el presente Contrato y tomar en arrendamiento, el
INMUEBLE ARRENDADOR y destinarlo para uso exclusivo de producción de
productos de plástico y papel.
h) En este acto otorga su consentimiento para que LA ARRENDADORA o cualquier
empresa relacionada con ella o cualquier otra compañía que contrate para estos fines,
investigue su situación crediticia y socio-económica, así como antecedente penales y
laborales ante cualquier instancia pública o privada o la cámara de propietarios de
bienes raíces.
g) It is its wish to enter into this Agreement and to lease the LEASED PROPERTY
and use it for the exclusive use of production of plastic and paper products.
h) In this act, it gives consent to the LESSOR or any company related to it or any other
company that contracts for these purposes, to investigate its credit and socio-economic
situation, as well as criminal and labor background before any public or private entity
or the chamber of real estate owners.
i) Que las actividades que realizará son compatibles con el uso de suelo, así como en
apego a las leyes y reglamentos de ámbito Federal, Estatal y Municipal, y tiene
conocimiento que deberá de obtener su constancia de uso de suelo con giro especifico
a su gasto y costa.
i) The activities it will carry out are compatible with the land use, as well as in
accordance with the laws and regulations of the Federal, State and Municipal levels,
and it is aware that it must obtain its proof of land use with specific reference at its
own expense.
III. Declara EL OBLIGADO SOLIDARIO, bajo protesta de decir verdad y por sus
propios derechos:
III. GUARANTOR states, under protest of telling the truth and for its own rights that:
a) Que su representada Fuling Plastic USA, Inc. es una subsidiaria de Fuling Global
Inc., lo acredita mediante su constitutiva la cual se adjunta al presente como Anexo 3,
es una compañía que cotiza en bolsa en Nasdaq. La compañía es fabricante y
distribuidora de productos de plástico y papel desechable para uso alimenticio y está
incorporada en el estado de Pennsylvania, EE. UU.
a) Its principal, Fuling Plastic USA, Inc. is a fully owned subsidiary of Fuling Global,
Inc., is justified with the By-Laws of Fuling Plastic Usa, Inc., attached hereto as
Exhibit 3, a publicly traded company on Nasdaq. The Company is a manufacturer and
distributor of single-use plastic and paper foodservice ware, incorporated in the
Commonwealth of Pennsylvania, USA.
4
b) Que comparece a la celebración del presente acto jurídico a fin de garantizar de
manera absoluta, continua, irrevocable y solidaria a favor de LA ARRENDADORA el
total y absoluto cumplimiento de todas y cada una de las obligaciones que deriven del
presente Contrato a cargo de LA ARRENDATARIA en los términos del mismo y por
tanto garantiza a favor de LA ARRENDADORA dicho cumplimiento total y completo
durante la vigencia del Periodo de Arrendamiento y mientras LA ARRENDATARIA
ocupe total o parcialmente el INMUEBLE ARRENDADO objeto del presente
Contrato.
b) It appears to the celebration of this legal act in order to guarantee in an absolute,
continuous, irrevocable and supportive manner in favor of THE LESSOR the total and
absolute compliance with each and every one of the obligations arising from this
Agreement at the expense of THE LESSEE in the terms thereof and therefore
guarantees in favor of the LESSOR full and complete compliance during the term of
the Lease Period and while the LESSEE occupies total or partially the LEASED
PROPERTY object of this Agreement.
c) Que para efectos de las notificaciones y avisos que procedan conforme al presente
Contrato señala como domicilio en 6690 Grant Way, Suite 1, Allentown, el estado de
Pennsylvania, C.P. 18106.
c) For purposes of the notifications and warnings that proceed in accordance with this
Agreement it indicates as domicile 6690 Grant Way, Suite 1, Allentown, Pennsylvania,
Zip. 18106.
IV. LAS PARTES declaran que es su deseo obligarse en los términos de este
Contrato y de sus anexos.
IV. THE PARTIES state that it is their wish to be bound by the terms of this
Agreement and its Exhibits.
Tomando en cuenta lo anteriormente declarado, LAS PARTES acuerdan someterse al
tenor de las siguientes:
Taking into account the foregoing, THE PARTIES agree to submit to the wording of
the following:
Primera. Objeto.
FIRST. Object.
CLAUSULAS
CLAUSES
a) LA ARRENDADORA otorga en calidad de arrendamiento a LA
ARRENDATARIA el uso temporal del INMUEBLE ARRENDADO tal cual se
encuentra descrito en el inciso d) de la Declaración I del presente Contrato así como en
el Anexo 1 del presente, el cual contiene las propuestas fase 1, y fase 2, bajo los
términos y condiciones que en este instrumento se establecen.
a) THE LESSOR grants the LESSEE temporary use of the LEASED PROPERTY as
it is described in clause d) of the Recital I of this Agreement as well as in the Exhibit 1
hereof, which contains the proposals phase 1, and phase 2, under the terms and
conditions that in this instrument they are established.
LA ARRENDADORA se obliga a entregar la posesión del INMUEBLE
ARRENDADO en su fase 1, el día de la firma del presente contrato (Fecha de
Entrega).
THE LESSOR agrees to deliver the possession of the LEASED PROPERTY during
phase 1, on the day of signing this agreement (Delivery Date).
5
En caso de que LA ARRENDADORA se vea demorada, obstaculizada o
imposibilitada para realizar la entrega del INMUEBLE ARRENDADO en la Fecha de
Entrega por causas de fuerza mayor que no le sean imputables o que no hubieren estado
bajo su control, la realización de la Fecha de Entrega será dispensada por el período de
ocurrencia de dicho evento de fuerza mayor, y en consecuencia será prorrogada por un
período equivalente al período de ocurrencia de dicho evento. Nada de lo aquí
contenido dispensará a LA ARRENDATARIA del cumplimiento de sus obligaciones
de pago conforme al presente Contrato. En el supuesto en el que LA
ARRENDATARIA no acuda a la recepción física del INMUEBLE ARRENDADO
en la Fecha de Entrega, éste se tendrá por entregado por lo que el Plazo de Gracia
correrá a partir de la fecha señalada y la Renta Mensual será exigible una vez
concluido el Plazo de Gracia.
In the event that THE LESSOR is delayed, hindered or unable to deliver the LEASED
PROPERTY on the Delivery Date due to force majeure that is not attributable to her
or that has not been under her control, the completion of the Delivery Date shall be
dispensed for the period of occurrence of said event of force majeure, and consequently
will be extended for a period equivalent to the period of occurrence of said event.
Nothing contained herein shall exempt THE LESSEE from the fulfillment of its
payment obligations under this Agreement. In the event that THE LESSEE does not
attend the physical reception of the LEASED PROPERTY on the Delivery Date, it
shall be considered delivered so that the Grace Period shall run from the date indicated
and the Monthly Rent shall be due once the Grace Period has ended.
LA ARRENDADORA, se compromete de acuerdo a la propuesta hecha a la
ARRANDATARIA, a entregar en arrendamiento la fase 2 del inmueble mencionado
en el Anexo 1, en fecha 01 de julio de 2019.
THE LESSOR agrees to deliver the possession of the LEASED PROPERTY phase 2
for lease mentioned in Exhibit 1 the proposal, and commits to deliver in time and
form to THE LESSEE on July 1, 2019.
EL ARRENDADOR le garantiza al ARRENDATARIO que el otro inquilino que
actualmente ocupa los 2,332.87-dos mil trescientos treinta y dos punto ochenta y siete
metros cuadrados restantes de la propiedad, abandonará la propiedad a tiempo según lo
estipulado en la propuesta. En caso de que EL ARRENDADOR no cumpla con lo
mencionado anteriormente, EL ARRENDADOR pagará a EL ARRENDATARIO
una multa contractual de USD $300.00 (Trescientos dólares) por día de retraso.
THE LESSOR guarantees THE LESSEE the other tenant that is currently occupying
the remaining 2,332.87 square meters of the property shall vacate the property on time.
In case THE LESSOR does not comply with the aforementioned, THE LESSOR shall
pay THE LESSEE a contractual penalty of USD $ 300.00 three hundred per day of
delay.
Segunda. Destino y Uso del INMUEBLE ARRENDADO; Aceptación del
Reglamento.
SECOND. Destination and Use of LEASED PROPERTY; Acceptance of the
Regulation.a)
a) LA ARRENDATARIA se obliga a utilizar el INMUEBLE ARRENDADO
exclusivamente para la producción de productos de plástico y papel relacionados a su
operación. En ningún caso podrá LA ARRENDATARIA variar el destino del
INMUEBLE ARRENDADO sin la previa autorización por escrito de LA
ARRENDADORA.
a). THE LESSEE agrees to use the LEASED PROPERTY exclusively for production
of plastic and paper products related to its operation. In no case may THE LESSEE
vary the use of the LEASED PROPERTY without the prior written authorization of
THE LESSOR.
6
b) LA ARRENDATARIA, por la firma de este Contrato, acepta y se obliga a cumplir
íntegramente con las reglas de uso, restricciones y demás obligaciones que, en su
carácter de arrendataria del INMUEBLE ARRENDADO, le deriven del Reglamento
del Parque Industrial Interpuerto Monterrey según se encuentre vigente.
b) THE LESSEE, by signing this Agreement, accepts and undertakes to comply in full
with the rules of use, restrictions and other obligations that, as lessee of the LEASED
PROPERTY, derive from the Regulations of the Interpuerto Monterrey Industrial Park
(the “Park Regulations” as is in force.
c) LA ARRENDATARIA no podrá tener en el INMUEBLE ARRENDADO ningún
tipo de explosivo o material o sustancia peligrosa de acuerdo a la legislación ambiental
aplicable, por lo que libera a LA ARRENDADORA de cualquier responsabilidad
derivada por el uso o posesión de cualquier sustancia tóxica y/o peligrosa, obligándose
igualmente a indemnizar en caso de cualquier siniestro o la situación derivada u
originada con motivo de la posesión o uso de explosivos, material o sustancias
peligrosas y/o tóxicas.
d) LA ARRENDADORA ha confirmado que el Parque Industrial Interpuerto
Monterrey y Servicios Interpuerto, S.A. de C.V. (colectivamente “Interpuerto”) que las
actividades de LA ARRENDATARIA no se encuentra dentro de las restricciones
descritas en el Artículo II.1 del Reglamento del Parque. Si, por alguna razón, las
actividades de LA ARRENDATARIA se encuentran en el Artículo II.1 del
Reglamento del Parque, LA ARRENDATARIA es responsable de obtener todas las
autorizaciones necesarias de Interpuerto de conformidad con el Artículo II.1 del
Reglamento del Parque.
c) THE LESSEE may not have any type of explosive or dangerous material or
substance in the LEASED PROPERTY according to the applicable environmental
legislation, thereby releasing THE LESSOR from any liability arising from the use or
possession of any toxic substance and / or dangerous, also being obliged to compensate
in case of any loss or the situation derived or originated due to the possession or use of
explosives, material or dangerous and / or toxic substances.
d) The LESSOR has confirmed with Interpuerto Monterrey Industrial Park and
Servicios Interpuerto, S.A. de C.V., (collectively “Interpuerto”) that the LESSEE’s
anticipated activities do not fall under the restrictions described in Article II.1 of the
Park Regulations. If for any reason the LESSEE’s activities fall under Article II.1 of
the Park Regulations, the LESSEE is responsible for obtaining all necessary
authorizations from Interpuerto in accordance with Article II.1 of the Park Regulations.
7
e) LA ARRENDADORA garantiza que el uso de suelo propuesto por parte de LA
ARRANDATARIA es consistente con el uso de suelo autorizado por Interpuerto
como se establece en el Artículo II.3 de las Regulaciones del Parque.
e) The LESSOR warrants that the LESSEE’s proposed use of land is consistent with
the land use authorized for Interpuerto as stated in Article II.3 of the Park Regulations.
Tercera. Vigencia del Arrendamiento.
THIRD. Validity of the Lease.
a) El Contrato tendrá vigencia de 48 (cuarenta y ocho) meses forzosos contados a partir
del 15 (quince) de febrero de 2019 (dos mil diecinueve) y terminando precisamente el
14 de febrero del 2023.
a) The Agreement will be in force for 48 (forty-eight) months mandatory starting on the
15th (fifteenth) of February of 2019 (the “Start Date”) and ending precisely on the 14th
(fourteen) of February of 2023 (the “End Date”).
b) Una vez concluido la vigencia del presente contrato, LA ARRENDATARIA podrá
siempre y cuando esté en cumplimiento de este Contrato, solicitar la renovación por un
periodo adicional de 2 (dos) años forzosos, la cual deberán solicitar a LA
ARRENDADORA previa notificación por escrito con 180 días naturales previos a la
terminación de la vigencia del presente Contrato.
b) Once the term of this agreement has expired, THE LESSEE may, provided it is in
compliance with this Agreement, request the renewal for an additional period of 2
(two) years, which it must request from THE LESSOR upon written notification with
180 calendar days prior to the end of this Agreement.
c) LA ARRENDATARIA renuncia en este acto a los beneficios de la continuación
automática del presente Contrato por tiempo indefinido una vez expirada la vigencia de
este Contrato, por lo cual renuncia a los artículos 2380 y 2381 del Código Civil para el
Estado de Nuevo León (el “Código Civil”).
c) THE LESSEE waives in this act the benefits of the automatic continuation of this
Agreement for an indefinite period after the expiration of this Agreement, for which it
waives articles 2380 and 2381 of the Civil Code for the State of Nuevo León ( the
“Civil Code”).
d) LA ARRENDATARIA considerará la posibilidad de celebrar un contrato de
arrendamiento similar para un segundo edificio que LA ARRENDADORA planea
construir cerca de la PROPIEDAD ARRENDADA, siempre y cuando las condiciones
del nuevo edificio y los términos de ese contrato sean satisfactorios para LA
ARRENDATARIA y que el plazo del mismo. termina simultáneamente como este
término de este contrato de arrendamiento.
d) THE LESSEE will consider entering into a similar lease for a second building that
THE LESSOR plans to construct near the LEASED PROPERTY, provided that the
conditions of the new building and the terms of that lease are satisfactory to THE
LESSEE and that the term of that lease ends simultaneously as this term of this lease.
8
Cuarta. Renta.
FOURTH. Rent.
a) LA ARRENDATARIA pagará por concepto de Renta Mensual por el INMUEBLE
ARRENDADO fase 1 los primeros 4 cuatro meses la cantidad de $20,899.00 (Veinte
Mil Ochocientos Noventa y Nueve Dólares 00/100) Dólares Americanos) más IVA,
después de los 4 cuatro meses LA ARRENDATARIA pagará por el inmueble
identificado como fase 2 en el Anexo 1 la cantidad de $29,810.47 (Veintinueve Mil
Ochocientos diez dólares 47/100 más IVA (referida como la “Renta Mensual”), dentro
de los primeros 5 (cinco) días naturales de cada mes.
a) THE LESSEE shall pay a monthly rent of USD twenty thousand eight hundred and
ninety-nine dollars ($20,899.00) plus VAT for the LEASED PROPERTY phase 1.
After 4 (four) months, THE LESSEE will pay USD twenty-nine thousand eight
hundred ten dollars with forty seven cents ($29,810.47) plus VAT for THE LEASED
PROPERTY identified as phase 2 in the Exhibit 1(each payment for either phase 1 or
phase 2 is referred to as a “Monthly Rent”). Payment shall be made within the first 5
(five) calendar days of each month.
La Renta Mensual referida en el párrafo anterior ha sido calculada a razón de $3.82
dólares (Tres dólares 82/100 Dólares, moneda de curso legal de los Estados Unidos de
América) por metro cuadrado del INMUEBLE ARRENDADO.
The Monthly Rent referred to in the previous paragraph has been calculated at the rate
$3.82 (three dollars 82/100 , legal currency of the United States of America) per square
meter of the LEASED PROPERTY.
b) LA ARRENDATARIA pagará la Renta Mensual por mes calendario anticipado
mediante depósito o transferencia bancaria a la cuenta bancaria que le indique LA
ARRENDADORA o de cualquier otra forma que le notifique por escrito.
b) THE LESSEE shall pay the Monthly Rent in advance at each calendar month by
deposit or bank transfer to the bank account indicated by THE LESSOR or in any
other way notified in writing.
c) Para el caso de que la fecha de inicio de la obligación de pago de la Renta Mensual
no corresponda al primer día natural del mes de que se trate, LA ARRENDATARIA
se obliga a pagar la cantidad que corresponda de acuerdo con el número de días
naturales que LA ARRENDATARIA ocupe en el INMUEBLE ARRENDADO, es
decir, LA ARRENDATARIA pagará a partir del día en que fenezca el PLAZO DE
GRACIA de desde la firma del presente contrato hasta el 14 de febrero de 2019 y
hasta el día en que inicie el primer mes calendario completo de pago de Renta (en lo
sucesivo el “PERIODO IRREGULAR”); para lo cual se dividirá el monto de la
Renta mensual entre 30 (treinta) días y el resultado obtenido se multiplicará por el
número de días naturales que LA ARRENDATARIA ocupará en el INMUEBLE
ARRENDADO durante el PERIODO IRREGULAR.
c) In the event that the start date of the payment obligation of the Monthly Rent does
not correspond to the first calendar day of the month in question, THE LESSEE agrees
to pay the corresponding amount according to the number of calendar days that The
LESSEE occupies in the LEASED PROPERTY, that is, THE LESSEE shall pay
from the day on which the GRACE PERIOD from the signing of this agreement until
February 14, 2019 and until the day in which the first full calendar month of rental
payment begins (hereinafter referred to as the “ IRREGULAR PERIOD”); for which
the amount of the Monthly Rent shall be divided by 30 (thirty) days and the result
obtained shall be multiplied by the number of calendar days that THE LESSEE shall
occupy in the LEASED PROPERTY during the IRREGULAR PERIOD.
9
Por lo tanto, el pago que corresponda al PERIODO IRREGULAR de acuerdo con lo
antes expuesto, se deberá de pagar junto con el pago de la Renta correspondiente al
primer mes calendario completo de pago de Renta Mensual.
Therefore, the payment corresponding to the IRREGULAR PERIOD in accordance
with the foregoing, shall be paid together with the Monthly Rent corresponding to the
first full calendar month of Monthly Rent payment.
d) LA ARRENDATARIA realizará los pagos de Renta y cuotas correspondientes en
una sola exhibición, por lo cual LA ARRENDADORA podrá rechazar pagos
parciales.
d) THE LESSEE shall make the corresponding Monthly Rent and installment
payments in a single installment, for which THE LESSOR may reject partial
payments.
e) LA ARRENDADORA entregará a LA ARRENDATARIA recibos comprobatorios
del pago de la Renta Mensual, los cuales serán el único medio legal de comprobar su
pago.
e) THE LESSOR shall provide THE LESSEE with proof of payment of the Monthly
Rent, which shall be the only legal means of verifying its payment.
f) LA ARRENDADORA en este acto instruye a LA ARRENDATARIA a cubrir el
importe total de la Renta Mensual y el Depósito en Garantía referido en el presente
Contrato en la cuenta que indique LA ARRENDADORA
f) THE LESSOR in this act instructs THE LESSEE to cover the total amount of the
Monthly Rent and the Security Deposit referred to in this Agreement in the account
that is indicated by THE LESSOR.
g) LA ARRENDATARIA pacta y se obliga a efectuar el pago de la Renta Mensual
vigente de acuerdo a lo establecido en el inciso a) de ésta misma cláusula y en la
cláusula Quinta del presente Contrato; en caso de incumplimiento a la obligación antes
referida, se generarán intereses moratorios en los términos de la cláusula séptima
siguiente. Si transcurridos 25 (veinticinco) días naturales LA ARRENDATARIA
continuara en el incumplimiento del pago de la Renta Mensual, conviene LA
ARRENDATARIA en pagar a LA ARRENDADORA, a partir de ese momento y en
lugar del interés moratorio, a título de pena convencional la cantidad equivalente a la
parte proporcional que por día resulte de aplicar la Renta Mensual multiplicada por 2-
dos por cada día de retraso, sin que esto implique renuncia alguna a la facultad de LA
ARRENDADORA de exigir la rescisión de este Contrato.
g) THE LESSEE agrees and undertakes to make the payment of the current Monthly
Rent in accordance with what is established in section a) of this clause and in clause
Fifth of this Agreement; in case of non-compliance with the aforementioned obligation,
late interest will be generated in the terms of the seventh clause below. If after 25
(twenty five) calendar days THE LESSEE shall continue to default on the Monthly
Rent, the LESSEE agrees to pay THE LESSOR, from that moment and instead of the
late interest, by way of conventional penalty the equivalent amount to the proportional
part that per day results from applying the Monthly Rent multiplied by 2 (two) for each
day of delay, without this implying any waiver of the right of THE LESSOR to
demand the rescission of this Agreement.
10
h) LA ARRENDATARIA no podrá retener la Renta Mensual en ningún caso y bajo
ningún título, aunque sea por falta de reparaciones urgentes o indispensables al
INMUEBLE ARRENDADO, ya que dicha obligación recae sobre LA
ARRENDATARIA. En este sentido, LA ARRENDATARIA renuncia en este acto a
lo previsto en lo establecido en el artículo 2310 del Código Civil del Estado de Nuevo
León.
i) LA ARRENDATARIA gozará de un Plazo de Gracia de pago de Renta Mensual el
cual comenzará a partir de la fecha de firma del presente contrato hasta el 14 de
febrero de 2019, por lo que LA ARRENDATARIA quedará exenta del pago de la
Renta Mensual pero si deberá pagar las cuotas de mantenimiento correspondientes al
INMUEBLE ARRENDADO.
h) THE LESSEE may not withhold the Monthly Rent in any case and under no title,
even for lack of urgent or essential repairs to the LEASED PROPERTY. In this sense,
THE LESSEE waives in this act the provisions of article 2310 of the Civil Code of the
State of Nuevo León.
i) THE LESSEE shall enjoy a Grace Period of Monthly Rent payment, which will start
from the date of signature of this agreement until February 14, 2019, so THE LESSEE
shall be exempt from any Monthly Rent payment, but must have to pay the
maintenance fees corresponding to the PROPERTY LEASED.
Quinta. Incrementos Anuales de la Renta
FIFTH. Annual Rent Increases
a) La Renta Mensual se incrementará anualmente de manera automática el día primero
del mes correspondiente al aniversario de Firma del presente Contrato en un porcentaje
equivalente al incremento porcentual de acuerdo al Índice Nacional de Precios al
Consumidor (CPI) publicado por el Departamento de Trabajo y Estadística de los
Estadios Unidos de Norte América (Bureau of Labor Statistics) más 1 (un) punto
porcentual, o el que lo sustituya, por el año inmediato anterior y así sucesivamente por
todos los años de vigencia del Contrato. En caso de existir un (CPI) negativo, deberá
haber un ajuste al alza de la Renta mensual, si el cambio del (CPI) es negativo, El
(CPI) en el porcentaje del 0% (cero) porciento, el ajuste será del 1% (un) punto
porcentual, si el (CPI) es negativo en un .5 punto cinco, el ajuste será 0.5 (cero punto
cinco) punto porcentual.
a) The Monthly Rent shall be annually and automatically increased on the first day of
the month corresponding to the anniversary of the signature of the present Agreement
in a percentage equivalent to the percentage increase according to the Consumer Price
Index (CPI) for all items published by the Bureau of Labor Statistics of the United
States of America plus 1 (one) percentage point, or the one that replaces it, for the
immediately previous year and so on for all the years of validity of the Agreement.
There shall be upward adjustment of the Monthly Rent if the CPI change is negative
CPI equals 0% (cero) percentage the adjustment will be 1 (one) percentage point, if the
CPI equals negative .5 point five the adjustment will be 0.5 (cero point five) percentage
point.
11
b) Al ser aplicable el incremento de la Renta Mensual, de no liquidarse éste, se tendrá
como incumplimiento en el pago de la Renta Mensual y Cuotas de mantenimiento.
b) When the Monthly Rent increase is applicable, if this is not settled, it shall be a
breach on the Monthly Rent and Maintenance Fees payments.
Sexta. Mantenimiento
SIXTH. Maintenance
a) LA ARRENDATARIA se obliga bajo su responsabilidad a sufragar directamente y
realizar el mantenimiento interior y exterior del INMUEBLE ARRENDADO,
incluyendo banquetas y áreas verdes, si las hubiere, dentro del perímetro del área
arrendada por LA ARRENDATARIA y en términos del Reglamento del Parque
Industrial Interpuerto Monterrey;
b) Independientemente de lo anterior, LA ARRENDATARIA se obliga a pagar
mensualmente a partir de la firma del presente contrato hasta el 30 de junio del 2019 la
cantidad de USD $565 (Quinientos Sesesnta y Cinco dólares, mas IVA, y a partir del
01 de julio del 2019 la cantidad de USD $908.00 (Novecientos Ocho dolares) más el
IVA, por concepto de Cuotas de Mantenimiento, dentro de los primeros 5 (cinco) días
naturales de cada mes y/o periodo de arrendamiento.
a) THE LESSEE undertakes under its responsibility to pay directly and perform the
internal and external maintenance of the LEASED PROPERTY, including sidewalks
and green areas, if any, within the perimeter of the leased area of the LESSE and in
accordance with the Regulations of the Interpuerto Monterrey Industrial Park;
b) Independently of the foregoing, the LESSEE agrees to pay monthly from the Start
Date until June 30, 2019 the amount of USD five hundred and sixty five dollars
($565.00) monthly plus VAT, and the amount of USD Nine hundred and eight
($908.00) monthly plus VAT from July 1, 2019 to the End Date, for the Maintenance
Fees, within the first 5 (five) calendar days of each month and / or lease period.
c) La Cuota de Mantenimiento se incrementarán anualmente de manera automática el
día primero del mes correspondiente al aniversario de Firma del presente Contrato en
un porcentaje equivalente al incremento porcentual de acuerdo al Índice Nacional de
Precios al Consumidor (INPC) que dé a conocer el Diario Oficial de la Federación(o el
que lo sustituya) o el 4% (cuatro por ciento), lo que resulte mayor, por el año
inmediato anterior y así sucesivamente por todos los años de vigencia del Contrato.
c) The Maintenance Fee shall be annually and automatically increased on the first day
of the month corresponding the anniversary of the Signature of the Agreement in a
percentage equivalent to the percentage increase according to the National Consumer
Price Index (INPC) that is published in the Official Gazette. of the Federation (or the
one that replaces it) or 4% (four percent), whichever is greater, for the immediately
previous year and so on for all the years of validity of the Agreement.
d) Si las circunstancias lo justifican, la anterior cuota de mantenimiento podrá variar
conforme lo indicado en el Reglamento del Parque Industrial Interpuerto Monterrey.
d) If circumstances justify it, the previous maintenance fee may vary as indicated in the
Regulations of the Interpuerto Monterrey Industrial Park.
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e) LA ARRENDATARIA autoriza a LA ARRENDADORA para que en caso de
incumplimiento en los pagos de cuotas de mantenimiento, Renta Mensual o servicios,
los servicios propios del INMUEBLE ARRENDADO proporcionados por o con la
intervención y cuidado de LA ARRENDADORA le sean suspendidos hasta en tanto
se liquiden los montos de cuotas de mantenimiento, Renta Mensual, servicios y demás
conceptos que se adeuden.
e) THE LESSEE authorizes the LESSOR so that in the event of non-payment of
maintenance fees, Monthly Rent, or the services of the LEASED PROPERTY
provided by or with the intervention and care of the LESSOR are suspended until the
amounts of maintenance fees, Monthly Rent, services and other concepts that are owed
are settled.
SĖptima. Intereses Moratorios.
SEVENTH. Late Interests.
Para el caso que LA ARRENDATARIA no pague en los plazos señalados la Renta
Mensual y/o las cuotas de mantenimiento, de conformidad con lo establecido en las
Cláusulas Cuarta, Quinta y Sexta, LA ARRENDADORA pondrá a LA
ARRENDATARIA en aviso por incumplimiento por escrito simple o correo
electrónico y otorgará a LA ARRENDATARIA catorce (14) días para subsanar el
incumplimiento. En el caso de que LA ARRENDATARIA no resuelva el
incumplimiento dentro de los catorce (14) días de haber recibido una notificación por
escrito por parte de LA ARRENDADORA, LA RRENDADORA se reserva el
derecho de cobrar adicionalmente intereses moratorios a razón de 2 (dos) veces la Tasa
de Interés Interbancaria de Equilibrio (TIIE) anual publicada mensualmente por el
Banco de México y LA ARRENDATARIA se obliga a dar cumplimiento. Los
intereses deberán ser calculados por los días vencidos y hasta que la cantidad adeudada
se pague totalmente.
In the event that THE LESSEE fails to pay the Monthly Rent and / or the maintenance
fees in the terms indicated and in accordance with the provisions of the Fourth, Fifth
and Sixth Clauses, THE LESSOR shall put THE LESSEE in default in simple writing
or an email and give THE LESSEE at fourteen (14) days to cure the default. In the
event that THE LESSEE fails to cure the default within fourteen (14) days of
receiving a written default notice from THE LESSOR, THE LESSOR reserves the
right to charge an additional late interest at the rate of 2 (two) times the annual
Interbank Interest Rate of Equilibrium (TIIE) monthly published by the Bank of
Mexico and the LESSEE undertakes to pay. The interest must be calculated for the
days due and until the amount owed is paid in full.
Octava. Renuncia al Derecho del Tanto.
EIGHTH. Waiver of the Right of First Refusal.
LA ARRENDATARIA renuncia en este acto al derecho del tanto consignado en los
artículos 2341 y 2379 del Código Civil, para el evento de venta del INMUEBLE
ARRENDADO.
THE LESSEE waives in this act the right of first refusal consigned in articles 2341
and 2379 of the Civil Code, for the event of sale of the LEASED PROPERTY.
Novena. Adecuaciones, Reparaciones y Mejoras.
NINTH. Adjustments, Repairs and Improvements.
a). LA ARRENDATARIA gozará del Plazo de Gracia que se establece en el presente
Contrato, contado a partir de la Fecha de Entrega del INMUEBLE ARRENDADO a
LA ARRENDATARIA (el “Plazo de Gracia”). LA ARRENDADORA otorga el
Plazo de Gracia única y exclusivamente para que LA ARRENDATARIA lleve a cabo
las adecuaciones que desee realizar dentro del INMUEBLE ARRENDADO; sin
embargo en el caso de que LA ARRENDATARIA inicie operaciones en el
INMUEBLE ARRENDADO con anterioridad a que concluya el citado Plazo de
Gracia, este terminará anticipadamente y LA ARRENDATARIA se obliga a iniciar el
pago de la Renta Mensual correspondiente.
a) THE LESSEE shall enjoy the Grace Period established in this agreement, starting
from the Delivery Date of the LEASED PROPERTY to the LESSEE (the “Grace
Period”). THE LESSOR grants the Grace Period only and exclusively for the
LESSEE to carry out the adjustments that it wishes to make within the LEASED
PROPERTY; however, in the event that THE LESSEE initiates operations in the
LEASED PROPERTY prior to the termination of the aforementioned Grace Period, it
shall prematurely end and THE LESSEE undertakes to initiate the payment of the
corresponding Monthly Rent.
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b). LA ARRENDATARIA se obliga a realizar las reparaciones de aquellos deterioros
que se causen al INMUEBLE ARRENDADO con motivo de negligencia o mala fe,
con excepción del deterioro razonable por uso, por lo cual LA ARRENDATARIA
libera a LA ARRENDADORA de las obligaciones que le imponen los artículos 2306
fracciones II y V, 2310, 2311 y 2315 del Código Civil, renunciando a dichos artículos
en lo que le sea favorable.
c). Durante la vigencia de este contrato y cualquiera de sus prórrogas, si las hubiere,
LA ARRENDADORA mantendrá y reparará, a su propio costo y gasto las partes
estructurales del Edificio, la estructura exterior, suelos y estructura del suelo (con
excepción de sellos), techos, estructura de los techos (con excepción de sellos)
incluyendo soportes de cimentación, plomería y suministro eléctrico a las paredes de
los Edificios Industriales.
A la recepción de la notificación por escrito de LA ARRENDATARIA en relación
con la necesidad de llevar a cabo reparaciones que se requieran de LA
ARRENDADORA de conformidad con esta Cláusula, LA ARRENDADORA
procederá diligentemente a llevar a cabo dichas reparaciones a su propio costo y gasto
y con una interferencia mínima en el uso normal de la Propiedad Arrendada por parte
de LA ARRENDATARIA.
d). LA ARRENDADORA negociará de buena fe con LA ARRENDATARIA para
incluir en el segundo edificio descrito en la propuesta el Anexo 1, un transformador de
750 KVA, igual que para el primer edificio. Si LA ARRENDATARIA requiere un
transformador de 1,500 KVA o 2,000 KVA, LA ARRENDADORA instalará dicho
transformador y LA ARRENDATARIA pagará la diferencia del costo de los 750
KVA a LA ARRENDADORA.
b) THE LESSEE undertakes to repair those damages that were caused by THE
LESSEE to the LEASED PROPERTY due to negligence or bad faith, except
reasonable wear and tear. THE LESSEE releases THE LESSOR from the obligations
imposed by articles 2306 fractions II and V, 2310, 2311 and 2315 of the Civil Code,
waiving the benefits of said articles in what is favorable.
c). During the term of this Lease and of any Renewals thereof, THE LESSOR shall
maintain and repair, at Lessor’s own cost and expense, the structural portions of the
Industrial Buildings, the exterior structure, floor and floor structure (except for seals),
roof, roof structure (except for seals), including foundations supports and plumbing and
electrical supply to Industrial Building’s walls.
Upon receipt of written notice from THE LESSE in connection with the need to carry
out repairs required from THE LESSOR under this Section, THE LESSOR shall
diligently proceed to carry out said repairs at THE LESSOR own cost and expense
and with minimum interference in THE LESSE normal use of the Leased Property
d). THE LESSOR will negotiate in good faith with THE LESSEE to include for the
second building mentioned in the proposal in Exhibit 1, a 750 KVA transformer, same
as for the first building. If THE LESSEE requires a 1,500 KVA or 2,000 KVA
transformer instead, THE LESSOR shall install such transformer and THE LESSEE
shall pay the difference from the cost of the 750 KVA to THE LESSOR.
14
e) LA ARRENDATARIA podrá, previo consentimiento por escrito de LA
ARRENDADORA, hacer a su costa, las adecuaciones, reparaciones y mejoras que
impliquen la modificación del INMUEBLE ARRENDADO y que tengan como
finalidad el lujo, remodelación, la comodidad o en su momento una mayor
funcionalidad de las instalaciones, en el entendido que dichas mejoras quedarán en
beneficio de LA ARRENDADORA desde la fecha de su realización, renunciado LA
ARRENDATARIA expresamente por ello a los beneficios que le otorgan los artículos
2317, fracciones I y II, y 2318 del Código Civil.
f). Las adecuaciones que lleve a cabo LA ARRENDATARIA no podrán alterar la
estructura ni la techumbre del INMUEBLE ARRENDADO. Sólo se permitirán
aquellas adecuaciones de tabla roca, techos falsos o adecuaciones de madera de fácil
instalación y remoción.
g). Las adecuaciones del INMUEBLE ARRENDADO deberán en todo momento
cumplir con las disposiciones del Reglamento del Parque Industrial Interpuerto
Monterrey, LA ARRENDATARIA deberá contar con todos los permisos y/o
autorizaciones necesarias, tanto municipales, estatales o federales para cualquier clase
de reparación o adecuación del INMUEBLE ARRENDADO en su caso, así como el
cumplimiento de las obligaciones laborales, de seguridad social y/o fiscales y demás
que correspondan, respecto de dichas reparaciones o adecuaciones.
e) THE LESSEE may, with prior written consent of the LESSOR, make at its own
expense, adjustments, repairs and improvements that involve the modification of the
LEASED PROPERTY and whose purpose is luxury, remodeling, comfort or at the
time a greater functionality of the facilities, with the understanding that said
improvements shall be for the benefit of the LESSOR from the date of its fulfilment,
the LESSEE expressly waived therefore for the benefits granted by articles 2317,
sections I and II, and 2318 of the Civil Code .
f) The adjustments made by the LESSEE may not alter the structure and the ceiling of
the LEASED PROPERTY. Only those adjustments of dry wall, false ceilings or
wood adjustments of easy installation and removal shall be allowed.
g) The adjustments of the LEASED PROPERTY must comply at all times with the
provisions of the Interpuerto Monterrey Industrial Park Regulation THE LESSEE
must have all the necessary municipal, state or federal permits and / or authorizations,
for any kind of repair or adaptation of the LEASED PROPERTY where appropriate,
as well as compliance with labor, social security and / or tax obligations and others that
correspond, with respect to said repairs or adjustments.
h) A la ARRENDATARIA se le permitirá realizar cambios en el edificio para instalar
el equipo necesario, y realizar ajustes en los muros siempre contando con la previa
aprobación de LA ARRENDADORA. LA ARRENDATARIA restaurará los muros al
estado original una vez que LA ARRENDATARIA desocupe la PROPIEDAD
ARRENDADA.
h) THE LESSEE shall be allowed to make changes to the building to install necessary
equipment and to make adjustments to the walls upon always counting with the prior
approval by THE LESSOR. THE LESSEE shall restore the walls to the original state
once THE LESSEE vacates the LEASED PROPERTY.
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i) A LA ARRENDATARIA se le permitirá, previa aprobación de LA
ARRENDADORA construir áreas de oficinas, baños y otras instalaciones en la
propiedad arrendada. LA ARRANDATARIA podrá dejar dichas modificaciones y no
estará obligado a restaurar la propiedad arrendada a su estado original, siempre y
cuando dichas construcciones no excedan el 8% ocho por ciento del edificio.
i) THE LESSEE shall be allowed, upon prior approval by THE LESSOR, to build
office areas, toilets, and other facilities in the LEASED PROPERTY. THE LESSEE
shall be allowed to leave such modifications and shall not be obliged to restore the
LEASED PROPERTY to its original state as long as it does not exceed the 8% eight
percent of the building.
décima. Actividades restringidas
TENTH. Restricted Activities.
LA ARRENDATARIA se obliga a solicitar la autorización por escrito de LA
ARRENDADORA para realizar la fabricación de cualquier tipo de galletas saladas,
galletas dulces, chicles, bebidas en polvo, queso crema, queso procesado, agua natural,
agua mineral con o sin sabor.
THE LESSEE is required to request the authorization in writing from the LESSOR in
order to manufacture any type of salty crackers, cookies, gum, powder drinks, cream
cheese and processed cheese, natural water, mineral water, with or without flavor.
En caso de que LA ARRENDATARIA por cualquier causa, motivo y/o título
transmita, la propiedad, uso y/o goce del Inmueble a una tercera persona deberá de
asentar las presentes restricciones en el documento por el cual transmita la propiedad,
uso y/o goce del Inmueble.
In case THE LESSEE for any reason or motive transfers ownership, use and/or
enjoyment of the LEASED PROPERTY to a third party, it shall include the current
restrictions in the document for which the ownership, use, and/or enjoyment is
transferred.
Décima Primera. Servicios.
ELEVENTH. Services.
a) LA ARRENDATARIA conoce el estatus actual de cómo se encentra la
infraestructura y contratará a su entero conocimiento, a su exclusiva costa, todos los
servicios que requiera en el INMUEBLE ARRENDADO, tales como energía
eléctrica, agua y drenaje, teléfono, mantenimiento y cualquier otro.
a) THE LESSEE is aware of the current status of the infrastructure and, at its own
exclusive expense, is responsible for setting up all the utility services required in the
LEASED PROPERTY, such as electricity, water and drainage, telephone,
maintenance and any other.
b) LA ARRENDATARIA reparará, a su costa, los desperfectos que se causen a las
instalaciones o equipos correspondientes de los servicios mencionados, así como los
daños y perjuicios que resultaren a LA ARRENDADORA con motivo de la utilización
de dichos servicios y de sus reparaciones.
b) THE LESSEE shall repair, at its own expense, any damage attributable to THE
LESSEE caused to the facilities or equipment corresponding to the aforementioned
services, as well as the damages that may result to the LESSOR due to the use of said
services and their repairs.
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c) LA ARRENDATARIA se obliga además a no tener adeudos pendientes derivados
del uso y goce de los servicios que contrate para la operación y marcha de su
negociación; y a liberar a LA ARRENDADORA de cualquier responsabilidad por
tales conceptos durante la vigencia y después de concluir la misma y proporcionar
cuando así lo solicite LA ARRENDADORA los comprobantes de los pagos y los
originales de las bajas de dichos servicios.
c) THE LESSEE also undertakes not to have outstanding debts derived from the use
and enjoyment of the services it contracts for the operation and progress of its
negotiation; and to release the LESSOR of any responsibility for such concepts during
the term and after concluding the same and provide, when requested by the LESSOR,
the proof of the payment and the original documents of the removals of said services.
Décima Segunda. Permisos y Autorizaciones; Cumplimiento de Leyes.
TWELFTH. Permits and Authorizations; Compliance with Laws.
a) LA ARRENDATARIA gestionará, obtendrá y mantendrá vigentes, a su costa, todos
los permisos, licencias y autorizaciones ante las autoridades municipales, estatales o
federales, que se requieran para iniciar operaciones y operar sus actividades y uso del
INMUEBLE ARRENDADO durante la vigencia del presente Contrato, obligándose a
darlos de baja o cancelarlos al momento de la desocupación del INMUEBLE
ARRENDADO.
En atención a lo anterior, LA ARRENDATARIA adicionalmente se obliga a entregar
a LA ARRENDADORA a los 15 días hábiles posteriores al aniversario de la fecha de
Apertura del INMUEBLE ARRENDADO, copia certificada del visto bueno de
Protección Civil del Estado o del Municipio de la circunscripción que le corresponda al
INMUEBLE ARRENDADO.
b) LA ARRENDATARIA se obliga a cumplir y respetar las leyes y reglamentos, tanto
municipales, estatales o federales, que regulan la actividad que pretende realizar en el
INMUEBLE ARRENDADO, tanto presentes como aquellos que entren en vigor
durante la vigencia del presente Contrato, quedando como única obligada ante dichas
autoridades.
a) THE LESSEE shall manage, obtain and maintain at its own expense, all permits,
licenses and authorizations before the municipal, state or federal authorities, required to
start operations and proceed with activities and use of the LEASED PROPERTY
during the term of the present Agreement, binding themselves to deregister or cancel
them at the time of vacating the LEASED PROPERTY.
In consideration of the foregoing, THE LESSEE additionally undertakes to deliver to
THE LESSOR 15 (fifteen) business days after the anniversary of the opening date of
the LEASED PROPERTY, a certified copy of the Civil Protection approval of the
State or Municipality of the district that corresponds to the LEASED PROPERTY.
b) THE LESSEE undertakes to comply with and respect the laws and regulations,
whether municipal, state or federal, that regulate the activity that it intends to carry out
in the LEASED PROPERTY, both present and those that come into force during the
term of this Agreement, being the only one bound before said authorities.
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Décima Tercera. Obligaciones adicionales.
THIRTEENTH. Additional obligations
Adicionalmente a cualquier otra obligación a cargo de LA ARRENDATARIA
conforme al presente Contrato, el Código Civil y demás leyes aplicables, LA
ARRENDATARIA se obliga además a lo siguiente:
In addition to any other obligation borne by the LESSEE under this Agreement, the
Civil Code and other applicable laws, the LESSEE further agrees to the following:
a) LA ARRENDATARIA se obliga a realizar el pago predial del inmueble arrendado.
a) THE LESSE agrees to make the payment of Property taxes of the leased property.
b) A no subarrendar el INMUEBLE ARRENDADO en su totalidad o en parte sin el
previo consentimiento por escrito de LA ARRENDADORA;
b) Not to sublease the LEASED PROPERTY in whole or in part without the prior
written consent of the LESSOR;
c) A conservar el INMUEBLE ARRENDADO y sus servicios en óptimas condiciones
y a devolverlo con las adecuaciones y sus Mejoras al término del presente Contrato, si
así se lo requiere LA ARRENDADORA;
c) To conserve the LEASED PROPERTY and its services in optimum conditions and
to return it with the adjustments and its Improvements at the end of this Agreement, if
so required by the LESSOR;
d) A responder de todos y cualesquier daños que sufra el INMUEBLE
ARRENDADO;
d) To answer for any and all damages suffered by the LEASED PROPERTY;
e) A dar aviso a LA ARRENDADORA de toda novedad o deterioro que perjudique o
pueda perjudicar el INMUEBLE ARRENDADO durante toda la vigencia del presente
Contrato, así como toda usurpación o novedad dañosa que otro haya hecho o
abiertamente prepare en el INMUEBLE ARRENDADO, de conformidad con lo
dispuesto en el artículo 2313 del Código Civil;
e) To notify the LESSOR of any news or deterioration that harms or may harm the
LEASED PROPERTY during the entire term of this Agreement, as well as any
harmful misappropriation or novelty that another has made or openly prepare in the
LEASED PROPERTY, in accordance with the provisions of article 2313 of the Civil
Code;
f) A no retener la Renta Mensual en ningún caso y bajo ningún concepto, a cuyo efecto
renuncia a los beneficios que le conceden los artículos 2339 y 2384 del Código Civil
para el Estado de Nuevo León;
f) Not to withhold the Monthly Rental in any case and under no circumstances, for
which purpose it waives the benefits granted by articles 2339 and 2384 of the Civil
Code for the State of Nuevo León;
g) Cumplir con el Reglamento del Parque Industrial Interpuerto Monterrey ; y
g) Comply with the Regulations of the Interpuerto Monterrey Industrial Park;
h) A actualizar el Depósito en Garantía de acuerdo a lo establecido en la Cláusula
Décima Cuarta del presente instrumento.
h) To update the Security Deposit in accordance with the provisions of Clause
Fourteen of this instrument.
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En caso de incumplimiento a cualquiera de las obligaciones antes referidas, LA
ARRENDATARIA conviene desde ahora en pagar a LA ARRENDADORA a título
de pena convencional la cantidad equivalente a la parte proporcional que por día
resulte de aplicar la Renta Mensual multiplicada por 2-dos por cada día de
incumplimiento.
In case of breach of any of the aforementioned obligations, the LESSEE agrees to pay
the LESSOR as a conventional penalty the amount equivalent to the proportional part
per day resulting from applying the Monthly Rental multiplied by 2-two for each non-
compliance day.
Décima Cuarta. Acceso de LA ARRENDADORA.
FOURTEEN. Access of THE LESSOR.
De conformidad con los Artículos 2306, fracciones III y IV y 2308 del Código Civil
para el Estado de Nuevo León, LAS PARTES reconocen y acuerdan que LA
ARRENDADORA no tendrá acceso al INMUEBLE ARRENDADO, salvo por causa
de reparaciones urgentes e indispensables debidamente notificadas por LA
ARRENDATARIA y que correspondan a LA ARRENDADORA en términos de este
Contrato, y a tal efecto LA ARRENDADORA no estará en posibilidad de
inspeccionar los actos o actividades que se lleven a cabo en el mismo.
In accordance with Articles 2306, sections III and IV and 2308 of the Civil Code for
the State of Nuevo León, THE PARTIES acknowledge and agree that THE LESSOR
shall not have access to the LEASED PROPERTY, except for urgent and essential
repairs duly notified by THE LESSEE and that correspond to THE LESSOR in terms
of this Agreement, and for this purpose THE LESSOR shall not be able to inspect the
acts or activities that are carried out in it.
Derivado de lo anterior LA ARRENDATARIA manifiesta bajo protesta de decir
verdad y asegura que tanto el dinero que destine al pago de la Renta Mensual como el
INMUEBLE ARRENDADO:
Derived from the above, THE LESSEE states under protest of telling the truth and
assures that both the money destined to the payment of the Monthly Rental and the
LEASED PROPERTY:
I. No serán instrumento, objeto o producto de ningún tipo de delito, en especial de
aquellos previstos en la fracción II segunda del artículo 22 veintidós Constitucional.
II. No serán utilizados o destinados a ocultar o mezclar bienes producto de algún delito.
III. No serán utilizados para la comisión de delitos o actos ilícitos.
I. They shall not be instrument, object or product of any type of crime, especially those
provided for in the second section of Article 22, twenty-two Constitutional.
II. They shall not be used or intended to hide or mix goods resulting from a crime.
III. They shall not be used for the commission of crimes or unlawful acts.
Lo anterior también será aplicable para aquellos bienes muebles en general que se
encuentren dentro del INMUEBLE ARRENDADO.
The foregoing shall also apply to personal property in general that are within the
LEASED PROPERTY.
LA ARRENDATARIA será la única responsable ante cualquier tipo de autoridades de
los actos o actividades que se lleven a cabo dentro del INMUEBLE ARRENDADO y
por lo tanto se obliga a sacar en paz y a salvo, y en su caso a restituir a LA
ARRENDADORA, de todas las consecuencias que el incumplimiento de esta
Cláusula pudiera causarle.
THE LESSEE shall be the only responsible before any type of authorities of the acts
or activities that are carried out within the LEASED PROPERTY and therefore it is
obliged to hold harmless, and as the case may be, to make restitution to THE
LESSOR, of all the consequences that the breach of this Clause could cause.
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Décima Quinta. Depósito en Garantía.
FIFTEEN . Security deposit.
a) Simultáneamente a la firma de este Contrato, LA ARRENDATARIA entrega a LA
ARRENDADORA en concepto de Depósito en Garantía la cantidad de $20,899.00
(Veinte Mil Ochocientos Noventa y Nueve Dólares 00/100) más IVA (equivalente a 1
(Un) mese de Renta Mensual) con el fin de garantizar: (i) el pago de los servicios que
se contraten en el INMUEBLE ARRENDADO, y (ii) cualesquier pagos pendientes,
daños o desperfectos a fin de que se devuelva el INMUEBLE ARRENDADO en
condiciones óptimas incluyendo las adecuaciones y Mejoras realizadas por LA
ARRENDATARIA, si así lo requiere LA ARRENDADORA.
a) Simultaneously to the signing of this Agreement, the LESSEE delivers to the
LESSOR in the form of Security Deposit the amount of $20,899.00 (Twenty thousand
eight hundred ninety-nine dollars) Plus VAT (equivalent to 1 (One) month of Monthly
Rental) in order to guarantee: (i) the payment of the services contracted in the
LEASED PROPERTY, and (ii) any pending payments, flaws or damages in order to
return the LEASED PROPERTY in optimal conditions including the adjustments and
improvements made by THE LESSEE, if so required by the LESSOR.
b) El Depósito en Garantía se actualizará anualmente conforme a los incrementos de la
renta a fin de que el importe equivalga al monto de Renta Mensual vigente en cada año
que permanezca vigente el presente Contrato.
b) The Security Deposit shall be annually updated in accordance with the rental
increases in order for the amount to equal the amount of the Monthly Rental in force in
each year that this Agreement remains in force.
c) El Depósito en Garantía se actualizará en cuando LA ARRENDATARIA obtenga
en arrendamiento el incremento de la superficie identificado en el Anexo 1, como la
fase 2.
c) The Security Deposit shall be updated at the moment THE LESSE increase the area
in lease, which is included in Exhibit 1, phase 2
d) Ante la expiración de la vigencia del presente Contrato, LA ARRENDADORA
reembolsará a LA ARRENDATARIA la cantidad que reciba como Depósito en
Garantía, sin generación de intereses, en un plazo de 60 (sesenta) días naturales después
de dicha terminación, previa comprobación de que no existe ningún adeudo en los
términos del inciso a anterior, por lo que, en su caso, reembolsará únicamente la
diferencia.
d) Upon the expiration of the term of this Agreement, THE LESSOR shall reimburse
THE LESSEE for the amount it receives as a Security Deposit, without generating
interest, within 60 (sixty) calendar days after said termination, after verification that
there is no debit in the terms of subsection a above, if applicable, it shall refund only
the difference.
20
e) Si durante el referido plazo de 60 (sesenta) días LA ARRENDATARIA presenta y
entrega a LA ARRENDADORA los recibos de todos los servicios del INMUEBLE
ARRENDADO totalmente liquidados mediante los comprobantes expedidos por las
dependencias o negociaciones que proporcionan dichos servicios, y no hubiere pagos
de Renta Mensual o Cuotas de Mantenimiento pendientes, o desperfectos en el
INMUEBLE ARRENDADO, LA ARRENDADORA devolverá el depósito dentro de
los 10 (diez) días hábiles siguientes a la fecha de entrega de dichos recibos.
e) If during the aforementioned term of 60 (sixty) days THE LESSEE presents and
delivers to the LESSOR the receipts of all the services of the LEASED PROPERTY
totally settled by the receipts issued by the dependencies or negotiations that provide
said services, and there were no payments of Monthly Rental or pending Maintenance
Fees, or damage to the LEASED PROPERTY, THE LESSOR shall return the
deposit within 10 (ten) business days following the delivery date of said receipts.
Décima Sexta. Obligado Solidario o Fianza.
SIXTEENTH. Guarantor or Deposit.
I.- Del Obligado Solidario. Fuling Plastic USA, Inc se obliga en este acto de manera
solidaria al cumplimiento de todas y cada una de las obligaciones de LA
ARRENDATARIA bajo este Contrato, hasta en tanto el INMUEBLE
ARRENDADO sea devuelta a entera satisfacción de LA ARRENDADORA.
I.- Of Guarantor. _Fuling Plastic USA, Inc. is hereby jointly and severally liability
obliged to comply with each and every one of the obligations of the LESSEE under
this Agreement, until the LEASED PROPERTY is returned to the satisfaction of
THE LESSOR.
I.1.-En garantía del cumplimiento de las obligaciones asumidas por LA
ARRENDATARIA en el presente Contrato, sus anexos, modificaciones y demás
obligaciones de la ley o de resoluciones judiciales dictadas a favor de LA
ARRENDADORA, el OBLIGADO SOLIDARIO renuncia a los beneficios de orden,
excusión y división a que se refieren los Artículos 2713 y 2714 del Código Civil, así
como en lo que le favorezcan en su caso, lo dispuesto en los artículos 2734, 2737,
2738, 2740 y 2741 del Código Civil.
I.2.- Esta Garantía será documentada, suscribiendo como OBLIGADO SOLIDARIO
el presente Contrato. Esta obligación solidaria subsistirá hasta que LA
ARRENDADORA haya recibido el pago de todas las obligaciones asumidas en el
presente Contrato y sus anexos y/o modificaciones por LA ARRENDATARIA a su
entera satisfacción, aún en los casos de prórroga sin consentimiento de EL
OBLIGADO SOLIDARIO, o en los que éstos no puedan subrogarse por cualquier
causa en los derechos y privilegios de LA ARRENDADORA o porque al incumplir
LA ARRENDATARIA, LA ARRENDADORA no ejercite sus derechos
judicialmente, o si ya iniciado el juicio deja de promover sin causa justificada por más
de tres meses, aún cuando EL OBLIGADO SOLIDARIO solicite a LA
ARRENDADORA que proceda judicialmente.
I.1.-In guarantee of the fulfillment of the obligations assumed by THE LESSEE in this
Agreement, its exhibits, amendments and other obligations of the law or of judicial
resolutions issued in favor of THE LESSOR, the GUARANTOR waives the benefits
of order, excuse and division referred to in Articles 2713 and 2714 of the Civil Code, as
well as what may favor, the provisions of articles 2734, 2737, 2738, 2740 and 2741 of
the Civil Code.
I.2.- This Guarantee shall be documented, subscribing this Agreement as the
GUARANTOR. This joint obligation shall subsist until THE LESSOR has received
the payment of all the obligations assumed in this Agreement and its exhibits and / or
amendments by THE LESSEE to its satisfaction, even in the cases of extension
without consent of THE GUARANTOR, or where they cannot be subrogated for any
reason in the rights and privileges of the LESSOR or because in case of breach by the
LESSEE, the LESSOR does not exercise their rights judicially, or if already initiated
the trial fails to promote without justified cause for more than three months, even when
THE GUARANTOR requests the LESSOR to proceed judicially.
21
I.3.-EL OBLIGADO SOLIDARIO conviene que si el presente Contrato es renovado,
ampliándose el plazo del mismo en favor de LA ARRENDATARIA, en este caso EL
OBLIGADO SOLIDARIO expresamente reconoce que continuará siendo válida su
obligación por todo el tiempo en que LA ARRENDATARIA permanezca en uso y
disfrute del INMUEBLE ARRENDADO, con o sin la autorización de LA
ARRENDADORA. De igual manera no concluirá la obligación de EL OBLIGADO
SOLIDARIO si LA ARRENDADORA no promueve judicialmente el cobro de las
rentas adeudadas o la desocupación, pues el hecho de que LA ARRENDADORA le
conceda a LA ARRENDATARIA un plazo adicional, fuere para el pago de la renta
adeudada o para el pago de cualquier otra cantidad adeudada y para la desocupación
del INMUEBLE ARRENDADO, no se extinguirán por este hecho las obligaciones de
EL OBLIGADO SOLIDARIO.
I.3.-THE GUARANTOR agrees that if this Agreement is renewed, extending the term
thereof in favor of THE LESSEE, in this case THE GUARANTOR expressly
acknowledges that its obligation shall remain valid for all the time that THE LESSEE
remains in use and enjoys the LEASED PROPERTY, with or without the
authorization of THE LESSOR. Likewise, the obligation of THE GUARANTOR
shall not be terminated if the LESSOR does not judicially promotes the collection of
the owed or unoccupied rentals, since the fact that THE LESSOR grants the LESSEE
an additional term, shall be for the payment of the rental owed or for the payment of
any other amount owed and for the vacating of the LEASED PROPERTY, the
obligations of THE GUARANTOR shall not be extinguished by this fact.
I.4.- EL OBLIGADO SOLIDARIO queda plenamente facultado y autorizado por LA
ARRENDATARIA a dar cumplimiento a cualquier obligación contenida o derivada
de este Contrato.
I.4.- THE GUARANTOR is duly empowered and authorized by THE LESSEE to
comply with any obligation contained or derived from this Agreement.
II.- De la Fianza
II.- Of the Deposit.
II.1.- En el caso de que no se nombre a un obligado solidario, LA ARRENDATARIA
deberá constituir dentro de los 10 (diez) días naturales siguientes a la celebración de
este Contrato una garantía suficiente para el cumplimiento de todas y cada una de sus
obligaciones bajo el presente Contrato, a juicio de LA ARRENDADORA. LA
ARRENDATARIA deberá otorgar fianza suficiente que garantice el monto del
presente Contrato de Arrendamiento debiendo LA ARRENDATARIA renovar dicha
fianza en el supuesto de renovarse el presente instrumento y/o durante la ocupación del
INMUEBLE ARRENDADO, obligándose LA ARRENDATARIA a entregar a LA
ARRENDADORA copia de dicha renovación a más tardar a los diez días naturales
siguientes al vencimiento de la póliza de fianza vigente.
II.1.- In the event that a Guarantor is not designated, THE LESSEE must constitute
within the 10 (ten) calendar days following the execution of this Agreement a sufficient
guarantee for the fulfillment of each and every one of its obligations under this
Agreement, according to THE LESSOR. THE LESSEE must grant sufficient security
to guarantee the amount of this Lease Agreement the LESSEE must renew said
deposit in the event of renewing this instrument and / or during the occupation of the
LEASED PROPERTY, obliging THE LESSEE to deliver to the LESSOR a copy of
said renewal no later than ten calendar days following the expiration of the current
security.
22
II.2.-El incumplimiento en la constitución de la Fianza en los términos señalados en la
presente Cláusula generará la rescisión a discreción de LA ARRENDADORA del
presente Contrato.
II.2.-The breach in the constitution of the Deposit in the terms indicated in this Clause
shall generate the termination at the discretion of THE LESSOR of this Agreement.
Décima Séptima. Seguros.
SEVENTEENTH. Insurance.
LAS PARTES establecen que LA ARRENDATARIA deberá, por su propia cuenta y
costo, contratar y mantener en vigor durante toda la vigencia del arrendamiento y sus
prorrogas si las hubiere, una Póliza de Seguro de Responsabilidad Civil General con
cualquier compañía de seguros mexicana autorizada por LA ARRENDADORA contra
todo Riesgo, Fenómenos Hidrometeorológicos, Terremoto, incluyendo Carga y
Descarga, Arrendatario de Inmuebles, Daños a la Contraparte del contrato y demás
riesgos que puedan causar pérdida por daños a terceros, por un mínimo de
$1,000,000.00 Dólares (Un Millón de Dólares) moneda de curso legal de los Estados
Unidos de América por evento, y en general todos los eventos que por su
acontecimiento pudieran generar consecuencias con cargo a LA ARRENDADORA o
en perjuicio del INMUEBLE ARRENDADO o por cualquier otro tipo de pérdida que
pudiera ser causada por algún acto de la naturaleza, de terceros o por su operación;
entendiéndose que el monto mínimo de la contratación de esta póliza en cualquier caso
y en todo momento durante toda la vigencia del presente Contrato será de cuando
menos el 100% (Cien por ciento) del valor de reposición nuevo en Dólares -moneda de
curso legal de los Estados Unidos de América- de las Obras de Adecuación, Mejoras y
Adaptaciones. En el entendido que LA ARRENDADORA no será responsable de los
daños y perjuicios en o los bienes de LA ARRENDATARIA o de terceras personas
que se encuentren dentro del INMUEBLE ARRENDADO, ni será responsable de
lesiones o daños que se causen a personas o bienes con motivo del desarrollo de las
actividades comerciales o por incendio, explosión, desprendimiento de materiales,
vapor, gas, electricidad, agua, lluvia, nieve o por fuga de tuberías, aparatos o
instalaciones hidráulicas o sanitarias o de cualquier otra naturaleza similar, que ocurran
dentro del INMUEBLE ARRENDADO, por lo que en el caso que ocurran dichos
acontecimientos, LA ARRENDATARIA se obliga a sacar en paz y a salvo a LA
ARRENDADORA.
THE PARTIES establish that THE LESSEE shall, at its own expense, contract and
keep in force throughout the term of the lease and its extensions, if any, a General Civil
Liability Insurance Policy with any Mexican insurance company authorized by THE
LESSOR against All Risk, Hydrometeorological Phenomena, Earthquake, including
Loading and Unloading, Tenant of Real Estate, Damages to the Contractor of the
agreement and other risks that may cause loss for damages to third parties, for a
minimum of $ 1,000,000.00 Dollars (One Million Dollars) legal currency of the United
States of America by event, and in general all the events that by their nature could
generate consequences charged to THE LESSOR or to the detriment of the LEASED
PROPERTY or by any other type of loss that could be caused by some act of nature,
of third parties or by its operation; meaning that the minimum amount of the
contracting of this policy in any case and at all times during the entire term of this
Agreement shall be at least 100% (One hundred percent) of the new replacement value
in Dollars - legal currency of the United States of America- of the Works of Adequacy,
Improvements and Adaptations. In the understanding that THE LESSOR shall not be
liable for damages in or property of THE LESSEE or third parties who are within the
LEASED PROPERTY, nor shall be liable for injuries or damages caused to persons
or property due to the development of commercial activities or by fire, explosion,
detachment of materials, steam, gas, electricity, water, rain, snow or by leaking pipes,
appliances or hydraulic or sanitary facilities or any other similar nature, that occur
within the LEASED PROPERTY, so that in the event that such events occur, THE
LESSEE undertakes to hold the LESSOR harmless.
23
LAS PARTES acuerdan que todos los bienes propiedad de LA ARRENDADORA que
se encuentren dentro del INMUEBLE ARRENDADO estarán bajo su propia
responsabilidad, cuidado o riesgo de LA ARRENDATARIA, razón por la cual releva
expresamente a LA ARRENDADORA de toda responsabilidad respecto de lo que les
ocurra a los mismos, obligándose igualmente, a reponerlos en caso de siniestro y a
colocar en el INMUEBLE ARRENDADO los extinguidores que señale la compañía de
seguros o que se establezcan en las disposiciones legales aplicables y a mantenerlos en
óptimas condiciones de funcionamiento. LA ARRENDATARIA será responsable de
asegurar todos sus bienes tangibles ubicados en La Edificación o INMUEBLE
ARRENDADO o predio arrendado así como sus pérdidas consecuenciales. LA
ARRENDATARIA releva para todo efecto legal a LA ARRENDADORA de
cualquier responsabilidad proveniente de siniestros y/o pérdidas de cualquier clase,
tales como incendios, Fenómenos Hidrometeorológicos, Terremoto y en general todos
los eventos que por su acontecimiento pudieran generar consecuencias con cargo a LA
ARRENDADORA o en perjuicio de La Edificación o INMUEBLE ARRENDADO
arrendado, por lo que en el caso que ocurran dichos acontecimientos, LA
ARRENDATARIA se obliga a sacar en paz y a salvo a LA ARRENDADORA.
LA ARRENDATARIA se obliga a proporcionar a LA ARRENDADORA copia
certificada de la póliza de seguro de referencia, dentro de los 30 (TREINTA) días
naturales posteriores a la Fecha de Entrega del INMUEBLE ARRENDADO,
obligándose LA ARRENDATARIA a: i) nombrar a LA ARRENDADORA, sus
Afiliadas, Cedentes y de la misma, como Asegurados Adicionales, y ii) mantener en
vigor dichos seguros desde la fecha de la entrega del INMUEBLE ARRENDADO para
su adecuación y durante todo el tiempo de VIGENCIA del presente contrato y hasta en
tanto LA ARRENDATARIA no devuelva formalmente INMUEBLE ARRENDADO
a LA ARRENDADORA.
THE PARTIES agree that all property owned by THE LESSOR that is within the
LEASED PROPERTY shall be under its own responsibility, care or risk of THE
LESSEE, which is why it expressly relieves THE LESSOR of all responsibility
regarding what happens to them, also being forced to replace them in the event of loss
and to place the extinguishers indicated by the insurance company or established in the
applicable legal provisions and to keep them in optimum operating conditions in the
LEASED PROPERTY. THE LESSEE shall be responsible for insuring all of its
tangible assets located in the CONSTRUCTION or LEASED PROPERTY or piece
of land as well as its consequential losses. THE LESSEE relieves for any legal effect
to the LESSOR of any responsibility arising from accidents and / or losses of any
kind, such as fires, Hydrometeorological Phenomena, Earthquake and in general all the
events that by their event could generate consequences charged to THE LESSOR or to
the detriment of the building or leased property leased, so that in the event that such
events occur, THE LESSEE is obliged to hold the LESSOR harmless.
THE LESSEE undertakes to provide THE LESSOR with a certified copy of the
reference insurance policy, within 30 (THIRTY) calendar days after the Delivery Date
of the LEASED PROPERTY, the LESSEE shall be obliged to: i) appoint the
LESSOR, its Affiliates, Assignors, as Additional Insured, and ii) keep these insurances
in force from the date of delivery of the LEASED PROPERTY for its adaptation and
during the entire period of validity of this agreement and as long as the LESSEE does
not formally returns the LEASED PROPERTY to the LESSOR.
24
Si transcurriera el término señalado en el párrafo que antecede sin que LA
ARRENDATARIA hubiere contratado el seguro a que se hace referencia en esta
cláusula o en caso de que la póliza no fuera renovada a tiempo, será facultativo para
LA ARRENDADORA (i) dar por rescindido el presente Contrato sin necesidad de
declaración judicial previa; ó (ii) contratar a su nombre el seguro antes descrito con la
institución aseguradora que LA ARRENDADORA elija libremente. En este caso, LA
ARRENDATARIA se obliga a rembolsar a LA ARRENDADORA, previo aviso
simple que por escrito le haga LA ARRENDADORA, del importe de la prima
correspondiente o cualquier cantidad que ésta hubiera erogado por este motivo más los
intereses correspondientes, que serán calculados en los mismos términos y condiciones
que se mencionan en la cláusula cuarta del presente Contrato.
If the term indicated in the preceding paragraph elapses without THE LESSEE having
contracted the insurance referred to in this clause or in the event that the policy was not
renewed on time, it shall be optional for THE LESSOR (i) terminate this Agreement
without prior judicial authorization; or (ii) contract the insurance described above with
the insurance company that THE LESSOR unrestrictedly chooses. In this case, THE
LESSEE is obliged to reimburse THE LESSOR, with a simple written notice from
THE LESSOR, the amount of the corresponding premium or any amount that the
latter had paid for this reason plus the corresponding interest, which shall be calculated
in the same terms and conditions that are mentioned in the fourth clause of this
Agreement.
LA ARRENDATARIA en todo momento durante el desarrollo de su operación y/o
actividades actuará en forma razonable y prudente y tomará todas y cada una de las
medidas de control de riesgos (entendiéndose como tal, una acción que sirve para
evitar y/o minimizar las pérdidas que llegara a sufrir LA ARRENDADORA y LA
ARRENDATARIA) para evitar una situación de agravación de riesgo y/o de
exclusión de la póliza de seguro de todo riesgo mencionada en este inciso.
THE LESSEE at all times during the development of its operation and / or activities
shall act in a reasonable and cautious manner and shall take each and every one of the
risk control measures (meaning that, an action that serves to avoid and/or minimize the
losses incurred by THE LESSOR and THE LESSEE) to avoid a situation of risk
aggravation and/or exclusion from the insurance policy of any risk mentioned in this
subsection.
25
En caso de que existan ampliaciones y modificaciones posteriores al inicio de vigencia
del presente Contrato que aumenten el valor total de reposición nuevo de las Obras de
Adecuación, Mejoras y Adaptaciones, y estas ampliaciones las realice persona distinta
a LA ARRENDADORA, LA ARRENDATARIA, desde la fecha de inicio de la
ejecución de las Obras y hasta la fecha de terminación de las mismas, se obliga a: (i)
contratar un seguro de obra civil y montaje que cubra los riesgos inherentes de la
ampliación y/o modificaciones según se requiera por hasta el valor de reposición
nuevo a la fecha de terminación de las Obras, (ii) así como cobertura de
Responsabilidad Civil por Daños a Terceros con motivo de la ejecución de dichas
Obras de Adecuación incluyendo Carga y Descarga, Arrendatario de Inmuebles, Daños
a la Contraparte del contrato y demás riesgos que puedan causar pérdida por daños a
terceros, con una suma asegurada suficiente para cubrir los daños y perjuicios que se
lleguen a causar a Terceros, de por lo menos de $500,000.00 dólares (Quinientos Mil
Dólares), con compañías de seguros mexicanas aceptables para la Arrendataria; iii) La
póliza de dicho seguro deberá ser entregada a LA ARRENDADORA antes de que se
inicien los trabajos de las Obras y (iv) Obtener de su aseguradora de Todo Riesgo el
aumento de suma asegurada según se requiera una vez terminadas las nuevas Obras de
Adecuación, Mejoras y Adaptaciones.
If there are subsequent extensions and amendments to the effective date of this
Agreement that increase the total value of new replacement of the Works of
Adaptation, Improvements and Adaptations, and these extensions are made by a person
other than THE LESSOR, THE LESSEE, from the date of commencement of the
execution of the Works and until the date of completion thereof, is obliged to: (i)
contract a civil and assembly work insurance covering the risks inherent in the
extension and / or amendments as required for as much as the value of the new
replacement to the date of completion of the Works, (ii) as well as coverage of Civil
Liability for Third Party Damages due to the execution of said Works of Adaptation
including Loading and Unloading, Leased Properties, Damages to the Opposing Party
of the agreement and other risks that may cause loss due to damages to third parties,
with a sufficient sum insured to cover the damages and losses caused by the they are
liable to cause Third Party, of at least $ 500,000.00 dollars (five hundred thousand
dollars) with Mexican insurance companies acceptable to the Lessee; iii) The policy of
said insurance must be delivered to THE LESSOR before the works of the
Construction begin and (iv) Obtain from the All Risk insurer the increase of insured
sum as required once the new Works of Adequacy, Improvements and Adaptations are
finished.
La póliza de seguro de Responsabilidad Civil (i) se deberá contratar de conformidad
con la práctica estándar de la industria de LA ARRENDATARIA y no deberá
contener ninguna disposición para cantidades auto-asegurables, en el entendido que
dicho seguro puede estar sujeto a un deducible o franquicia de $10,000.00 Dólares
(Diez Mil Dólares), moneda de curso legal en los Estados Unidos de América o su
equivalente en Moneda Nacional Mexicana, (ii) deberá estipular que LA
ARRENDADORA en su caso, será de primera prioridad de indemnización de la
póliza de seguro por la existencia de la cobertura de Arrendatario de Inmuebles (iii)
deberá estipular que bajo la cobertura de Responsabilidad Civil de arrendatario de
inmuebles, la indemnización será realizada a Valor de Reposición Nuevo y (iv) dicha
póliza de seguro deberá ser satisfactoria para LA ARRENDADORA en todos sus
aspectos.
The Civil Liability insurance policy (i) shall be contracted in accordance with the
industry standard practice of THE LESSEE and shall not contain any provision for
self-insuring amounts, provided that said insurance may be subject to a deductible or
franchise of $10,000.00 Dollars (Ten Thousand Dollars), legal currency in the United
States of America or its equivalent in Mexican National Currency, (ii) must stipulate
that THE LESSOR, as the case may be, shall be the first priority of indemnity of the
policy of insurance for the existence of the coverage of the Lessee of properties (iii)
must stipulate that under the coverage of Civil Liability of the lessee, the compensation
shall be made at the New Replacement Value and (iv) said insurance policy must be
satisfactory for THE LESSOR in all its aspects.
26
En caso de que La Edificación o INMUEBLE ARRENDADO fuese total o
parcialmente destruido por cualquier siniestro, LAS PARTES se obligan a reinvertir
en la reconstrucción o reparación de La edificación o INMUEBLE ARRENDADO el
importe de la indemnización obtenido de las Compañías Aseguradoras
correspondientes así como las cantidades que resulten necesarias para dejar en perfecto
funcionamiento La Edificación o INMUEBLE ARRENDADO. Así mismo LA
ARRENDATARIA se compromete a reponer sus equipos, mercancías y maquinaria
afectados que no estuviesen asegurados.
In the event that the CONSTRUCTION or LEASED PROPERTY was totally or
partially destroyed by any loss, THE PARTIES are obliged to reinvest in the
reconstruction or repair of the CONSTRUCTION or LEASED PROPERTY the
amount of compensation obtained from the corresponding Insurance Companies as
well as the amounts that are necessary to leave CONSTRUCTION or LEASED
PROPERTY in perfect operation. Likewise, THE LESSEE undertakes to replace its
affected equipment, merchandise and machinery that were not insured.
A requerimiento de LA ARRENDADORA, el importe asegurado bajo la presente
póliza de seguro de Responsabilidad Civil podrá en cualquier momento ser aumentado
a quedar en el monto de deducible o franquicia de la póliza de seguro de
Responsabilidad Civil del que se menciona a continuación.
At the request of THE LESSOR, the amount insured under this Civil Liability
insurance policy may at any time be increased to be in the deductible or franchise
amount of the Civil Liability insurance policy of mentioned below.
LA ARRENDADORA y LA ARRENDATARIA convienen en que LA
ARRENDATARIA se obliga a contratar, un Seguro de Responsabilidad Civil General
con una compañía de seguros mexicana de reconocido prestigio a nombre de LA
ARRENDADORA que cubra lesiones corporales o fallecimiento o daños a terceros en
sus bienes, incluyendo Actividades e Inmuebles, Carga y Descarga, Cruzada, Daños a
la Contraparte del Contrato y Cruzada por Vecinaje por US $1,000,000.00 Dólares (Un
Millon de Dólares) moneda de curso legal en los Estados Unidos de América
THE LESSOR and THE LESSEE agree that THE LESSEE is obliged to contract, a
General Civil Liability Insurance with a Mexican insurance company of recognized
prestige in the name of THE LESSOR that covers bodily injury or death or damage to
third parties in its assets, including Activities and Properties, Loading and Unloading,
Crusade, Damage to the Opposing Party of the Agreement and Crossing by
Neighboring for US $ 1,000,000.00 Dollars (One Million Dollars) legal currency in the
United States of America
La contratación de esta póliza de seguro no limita ni libera de responsabilidad a LA
ARRENDATARIA en caso de la ocurrencia de un siniestro cuyo monto sea mayor a
la Suma Asegurada contratada o que dicho siniestro no esté cubierto.
The hiring of this insurance policy does not limit or release liability to the LESSEE in
case of the occurrence of a loss whose amount is greater than the Insured Sum
contracted or that said loss is not covered.
27
Por virtud de las obligaciones a que se refiere esta cláusula, LA ARRENDATARIA
releva para todo efecto legal a LA ARRENDADORA de cualquier responsabilidad
civil proveniente de siniestros de cualquier clase, tales como incendios, inundaciones,
terremotos, huracanes, entendiéndose dicha enumeración en forma enunciativa y no
limitativa, por lo que en el caso que sucedan dichos acontecimientos, LA
ARRENDATARIA se obliga a sacar en paz y a salvo a LA ARRENDADORA de
todos ellos.
By virtue of the obligations referred to in this clause, THE LESSEE relieves THE
LESSOR for any legal effect of any civil liability arising from incidents of any kind,
such as fires, floods, earthquakes, hurricanes, said enumeration being understood not
limiting, so that in the event that such events occur, THE LESSEE undertakes to hold
THE LESSOR harmless.
Todas las pólizas de seguros deberán estipular que la aseguradora no podrá cancelar o
realizar cambios materiales a los términos y condiciones de dichas pólizas de seguros
sin aviso previo y por escrito a LA ARRENDADORA y a LA ARRENDATARIA
con al menos treinta (30) días de anticipación, incluyendo la cancelación debido a la
falta de pago de la prima. Asimismo, todas las pólizas de seguros contratadas de
conformidad con esta cláusula y cualesquier pólizas contratadas en sustitución o
reemplazo de cualquiera de aquellas pólizas, y cualesquier otra póliza de seguro que la
Arrendataria tenga contratada, deberán:
All insurance policies must stipulate that the insurer may not cancel or make material
changes to the terms and conditions of said insurance policies without prior notice in
writing to THE LESSOR and THE LESSEE at least thirty (30) days in advance,
including cancellation due to non-payment of the premium. Likewise, all insurance
policies contracted in accordance with this clause and any policies contracted to replace
any of those policies, and any other insurance policy that the Lessee has contracted,
shall:
a) Nombrar a LA ARRENDADORA, sus Afiliadas, Cedentes y Cesionarios y los
respectivos Directores, Funcionarios y Empleados de la misma, como Asegurados
Adicionales (“los Asegurados Adicionales”),
a) Appoint THE LESSOR, its Affiliates, Assignors and Assignees and the respective
Directors, Officers and Employees of the same, as Additional Insured (“Additional
Insured”),
b) Estipular que, con respecto a los intereses de los Asegurados Adicionales, dichas
pólizas de seguro deberán asegurar a los Asegurados Adicionales, independientemente
de cualquier incumplimiento o violación por parte de LA ARRENDADORA o de LA
ARRENDATARIO de cualquier garantía, declaración, o condiciones que figuren en
dichas pólizas de seguros,
b) Stipulate that, with respect to the interests of the Additional Insured, said insurance
policies shall insure the Additional Insured, independently of any breach or violation of
THE LESSOR or THE LESSEE of any guarantee, statement or conditions that appear
in these insurance policies,
c) Estipular que los Asegurados Adicionales no tendrán responsabilidad alguna por
cualesquier primas, determinaciones, garantías o representaciones con dichos seguros.
c) Stipulate that the Additional Insured shall not have any liability for any premiums,
determinations, guarantees or representations with said insurances.
d) Ser principales sin derecho de contribución de cualquier otro seguro contratado por
los Asegurados Adicionales.
d) Be primary without the right to contribute for any other insurance contracted by the
Additional Insured.
e) Estipular expresamente que todas sus disposiciones, excepto por los Límites de
responsabilidad, operarán en la misma manera a que si existiera una póliza de seguro
separada que cubriere a cada asegurado, y contener una renuncia a disposiciones de
subrogación en contra de LA ARRENDADORA, sus afiliadas, Cedentes y
Cesionarios y los respectivos Directores, funcionarios y empleados de la misma.
e) Expressly stipulate that all its provisions, except for the Limits of Liability, shall
operate in the same manner as if there were a separate insurance policy covering each
insured, and contain a waiver of provisions of subrogation against THE LESSOR, its
affiliates, Assignors and Assignees and the respective Directors, officers and
employees thereof.
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Décima Octava. Protección de Datos Personales.
EIGHTEENTH. Personal Data Protection.
Ambas están conscientes de que los datos personales que LA ARRENDADORA
recabe de manera previa y para la celebración del presente Contrato, están protegidos
por la Ley Federal de Protección de Datos Personales en Posesión de Particulares y
que dentro de los datos se encuentran datos sensibles.
Both are aware that the personal data that THE LESSOR collects in advance and for
the celebration of this Agreement, are protected by the Federal Law of Protection of
Personal Data Held by Private Parties and that sensitive data are included in the data.
LA ARRENDATARIA manifiesta que conoce el formato de AVISO DE
PRIVACIDAD proporcionado por LA ARRENDADORA, a fin de dar cumplimiento
en los términos de este; consecuentemente, ambas partes se comprometen a utilizar los
datos recabados únicamente para los fines que se mencionan en el aviso de privacidad,
comprometiéndose a cumplir con las obligaciones que de su parte se desprendan de
dicho documento.
THE LESSEE states that is aware of the format of PRIVACY NOTICE provided by
THE LESSOR, in order to comply with its terms; consequently, both parties undertake
to use the data collected only for the purposes mentioned in the privacy notice,
committing to comply with the obligations arising from said document.
Así mismo ambas partes reconocen que la información obtenida, tiene el carácter de
confidencial frente a terceros y dentro de lo que corresponda para LAS PARTES,
aplicables para todos los efectos legales a que haya lugar y por ende son sujetos al más
estricto secreto profesional, incluso una vez que se dé por terminada la relación
contractual que se origina del presente documento.
Likewise, both parties acknowledge that the information obtained is confidential before
third parties and, as appropriate, for THE PARTIES, applicable for all legal purposes
that may arise and are therefore subject to the strictest professional secrecy, including
once the contractual relationship originating from this document is terminated.
Consecuentemente LA ARRENDADORA únicamente utilizará los datos personales
que se recaben única y exclusivamente para el cumplimiento del objeto del presente
Contrato.
Consequently, the LESSOR shall only use the personal data that is collected solely
and exclusively for the fulfillment of the object of this Agreement.
De igual manera LA ARRENDATARIA se compromete a no transferir dato alguno de
los que tuviera conocimiento de LA ARRENDADORA y/o sus representantes legales
a persona moral o física alguna, so pena de responder por las responsabilidades civiles,
administrativas, penales o de cualquier otra naturaleza que se pudiera suscitar por su
incumplimiento, así como a indemnizar a LA ARRENDADORA o a cualquier tercero
por cualquier sanción, daños o perjuicios que se le pudieran ocasionar por la
inobservancia e incumplimiento por parte de LA ARRENDATARIA de sus
obligaciones al respecto.
Likewise, the LESSEE undertakes not to transfer any information of any knowledge
of THE LESSOR and / or its legal representatives to any natural person or legal entity,
under penalty of liability for civil, administrative, criminal or any other nature that
could be caused by its non-compliance, as well as to compensate THE LESSOR or
any third party for any sanction or damages that may be caused by the breach and non-
compliance of obligations by THE LESSEE in this regard.
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Por su parte LA ARRENDATARIA manifiesta su conocimiento y acuerdo de que LA
ARRENDADORA podrá conservar sin responsabilidad alguna, una base de datos con
la información recabada para efectos del presente Contrato y sin fines de divulgación.
On this behalf, the LESSEE expresses its knowledge and agreement that THE
LESSOR may conserve, without liability, a database with the information collected for
the purposes of this Agreement and non-disclosure purposes.
Para efecto de proteger la información que sea recabada del titular, ambas partes se
obligan operar y manejar la información con medidas de seguridad administrativas,
técnicas y físicas que protejan los daños recabados contra daño, pérdida, alteración,
destrucción o el uso, acceso o tratamiento no autorizado y en general, a velar por el
cumplimiento de la normatividad aplicable en materia de protección de datos
personales.
In order to protect the information that is collected from the owner, both parties are
obliged to operate and manage the information with administrative, technical and
physical security measures that protect the damage collected against damage, loss,
alteration, destruction or use, access or treatment not authorized and in general, to
ensure compliance with the applicable regulations on the protection of personal data.
Del mismo modo, LAS PARTES se obligan a notificar de manera inmediata las
vulneraciones de seguridad ocurridas en cualquier fase del tratamiento que afecten de
forma significativa los derechos patrimoniales o morales de los titulares, para efecto de
estar en posibilidad de informar al titular, a fin de que este último pueda tomar las
medidas correspondientes a la defensa de sus derechos, so pena de responder por las
responsabilidades de cualquier naturaleza que se pudieran generar con motivo de su
incumplimiento. Se entiende por vulneración de seguridad cualquier incidente que
implique el acceso o la divulgación no autorizada de la información.
Likewise, THE PARTIES are obliged to immediately notify about the security
infringements occurred in any phase of the treatment that significantly affect the
economic or moral rights of the holders, in order to be able to inform the owner, in
order that the latter may take the corresponding measures to defend their rights, under
penalty of responding for responsibilities of any nature that may arise due to non-
compliance. Security infringement is understood as any incident that implies
unauthorized access or disclosure of the information.
Décima Novena. Privación del Uso del INMUEBLE ARRENDADO.
NINETEENTH. Deprivation of the use of LEASED PROPERTY.
a). LA ARRENDATARIA en este acto renuncia a los beneficios del artículo 2339 del
Código Civil, por lo cual en caso que durante la vigencia de este Contrato se llegare a
efectuar la ampliación de la calle donde se encontrare INMUEBLE ARRENDADO,
se obliga a pagar íntegramente la Renta Mensual sin reducción alguna, no obstante
cualquier notificación gubernamental sobre la referida ampliación.
a) THE LESSEE in this act waives the benefits of Article 2339 of the Civil Code, so
that in the event that during the term of this Agreement a street extension where the
LEASED PROPERTY is made, it is obliged to pay in full the Monthly Rental without
any reduction, notwithstanding any governmental notification regarding said extension.
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b). LA ARRENDATARIA acepta que en caso que cualquier autoridad expropie el
INMUEBLE ARRENDADO, por causa de utilidad pública operará la terminación
automática del presente Contrato, por lo cual LA ARRENDATARIA en este acto
renuncia a los beneficios del artículo 2304 del Código Civil, obligándose a desocupar y
entregar el INMUEBLE ARRENDADO a LA ARRENDADORA, inmediatamente
ante su requerimiento.
c). En caso de privación, despojo, perturbación, huelga o cualquier otro acto de
terceros que afecte el uso o goce del INMUEBLE ARRENDADO o la posesión del
mismo, por actos imputables o relacionados con LA ARRENDATARIA, éste tendrá
la obligación de realizar las acciones que correspondan para continuar con el uso del
INMUEBLE ARRENDADO o defender el uso o goce del mismo; sin perjuicio del
pago de daños y perjuicios en favor de LA ARRENDADORA. En tal caso, continuará
la obligación de LA ARRENDATARIA del pago puntual de la Renta Mensual y las
cuotas de mantenimiento.
b) THE LESSEE accepts that in the event that any authority expropriates the
LEASED PROPERTY, for the cause of public utility the automatic termination of this
Agreement shall operate, for which THE LESSEE in this act waives the benefits of
Article 2304 of the Civil Code, obliging to vacate and deliver the LEASED
PROPERTY to the LESSOR, immediately upon request.
c) In case of deprivation, dispossession, disturbance, strike or any other act of third
parties that affects the use or enjoyment of the LEASED PROPERTY or the
possession thereof, for acts attributable to or related to THE LESSEE, the latter shall
be obliged to perform the actions that correspond to continue with the use of the
LEASED PROPERTY or defend the use or enjoyment thereof; without prejudice to
the payment of damages in favor of THE LESSOR. In this case, the LESSEE shall
continue to pay the monthly payment and the maintenance fees.
Vigésima. Garantías e Indemnizaciones
TWENTIETH. Warranties and Indemnification
EL ARRENDADOR representa y garantiza que:
THE LESSOR represents and warrants that:
(i) Está debidamente organizada y en buen estado conforme a las leyes de la
jurisdicción de su organización y tiene plena capacidad y derecho para hacer y cumplir
este Contrato, y se ha obtenido toda la autoridad necesaria;
(i) it is duly organized and in good standing under the laws of the jurisdiction of its
organization and has full capacity and right to make and perform this Agreement, and
all necessary authority has been obtained;
(ii) La realización y el cumplimiento de este Contrato no infringen ni infringirán las
disposiciones de ninguna ley, reglamento u orden aplicables, y no dan lugar ni violarán,
o constituirán un incumplimiento conforme a, cualquier acuerdo material, instrumento
o documento en el que es parte o por el cual él o cualquiera de sus bienes pueden estar
vinculados o afectados;
(ii) the making and performance of this Agreement does not and will not violate the
provisions of any applicable law, regulation or order, and does not and will not result in
the breach of, or constitute a default under, any material agreement, instrument or
document to which it is a party or by which it or any of its property may be bound or
affected;
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(iii) Todos los consentimientos, aprobaciones, licencias y autorizaciones, y las
presentaciones y registros ante, cualquier autoridad gubernamental requerida según las
leyes y regulaciones aplicables para la realización y el cumplimiento de este Contrato
se han obtenido o realizado y están en pleno vigor y efecto;
(iii) all consents, approvals, licenses and authorizations of, and filings and registrations
with, any governmental authority required under applicable law and regulations for the
making and performance of this Agreement have been obtained or made and are in full
force and effect;
(iv) específicamente, posee o cuenta con la aprobación adecuada del propietario para
arrendar la PROPIEDAD ARRENDADA y ha obtenido la licencia de construcción
correspondiente;
(iv) specifically, it owns or has proper approval from owner to lease the LEASED
PROPERTY and has obtained the relevant construction license; and
(v) Que la PROPIEDAD ARRENDADA no tiene ningún problema de contaminación
o medio ambiente existente que viole la ley ambiental de la (s) jurisdicción (es)
aplicable (s) o hace que la PROPIEDAD ARRENDADA sea susceptible de futuras
violaciones ambientales.
(v) that the LEASED PROPERTY does not have any existing pollution or
environmental issue that violates the environmental law of the applicable
jurisdiction(s) or makes the LEASED PROPERTY susceptible to future
environmental violations.
(vi) Específicamente que el diseño y la construcción de la PROPIEDAD
ARRENDADA se ajustan estrictamente a las Normas del Parque.
(vi) specifically, the design and construction of the LEASED PROPERTY is in strict
compliance with the Park Regulations.
LA ARRENDADORA indemnizará A EL ARRENDATARIO y eximirá de toda
pérdida o gasto que el ARRENDATARIO pueda sostener o incurrir (incluidos los
honorarios de los abogados) como consecuencia directa de la infracción de LA
ARRENDADORA de las declaraciones y garantías estipuladas en el párrafo anterior.
THE LESSOR shall indemnify THE LESSEE and hold THE LESSEE harmless from
any loss or expense that THE LESSEE may sustain or incur (including attorneys’ fees)
as a direct consequence of THE LESSOR’s breach of the representations and
warranties made in the previous paragraph.
Vigésima Primera. Terminación del Contrato.
TWENTY-FIRST. Termination of Agreement
El presente Contrato terminará su vigencia por cualquiera de las siguientes causas:
This Agreement shall end its validity for any of the following causes:
i) Mediante acuerdo por escrito de LAS PARTES;
i) By written agreement of THE PARTIES;
ii) Automáticamente por la expiración de su vigencia o de su prórroga, en su caso;
ii) Automatically by the expiration of its validity or of its extension, as the case may
be;
iii) Automáticamente ante la disolución, liquidación, quiebra o insolvencia de LA
ARRENDATARIA;
iii) Automatically before the dissolution, liquidation, bankruptcy or insolvency of THE
LESSEE;
iv) Automáticamente ante un Cambio de Control de LA ARRENDATARIA. Para
efectos de este Contrato un “Cambio de Control” significa una transmisión, fusión,
consolidación, venta, amortización o emisión, directa o indirecta, de acciones, partes
sociales, derechos de beneficiario o derechos de propiedad que tengan como objeto o
resultado un cambio en la posibilidad, directa o indirectamente, de nombrar y remover
a la mayoría del órgano de administración de LA ARRENDATARIA; y
iv) Automatically before a Change Control of the LESSEE. For purposes of this
Agreement, a "Control Change" means a direct or indirect transfer, merger,
consolidation, sale, amortization or issue of shares, social shares, beneficiary rights or
property rights that have as their object or result a change. in the possibility, directly or
indirectly, of appointing and removing the majority of the administration body of THE
LESSEE; and
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En caso que se haya actualizado alguna de las causas de terminación del presente
Contrato antes mencionadas y LA ARRENDATARIA siga de hecho ocupando
INMUEBLE ARRENDADO, se considerará que lo realiza con expresa oposición de
LA ARRENDADORA, en cuyo caso LA ARRENDATARIA pagará a LA
ARRENDADORA una pena convencional equivalente al 200% (doscientos por
ciento) de la Renta Mensual por cada mes o fracción de mes que continúe en esa
ocupación del INMUEBLE ARRENDADO.
En cualquier caso de terminación de este Contrato, LA ARRENDATARIA se obliga a
desocupar INMUEBLE ARRENDADO y a retirar, a su costa, todos aquellos
muebles, accesorios y demás instalaciones de su propiedad que se encuentren dentro
del mismo, debiendo entregar INMUEBLE ARRENDADO en óptimas condiciones
para su uso inmediato y, con las adecuaciones y Mejoras si así lo requiriese LA
ARRENDADORA.
No obstante lo anterior, LAS PARTES están de acuerdo que en el caso que una vez
terminado este Contrato, LA ARRENDADORA, mediante inspección que realice en
el INMUEBLE ARRENDADO a través de fedatario público, descubra que en el
INMUEBLE ARRENDADO ya no se encuentra personal de LA ARRENDATARIA
en uso del mismo, LA ARRENDADORA tendrá el derecho de tomar posesión
inmediata del INMUEBLE ARRENDADO, mediante la apertura de cerraduras y la
desocupación de los muebles y accesorios que ahí se encuentren o mediante cualquier
otra acción tendiente a la toma de posesión del INMUEBLE ARRENDADO,
considerándose como una entrega voluntaria del INMUEBLE ARRENDADO por LA
ARRENDATARIA para todos los efectos legales.
In case any of the causes of termination of this Agreement mentioned above have been
updated and THE LESSEE continues to occupy the LEASED PROPERTY, it shall
be considered that it is done with express opposition from THE LESSOR, in which
case THE LESSEE shall pay THE LESSOR a conventional penalty equivalent to
200% (two hundred percent) of the Monthly Rental for each month or fraction of the
month that continues in that occupation of the LEASED PROPERTY.
In any case of termination of this Agreement, THE LESSEE undertakes to vacate the
LEASED PROPERTY and to remove, at its own expense, all furniture, accessories
and other facilities of its property that are within it, and must deliver the LEASED
PROPERTY in optimal conditions for its immediate use and, with the adjustments and
improvements if so required by the LESSOR.
Notwithstanding the above, THE PARTIES agree that once this Agreement is
completed, THE LESSOR, through inspection carried out in the LEASED
PROPERTY through notary public, discovers that in the LESSEE’s staff is no longer
in use of the LEASED PROPERTY, THE LESSOR shall have the right to take
immediate possession of the LEASED PROPERTY, by opening locks and vacating
the furniture and accessories found there or through any other action tending to take
possession of the LEASED PROPERTY, considered as a voluntary delivery of the
LEASED PROPERTY by THE LESSEE for all legal purposes.
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En cualesquiera de los casos a que se refiere esta Cláusula, LA ARRENDADORA
además de dar por terminado anticipadamente el presente Contrato, tendrá el derecho
de exigir la inmediata desocupación y entrega del INMUEBLE ARRENDADO y
ejercer las acciones correspondientes ante los Tribunales, reclamando las rentas
mensuales vencidas, si las hubiera y las que, se sigan venciendo por toda la vigencia
del contrato, así como el pago de daños y perjuicios.
En caso de que LA ARRENDATARIA solicite la terminación anticipada o se rescinda
el presente Contrato por cualquier Caso Incumplimiento de LA ARRENDATARIA,
LA ARRENDATARIA deberá pagar a LA ARRENDADORA el resto de la Renta
Mensual no pagadas por el periodo forzoso del presente Contrato, o bien continuar con
el pago de la renta mensual hasta que LA PROPIEDAD ARRENDADA, sea
arrendada por otro arrendatario. LA ARRENDATARIA podrá coadyuvar para
identificar un arrendatario sustituto debiendo en todo momento el inquilino ser
aceptable por LA ARRENDADORA
In any of the cases referred to in this Clause, THE LESSOR in addition to terminate
this Agreement in advance, shall have the right to demand the immediate vacating and
delivery of the LEASED PROPERTY and exercise the corresponding actions before
the Courts, claiming the monthly rentals expired, if any, and those that are still due for
the entire term of the agreement, as well as the payment of damages.
In the event that THE LESSEE requests the early termination or terminates this
Agreement for any Event of Default of THE LESSEE, THE LESSEE must pay the
total of the missing rents or shall continue to pay Monthly Rents to THE LESSOR
until the LEASED PROPERTY is leased to another lessee. THE LESSEE may help
to identify a substitute lessee, at all times the tenant must be acceptable to THE
LESSOR.
Vigésima Segunda. Recisión del Contrato.
TWENTY-SECOND. Anticipated Termination.
Además de cualquiera otra situación establecida en la ley o especificada en el presente
Contrato como caso de incumplimiento, en casos de que ocurra uno o más de los
siguientes supuestos casos durante la vigencia del presente Contrato, constituirá un
caso de incumplimiento (un “Caso de Incumplimiento”) por parte de LA
ARRENDATARIA:
In addition to any other situation established in the law or specified in this Agreement
as an evet of default, in cases where one or more of the following alleged cases occurs
during the term of this Agreement, it shall constitute a case of non-compliance (a
"Event of Default ") by THE LESSEE:
1.Por falta de pago de una o más mensualidades de la Renta Mensual o cuotas de
mantenimiento, en la forma y plazos pactados en este Contrato;
1. For lack of payment of one or more monthly installments of the Monthly Rental or
maintenance fees, in the manner and terms agreed in this Agreement;
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2. Por dar al INMUEBLE ARRENDADO un uso distinto al pactado en este Contrato;
2. To provide the LEASED PROPERTY a different use from the one agreed in this
Agreement;
3. Por incumplimiento al Reglamento del Parque Industrial Interpuerto Monterrey;
3. For non-compliance with the Regulations of the Interpuerto Monterrey Industrial
Park;
4. Si LA ARRENDATARIA no conserva el INMUEBLE ARRENDADO en buenas
condiciones de mantenimiento y conservación con recursos propios, en términos de la
cláusula Sexta.
4. If THE LESSEE does not keep the LEASED PROPERTY in good conditions of
maintenance and conservation with its own resources, in terms of the Sixth clause.
5. Si LA ARRENDATARIA variare la forma del INMUEBLE ARRENDADO, sin
autorización por escrito de LA ARRENDADORA;
5. If THE LESSEE changes the form of the LEASED PROPERTY, without written
authorization from THE LESSOR;
6. Si INMUEBLE ARRENDADO es objeto de perturbación o cualquier otro acto de
terceros que afecte el uso o goce del mismo, la posesión del mismo o bien la
propiedad, por error, omisión, negligencia o culpa de LA ARRENDATARIA;
6. If the LEASED PROPERTY is subject to disturbance or any other act of third
parties that affects the use or enjoyment thereof, the possession of it or the property, by
mistake, omission, negligence or fault of THE LESSEE;
7. Si LA ARRENDATARIA subarrienda, cede, traspasa o negocia en cualquier forma
con terceros los derechos que ampara este Contrato, sin el previo consentimiento por
escrito de LA ARRENDADORA;
7. If THE LESSEE sub-stores, transfers, transfers or negotiates in any way with third
parties the rights protected by this Agreement, without the prior written consent of
THE LESSOR;
8. Si el INMUEBLE ARRENDADO permanece cerrado o no es operado de manera
continua en un periodo consecutivo o no igual o mayor a diez días naturales en un
período de sesenta días naturales, por actos u omisiones imputables o no a LA
ARRENDATARIA.
8. if the LEASED PROPERTY remains closed or is not operated continuously in a
consecutive period or not equal to or greater than ten calendar days in a period of sixty
calendar days, for acts or omissions attributable or not to THE LESSEE.
9. En caso de incumplimiento a cualesquiera otra de sus obligaciones contraídas por el
presente Contrato, el Reglamento del Parque Industrial Interpuerto Monterrey o
cualquier directriz de uso emitida por el órgano de administración de Parque Industrial
Interpuerto Monterrey.
9. In case of non-compliance with any other of its obligations contracted by this
Agreement, the Regulations of the Interpuerto Monterrey Industrial Park or any
guideline of use issued by the management body of Parque Industrial Interpuerto
Monterrey.
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De actualizarse cualquier Caso de Incumplimiento de los antes mencionados, LA
ARRENDADORA le notificará dicho incumplimiento a LA ARRENDATARIA para
que ésta dentro de un plazo de 15 (quince) días naturales subsane dicho Caso de
Incumplimiento, ahora bien de no haberse subsanado el Caso de Incumplimiento en el
plazo asignado, LA ARRENDADORA notificará a LA ARRENDATARIA el
rescisión del Contrato señalando una fecha para el desalojo del INMUEBLE
ARRENDADO y posterior entrega de la posesión material y jurídica, lo cual no
ocurrirá en un plazo menor a 5 días posteriores a que haya sido notificada la recisión.
La parte que no ha incurrido en incumplimiento podrá hacer valer los recursos a que
tiene derecho en los términos de las Leyes, incluyendo de manera enunciativa, más no
limitativa, el derecho de exigir el cumplimiento forzoso y de demandar el pago de
daños y perjuicios.
Además, la parte que no incurra en incumplimiento tendrá el derecho de rescindir el
presente Contrato ante la existencia de un Caso de Incumplimiento, sin necesidad de
intervención y/o declaratoria judicial previa, por lo que LAS PARTES especifican que
este acuerdo es un Pacto Comisorio Expreso y/o Cláusula Resolutoria en materia de
arrendamiento de bienes inmuebles en los términos dispuestos por el Código Civil para
el Estado de Nuevo León, así como por la demás legislación aplicable. En tal caso, y
no obstante la rescisión que pueda tener lugar, la parte que rescinda el presente
Contrato conservará y no renuncia al derecho de iniciar cualquier acción que pudiera
corresponderle derivado de dicho incumplimiento en contra de la parte que ha
incumplido.
En caso que el presente Contrato sea rescindido por Caso de Incumplimiento de LA
ARRENDATARIA, entonces LA ARRENDATARIA deberá pagar a LA
ARRENDADORA el importe equivalente al 200% (doscientos por ciento) de la Renta
Mensual por devengarse a partir de la fecha del Caso de Incumplimiento y hasta la
fecha de terminación como si estas se hubiesen devengado, a manera de pena
convencional. Igualmente, una vez notificada el aviso de rescisión del Arrendamiento
en términos de lo dispuesto por el artículo 2384 BIS II, del Código Civil de Nuevo
León, se procederá al desalojo del INMUEBLE ARRENDADO y posterior entrega de
la posesión material y jurídica.
If any Event of Default of the aforementioned is updated, THE LESSOR shall notify
said infringement to the LESSEE so that within a period of 15 (fifteen) calendar days it
shall remedy the Event of Default, now that the Event of Default has not been
corrected. Within the allotted time, THE LESSOR shall notify THE LESSEE of the
termination of the Agreement, stating a date for the eviction of the LEASED
PROPERTY and subsequent delivery of the material and legal possession, which shall
not occur within a period of less than 5 days after it has been notified the rescission.
The party that has not breached may enforce the resources to which it is entitled under
the terms of the laws, including, but not limited to, the right to demand enforcement
and to demand the payment of damages.
In addition, the non-defaulting party shall have the right to terminate this Agreement in
the Event of a Default, without the need for intervention and / or prior judicial
declaration, so THE PARTIES specify that this agreement is an Express Commitment
Pact and / or Cancellation Clause in the matter of the lease of real estate in the terms
established by the Civil Code for the State of Nuevo León, as well as by the other
applicable legislation. In such case, and notwithstanding the termination that may take
place, the party that terminates this Agreement shall retain and not waive the right to
initiate any action that may correspond derived from said breach against the party that
has breached.
In the event that this Agreement is terminated for Event of Default by the LESSEE,
then THE LESSEE must pay THE LESSOR the amount equivalent to 200% (two
hundred percent) of the Monthly Rental to be accrued as of the date of the Event of
Default and until the termination date as if they had accrued, as a conventional penalty.
Likewise, once notified the termination notice of the Lease in terms of the provisions
of article 2384 BIS II, of the Civil Code of Nuevo León, the eviction of the LEASED
PROPERTY shall be carried out and subsequent delivery of the material and legal
possession.
36
Vigésima Tercera. Fuerza Mayor o Caso Fortuito.
TWENTY-THIRD. Force majeure or fortuitous event.
LA ARRENDATARIA se obliga a cumplir íntegramente con las obligaciones que
contrae por este Contrato, aún en caso fortuito o de fuerza mayor y acepta su
responsabilidad, de acuerdo con el artículo 2005 del Código Civil, renunciando en lo
que le favorezcan los artículos 2325 y 2326 del propio Código Civil.
THE LESSEE undertakes to fully comply with the obligations contracted by this
Agreement, even in case of fortuitous event or force majeure and accepts its liability, in
accordance with article 2005 of the Civil Code, waiving in favor of articles 2325 and
2326 of the Civil Code itself.
Vigésima Cuarta. Cesión.
TWENTY-FOURTH. Assignment.
a). LA ARRENDADORA podrá ceder en cualquier tiempo, total o parcialmente, sus
derechos y/u obligaciones derivados de este Contrato sin el consentimiento de LA
ARRENDATARIA, pudiendo notificárselo a ésta, solo para efectos de identificarle el
lugar donde realizará los pagos de la Renta Mensual.
a) THE LESSOR may assign at any time, totally or partially, its rights and / or
obligations derived from this Agreement without the consent of THE LESSEE, being
able to notify it, only for the purpose of identifying the place where it shall make the
payments of the Monthly Rental.
b) LA ARRENDATARIA podrá ceder en cualquier momento total o parcialmente sus
derechos y/o obligaciones derivadas de este Contrato con el previo consentimiento de
LA ARRENDADORA.
b) THE LESSEE may assign at any time, totally or partially, its rights and / or
obligations derived from this Agreement with the consent of THE LESSOR.
c). LA ARRENDATARIA podrá subarrendar la PROPIEDAD ARRENDADA si LA
ARRENDATARIA quiere desalojar la PROPIEDAD ARRENDADA antes de que
finalice el contrato de cuatro años o cualquier período de extensión de la misma,
siempre y cuando cuente con el consentimiento previo y por escrito de LA
ARRENDADORA. LA ARRENDADATARIA se asegurará de que dicho
subarrendamiento cumpla con las Regulaciones del Parque o, como alternativa, sea
responsable de obtener toda la aprobación necesaria de Interpuerto para dicho
subarriendo de conformidad con el Artículo IX.1 u otras disposiciones pertinentes de
las Regulaciones del Parque.
c) THE LESSEE may sublet the LEASED PROPERTY if THE LESSEE wants to
vacate the LEASED PROPERTY prior to the end of the four-year lease or any
extension period thereof long as it obtains with the prior written consent of THE
LESSOR. The LESSEE shall ensure that such subleasing is in compliance with the
Park Regulations or alternatively be responsible for obtaining all necessary approval
from Interpuerto for such subleasing in accordance with Article IX.1 or other relevant
provisions of the Park Regulations.
37
Vigésima Quinta. Responsabilidad Laboral.
TWENTY FIFTH. Labor Liability
LA ARRENDATARIA conforme a las leyes y reglamentos mexicanos aplicables será
responsable sin limitación, de las obligaciones legales, si las hubiere, para con todo el
personal empleado por LA ARRENDATARIA en la edificación de las mejoras, así
como en la operación de objetos ajenos a instalar en el INMUEBLE ARRENDADO,
ya sea sindicalizado o no, temporal o de otra índole (incluyendo cualesquiera
subcontratistas), y el pago o cuotas al Instituto Mexicano del Seguro Social, el Sistema
de Ahorro para el Retiro (SAR), INFONAVIT o cualesquiera otros impuestos, cuotas o
derechos aplicables. Por lo anterior LA ARRENDATARIA reconoce y acepta que
cuenta con los elementos propios a que se refieren los artículos 13 y 15 de la ley
Federal del Trabajo, siendo en consecuencia único patrón de todas y cada una de las
personas que trabajen para ella, liberando a LA ARRENDADORA de cualquier
responsabilidad laboral, tales como IMSS, INFONAVIT, salarios, SAR,
indemnizaciones e impuestos y cualquier otra responsabilidad. En consecuencia LA
ARRENDATARIA en todo caso indemnizará y mantendrá libre de cualquier gasto,
daño y perjuicio a LA ARRENDADORA y en todo caso, asumirá y cubrirá
directamente todas las responsabilidades en que se llegare a encontrar, así como los
gastos y costas de los juicios, aún en el caso de que las autoridades condenaren a LA
ARRENDADORA, por no haber contestado la demanda laboral interpuesta por alguno
de los trabajadores de LA ARRENDATARIA o por no haberse excepcionado
eficazmente de ella.
THE LESSEE, according to the applicable Mexican laws and regulations, shall be
responsible without limitation, of the legal obligations, if any, for all personnel
employed by THE LESSEE in the construction of the improvements, as well as in the
operation of foreign objects to install in LEASED PROPERTY, whether unionized or
not, temporary or otherwise (including any subcontractors), and payment or fees to the
Mexican Institute of Social Security, the Retirement Savings System (SAR),
INFONAVIT or any other taxes , fees or applicable fees. For this reason, the LESSEE
acknowledges and accepts that it has the proper elements referred to in articles 13 and
15 of the Federal Labor Law, and as such is the sole employer of each and every one of
the people working for it, releasing THE LESSOR of any labor responsibility, such as
IMSS, INFONAVIT, salaries, SAR, indemnities and taxes and any other responsibility.
Consequently THE LESSEE shall in any case indemnify and shall hold harmless from
any expense, damage and injury to the LESSOR and in any case, it shall assume and
directly cover all the responsibilities in which it shall be found, as well as the expenses
and costs of the trials, even in the event that the authorities condemn the LESSOR, for
not having answered the labor lawsuit filed by any of the workers of THE LESSEE or
for not having effectively exempted from it.
Vigésima Sexta. Ambiental.
TWENTY SIXTH. Environmental.
LA ARRENDATARIA manifiesta que recibe limpio el INMUEBLE ARRENDADO
a la Fecha de Entrega y en caso contrario se lo hará saber a LA ARRENDADORA
dentro de los 10 días siguiente a la Fecha de Entrega. Asimismo, LA
ARRENDATARIA manifiesta y garantiza que durante la vigencia del presente
Contrato no utilizará dentro del INMUEBLE ARRENDADO, ni realizará ningún acto,
dentro de los mismos, por virtud del cual la Construcción y/o el Terreno se contaminen
con Sustancias Peligrosas u otras sustancias que con el simple paso del tiempo puedan
ser Sustancias Peligrosas, conforme a las leyes y reglamentos ambientales aplicables.
THE LESSEE states that the LEASED PROPERTY is clean and delivered on the
Delivery Date and otherwise she shall inform THE LESSOR within 10 days after the
Delivery Date. Likewise THE LESSEE states and guarantees that during the term of
this Agreement she shall not use within the LEASED PROPERTY not shall perform
any act, within them, by virtue of which the Construction and /or the Land are
contaminated with Hazardous Substances or other Substances that, with the simple
passage of time, may be Hazardous Substances, in accordance with applicable
environmental laws and regulations.
38
LA ARRENDATARIA está obligada a usar el INMUEBLE ARRENDADO de
conformidad con todas las leyes y reglamentos ambientales aplicables. Si cualquier
reclamo se llegase a presentar en contra de LA ARRENDADORA por cualquier
persona y/o entidad relacionada con cualquier contaminación de Sustancias Peligrosas
presentes en el INMUEBLE ARRENDADO durante la vigencia del presente Contrato
o las mejoras que al efecto realice, debido al incumplimiento de LA
ARRENDATARIA de sus obligaciones conforme a esta Cláusula, todos los costos de
remediación incurridos por, todas las responsabilidades impuestas sobre, y las
pérdidas, daños y perjuicios sufridos por LA ARRENDADORA por causa de la
misma serán a cargo de LA ARRENDATARIA, y LA ARRENDATARIA por la
presente conviene en indemnizar, defender y liberar de responsabilidad a LA
ARRENDADORA de y contra cualesquier costos, responsabilidades, pérdidas, daños
y perjuicios, incluyendo sin limitación, respecto a todo reclamo de terceros y/o
autoridades (incluyendo cantidades pagadas en arreglo de los mismos y aprobadas por
LA ARRENDATARIA por escrito, con o sin acciones judiciales legales) por lesiones
personales o daño en propiedad y otros reclamos, acciones, procedimientos
administrativos, sentencias, penas, multas, costos, pérdidas, honorarios razonables de
abogados y gastos, asesores u honorarios razonables de peritos, y todos los costos
incurridos en hacer cumplir esta indemnización. LA ARRENDADORA tendrá el
derecho en cualquier momento, después de un aviso razonable, a tomar muestras de los
derrames generados por LA ARRENDATARIA para ser analizados por un perito
ambiental designado y pagado por LA ARRENDATARIA.
THE LESSEE is obliged to use the LEASED PROPERTY in accordance with all
applicable environmental laws and regulations. If any claim is filed against THE
LESSOR by any person and / or entity related to any contamination of Hazardous
Substances present in the LEASED PROPERTY during the term of this Agreement or
the improvements made to that effect, due to the breach of obligations of the LESSEE
under this Clause, all remediation costs incurred, all liabilities imposed, and losses,
damages and losses suffered by THE LESSOR due to the same shall be borne by THE
LESSEE, and THE LESSEE by this agrees to indemnify, defend and release from
liability to the LESSOR of and against any costs, liabilities, losses, damages and
losses, including without limitation, with respect to all claims of third parties and / or
authorities (including amounts paid in accordance with the same and approved by THE
LESSEE in writing, with or without legal actions legal) for personal injury or property
damage and other claims, actions, administrative procedures, judgments, penalties,
fines, costs, losses, reasonable attorneys' fees and expenses, advisors or reasonable fees
of experts, and all costs incurred in enforcing this compensation. THE LESSOR shall
have the right at any time, after reasonable notice, to take samples of the spills
generated by THE LESSEE to be analyzed by an environmental expert designated and
paid by THE LESSEE.
39
Las obligaciones de indemnización comprendidas en esta cláusula deberán permanecer
vigentes hasta la terminación del presente Contrato y/o entrega del INMUEBLE
ARRENDADO; en el entendido de que en ningún caso la falta de conocimiento de la
existencia de algún hecho o acto referido en las manifestaciones y garantías otorgadas
por LA ARRENDATARIA constituirá excusa o excepción a las obligaciones de
indemnización antes referidas.
The indemnification obligations included in this clause must remain in force until the
termination of this Agreement and / or delivery of the LEASED PROPERTY; in the
understanding that in no case shall the lack of knowledge of the existence of any act or
act referred to in the manifestations and guarantees granted by THE LESSEE
constitute an excuse or exception to the aforementioned indemnification obligations.
LA ARRENDATARIA conviene que las operaciones realizadas durante las mejoras
que efectúe en el INMUEBLE ARRENDADO y la vigencia del presente Contrato
deberán ir de conformidad con todas las leyes, reglamentos y ordenamientos
aplicables, incluyendo, sin limitación, a las leyes, reglamentos y ordenamientos
relacionados con las Sustancias Peligrosas.
THE LESSEE agrees that the operations carried out during the improvements made in
the LEASED PROPERTY and the validity of this Agreement shall be in accordance
with all applicable laws, regulations and ordinances, including, without limitation, the
laws, regulations and ordinances related to the Hazardous Substances.
Vigésima Séptima. Domicilios y Notificaciones.
TWENTY-SEVENTH. Domiciles and Notifications.
a). Toda clase de avisos, reclamaciones, comunicaciones y notificaciones a que haya
lugar entre LAS PARTES, con motivo del presente Contrato, deberán ser hechas por
escrito y deberán ser entregadas personalmente, o por correo certificado con acuse de
recibo. Cuando se trate de notificaciones a LA ARRENDATARIA o al OBLIGADO
SOLIDARIO serán hechas en el INMUEBLE ARRENDADO y en los domicilios
previstos en el capítulo de Declaraciones del presente Contrato.
a) All kinds of notices, claims, communications and notifications that may take place
between THE PARTIES, for the purpose of this Agreement, shall be made in writing
and shall be delivered personally, or by certified mail with acknowledgment of receipt.
In the case of notifications to THE LESSEE or the GUARANTOR shall be made in
the LEASED PROPERTY and in the domiciles provided in the Clauses of this
Agreement.
b). Todas las notificaciones hechas a LA ARRENDADORA deberán hacerse en el
domicilio señalado en el inciso c) de la Declaración Primera.
b) All notifications made to THE LESSOR must be made at the address indicated in
paragraph c) of the First Statement.
Vigésima Octava. Legislación Aplicable y Jurisdicción.
TWENTY-EIGHTH. Applicable Legislation and Jurisdiction.
Para la solución de cualquier controversia que pudiera surgir con motivo de la
interpretación, cumplimiento y ejecución del presente Contrato, LAS PARTES se
someten a las leyes del Estado de Nuevo León y a la jurisdicción de los tribunales
competentes en Monterrey, Nuevo León, y renuncian para tal efecto a cualquier otra
legislación y fuero jurisdiccional que por razón de sus domicilios presentes o futuros
les corresponda o pudiera corresponder.
For the solution of any controversy that may arise due to the interpretation, fulfillment
and execution of this Agreement, THE PARTIES submit to the laws of the State of
Nuevo León and the jurisdiction of the competent courts in Monterrey, Nuevo León,
and resign to such effect to any other legislation and jurisdictional jurisdiction that by
reason of their present or future domiciles corresponds to them or could correspond.
40
Vigésima Novena. Acuerdo Único y Modificaciones.
TWENTY-NINTH. Sole Agreement and Amendments.
a) Este Contrato y sus anexos, contienen la totalidad del acuerdo entre LAS
PARTES formando en conjunto un solo instrumento; razón por la cual LAS PARTES
dejan sin efecto legal alguno cualquier otro acuerdo legal o escrito que hayan acordado
o suscrito con fecha anterior a la fecha de celebración del mismo.
a) This Agreement and its annexes contain the entire agreement between THE
PARTIES, forming together a single instrument; reason for which THE PARTIES
leave without any legal effect any other legal or written agreement that they have
agreed or subscribed with date prior to the date of its conclusion.
b) Este Contrato sólo podrá ser modificado mediante convenio escrito firmado por
LAS PARTES.
b) This Agreement may only be modified by means of a written agreement signed by
THE PARTIES.
Trigésima . Invalidez Parcial.
THIRTIETH. Partial Invalidity.
Si cualquiera de las cláusulas de este Contrato es declarada como inválida o no
ejecutable por cualquier tribunal de jurisdicción competente, las demás cláusulas del
Contrato permanecerán en vigor y con plenos efectos. Cualquier cláusula de este
Contrato declarada parcialmente inválida o no ejecutable permanecerá en vigor con
plenos efectos con relación a la parte que no fue declarada inválida o no ejecutable.
If any of the clauses of this Agreement is declared invalid or unenforceable by any
court of competent jurisdiction, the other clauses of the Agreement shall remain in
force and with full effect. Any clause of this Agreement declared partially invalid or
unenforceable shall remain in force with full effect in relation to the party that was not
declared invalid or unenforceable.
trigésima Primera. Interpretación.
THIRTIETH FIRST. Interpretation.
a) Los encabezados de las cláusulas del presente Contrato son establecidos
únicamente por razones de referencia y no afectarán la interpretación del mismo. Todas
las referencias a “Cláusula” o “Cláusulas” se refieren a la Cláusula o a las Cláusulas
correspondientes del presente Contrato.
a) The headings of the clauses of this Agreement are established only for reasons of
reference and shall not affect the interpretation thereof. All references to "Clause" or
"Clauses" refer to the Clause or to the corresponding Clauses of this Agreement.
b) Todas las palabras utilizadas en este Contrato serán leídas como del género o
número que requieran las circunstancias. Al menos que se establezca lo contrario, la
palabra “incluyendo” no limita las palabras o términos a las cuales hace referencia.
b) All words used in this Agreement shall be read as of the gender or number required
by the circumstances. Unless stated otherwise, the word "including" does not limit the
words or terms to which it refers.
c) Cualquier referencia a “día” o “días” deberá entenderse por referirse a días
naturales, salvo que se precise que son días hábiles.
c) Any reference to "day" or "days" shall be understood as referring to calendar days,
unless it is specified that they are business days.
41
trigésima Segunda. Idioma.
THIRTY-SECOND. Language.
Este Contrato se suscribe tanto en español como en inglés, y ambos textos serán
obligatorios y constituirán uno y el mismo documento, en el entendido, sin embargo,
que en caso de discrepancia entre ambos textos, la versión en español prevalecerá.
This Agreement is signed in both Spanish and English, and both texts shall be
mandatory and shall constitute one and the same document, however, in the event of
discrepancy between the two texts, the Spanish version shall prevail.
Bien entendidas LAS PARTES del contenido y efectos legales del presente Contrato,
lo firman en cuatro tantos de conformidad y ante dos testigos en la ciudad de
Monterrey, Nnuevo León, Nuevo León el día 14 de Diciembre de 2018.
THE PARTIES have understood the content and legal effects of this agreement, and
sign it in four counterparts of conformity and before two witnesses in the city of
Monterrey, Nuevo León on December 14, 2018.
LA ARRENDADORA
THE LESSOR
Servicios Interpuerto, S.A. de C.V.
Nombre: Mauricio Garza Kalifa
Su: Representante Legal
LA ARRENDATARIA
Mayenco, S. de R.L. de C.V.
Nombre: Moisés Chávez Alvarado
Su: Representante Legal
EL OBLIGADO SOLIDARIO
FULING PLASTIC USA, INC.
Nombre: Xinfu Hu
President and CEO
Servicios Interpuerto, S.A. de C.V.
Name: Mauricio Garza Kalifa
Its: Legal Representative
THE LESSEE
Mayenco, S. de R.L. de C.V.
Name: Moisés Chavez Alvarado
Its: Legal Representative
THE GUARANTOR
FULING PLASTIC USA, INC.
Name: Xinfu Hu
President and CEO
42
Exhibit 12.1
I, Xinfu Hu, certify that:
1. I have reviewed this annual report on Form 20-F of Fuling Global Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that
has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and
the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the company’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial
reporting.
Date: April 5, 2019
/s/ Xinfu Hu
By:
Name: Xinfu Hu
Title:
Chief Executive Officer
Exhibit 12.2
I, Gilbert Lee, certify that:
1. I have reviewed this annual report on Form 20-F of Fuling Global Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that
has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and
the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the company’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial
reporting.
Date: April 5, 2019
/s/ Gilbert Lee
By:
Name: Gilbert Lee
Title:
Chief Financial Officer
CERTIFICATION
Exhibit 13.1
In connection with the Annual Report of Fuling Global Inc. (the “Company”) on Form 20-F for the fiscal year ended December 31, 2018 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Xinfu Hu, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 5, 2019
/s/ Xinfu Hu
By:
Name: Xinfu Hu
Title:
Chief Executive Officer
CERTIFICATION
Exhibit 13.2
In connection with the Annual Report of Fuling Global Inc. (the “Company”) on Form 20-F for the fiscal year ended December 31, 2018 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Gilbert Lee, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 5, 2019
/s/ Gilbert Lee
By:
Name: Gilbert Lee
Title:
Chief Financial Officer
Fuling Global Inc. Reports Full Year 2018 Financial Results
Exhibit 99.1
ALLENTOWN, PA., Apr. 5, 2019 /PRNewswire/ -- Fuling Global Inc. (NASDAQ: FORK) (“Fuling Global” or the “Company”), a specialized producer and distributor of
plastic and paper serviceware, with precision manufacturing facilities in both the U.S., Mexico and China, today announced its financial results for the twelve months ended
December 31, 2018.
($ millions, except per share data)
Revenues
Gross profit
Gross margin
Operating income
Operating margin
Net income from continuing operations
Net loss from discontinued operations
Net income attributable to Fuling Global
Earnings per share
- from continuing operations
- from discontinued operations
For the Twelve Months Ended December 31,
2018
2017
$
$
$
$
$
$
$
$
$
$
138.66
29.75
$
21.5%
$
10.17
7.3%
9.85
$
(0.09) $
$
9.86
$
0.62
0.62
$
(0.01) $
124.21
26.13
21.0%
9.09
7.3%
8.27
(1.97)
6.28
0.40
0.52
(0.13)
% Change
11.6%
13.8%
0.5 percentage points
11.8%
0.0 percentage points
19.1%
-95.5%
57.1%
56.9%
19.0%
-95.5%
●
●
Total revenues increased by 11.6% to $138.66 million for the year of 2018 from $124.21 million for the prior year, driven by increased sales volume and blended
average selling price (“ASP”).
Total sales volume increased by 8.8% to 49.9 million kilograms for the year of 2018 from 45.9 million kilograms for the prior year. The increase in sales volume was
across all product categories. Blended ASP also increased by 2.6% to $2.78 per kilogram for the year of 2018 from $2.71 per kilogram for the prior year.
● Gross profit increased by 13.8% to $29.75 million for the year of 2018 from $26.13 million for the prior year. Gross margin increased by 0.5 percentage points to 21.5%
for the year of 2018 from 21.0% for the prior year. The increase in gross margin was primarily due to lower unit cost of raw materials and higher ASP, partially offset by
increased labor cost.
● Net income attributable to Fuling Global was $9.86 million, or $0.62 per basic and diluted share, for the year of 2018, compared to $6.28 million, or $0.40 per basic and
diluted share, for the prior year. Net income from continuing operations was $9.85 million, or $0.62 per share, for the year of 2018, compared to $8.27 million, or $0.52
per share, for the prior year.
Mr. Xinfu Hu, Chief Executive Officer of the Company, commented, “With sales volume and revenues growing by 8.8% and 11.6%, respectively, our 2018 results highlighted
continued strength in our business. Profitability also improved significantly with net income from continuing operations increasing by 19.1%, thanks to favorable pricing
environment (increase in blended ASP and decrease in unit cost of raw materials), stringent cost control that more than offset increase in labor cost and streamlined
manufacturing process.”
Ms. Guilan Jiang, Chairwoman of the Company, added, “As we are steadfast in executing our long-term strategic plan while pursuing lean manufacturing and stringent cost
control, we have exited 2018 on a strong footing and with increasing optimism. We look forward to extending our streak of shipment and top line growths in 2019 and beyond.”
Full Year 2018 Financial Results
Revenues
For the year of 2018, total revenues increased by $14.46 million, or 11.6%, to $138.66 million from $124.21 million for the prior year. The increase in total revenues was driven
by an 8.8% increase of sales volume and a 2.6% increase in blended ASP. Revenues from Zhejiang Great Plastics Technology Co., Ltd., our discontinued business, was $5.6
million and $3.0 million for the year of 2018 and 2017, respectively, and were included in net loss from discontinued operation.
Overall sales volume increased by 4.0 million kilograms, or 8.8%, to 49.9 million kilograms for the year of 2018 from 45.9 million kilograms for the prior year. The increase in
sales volume was across all product categories. Sales volume of cutlery increased by 0.9 million kilograms, or 3.0%, to 30.3 million kilograms for the year of 2018 from 29.4
million kilograms for the prior year. Sales volume of straws increased by 1.6 million kilograms, or 86.7%, to 3.5 million kilograms for the year of 2018 from 1.9 million
kilograms for the prior year. Sales volume of cups and plates increased by 1.1 million kilograms, or 10.7%, to 11.7 million kilograms for the year of 2018 from 10.6 million
kilograms for the prior year. Sales volume of other products increased by 0.4 million kilograms, or 9.7%, to 4.4 million kilograms for the year of 2018 from 4.0 million
kilograms for the prior year.
Blended ASP increased by $0.07 per kilogram, or 2.6%, to $2.78 per kilogram for the year of 2018 from $2.71 per kilogram for the prior year. The increase in blended ASP was
mainly related to cutlery, cups and plates and other products, and partially offset by decrease in ASP for straws. ASP of cutlery increased by $0.09 per kilogram, or 4.1%, to
$2.20 per kilogram for the year of 2018 from $2.11 per kilogram for the prior year. ASP of straws decreased by $3.23 per kilogram, or 32.2%, to $6.80 per kilogram for the year
of 2018 from $10.03 per kilogram for the prior year. ASP of cups and plates increased by $0.03 per kilogram, or 0.8%, to $3.19 per kilogram for the year of 2018 from $3.16
per kilogram for the prior year. ASP of other products increased by $0.04 per kilogram, or 1.7%, to $2.52 per kilogram for the year of 2018 from $2.47 per kilogram for the
prior year.
The increase in revenues was across all product categories. Revenues from cutlery sales increased by $4.46 million, or 7.2%, to $66.56 million for the year of 2018 from $62.10
million for the prior year. Revenues from straws sales increased by $4.94 million, or 26.5%, to $23.57 million for the year of 2018 from $18.63 million for the prior year.
Revenues from cups and plates sales increased by $3.90 million, or 11.6%, to $37.44 million for the year of 2018 from $33.54 million for the prior year. Revenues from other
products sales increased by $1.16 million, or 11.6%, to $11.09 million for the year of 2018 from $9.94 million for the prior year. Cutlery, straws, cups and plates, and other
products accounted for 48.0%, 17.0%, 27.0%, and 8.0% of total revenues for the year of 2018, compared to 50.0%, 15.0%, 27.0%, and 8.0% for the prior year, respectively.
Cutlery
Straws
Cups and plates
Others
Total
2018
For the Twelve Months Ended December 31,
2017
Y/Y Change
Revenues
($’000)
% of
Total
Revenues
($’000)
% of
Total
Amount
($’000)
%
$
$
66,559
23,573
37,439
11,093
138,664
48.0% $
17.0%
27.0%
8.0%
100.0% $
62,104
18,631
33,537
9,937
124,209
50.0% $
15.0%
27.0%
8.0%
100.0% $
4,455
4,942
3,902
1,156
14,455
7.2%
26.5%
11.6%
11.6%
11.6%
On a geographical basis, sales in the U.S., Fuling Global’s largest market, increased by $11.74 million, or 11.0%, to $118.31 million for the year of 2018 from $106.56 million
for the prior year. Sales in China increased by $0.55 million, or 7.0%, to $8.29 million for the year of 2018 from $7.74 million for the prior year. Sales in Europe increased by
$0.52 million, or 8.5%, to $6.62 million for the year of 2018 from $6.10 million for the prior year. Sales in other countries increased by $1.65 million, or 43.3%, to $5.45
million for the year of 2018 from $3.80 million for the prior year.
1
2018
For the Twelve Months Ended December 31,
2017
Y/Y Change
Revenues
($’000)
% of
Total
Revenues
($’000)
% of
Total
Amount
($’000)
%
$
$
118,308
6,622
8,286
5,448
138,664
85.3% $
4.8%
6.0%
3.9%
100.0% $
106,564
6,101
7,741
3,803
124,209
85.8% $
4.9%
6.2%
3.1%
100.0% $
11,744
521
545
1,645
14,455
11.0%
8.5%
7.0%
43.3%
11.6%
U.S.
Europe
China
Others
Total
Gross profit
Total cost of goods sold increased by $10.83 million, or 11.0%, to $108.91 million for the year of 2018 from $98.08 million for the prior year. The increase was primarily due to
increased sale volume as well as lower unit price of raw materials. Oil prices started to decrease from the middle of 2018 and decreased oil prices led to decreased unit price of
raw materials in 2018.
Gross profit increased by $3.62 million, or 13.8%, to $29.75 million for the year of 2018 from $26.13 million for the prior year. Gross margin was 21.5% the year of 2018,
compared to 21.0% for the prior year. The increase in gross margin was primarily attributable to decreased unit cost of raw materials and higher average selling price, partially
offset by increased labor cost in 2018. Gross margin for cutlery, straws, cups and plates and other products were 16.5%, 16.8%, 33.1%, and 25.4%, respectively, in the year of
2018, compared to 15.8%, 15.9%, 33.3%, and 26.6%, respectively, in the prior year.
Operating income
Selling expenses increased by $1.00 million, or 14.6%, to $7.83 million for the year of 2018 from $6.83 million for the prior year. As a percentage of sales, selling expenses
were 5.6% in the year of 2018, compared to 5.5% in the prior year. The increase in selling expenses was consistent with the increase in revenues. General and administrative
expenses increased by $1.07 million, or 14.7%, to $8.32 million for the year of 2018 from $7.25 million for the prior year. As a percentage of sales, general and administrative
expenses were 6.0% in the year of 2018, compared to 5.8% in the prior year. Research and development expenses increased by $0.48 million, or 16.2%, to $3.43 million for the
year of 2018 from $2.95 million for the prior year. As a percentage of sales, research and development expenses were 2.5% in the year of 2018, compared to 2.4% in the prior
year. We expect to increase our R&D expenditures proportionate to our revenue increase, as we continue to conduct research and development activities, especially seeking to
increase the use of environmentally-friendly materials, develop biodegradable materials and reduce reliance on fossil-based raw materials.
As a result, total operating expenses increased by $2.54 million, or 14.9%, to $19.58 million for the year of 2018 from $17.04 million for the prior year.
Operating income increased by $1.08 million, or 11.8%, to $10.17 million for the year of 2018 from $9.09 million for the prior year. Operating margin was 7.3% for the year of
2018, compared to 7.3% for the prior year. The operating margin was unchanged mainly because the increase in gross margin was partially offset by increase in operating
expenses as a percentage of sales.
2
Income before income taxes
Total net other income, which includes interest income and expenses, subsidy income and other non-operating income and expenses, was $0.81 million for the year of 2018,
compared to total net other expense of $0.04 million for the prior year. The difference was mainly due to increased subsidy income and other income and partially offset by
increased interest expense in the year of 2018.
Income before income taxes increased by $1.92 million, or 21.2%, to $10.97 million for the year of 2018 from $9.05 million for the prior year.
Provision for income taxes was $1.13 million for the year of 2018, compared to $0.79 million for the prior year.
Net income
Net income from continuing operations increased by $1.58 million, or 19.1%, to $9.85 million for the year of 2018 from $8.27 million for the prior year. Net loss from
discontinued operations was $0.09 million for the year of 2018, compared to $1.97 million for the prior year. As a result, net income increased by $3.47 million, or 55.1%, to
$9.76 million for the year of 2018 from $6.29 million for the prior year. After deduction of non-controlling interest, net income attributable to Fuling Global increased by $3.59
million, or 57.1%, to $9.86 million for the year of 2018 from $6.28 million for the prior year.
Basic and diluted earnings per share were $0.62 for the year of 2018, compared to $0.40 for the same period of last year. Basic and diluted earnings per share from continuing
operations were $0.62 for the year of 2018, compared to $0.52 for the prior year.
Financial Condition
As of December 31, 2018, the Company had cash and cash equivalents and restricted cash of $4.40 million and $2.40 million, respectively, compared to $4.10 million and
$3.77 million, respectively, at the end of 2017. Short-term borrowing and bank notes payable were $19.89 million and $2.89 million, respectively, as of December 31, 2018,
compared to $27.42 million and $4.44 million, respectively, at the end of 2017. Long-term borrowing was $7.20 million as of December 31, 2018, compared to $1.80 million at
the end of 2017.
Net cash provided by operating activities was $11.58 million for the year of 2018, compared to $2.47 million for the prior year. Net cash used in investing activities was $8.73
million for the year of 2018, compared to $14.35 million for the prior year. Net cash used in financing activities was $2.77 million for the year of 2018, compared to net cash
provided by financing activities of $13.84 million for the prior year.
About Fuling Global Inc.
Fuling Global Inc. (“Fuling Global”) is a specialized producer and distributor of plastic and paper serviceware, with precision manufacturing facilities in both the U.S., Mexico
and China. The Company’s plastic and paper serviceware products include disposable cutlery, drinking straws, cups, plates and other plastic products and are used by more than
one hundred customers primarily from the U.S. and Europe, including Subway, Wendy’s, Burger King, Taco Bell, KFC (China only), Walmart, and McKesson. More
information about the Company can be found at: http://ir.fulingglobal.com/.
Forward-Looking Statements
This press release contains information about Fuling Global’s view of its future expectations, plans and prospects that constitute forward-looking statements. Actual results
may differ materially from historical results or those indicated by these forward-looking statements as a result of a variety of factors including, but not limited to, risks and
uncertainties associated with its ability to raise additional funding, its ability to maintain and grow its business, variability of operating results, its ability to maintain and
enhance its brand, its development and introduction of new products and services, the successful integration of acquired companies, technologies and assets into its portfolio of
software and services, marketing and other business development initiatives, competition in the industry, general government regulation, economic conditions, dependence on
key personnel, the ability to attract, hire and retain personnel who possess the technical skills and experience necessary to meet the requirements of its clients, and its ability to
protect its intellectual property. Fuling Global encourages you to review other factors that may affect its future results in Fuling Global’s annual report and in its other filings
with the Securities and Exchange Commission.
For more information, please contact:
At the Company:
Gilbert Lee, CFO
Email: glee@fulingusa.com
Phone: +1-610-366-8070 x1835
Web: http://ir.fulingglobal.com/
Investor Relations:
Tony Tian, CFA
Weitian Group LLC
Email: ttian@weitianco.com
Phone: +1-732-910-9692
3
FULING GLOBAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets:
Cash and cash equivalents
Restricted cash
Certificates of deposit
Accounts receivable, net
Advances to supplier, net
Inventories, net
Security deposits for sale leaseback
Prepaid expenses and other current assets
Current assets from discontinued operation
Total Current Assets
Property, plant and equipment, net
Intangible assets, net
Prepayments for construction and equipment purchases
Security deposits for sale leaseback - long term
Other assets
Non-current assets from discontinued operations
Total Assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Short term borrowings
Bank notes payable
Advances from customers
Accounts payable
Accounts Payable-related party
Accrued and other liabilities
Other payable - sale leaseback
Taxes payable
Deferred gains
Due to Related party
Current liabilities from discontinued operation
Total Current Liabilities
Deferred tax liability
Long term payable - sale leaseback
Long term borrowings
Total Liabilities
Commitments and contingencies
Shareholders’ Equity
Common stock: $0.001 par value, 70,000,000 shares authorized, 15,795,910 and 15,780,205 shares issued and outstanding as of
December 31, 2018 and December 31, 2017, respectively
Additional paid in capital
Statutory reserve
Retained earnings
Accumulated other comprehensive income
Total Fuling Global Inc.’s equity
Non-controlling interest
Total Shareholders’ Equity
December 31,
December 31,
2018
2017
$
$
$
4,400,402 $
2,396,993
-
27,760,956
1,255,420
22,274,613
-
1,394,234
37,761
59,520,379
51,836,633
8,157,916
1,222,888
1,590,671
297,906
13,697
122,640,090 $
4,103,797
3,767,081
105,707
22,935,245
509,770
19,320,066
771,814
2,185,961
3,313,681
57,013,122
43,680,372
8,797,581
527,568
543,996
282,195
5,884,799
116,729,633
19,890,641 $
2,888,053
393,749
18,186,400
82,014
2,121,304
2,847,859
247,635
291,170
12,200
528,263
47,489,288
577,826
2,635,567
7,203,357
57,906,038
27,417,082
4,436,680
543,675
12,797,853
-
2,794,584
2,755,931
262,828
87,605
-
4,466,481
55,562,719
-
1,371,359
1,801,887
58,735,965
15,797
30,009,545
5,532,945
31,602,434
(2,472,254)
64,688,467
15,781
29,904,285
4,617,039
22,654,848
651,597
57,843,550
45,585
64,734,052
150,118
57,993,668
Total Liabilities and Shareholders’ Equity
$
122,640,090 $
116,729,633
4
FULING GLOBAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Revenues
Cost of goods sold
Gross Profit
Operating Expenses
Selling expenses
General and administrative expenses
Research and development expenses
Total operating expenses
Income from Operations
Other Income (Expense):
Interest income
Interest expense
Subsidy income
Investment loss
Foreign currency transaction gain (loss)
Other income, net
Total other income (expense), net
Income Before Income Taxes
Provision for Income Taxes
Net income from continuing operations
Discontinued operation:
Net loss from discontinued operations, net of tax
Net income
For the Years Ended December 31,
2017
2016
2018
$
$
138,664,272
108,914,256
29,750,016
124,208,506 $
98,077,100
26,131,406
102,320,689
77,129,454
25,191,235
7,830,280
8,323,207
3,430,529
19,584,016
6,834,645
7,254,270
2,953,477
17,042,392
5,955,391
6,277,018
2,355,449
14,587,858
10,166,000
9,089,014
10,603,377
32,810
(1,768,434)
1,705,956
(8,667)
780,406
65,926
807,997
57,477
(981,061)
1,012,128
-
(175,271)
51,607
(35,120)
27,870
(589,758)
1,646,774
-
56,970
65,260
1,207,116
10,973,997
9,053,894
11,810,493
1,126,736
788,370
1,561,404
$
9,847,261
$
8,265,524 $
10,249,089
(88,302)
9,758,959
(1,974,852)
6,290,672
(2,306,036)
7,943,053
Less: net income (loss) attributable to non-controlling interest from continuing operations
(104,533)
12,875
20
Net income attributable to Fuling Global Inc.
$
9,863,492
$
6,277,797 $
7,943,033
Other Comprehensive Income
Foreign currency translation income (loss)
Comprehensive income attributable to Fuling Global Inc.
Earnings per share - Basic and diluted
Continuing operations
Discontinued operations
Weighted average number of shares - Basic and diluted
Continuing operations and discontinued operations
(3,123,851)
$
6,739,641
2,172,347
8,450,144 $
(1,913,200)
6,029,833
0.62
$
(0.01) $
0.52 $
(0.13) $
0.65
(0.15)
$
$
$
15,782,055
15,759,293
15,735,588
5
FULING GLOBAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Net (loss) from discontinued operations
Net income from continuing operations
Adjustments to reconcile net income to net cash provided by operating activities:
Stock based compensation
Deferred tax expense
Depreciation and amortization
Bad debt provisions (recovery)
Unrealized (gains) losses
Inventory reserve
(Gain) loss on disposal of fixed assets
Changes in operating assets:
Accounts receivable
Advances to suppliers
Inventories
Other assets
Security deposit for sale leaseback
Changes in operating liabilities:
Accounts payable
Accounts Payable-related party
Advance from customers
Deferred gains
Deferred tax liability
Taxes payable
Accrued and other liabilities
Net cash provided by operating activities from continuing operations
Net cash provided by operating activities from discontinuing operations
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment
Additions to construction in progress
Cash receipts from disposal property and equipment
Cash increase in certificates of deposit
Payments of construction and equipment purchase
Repayments of deposit and prepayments for construction and equipment purchase
Purchase of intangible assets
Cash from discontinued business
Net cash (used in) investing activities from continuing operations
Net cash provided by (used in) investing activities from discontinuing operations
Net cash (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings
Repayments of short-term borrowings
Proceeds from long-term borrowings
Proceeds from bank notes payable
Repayments of bank notes payable
Repayment of third party borrowing
Proceeds from loans from related parties
Repayments of loans from related parties
Proceeds from other payable - sales lease back
Repayments of other payable - sales lease back
Net cash provided by (used in) financing activities from continuing operations
Net cash (used in) financing activities from discontinuing operations
Net cash provided by (used in) financing activities
For the Years Ended December 31,
2017
2016
2018
$
9,758,959
$
(88,302)
9,847,261
6,290,672 $
(1,974,852)
8,265,524
7,943,053
(2,306,036)
10,249,089
105,276
-
4,406,888
(3,372)
(4,849)
38,716
(30,981)
-
(5,547,070)
(733,643)
(3,805,026)
704,459
(359,340)
-
5,195,799
85,253
(301,971)
216,506
600,646
(40,248)
(566,821)
9,807,483
1,770,101
11,577,584
(4,171,367)
(9,878,241)
272,055
103,967
(752,299)
-
(6,589)
(18,684)
(14,451,158)
5,719,074
(8,732,084)
33,213,599
(39,629,404)
5,631,163
5,947,885
(7,309,428)
-
-
(24,930)
5,784,874
(4,144,246)
(530,487)
(2,241,606)
58,867
-
3,611,510
154,051
34,417
22,818
43,172
-
(2,414,707)
(40,504)
(3,408,394)
(1,969,564)
(523,839)
-
(2,285,276)
-
(43,339)
(583,978)
-
(258,589)
1,270,299
1,932,468
542,170
2,474,638
(6,388,069)
(10,231,413)
13,352
1,479,874
(480,689)
1,358,566
(2,602)
64,208
(14,186,773)
(159,086)
(14,345,859)
31,239,350
(20,342,692)
1,048,749
7,002,823
(4,871,021)
-
-
(57,148)
2,906,977
(2,638,787)
14,288,251
(450,272)
123,339
319,252
2,354,193
(1,645)
(60,225)
23,932
(12,687)
-
(6,742,328)
(251,704)
(3,262,302)
(5,159,033)
(755,934)
-
5,525,688
-
34,729
679,774
-
(558,864)
1,446,220
3,951,494
1,193,663
5,145,157
(3,838,709)
(12,679,337)
19,296
1,505,061
(1,996,510)
1,354,585
(8,298,564)
435,085
(23,499,093)
(149,403)
(23,648,496)
23,677,701
(18,538,408)
836,471
5,255,076
(5,431,761)
(180,611)
55,484
-
3,941,746
(172,154)
9,443,544
(1,463,718)
(2,772,093)
13,837,979
7,979,826
EFFECT OF EXCHANGE RATES CHANGES ON CASH AND CASH EQUIVALENTS
(1,146,890)
(356,466)
(400,727)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
(1,073,483)
1,610,292
(10,924,240)
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR
7,870,878
6,260,586
17,184,826
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR
LESS: RESTRICTED CASH
CASH AND CASH EQUIVALENTS, END OF YEAR
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
$
$
$
6,797,395
$
7,870,878 $
6,260,586
6,797,395
2,396,993
4,400,402
$
$
7,870,878 $
3,767,081
4,103,797 $
6,260,586
2,333,608
3,926,978
Cash paid during the year for:
Interest paid
Income tax paid
Non-cash investing activities:
Transfer from construction in progress to fixed assets
Transfer from accounts payable to fixed assets
Transfer from advance payments to fixed assets
$
$
$
$
$
1,329,377
331,997
$
$
836,401 $
1,433,998 $
762,868
2,331,173
9,918,862
851,966
170,281
$
$
$
15,545,784 $
1,162,202 $
191,868 $
1,209,221
-
296,853
6