Item 5. Operating and Financial Review
and Prospects
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion
and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements included
in this Annual Report beginning on page F-1. The consolidated financial statements have been prepared in accordance with U.S. GAAP.
The following discussion and analysis contain forward-looking statements that involve risks and uncertainties.
Overview
We
develop, manufacture and distribute high quality plastic film using the biaxially oriented stretch technique, otherwise known as
BOPET film. Since the establishment of the Company, a substantial portion of our revenues has been derived from the sales
of BOPET film. We sell majority of our BOPET film products to domestic customers in China with minority of them sold to Europe,
Asia, North America and other overseas markets.
Our Corporate Structure and Operating History
The diagram below illustrates our corporate structure:
Shandong
Fuwei, our PRC operating subsidiary, was formed on January 28, 2003, as a Sino-foreign equity joint venture under the name Weifang
Fuwei Plastic Co., Ltd. In July 2003, this company began production of BOPET film, initially renting the necessary fixed assets
from Shandong Neo-Luck, a company involved in BOPET film production in which Mr. Xiaoming Wang, our former executive officer,
served as executive officer at the time.
Shandong Fuwei subsequently acquired these
fixed assets through two auction proceedings, the first in October of 2003 and the second in December 2004. At the first auction
proceeding in October 2003, Shandong Fuwei acquired assets related to the Brückner production line that it had been renting
from Shandong Neo-Luck. This line had been previously mortgaged by Shandong Neo-Luck to Bank of China, Weifang city branch as security
for several loans extended to Shandong Neo-Luck’s affiliates. When these loans went into default, Bank of China brought a
series of legal actions in Weifang Municipal People’s Court that resulted in the assets securing the loans being sold at
a public auction. Following its successful bid at an auction on October 9, 2003, Shandong Fuwei acquired the Brückner production
line and facilities (with an appraised value of approximately RMB169 million) for RMB156 million.
In November 2003, Shandong Fuwei’s
shares were sold to Shenghong Group Co., Ltd. (“Shenghong Group”) and Shandong Baorui for an aggregate consideration
of RMB98.2 million. Tongju Zhou, a former director of the Company, and Duo Wang each indirectly own 50% of Easebright Investments
Limited (“Easebright”), one of our principal shareholders, and are both officers and directors of Shandong Baorui.
Jun Yin and Duo Wang own 17.5% and 4.6%, respectively, of Shandong Baorui. In 2004, Messrs. Zhou and Wang, along with Jun Yin established
several offshore holding companies in the British Virgin Islands and the Cayman Islands to acquire and hold these shares. In October
2004, Fuwei (BVI) entered into a sale and purchase agreement with Shenghong Group and Shandong Baorui pursuant to which Fuwei (BVI)
acquired the respective equity interest of Shenghong Group and Shandong Baorui in Shandong Fuwei for an aggregate consideration
of RMB91 million. Shandong Fuwei thereafter became a wholly-owned subsidiary of Fuwei (BVI) and was converted into a wholly-foreign
owned enterprise pursuant to PRC law.
As a result of its ongoing financial difficulties,
Shandong Neo-Luck was declared bankrupt by the Weifang Municipal People’s Court in the PRC on September 24, 2004. Prior to
the bankruptcy, Shandong Neo-Luck’s then major operating asset, the DMT production line, had been pledged by Shandong Neo-Luck
to Weifang City Commercial Bank. When Shandong Neo-Luck was declared bankrupt, the Shandong Branch of Bank of China seized the
production line by order of the Qingdao Intermediate People’s Court and the Qingdao Southern District People’s Court
while the Weifang Branch of Bank of Communications did so through Weifang Intermediate People’s Court. As such, the effectiveness
of the pledge in favor of Weifang City Commercial Bank was under dispute. Subsequently, pursuant to the decision from Weifang Intermediate
People’s Court, Weifang City Commercial Bank ranked senior in terms of the right of claims.
The pledged DMT production line was put
up for public auction by the Shandong Neo-Luck Liquidation committee on October 22, 2004. In view of the above complexities, the
auction was deemed to be tremendously risky at that time, and therefore, our PRC operating subsidiary did not directly participate
in the first auction, which began with a bid price of approximately RMB53 million by reference to an independent valuation performed
on a forced sale basis. However, due to the potential tremendous risk involved, the auction had been withdrawn twice and the starting
bid price had been further reduced to approximately RMB34 million and was finally purchased by Beijing Baorui, a company indirectly
controlled by Shandong Baorui. When the DMT production line was put for public auction by Beijing Baorui three months later, our
PRC operating subsidiary purchased it for approximately RMB119 million, which was supported by an independent valuation performed
on a going concern basis. We understood that acquiring the DMT production line from Beijing Baorui through the first auction would
be an effective way to minimize the risk associated with the uncertainties arising from the bankruptcy of Shandong Neo-Luck. The
price difference of approximately RMB85 million represented a risk premium paid to Beijing Baorui, which bore the ultimate risks
of recourse from creditors of Shandong Neo-Luck.
Subsequent
to the auction for several years, the PRC government conducted an investigation into the conduct of certain individuals in connection
with such transactions. In March 2009, Messrs. Yin, Wang and Zhou committed the crime of corruption by verdict of the Jinan
Intermediate People’s Court in the city of Jinan, Shandong Province. In November 2009, the Company became aware of the final
verdict issued by the Supreme People's Court of Shandong Province. The Supreme People’s Court upheld the initial verdict
issued by the Intermediate court in March 2009. The March 2009 initial verdict sentenced Mr. Yin to death, with a stay of execution
for two years, and the other two defendants, Mr. Zhou and Mr. Wang, each received life imprisonment. All of the personal property
of the three individuals will be confiscated.
At
the time of the our initial public offering, we had obtained an opinion of PRC counsel with respect to the validity of the auction
proceedings under PRC law, although you should read the description of the opinion and the subsequent development in March 2009
described under the title “Risk Factors — The circumstances under which we acquired ownership of our main productive
assets may jeopardize our ability to continue as an operating business”. Certain of the assumptions relied upon
in providing that opinion have been called into question by the verdict referred to above.
On May 9, 2011, we received a notification
from the Weifang State-owned Assets Operation Administration Company, a wholly-owned subsidiary of Weifang State-owned Asset Management
and Supervision Committee (the “Administration Company”) regarding the transfer of the ownership of controlling shareholders.
According to the notification, our former
controlling shareholders, Messrs. Jun Yin, Duo Wang and Tong Ju Zhou, had transferred their entire ownership in several intermediate
holding companies to the Administration Company, Ms. Qing Liu and Mr. Zhixin Han. As a result of the transfers, and based on the
information provided by the Administration Company, 52.90% of its outstanding ordinary shares are controlled indirectly by the
Administration Company and 12.55% of its outstanding ordinary shares are jointly controlled indirectly by Ms. Liu and Mr. Han.
We received a second notification dated
May 17, 2011 (the “Second Notification”) from the Administration Company regarding the transfer of ownership of Fuwei
stock previously controlled by our major shareholders.
As
discussed in the Second Notification, Ms. Qing Liu and Mr. Zhixin Han transferred their entire ownership in the intermediate holding
company, Easebright Investments Limited, to the Administration Company. As a result of the transfer, and based on the information
provided by the Administration Company, 65.45% of its outstanding ordinary shares were controlled indirectly by the Administration
Company and the sole director of each of the intermediate holding companies, Mr. Zheng Min.
On
August 14, 2013, we received the first notice from our controlling shareholder, the Weifang State-owned Assets Operation
Administration Company, a wholly-owned subsidiary of Weifang State-owned Asset Management and Supervision Committee (collectively,
the “Administration Company”) indicating that the Administration Company had determined to place control over 6,912,503
(or 52.9%) of its outstanding ordinary shares up for sale at a public auction to be held in China. Four public auctions were held
in Jinan, Shandong Province, China. We learned that they failed due to a lack of bidders registered for the auction. On March 25,
2014, the fifth public auction was held in Jinan, Shandong Province, China and we became aware that the fifth public auction has
resulted in the acceptance of a successful bid. Shandong SNTON Optical Materials Technology Co., Ltd. (“Shandong SNTON”),
the successful bidder in the fifth public auction of 6,912,503 (or 52.9%) of the Company’s outstanding ordinary shares (the
“Shares”) held on March 25, 2014, was entrusted by Hongkong Ruishang International Trade Co., Ltd., a Hong Kong corporation,
(“Hongkong Ruishang”) to handle all the formalities and procedure in connection with the public auction. As a result
of the entrusted arrangement, Hongkong Ruishang is the party controlling the Shares acquired in the fifth public auction. According
to publicly available information in the People’s Republic of China, Shandong SNTON is a wholly owned subsidiary of Shandong
SNTON Group Co., Ltd (“SNTON Group”). Mr. Xiusheng Wang, the chairman of the Board of Directors of SNTON Group, is
also Hongkong Ruishang’s chairman. This disclosure is based solely on information contained in a Schedule 13D amendment filed
by Hongkong Ruishang with the SEC on November 12, 2014.
On
May 14, 2014, we announced that we received a notification from Shandong Fuhua Investment Company Limited. (“Shandong Fuhua”)
with respect to an entire ownership transfer of our 12.55% outstanding ordinary shares from the Administration Company to Shandong
Fuhua. The Administration Company originally held these shares indirectly through an intermediate holding company, Easebright Investments
Limited (“Easebright”). As a result of this transfer, Shandong Fuhua indirectly owns 12.55% of the outstanding ordinary
shares of the Company through Easebright. Mr. Jingang Yang was appointed as the director of Easebright. This disclosure
is based solely on information contained in a Schedule 13D filed by Shandong Fuhua with the SEC on December 30, 2014. Fuwei was
informed by Easebright that Mr. Qingxin Dong has been the director since 2018.
On
December 5, 2016, we held an extraordinary general meeting of shareholders pursuant to which a 1-for-4 reverse stock split
of our authorized ordinary shares, accompanied by a corresponding decrease in our issued and outstanding ordinary shares and an
increase of the par value of each ordinary share from $0.129752 to US$0.519008 (the “Reverse Stock Split”), was approved
by our shareholders of record. Our ordinary shares began to trade on the NASDAQ Stock Market on the post-Reverse Stock Split basis
under the symbol “FFHL” at the open of business on December 6, 2016.
On January 28, 2019, We entered into a
Securities Purchase Agreement (the “Purchase Agreement”) with Gold Glory Blockchain Inc. ("Gold Glory"),
a California-headquartered company focused on blockchain technology applications and digital asset services. The Purchase Agreement
will result in the issuance by us of 9,500,000 new ordinary shares in exchange for all outstanding shares of Gold Glory. We concurrently
entered into a Share Transfer Agreement (the “Transfer Agreement”) with Hong Kong Ruishang International Trade Co.
Ltd. ("Ruishang"), the current majority owner of our equity shares. Pursuant to the Transfer Agreement, we agreed to
sell, assign and deliver all shares of Fuwei Films (BVI) Co. Ltd. ("Fuwei BVI"), a subsidiary directly owned by us, plus
cash consideration of USD3 million to Ruishang, in exchange for all 1,728,126 ordinary shares of the Company owned by Ruishang,
representing 52.9% of our outstanding shares. This transaction will effectively transfer our existing business to Ruishang, after
which we will only own the shares of Gold Glory.
The closing of the transaction is subject
to the following conditions, (i) concurrent divesture of our current business, which is to be effected through sale of Fuwei BVI
to Ruishang, pursuant to the Transfer Agreement (ii) approval of the transactions contemplated by the Purchase Agreement and the
Transfer Agreement by our Board of Directors and shareholders; (iii) receipt of necessary regulatory approvals, including NASDAQ
approval, and (iv) a private placement of ordinary shares by Gold Glory raising at least USD10 million.
We
were previously informed that Gold Glory needs additional time to complete its audit. No formal amendment reflecting an extension
has been entered into by the parties. We are still waiting for the completion of Gold Glory’s audit and will provide further
updates when available.
Our
ordinary shares began to trade on the NASDAQ Stock Market on the post-Reverse Stock Split basis under the symbol “FFHL”
at the open of business on December 6, 2016. The new CUSIP number for our ordinary shares post-Reverse Stock Split is G3704F
110. We would round up to the next full share of our ordinary shares any fractional shares that result from the Reverse Stock Split.
Key Factors Affecting Our Results of Operation
The following are key factors that affect our financial condition
and results of operations and we believe them to be important to the understanding of our business:
Raw Material Prices
For
the years ended 2019, 2018 and 2017, the total cost of raw materials made up approximately 74.3%, 72.6%, and 69.7% of production
cost, respectively. The primary raw materials used in our production of BOPET film are polyethylene terephthalate (or PET) resin
and additives, which made up approximately 77.1% and 22.9%, respectively, of our total cost of raw materials in 2019. PET resin
trades as a commodity and its market price is influenced significantly by global energy prices, including the price of crude oil.
In addition, PET resin is mainly used in textile industry and accordingly the demand from that industry will also affect the price
of PET resin.
Although
we try to pass on all increases in our raw material costs to our customers, we can only pass on a portion of the increase
to our customers due to the increased supply than demand in the market. We obtain a significant amount of the PET resin used at
our facilities from two suppliers, who have agreed to supply us fixed quantities of PET resin monthly at the prevailing market
price. We have not engaged in any hedging transactions to limit our exposure to fluctuations in the market prices of these raw
materials or their components.
Prices of Our Products
Our
BOPET film products generally fall into two categories: commodity products and specialty products. The price of commodity products,
such as printing films, stamping and transfer films and metallized films, is typically driven by supply and demand conditions
in the market. We have more control over pricing for our specialty products, such as dry films.
As selling prices are generally higher
for those types of BOPET film products which require higher technical expertise, our revenue will be affected, to certain extent,
by our product mix. Our product mix is dependent on, among other things, our production facilities, R&D abilities and new product
commercialization.
Demand for Our Products
We have been able to expand our product
range and markets by introducing new products required by customers. We believe that our technical expertise is important in introducing
products that are in demand.
Our
BOPET film products are mostly sold to customers in the flexible packaging industry for consumer products such as food, pharmaceutical
products, cosmetics, tobacco, alcohol and beverage. Recently, the sales of the light-resistant dry film which is used in printed
circuit board also significantly increased. In the fiscal years ended December 31, 2019, 2018 and 2017, approximately 85.8%,
86.4% and 80.9%, respectively, of our total revenue was derived from the PRC. The demand for our products is therefore, to a large
extent, affected by the general economic conditions in the PRC. A significant improvement in the economic environment in the PRC
will likely improve consumer spending and increase the demand for our products. However, the economic downturn of the PRC market
will impact our customers’ demand and will decrease the demand for our products.
Production Capacity and Utilization Rates
Our
sales volume is limited by our operational annual production capacity and this depends largely on supply and demand in the
market. The third production line has not been able to continue its production since April 2015 due to lack of purchase orders
which is the result of greater supply than demand in the market.
As we grow our business in the future,
our ability to fulfill more and larger orders will be dependent on our ability to increase our production capacity. As our business
is capital-intensive, our ability to expand our production capacity will depend on, inter alia, the availability of capital
to meet our needs of expansion or upgrading of production lines.
Competition
We
believe that we are currently one of the few producers of BOPET films in the PRC with research and development capability.
Our past financial performance is attributable to our market position in the industry. Over time, there may be new investors into
our industry, and the current BOPET film manufacturers may expand their production capacity. We believe that currently our major
competitors in the BOPET manufacturing market in the PRC include Dupont Hongji Films Foshan Co., Ltd., Yihua Toray Polyester Film
Co., Ltd., and Shandong Fenghua Plastic Technology Co., Ltd.
Our ability to enhance existing products,
introduce new products to meet customers’ demand, deliver quality products to our customers and maintain our established
industry reputation will affect our competitiveness and market position.
Our ability to compete against new and
existing competitors to maintain or improve our market position and secure orders will affect our revenue and financial performance.
Description of Certain Statements of Income Line Items
Revenues
Revenue
from the sale of our domestic BOPET film products is recognized when significant risks and rewards of ownership have been transferred
to the buyer. No revenue is recognized if there are significant uncertainties regarding recovery of the consideration due, associated
costs or the possible return of goods, or when the amount of revenue and costs incurred or to be incurred in respect of the transaction
cannot be measured reliably. In respect of our overseas sales, we ship directly to the destinations of our overseas customers and
our revenue is recognized at the time when we receive customs clearance of our exports. Most of our overseas sales are conducted
on a Cost, Insurance and Freight (or “CIF”) basis, meaning that we pay the costs and freight necessary to get the products
to the port of destination, and the risk of loss is transferred from us to the buyer when the goods pass the ship’s rail
at the port of destination. In addition, we have to procure marine insurance against the buyer’s risk of loss of damage to
the goods during the carriage. Most of our sales invoices are denominated in the Chinese Yuan (Renminbi), although certain
of our overseas sales are denominated in US dollars.
Cost of Goods Sold
Our
cost of goods sold comprises mainly of materials costs, energy expenses, factory overheads, packaging materials and direct
labor. The breakdown of our cost of goods sold in percentage is as follows:
|
|
Year
Ended December
31, 2019
|
|
|
Year Ended December
31, 2018
|
|
|
Year Ended December
31, 2017
|
|
Materials costs
|
|
|
74.3
|
%
|
|
|
72.6
|
%
|
|
|
69.7
|
%
|
Energy expense
|
|
|
8.9
|
%
|
|
|
8.5
|
%
|
|
|
11.0
|
%
|
Factory overhead
|
|
|
9.4
|
%
|
|
|
9.8
|
%
|
|
|
10.2
|
%
|
Packaging materials
|
|
|
4.0
|
%
|
|
|
4.6
|
%
|
|
|
4.5
|
%
|
Direct labor
|
|
|
3.4
|
%
|
|
|
4.5
|
%
|
|
|
4.6
|
%
|
Material Costs
As
noted above, the raw materials used in our BOPET film production are PET resin and additives, which made up approximately 77.1%
and 22.9%, respectively of our total materials costs in 2019.
Energy expense
Energy
expense includes electricity, gas and water costs, in which electricity is the main energy consumed.
Factory Overhead
Factory
overhead comprises primarily of depreciation, electricity and water charges, and repair and maintenance of our machinery and equipment,
etc. In 2019, the depreciation expense and repair and maintenance expenditure accounted for 67.7% and 18.6% of factory overhead,
respectively.
Packaging Materials
Our
packaging materials mainly comprise of, among other things, packaging pallets and carton cores, used for the packaging of
our BOPET film products for delivery to customers. Generally, our unit cost of packaging materials does not fluctuate significantly
and our total costs for packaging materials typically vary in line with our sales volume.
Direct Labor
Direct
labor cost includes salaries, wages, bonuses and other payments to our employees in the PRC who are involved in the production
of our products. The main factors affecting our direct labor cost are CPI, the changes of any government policies or laws
and the demand and supply of skilled labor.
Operating Expenses
Our operating expenses comprise of administrative expenses,
distribution expenses and other operating expense.
Our
administrative expenses comprise mainly of administrative staff salaries and related welfare costs, research and development expenses,
depreciation charges of office equipment, furniture and fixtures, amortization charges relating to land use rights, allowance for
doubtful trade receivables, professional fees, government duties and fees, insurance expenses, rental expenses, travel expenses,
entertainment expenses, office expenses and miscellaneous expenses.
Our
distribution expenses comprise mainly of freight costs, travel expenses, marketing and promotion expenses as well as salaries
and commission paid to our sales and marketing personnel.
Other operating expenses comprise mainly
of loss on disposal of property, plant and equipment and miscellaneous expenses.
Finance Costs
Finance
costs comprise mainly of interest expense relating to our loans, capital lease obligations, exchange deficit and bank charge.
Income Tax Expense
For the period from January 28, 2003 to
December 31, 2004, Shandong Fuwei was granted certain tax relief under which it was exempted from PRC income tax. As of January
2005, Shandong Fuwei has been a wholly foreign-owned enterprise under the laws of the PRC. Accordingly, Shandong Fuwei is entitled
to tax concessions whereby the profit for the first two financial years beginning with the first profit-making year (after setting
off tax losses carried forward from prior years) is exempt from income tax in the PRC and the profit for each of the subsequent
three financial years is taxed at 50% of the prevailing tax rates set by the relevant tax authorities.
On
March 16, 2007, the National People’s Congress of the PRC passed the Enterprise Income Tax Law of the People’s Republic
of China, which law took effect on January 1, 2008 (the “New Tax Law”). Under the New Tax Law, domestic enterprises
and foreign-invested enterprises generally became subject to a unified enterprise income tax rate of 25%, except that enterprises
incorporated prior to March 16, 2007 may continue to enjoy existing preferential tax treatments until January 1, 2013. In addition,
certain qualifying “High Technology Enterprises” may still benefit from a preferential tax rate of 15% under the New
Tax Law if they meet the definition of “Government Advocated High Technology Enterprise” to be set forth in the more
detailed implementing rules when they become adopted. Shandong Fuwei was designated as a High-and-New Tech Enterprise in December
2008 and will retain its status as a high-tech enterprise for three years commencing from 2011 enjoying a favorable corporate tax
rate of 15% during the term from January 1, 2011 to December 31, 2013 pursuant to Enterprise Income Tax Law. In December 2014,
Shandong Fuwei failed to be designated as a High Technology Enterprise and it became subject to a standard enterprise income tax
at a rate of 25% in 2014 and 2015. In 2016, Shandong Fuwei was designated as a High-and-New Tech Enterprise and as a result, it
is entitled to preferential tax treatment at an EIT rate of 15% for the years ended December 31, 2016, 2017 and 2018. In 2019,
Shandong Fuwei was designated as a High-and-New Tech Enterprise and as a result, it is entitled to preferential tax treatment at
an EIT rate of 15% for the years ended December 31, 2019, 2020 and 2021.
Inflation
According to the National Bureau of Statistics
of China, the change in the consumer price index in China was 2.9%, 2.1% and 1.6% in 2019, 2018 and 2017, respectively.
Critical Accounting Policies
The SEC defines critical accounting policies
as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and
those that require significant judgments and estimates. We prepare our financial statements in accordance with the U.S. GAAP, which
requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities, to disclose contingent
assets and liabilities on the date of the financial statements, and to disclose the reported amounts of revenues and expenses incurred
during the financial reporting period. We continue to 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.
We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual
results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their
application. We consider the policies discussed below to be critical to an understanding of our financial statements as their application
assists management in making their business decisions.
Goodwill
Impairment Goodwill represents the excess of purchase price and related costs over the value assigned to the net
tangible and identifiable intangible assets of businesses acquired. Goodwill is not amortized but is tested for impairment
annually, or when circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting
unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds the fair
value of the reporting unit, with the fair value of the reporting unit determined using a discounted cash flow (DCF) analysis.
A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash
flows, including the discount rate, the internal rate of return, and projections of realizations and costs to produce. Management
considers historical experience and all available information at the time the fair values of its reporting units are estimated.
Collectability
of Accounts Receivable Our management has a credit policy in place and the exposure to credit risk is monitored on an ongoing
basis. Credit evaluations are performed on all customers requiring credit over a certain amount. Generally, we offer our customers
in the PRC credit terms of up to 30-45 days. Our international sales are settled through telegraphic transfer and letters of credit,
which generally have payment terms of between 30 and 60 days.
We
offer different credit terms to our customers based on criteria such as working relationship, payment history, creditworthiness
and their financial position. All credit terms are to be approved by our finance department, in consultation with our sales and
marketing department. For extension of larger credit limits, approvals have to be sought from our credit committee which is made
up of members from our finance department, sales department and CFO. Our finance department and sales department review our outstanding
debt account on a monthly basis and follow up with customers when payments are due. We do not impose interest charges on overdue
account receivable.
As of December 31, 2019, our largest trade
debtor was Hunan Hori New Materials Co., Ltd., a company based in China. The balance of trade receivables from Hunan Hori New Materials
Co., Ltd. was RMB2.7 million.
We make specific allowance for doubtful
trade receivables when our management takes the view (taking into account the aging of trade receivables and in consultation with
our sales department) that we will not be able to collect the amounts due. Our customers pay by installments, creating long accounts
receivable cycles. We provide for an allowance for doubtful accounts based on our best estimate of the amount of losses that could
result from the inability or intention of our existing customers not to make the required payments. We generally review the allowance
by taking into account factors such as historical experience, age of the accounts receivable balances and economic conditions.
Specific write-off of trade receivables
is made when the outstanding trade receivables have been due for more than two years.
The
analysis of the allowance for doubtful amounts for 2019, 2018 and 2017 is as follows (in thousands):
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
RMB
|
|
Balance at beginning of year
|
|
|
1,847
|
|
|
|
265
|
|
|
|
2,467
|
|
|
|
3,213
|
|
Bad debt expense (recovery)
|
|
|
(1,014
|
)
|
|
|
(145
|
)
|
|
|
(620
|
)
|
|
|
(746
|
)
|
Write-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
833
|
|
|
|
120
|
|
|
|
1,847
|
|
|
|
2,467
|
|
Impairment
of Long-lived Assets
The
Company recognizes an impairment loss when circumstances indicate that the carrying value of long-lived assets with finite lives
may not be recoverable. Management’s policy in determining whether an impairment indicator exists, a triggering event, comprises
measurable operating performance criteria at an asset group level as well as qualitative measures. If an analysis is necessitated
by the occurrence of a triggering event, the Company uses assumptions, which are predominately identified from the Company’s
strategic long-range plans, in determining the impairment amount. In the calculation of the fair value of long-lived assets, the
Company compares the carrying amount of the asset group with the estimated future cash flows expected to result from the use of
the assets. If the carrying amount of the asset group exceeds the estimated expected undiscounted future cash flows, the Company
measures the amount of the impairment by comparing the carrying amount of the asset group with their estimated fair value. We estimate
the fair value of assets based on market prices (i.e., the amount for which the asset could be bought by or sold to a third party),
when available. When market prices are not available, we estimate the fair value of the asset group using discounted expected future
cash flows at the Company’s weighted-average cost of capital. Management believes its policy is reasonable and is consistently
applied. Future expected cash flows are based upon estimates that, if not achieved, may result in significantly different results.
Considering the indivisibility of land and plant and the commonality of equipment, staff and technology, we take fixed assets
and intangible assets as the group of assets.
Results of Operations
The following discussion of our results
of operations is based upon our audited consolidated financial statements beginning on page F-1 of this Annual Report.
The table below sets forth certain line items from our Statement
of Income as a percentage of revenues:
|
|
For the year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(% of Total Revenue)
|
|
Gross profit
|
|
|
24.9
|
|
|
|
16.4
|
|
|
|
9.3
|
|
Operating expenses
|
|
|
18.0
|
|
|
|
19.8
|
|
|
|
21.0
|
|
Other expense
|
|
|
(2.8
|
)
|
|
|
(2.2
|
)
|
|
|
(3.9
|
)
|
Income tax benefit (loss)
|
|
|
(0.7
|
)
|
|
|
(1.1
|
)
|
|
|
(0.3
|
)
|
Net income (loss)
|
|
|
3.4
|
|
|
|
(6.6
|
)
|
|
|
(15.8
|
)
|
Fiscal
year ended 2019 compared to fiscal year ended 2018
Revenues
Our revenue can be analyzed as follows (in thousands):
|
|
For the year ended December 31,
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
RMB
|
|
|
US$
|
|
|
% of Total
|
|
|
RMB
|
|
|
% of Total
|
|
Stamping and transfer film
|
|
|
116,681
|
|
|
|
16,760
|
|
|
|
34.8
|
%
|
|
|
129,548
|
|
|
|
38.9
|
%
|
Printing film
|
|
|
33,877
|
|
|
|
4,866
|
|
|
|
10.1
|
%
|
|
|
30,686
|
|
|
|
9.2
|
%
|
Metallized film
|
|
|
5,493
|
|
|
|
789
|
|
|
|
1.6
|
%
|
|
|
4,373
|
|
|
|
1.3
|
%
|
Specialty film
|
|
|
162,432
|
|
|
|
23,332
|
|
|
|
48.4
|
%
|
|
|
148,801
|
|
|
|
44.6
|
%
|
Base film for other applications
|
|
|
17,137
|
|
|
|
2,462
|
|
|
|
5.1
|
%
|
|
|
20,114
|
|
|
|
6.0
|
%
|
|
|
|
335,620
|
|
|
|
48,209
|
|
|
|
100
|
%
|
|
|
333,522
|
|
|
|
100
|
%
|
During
the fiscal year ended December 31, 2019, net revenues were RMB335.6 million (US$48.2 million), compared to RMB333.5 million
in 2018, representing an increase of RMB2.1 million or 0.6%. The decrease in average sales price caused a decrease of RMB0.8 million,
which was more than offset by the increase in sales volume factor caused an increase of RMB2.9 million.
In
2019, sales of specialty films were RMB162.4 million (US$23.3 million) or 48.4% of our total revenues as compared to
RMB148.8 million or 44.6% in 2018, which was an increase of RMB13.6 million, or 9.1% higher than 2018. The increase of sales
volume led to an increase of RMB14.3 million, offset in part by the decline in average sales price which caused a decrease of
RMB0.7 million.
Overseas sales were RMB47.6 million (US$6.8
million) or 14.2% of total revenues, compared with RMB45.4 million or 13.6% of total revenues in 2018. The increase of average
sales price caused an increase of RMB0.6 million and the increase of sales volume caused an increase of RMB1.6 million.
The
following is a breakdown of domestic versus overseas sales for the periods ended December 31, 2019 and 2018 (amounts in
thousands):
|
|
For the year ended December 31,
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
RMB
|
|
|
US$
|
|
|
% of Total
|
|
|
RMB
|
|
|
% of Total
|
|
Sales in China
|
|
|
288,066
|
|
|
|
41,378
|
|
|
|
85.8
|
%
|
|
|
288,128
|
|
|
|
86.4
|
%
|
Sales in other countries
|
|
|
47,554
|
|
|
|
6,831
|
|
|
|
14.2
|
%
|
|
|
45,394
|
|
|
|
13.6
|
%
|
|
|
|
335,620
|
|
|
|
48,209
|
|
|
|
100.0
|
%
|
|
|
333,522
|
|
|
|
100.0
|
%
|
Cost of Goods Sold
Cost
of goods sold during 2019 totaled RMB252.0 million (US$36.2 million) as compared to RMB278.8 million in the prior year.
This was RMB26.8 million or 9.6% lower than 2018. The decline in unit cost of goods sold caused a decrease of RMB29.2 million and
the increase of sales volume led to an increase of RMB2.4 million. The decrease of cost of goods was mainly due to the price decrease
of raw materials.
Gross Profit
Our
gross profit for the year ended December 31, 2019 was RMB83.6 million (US$12.0 million), compared to RMB 54.7 million (US$8.0
million) in 2018. Our average unit sales price decreased by 0.2% compared to last year. The unit sales cost decreased by 10.4%
due to the price decrease of main raw materials. Consequently, the decrease in cost of goods sold per unit in product exceeded
that sales price during 2019 compared with 2018, which contributed to the increase in our gross profit. Our gross margin was 24.9%
for the year of 2019, as compared to a gross margin of 16.4% in 2018. Gross margin increased by 8.5 percentage points compared
to the same period in 2018.
Operating Expenses
Our operating expenses during the year
ended December 31, 2019 were RMB60.5 million, a decrease of RMB5.5 million, or 8.3%, as compared to 2018. The decrease was mainly
due to the reduction in expense of R&D.
Other Expense
Total
other expense is a combination of interest income, interest expense and others income (expense). Total other expense during
the year ended December 31, 2019 was RMB9.4 million (US$1.4 million), compared to total other expense of RMB7.3 million in 2018.
This increase is mainly attributed to the increased provision
for obsolete stocks.
Income Tax Expense
Income
tax expense during the year ended December 31, 2019 was RMB2.3 million (US$0.3 million) compared to RMB3.6 million during 2018,
which was mainly attributable to tax effect of changes in deferred tax during 2019. We did not recognize deferred tax assets for
the loss of previous years after considering the possibility of realizing the benefits under the conservatism principle.
Fiscal
year ended 2018 compared to fiscal year ended 2017
Revenues
Our revenue can be analyzed as follows (in thousands):
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
|
|
|
2017
|
|
|
|
|
|
|
RMB
|
|
|
US$
|
|
|
%
of Total
|
|
|
RMB
|
|
|
%
of Total
|
|
Stamping and transfer film
|
|
|
129,548
|
|
|
|
18,843
|
|
|
|
38.9
|
%
|
|
|
116,396
|
|
|
|
40.0
|
%
|
Printing film
|
|
|
30,686
|
|
|
|
4,463
|
|
|
|
9.2
|
%
|
|
|
24,779
|
|
|
|
8.5
|
%
|
Metallized film
|
|
|
4,373
|
|
|
|
636
|
|
|
|
1.3
|
%
|
|
|
8,431
|
|
|
|
2.9
|
%
|
Specialty film
|
|
|
148,801
|
|
|
|
21,642
|
|
|
|
44.6
|
%
|
|
|
108,089
|
|
|
|
37.2
|
%
|
Base film for other applications
|
|
|
20,114
|
|
|
|
2,925
|
|
|
|
6.0
|
%
|
|
|
33,011
|
|
|
|
11.4
|
%
|
|
|
|
333,522
|
|
|
|
48,509
|
|
|
|
100
|
%
|
|
|
290,706
|
|
|
|
100
|
%
|
During
the fiscal year ended December 31, 2018, net revenues were RMB333.5 million (US$48.5 million), compared to RMB290.7 million
in 2017, representing an increase of RMB42.8 million or 14.7%. For further analysis of the factors causing revenue increase, the
increase of average sales price caused an increase of RMB53.9 million and the reduction of sales volume factor caused a decrease
of RMB11.1 million.
In
2018, sales of specialty films were RMB148.8 million (US$21.6 million) or 44.6% of our total revenues as compared to RMB108.1
million or 37.2% in 2017, which was an increase of RMB40.7 million, or 37.7%, as compared to the same period in 2017. The increase
of average sales price caused an increase of RMB7.1 million and the increase of sales volume factor caused an increase of RMB33.6
million.
Overseas sales were RMB45.4 million or
US$6.6 million, or 13.6% of total revenues, compared with RMB55.6 million or 19.1% of total revenues in 2017. The increase of average
sales price caused an increase of RMB6.4 million and the reduction of sales volume factor caused a decrease of RMB16.6 million.
The
following is a breakdown of domestic versus overseas sales for the periods ended December 31, 2018 and 2017 (amounts in
thousands):
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
|
|
|
2017
|
|
|
|
|
|
|
RMB
|
|
|
US$
|
|
|
% of Total
|
|
|
RMB
|
|
|
% of Total
|
|
Sales in China
|
|
|
288,128
|
|
|
|
41,907
|
|
|
|
86.4
|
%
|
|
|
235,143
|
|
|
|
80.9
|
%
|
Sales in other countries
|
|
|
45,394
|
|
|
|
6,602
|
|
|
|
13.6
|
%
|
|
|
55,563
|
|
|
|
19.1
|
%
|
|
|
|
333,522
|
|
|
|
48,509
|
|
|
|
100.0
|
%
|
|
|
290,706
|
|
|
|
100.0
|
%
|
Cost of Goods Sold
Cost
of goods sold during the year of 2018 totaled RMB278.8 million (US$40.6 million) as compared to RMB263.6 million in the
prior year. This was RMB15.2 million or 5.8% higher than 2017. The increase of unit cost of goods sold caused an increase of RMB25.3million
and the reduction of sales volume factor led to a decrease of RMB10.1 million. The increase of cost of goods was mainly due to
the price increase of raw materials.
Gross Profit
Our
gross profit for the year ended December 31, 2018 was RMB54.7 million (US$27.1 million), compared to RMB27.1 million in
2017. Our average unit sales price increased by 19.3% compared to last year. The unit sales cost increased by 10.0% due to the
price increase of main raw materials. Consequently, the increase in sales price exceeded that cost of goods sold per unit in product
during 2018 compared with 2017, which contributed to the increase in our gross profit. Our gross margin was 16.4% for the year
of 2018, as compared to a gross margin of 9.3% in 2017. Gross margin increased by 7.1 percentage points compared to the same period
in 2017.
Operating Expenses
Our operating expenses during the year
ended December 31, 2018 were RMB66.0 million, an increase of RMB5.0 million, or 8.2%, as compared to 2017.
Other Expense
Total
other expense is a combination of interest income, interest expense and others income (expense). Total other expense during
the year ended December 31, 2018 was RMB7.3 million (US$1.1 million), compared to total other expense of RMB11.3 million in 2017.
This decrease is mainly attributed to the increased other income.
Income Tax Expense
Income
tax expense during the year ended December 31, 2018 was RMB3.6 million (US$0.5 million) compared to an income tax expense of RMB0.8
million during 2017, which was mainly attributable to tax effect of changes in deferred tax during 2018. We only recognized deferred
tax assets for the loss of 2018 after considering the possibility of realizing the benefits under the conservatism principle.
Liquidity and Capital Resources
Since inception, our sources of cash were
mainly from cash generated from our operations and borrowings from financial institutions and capital contributed by our shareholders.
Our
capital expenditures in 2019 were primarily financed through operating activities, short-term borrowings from financial
institutions and related party. The interest rates of short-term borrowings from financial institutions during the three-year period
from 2017 to 2019 ranged from 0% to 6.5%, and these borrowings may not be paid prior to maturity.
Since
inception, we have utilized significant amounts of secured short-term financing to fund our acquisition of Brückner,
DMT and Dornier production lines and working capital needs. As of December 31, 2019, we had borrowing of RMB65.0 million from Bank
of Weifang.
Each of the related loan agreements contains
provisions regarding collateral, covenants prohibiting us from engaging in certain activities (including selling, mortgaging or
otherwise disposing of or encumbering all or substantially all of our assets or before any merger, acquisition, spin-off, or other
transaction resulting in a change in our corporate structure) without the lenders consent and acceleration (and setoff) provisions
in the event of default in payment or failure to comply with such covenants.
In
April 2014, we obtained a loan for a total amount of RMB105 million from Shandong SNTON Optical Materials Technology Co.,
Ltd. (the “Shandong SNTON”) to pay off certain short-term loans due to Bank of Communications Co., Ltd. The interest
shall be calculated at the benchmark rate, plus an additional 20% of the said benchmark rate, for the loan of the same term announced
by the People’s Bank of China. The interest must be paid quarterly and settled in full at the end of the year. As of December
31, 2014, the principal of this loan and the interest have not been paid. In March 2015, we entered into a supplemental agreement
with Shandong SNTON pursuant to which the parties agreed that we will pay off the principal of this loan plus interest upon availability
of new loans from banks or other financial institutions.
As
of December 31, 2019, the principal of this loan from Shandong SNTON was RMB86.80 million and the interest was RMB32.5 million.
The
credit line amounting to RMB95.0 million (US$13.6 million) was granted by Bank of Weifang. The term is from July 2018 to July 2021.
It was secured by a pledge of plant and land use right. The credit line was used to purchase raw materials. As of December
31, 2019, the amount of credit line granted by Bank of Weifang was all used.
The
main source of cash inflow for the next twelve months will come from sales of products, and the estimated inflow is RMB399.6
million. The estimated cash outflow is RMB286.2 million. The amount of cash used in the purchase of raw materials and packaging
materials is estimated to be RMB189.0 million and RMB12.1 million, respectively. Cash used for power costs, labor costs, maintenance
and renovation expenses is estimated to be RMB25.8 million, RMB17.1 million and RMB7.4 million, respectively. Total cash used in
sales expenses, financial expenses and administrative expenses is estimated to be RMB34.8 million. The foregoing description has
been prepared based on the information available to us as of the date of this Annual Report on Form 20-F and there are numerous
factors that could contribute to a different result such as risks inherent in, the BOPET film industry in China; uncertainty as
to future profitability and competition in the BOPET film industry; growth of, and risks inherent in, the BOPET film industry in
China and numerous other factors as more fully disclosed in our reports filed with the U.S. Securities and Exchange Commission.
We believe that, after taking into consideration
our present and future banking facilities, borrowing from related party, existing cash and the expected cash flows to be generated
from our operations, we have adequate sources of liquidity to meet our short-term obligations and our working capital.
A
summary of our cash flows for 2019, 2018 and 2017 is as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
RMB
|
|
Net cash provided by (used in) operating activities
|
|
|
54,366
|
|
|
|
7,809
|
|
|
|
25,381
|
|
|
|
10,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(12,559
|
)
|
|
|
(1,804
|
)
|
|
|
(4,591
|
)
|
|
|
(2,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(2,344
|
)
|
|
|
(336
|
)
|
|
|
(41,332
|
)
|
|
|
(26,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes
|
|
|
-
|
|
|
|
(85
|
)
|
|
|
(2,014
|
)
|
|
|
1,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalent
|
|
|
39,463
|
|
|
|
5,584
|
|
|
|
(22,556
|
)
|
|
|
(17,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent, restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of the year
|
|
|
46,908
|
|
|
|
6,823
|
|
|
|
69,464
|
|
|
|
86,764
|
|
At end of the year
|
|
|
86,371
|
|
|
|
12,407
|
|
|
|
46,908
|
|
|
|
69,464
|
|
Operating Activities
Net
cash provided by operating activities was RMB54.4 million for the year ended December 31, 2019.
Net
cash provided by operating activities was RMB25.4 million for the year ended December 31, 2018.
Net
cash provided by operating activities was RMB10.8 million for the year ended December 31, 2017.
Investing Activities
Net
cash used in investing activities was RMB12.6 million in 2019 mainly attributable to the increased expenditure of purchasing
fixed assets.
Net
cash used in investing activities was RMB4.6 million in 2018 mainly attributable to the increased expenditure of purchasing
fixed assets.
Net
cash used in investing activities was RMB2.9 million in 2017 mainly attributable to the increased expenditure of purchasing
fixed assets.
Financing Activities
Net cash used in financing activities was
RMB2.3 million for the year ended December 31, 2019, which was mainly due to changes in the amount of notes payable and loans from
related party.
Net cash used in financing activities was
RMB41.3 million for the year ended December 31, 2018, which was mainly due to changes in the amount of notes payable.
Net cash used in financing activities was
RMB27.0 million for the year ended December 31, 2017, which was mainly due to increased pay-back of short-term loans from banks
and changes in the amount of notes payable.
Foreign Exchange Exposure
Translations
Our
reporting currency is RMB. The functional currency of our operating subsidiary in the PRC is RMB and our operating subsidiary also
maintains its books and records in RMB. Accordingly, we are not exposed to any material foreign currency translation effects.
Transactions
We are, to a certain extent, exposed to
transaction foreign currency exposure arising from our operations in the PRC.
We
began conducting part of our sales in foreign currency in 2004 with the commencement of our overseas sales business. During 2019,
2018 and 2017, approximately 85.8%, 86.4%, and 80.9% respectively, of our revenue was denominated in RMB and the remainder was
in US dollar. The proportion of raw materials we purchased within the PRC during 2019, 2018 and 2017 were 100%, 100%, and 100.0%,
respectively. The remainder was purchased in US dollars.
Our foreign currency exchange risk arises
mainly from this mismatch between the currency of our sales, purchases and operating expenses. We may, therefore, be susceptible
to foreign exchange exposure.
In addition, we also maintain US dollar
accounts with financial institutions for our US dollar receipts and US dollar payments. We may also incur foreign exchange gains
or losses when we convert the US dollar balances into RMB.
Currently,
we do not have a formal foreign currency hedging policy as our foreign exchange gains and losses in 2019, 2018 and 2017
were insignificant. Our management believes that it is more efficient for us to assess the hedging need of each transaction on
a case-by-case basis. We will continue to monitor our foreign exchange exposure in the future and will consider hedging any material
foreign exchange exposure should such need arise.
Capital Expenditures and Contractual
Commitments
Capital Expenditures
Our
capital expenditures in 2019, 2018 and 2017 were as follows (in thousands):
|
|
For the year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Buildings
|
|
-
|
|
|
-
|
|
|
-
|
|
Plant and equipment
|
|
|
8,149
|
|
|
|
5,103
|
|
|
|
3,702
|
|
Motor vehicles
|
|
|
310
|
|
|
|
56
|
|
|
|
-
|
|
Assets under construction
|
|
|
-
|
|
|
|
4,819
|
|
|
|
3,003
|
|
Others (computer and furniture fittings)
|
|
|
5,258
|
|
|
|
748
|
|
|
|
628
|
|
Total
|
|
|
13,717
|
|
|
|
10,726
|
|
|
|
7,333
|
|
The
following table summarizes our contractual commitments as of December 31, 2019 and the effects caused by those commitments
are expected to have on our liquidity and cash flow in future periods:
Contractual Commitments
|
|
Total
|
|
|
Less than 1 Total Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
More than 5 Years
|
|
|
|
(RMB in thousands)
|
|
Equipment Purchase Contract(i)
|
|
1,010
|
|
|
1,010
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Due to related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Principal
|
|
86,874
|
|
|
86,874
|
|
|
|
|
|
|
|
|
|
|
-Interest(iii)
|
|
4,535
|
|
|
4,535
|
|
|
|
|
|
|
|
|
|
|
Bank loans(ii)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Principal
|
|
65,000
|
|
|
65,000
|
|
|
|
|
|
|
|
|
|
|
-Interest(iii)
|
|
4,225
|
|
|
4,225
|
|
|
|
|
|
|
|
|
-
|
|
Notes payable
|
|
41,000
|
|
|
41,000
|
|
|
|
|
|
|
|
|
|
|
Operating leases(iv)
|
|
26
|
|
|
26
|
|
|
|
|
|
-
|
|
|
-
|
|
Total
|
|
202,670
|
|
|
202,670
|
|
|
|
|
|
-
|
|
|
-
|
|
|
(i)
|
The purchase of equipment will
be financed by the sale of our ordinary shares or by bank borrowings or by funds generated from business operations.
|
|
(ii)
|
We have a secured short-term loan
of RMB65.0 million as of December 31, 2019. Our obligations under our existing loans have been mainly met through the cash flow
from our operations and financing activities. In the past, cash flow from operations has been sufficient to meet payment obligations
and/or we have been able to extend our borrowings. In the event that our cash flows are insufficient to satisfy these obligations,
we may consider additional bank loans, issuing bonds, or other forms of financing to satisfy our capital requirements. December
31, 2019, our principal of loans from related parties was RMB86.80 million and the interest was RMB32.5 million.
|
|
(iii)
|
The interest expenses are estimated based on the interest rate of borrowings adopted by the People’s
Bank of China on December 31, 2019 plus an estimated risk premium on borrowing.
|
|
(iv)
|
The operating leases mainly relate to
our rental of staff dorms. The term of these leases typically ranges from 1 year to two years, and are renewable subject
to renegotiation of terms upon expiration. We intend to finance these operating leases from our cash flows from operations.
|
Off-Balance Sheet Arrangements and Contingent Liabilities
We do not have any off-balance sheet guarantees,
any outstanding derivative financial instruments, interest rate swap transactions or foreign currency forward contracts.
Inflation
According
to the National Bureau of Statistics of China, the change in the consumer price index in China was 2.9%, 2.1% and 1.6% in
2019, 2018 and 2017, respectively.
Recent Accounting Pronouncements
Disclosure
Framework
In August 2018, the FASB
issued ASU No. 2018-13, "Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU
2018-13"), which removes, modifies, and adds certain disclosure requirements in ASC 820. ASU 2018-13 is effective for fiscal
years and interim periods beginning after December 15, 2019; early adoption is permitted. We are in the process of evaluating the
impact of this standard on our disclosures but do not currently believe that it will have a material impact.
Leases
In
February 2016, the FASB issued ASU 2016-02,"Leases" to provide a new comprehensive model for lease accounting. Under
this guidance, lessees and lessors should apply a "right-of-use" model in accounting for all leases (including subleases)
and eliminate the concept of operating leases and off-balance sheet leases. This guidance is effective for annual periods and interim
periods within those annual periods beginning after December 15, 2018. Early adoption is permitted. We adopted the provision of
ASU 2016-02 .The adoption of ASU 2016-02 did not have a
material impact on our consolidated financial statements.
Financial
Instruments - Credit Losses
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The amendments in this Update require
a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected
to be collected. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate
for assets measured either collectively or individually. The use of forecasted information incorporates more timely information
in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. ASU 2016-13 is
effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
Early adoption is allowed as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. We are still evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
Other pronouncements issued
by the FASB or other authoritative accounting standards group with future effective dates are either not applicable or not significant
to the consolidated financial statements of the Company.
Research and Development, Patents and Licenses
We
rely on copyright, patent, trademark and other intellectual property law, nondisclosure agreement and technical know-how to protect
our intellectual property and proprietary rights. We enter into confidentiality and licensing agreements with the relevant
employees. Our senior employees and employees who work in our research and development department and other technical departments
have signed agreements acknowledging that we own the rights to all technology, inventions, trade secrets, works of authorship,
developments and other processes generated in connection with their employment with us or their use of our resources or relating
to our business or our property and that they must assign any ownership rights that they may claim in those works to us. As most
of our business is currently conducted in mainland China, we have not taken any action outside mainland China to protect our intellectual
property.
As
of the date of this Annual Report, we have received 24 patents from the PRC authorities.
We
currently sell our products in the PRC with the registered trademark of “Fuwei Films”. Our ability to compete
in our markets and to achieve future revenue growth will depend, in significant part, on our ability to protect our proprietary
technology and operate without infringing upon the intellectual property rights of others. An infringement upon these rights may
reduce or eliminate any competitive advantage we have developed, causing us to lose sales or otherwise harm our business. We are
not aware of any infringement or unauthorized use of our intellectual property rights. We will take appropriate legal actions to
protect our rights if there is any unauthorized use or infringement of our rights in the future. To date, we have not been sued
for infringement of intellectual property rights by any third party.
Trend Information
Since
the second half of 2011, the international capacity of BOPET films surged especially in countries such as India and China which
attributed to more supply than demand and reduced prices in the market. We expect this trend to continue in 2020. We expect
that in the next two to three years, the global BOPET production capacity will continue to increase while supply will continue
to surpass demand in the market.
In addition, aiming at the rapidly developed
thick films market (with applications in high value-added optical, electronics, electrical, solar energy and other industries),
giants including Mitsubishi Plastics, Inc., SKC, Inc. and China Lucky Film Corporation invested in and built production lines
in China, which will bring challenges and fiercer competition to our thick film project.
Other than as disclosed elsewhere in this
Annual Report, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have
a material effect on our net sales, profitability, liquidity or capital resources, or that caused the disclosed financial information
to not necessarily be indicative of future operating results or financial conditions.
Item 6. Directors, Senior Management and Employees
A. Directors and senior management.
The following table sets forth information
regarding our directors and executive officers as of the date of this Annual Report on Form 20-F:
Directors and Executive Officers
Name
|
|
Age
|
|
Position
|
Zengyong Wang
|
|
54
|
|
Chairman, Director and Chief Executive Officer
|
|
|
|
|
|
Benjie Dong
|
|
42
|
|
Chief Financial Officer and Director
|
|
|
|
|
|
Tee Chuang Khoo (1) (2)
|
|
74
|
|
Independent Director
|
|
|
|
|
|
Junying Liu(1) (2)(3)
|
|
67
|
|
Independent Director
|
|
|
|
|
|
Jianguo Zhang (3)
|
|
59
|
|
Independent Director
|
|
|
|
|
|
Zhimei Liu
|
|
48
|
|
President of Shandong Fuwei
|
|
|
|
|
|
Yong Jiang
|
|
46
|
|
Board Secretary and Vice President of Shandong Fuwei
|
|
|
|
|
|
Xiaoming Wang(4)
|
|
60
|
|
Former Vice President of Shandong Fuwei
|
|
(1)
|
Member of the Audit Committee.
|
|
(2)
|
Member of the Compensation Committee.
|
|
(3)
|
Member of the Corporate Governance and Nominating Committee.
|
|
(4)
|
Mr. Xiaoming Wang resigned from his position as the Vice President of Shandong Fuwei in June 2019
|
Mr.
Zengyong Wang has been a director and Vice President of Shandong SNTON Group Co., Ltd. (the “SNTON Group”)
since February 2006, where he has been responsible for SNTON Group’s business management affairs, production planning and
management and the supply market of SNTON Group’s subsidiaries. Mr. Wang has more than ten years of large-scale enterprise
group management experience. From January 2001 to February 2006, Mr. Wang served as a member of the Board of Supervisors of SNTON
Group. From October 2003 to February 2006, Mr. Wang was the director of human resources of SNTON Group. From January 1995 to October
2003, Mr. Wang was the General Manager responsible for the overall management of operations of SNTON Hualu New Materials Co., Ltd.,
of which the main products were new patterns of middle and high pressed glass fiber reinforced plastic composite pipe fittings
used for oil translation. In 2009, Mr. Wang studied in a selected EMBA class in Tsinghua University School of Economics and Management.
From 2000 to 2002, Mr. Wang studied Economics and Management in Shandong Provincial Committee Party School. In March 2001, Mr.
Zengyong Wang received his professional title of Senior Engineer certificate awarded by Shandong Province Office of Personnel.
Mr.
Benjie Dong has been a director of Shandong SNTON Group Co., Ltd. (“SNTON Group”) since December 2012,
and the vice president of SNTON Group since October 2005. From October 2005 to December 2012, Mr. Dong was the vice general manager
and head of the finance department of SNTON Group and he was the finance minister of SNTON Group from May 2003 to October 2005.
Prior to this, he was the vice finance minister of SNTON Group from June 2000 to May 2003. Mr. Dong joined SNTON Group in March
1996 as an accountant until June 2000. Prior to joining Shandong SNTON Group, he worked at Shandong Kenli County Oil Chemical
Factory as an accountant from October 1995 to March 1996. Mr. Dong studied Business Management and received his postgraduate degree
from the City University of Macau in 2009. From 2002 to 2005, he studied Economics and Management and received his bachelor degree
from Shandong University of Technology. From 1997 to 1999, Mr. Dong studied Economics and Management and received his college degree
from the Shandong Provincial Committee Party School. From 1993 to 1995, Mr. Dong studied at Dongying Television University where
he obtained his degree in accounting.
Tee
Chuang Khoo has been a director of our Company since November 2007. Mr. Khoo was a Senior Partner in Management
Consulting at DENEC Management Consulting Co., Ltd. (“DENCE”) in Shanghai from October 2005 to October 2007. From November
2000 to September 2005, Mr. Khoo was a Senior Partner at Improve Management Consulting Services in Malaysia where he was responsible
for reducing manufacturing costs and process improvement. Mr. Khoo was an Executive Director at JPK (M) Sdn Bhd, a Malaysian-listed
company, from October 1998 to September 2000, where he assisted the Managing Director with the entire operation of the company.
From November 1996 to August 1998, he was the General Manager of Broadway Group’s (a Singapore-listed company) product factories
in Johor Baru, Malaysia, and in China. He also held managerial positions at the Malaysian conglomerate, The Lion Group, and he
was a Human Resources Manager at Metal Box Singapore Ltd, a Singapore-listed company owned by the British Metal Box Group. Mr.
Khoo received a Bachelor of Arts in Finance & Management from the University of Oregon (USA), a Masters in Business Administration
(MBA) from University of Southern California (USA) and a diploma in Accounting from the Association of International Accountants
from the United Kingdom.
Mr.
Junying Liu has been a director of our Company since December 31, 2016. Mr. Liu acted as counsel to China Lucky
Group Corporation (“Lucky Group”), a subsidiary of China Aerospace Science and Technology Corporation, a company mainly
engaged in the research, design, manufacture and launch of space systems (“ASTC”) from December 2013 to December 2015.
He received the title of senior research fellow in 2013 granted by ASTC. He was the General Manager of Hefei Lucky Science &
Technology Industry Company where he was responsible for the company’s daily operation and was the Vice Chief Engineer of
Lucky Group from February 2007 to November 2013 and retired from this position in 2013. Mr. Liu was the General Manager of both
Lucky Group’s Films Business Division and Baoding Lucky Films Co., Ltd. from February 1997 to January 2007. Mr. Liu received
his positional title of Senior Engineer in 1997. From February 1993 to January 1997, Mr. Liu was the President of the Film Base
Factory of Lucky Group and was the director of Administrative Department of Lucky Group from January 1991 to February 1993. He
was the Vice Chairman of Association of Science of Lucky Group from 1985 to 1991 and was a lab technician and an engineer at Lucky
Group from 1980 to 1985. Mr. Liu graduated and obtained his bachelor’s degree in Photosensitive Materials in 1980 from East
China University of Science and Technology.
Jianguo Zhang has been the
Vice Chairman and General Manager of CCS (Shanghai) Functional Films Industry Co., Ltd. since August 2015, where he has been responsible
for the manufacturing, development and management operation of functional films. In addition, he has been the Chairman of Shanghai
Pudong Science and Technology Venture Investment Co., Ltd., a company engaged in equity investment, since September 2010,
where he has been responsible for the management of venture capital fund. From April 2008 to July 2010, he was the Vice General
Manger of Medium and Thick Steel Plate Branch of Baoshan Iron & Steel Co., Ltd., where he was responsible for the production,
technology, energy, security and environmental protection of the company. From February 2008 to April 2008, Mr. Zhang was the
Vice Chairman and General Manager of Nantong Baosteel Iron Co., Ltd., responsible for the general operation management and the
iron and steel smelting. From April 2001 to February 2008, he acted as the Vice Chairman and General Manager of Nantong Baosteel&
Nippon Steel Manufacturing Co., Ltd., responsible for the general operation management and the iron and steel smelting. From April
1997 to April 2001, he was the Assistant of General Manager and Vice General Manager of Nantong Baosteel&Nippon Steel Manufacturing
Co., Ltd. where he was responsible for the manufacturing, technology and equipment of Iron and steel smelting. Mr. Zhang received
his EMBA at Fudan University in June 2010.In July 2004, Mr. Zhang received his Master of Business Administration at Adult
Education College of Shanghai Jiao Tong University. From January 1999 to July 2001, he studied Administrative Management at Shanghai
Administrative Management College of Further Education where he obtained his college degree.
Ms. Zhimei Liu has been appointed as the President of Fuwei Films (Shandong) Co., Ltd (“Fuwei Shandong”)
by the Company since December 22, 2014, where she has been responsible for the overall business management, day-to-day operations
and other affairs designated by the board of directors of Fuwei Shandong. From May 2012 to November 2014, Ms. Liu acted as the
Director of Administration of Shandong SNTON Steel Cord Co., Ltd. (“SNTON Steel Cord”), a subsidiary of Shandong SNTON
Group Co., Ltd. where she was responsible for formulating and implementing business strategies and operation. From December 2008
to April 2012, Ms. Liu was the Manager of Corporate Planning Department and the Manager of Staff Training Center of SNTON Steel
Cord as an Associate Senior Engineer. From April 2007 to November 2008, Ms. Liu served as the Manager of Administration Department
of SNTON Steel Cord where she was in charge of overall corporate project planning. From November 2005 to April 2007, Ms. Liu was
the assistant manager of supplies department of SNTON Steel Cord where she was overseeing matters related to raw materials, equipment
and supplies with respect to production. Ms. Liu joined Shandong SNTON Group Co., Ltd. in 1996 as a technician, office clerk, purchasing
officer, sales person, and accountant in the subsidiary and branch company of Shandong SNTON Group Co., Ltd. Ms. Liu studied Business
Management in China University of Petroleum from 2007 to 2009.In 1994, Ms. Liu graduated from Shandong Vocational College of Industry
where her major was Computer Application.
Yong
Jiang has been the Board Secretary since April 2011. Since July 2014, Mr. Jiang is the vice president and in charge
of the products sale of Fuwei Films (Shandong) Co., Ltd. He is also assistant President of Fuwei Films (Shandong) Co., Ltd. since
2007. From 2003 to 2006, he served as assistant manager, deputy manager and manager of the marketing department for Shandong Fuwei.
In 1998, he joined Weifang Neoluck Plastic Co., Ltd. where he was responsible for overseas sales and production planning. In December
2015, Mr. Jiang obtained his EMBA degree in Nankai University. In 1998, he received his bachelor’s degree in Information
Management and Information System from Shandong University.
Xiaoming
Wang resigned from his position as the Vice President of Shandong Fuwei and decided to retire in June 2019. He was
the Vice President of Shandong Fuwei from January 2005 to June 2019 and was responsible for the management of our production facilities,
production planning and engineering from January 2005 to June 2014. From July 2014 to June 2019, Mr. Wang was in charge of managing
products quality. Prior to joining us, Mr. Wang was the vice manager of Weifang Engine Manufacturing Co. from 1986 to 1998 and
the deputy general manager of Shandong Neo-Luck from 1998 to 2003. Mr. Wang was the deputy general manager of Shandong Fuwei during
2004. Mr. Wang was certified as a professional economist by the Shandong Province Human Resources Committee in 2001 and obtained
a certificate in Economics Management awarded by the PRC Central Party Learning Institute and obtained a certificate in Business
Enterprises Operational Management from the Shandong Television University in 1986.
None of our directors or officers is related
to each other. To the best of our knowledge and belief, there are no arrangements or understandings with any of our
principal shareholders, customers, suppliers, or any other person, pursuant to which any of our directors or executive officers
were appointed.
The business address of our directors and
executive officers is No. 387 Dongming Road, Weifang Shandong, People’s Republic of China, Postal Code: 261061.
Board Committees
Our Board of Directors has established
an Audit Committee, Compensation Committee and a Corporate Governance and Nominating Committee, and adopted charters for each of
these committees. We have appointed independent directors to each of our committees.
Nasdaq
Rule 5605(b)(1) requires that the Board be comprised of a majority of Independent Directors as such term is defined in Rule 5605(a)(2).
The Company provided Nasdaq with a notice on December 25, 2007 stating that as a “Controlled Company”, it is exempt
from the requirements of Rule 5605(b)(1). Pursuant to Rule 5615(c)(1), a “Controlled Company” is a Company of which
more than 50% of the voting power for the election of directors is held by an individual, a group or another company. As
of December 31, 2016, Hongkong Ruishang International Trade Co. Ltd controlled 52.9% of the outstanding ordinary shares of
Fuwei. As a result, Fuwei is considered to be a Controlled Company and relied upon the exemption from December 25, 2007.
Audit Committee
Our
Audit Committee currently consists of Tee Chuang Khoo (chairman), Junying Liu and Jianguo Zhang. The Audit Committee will
oversee our accounting and financial reporting processes and the audits of our financial statements. The audit Committee is responsible
for, among other things:
|
·
|
selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the
independent auditors;
|
|
·
|
reviewing and approving all proposed related-party transactions;
|
|
·
|
discussing the annual audited financial statements with management and the independent auditors;
|
|
·
|
annually reviewing and reassessing the adequacy of our audit committee charter;
|
|
·
|
meeting separately and periodically with management and the independent auditors;
|
|
·
|
reviewing such other matters that are specifically delegated to our audit committee by our board of directors from time to
time; and
|
|
·
|
reporting regularly to the full board of directors.
|
Compensation Committee
Our
Compensation Committee currently consists of Tee Chuang Khoo and Junying Liu. The Compensation Committee is responsible
for, among other things:
|
·
|
reviewing and determining the compensation package for our senior executives;
|
|
·
|
reviewing and making recommendations to our board with respect to the compensation of our directors;
|
|
·
|
reviewing and approving officer and director indemnification and insurance matters;
|
|
·
|
reviewing and approving any employee loan in an amount equal to or greater than RMB100,000; and
|
|
·
|
reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar arrangements,
annual bonuses, employee pension and welfare benefit plans.
|
Corporate Governance and Nominating Committee
Mr.
Junying Liu is the sole member of our Corporate Governance and Nominating Committee. The Corporate Governance and Nominating
Committee is responsible for, among other things:
|
·
|
identifying and recommending to the board nominees for election or re-election to the board;
|
|
·
|
making appointments to fill any vacancy on our board;
|
|
·
|
reviewing annually with the board the current composition of the board in light of the characteristics of independence, age,
skills, experience and availability of service to us;
|
|
·
|
identifying and recommending to the board any director to serve as a member of the board’s
committees;
|
|
·
|
advising the board periodically with respect to significant developments in the law and practice of corporate governance as
well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate
governance and on any corrective action to be taken; and
|
|
·
|
monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our
procedures to ensure proper compliance.
|
Duties of Directors
Under
Cayman Islands laws, our directors have a common law duty of loyalty to act honestly in good faith with a view to our best interests.
Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent
person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance
with our memorandum and articles of association. A shareholder has the right to seek damages if a duty owed by our directors is
breached. You should read “Information - Differences in Corporate Law” for a more complete discussion of these
matters.
B. Compensation
Compensation of Directors and Executive Officers
All directors receive reimbursements from
us for expenses which are necessary and reasonably incurred by them for providing services to us or in the performance of their
duties. Our directors who are also our employees receive compensation in the form of salaries, housing allowances, other allowances
and benefits in kind in their capacity as our employees. Our directors do not receive any compensation in their capacity as directors
in addition to their salaries and other remunerations as members of our management team. We pay their expenses related to attending
board meetings.
The
aggregate cash compensation and benefits that we paid to our directors and executive officers, a group of 6 persons for the
year ended December 31, 2019 was approximately RMB0.93 million. No executive officer is entitled to any severance benefits
upon termination of his or her employment with the Company.
Employment and Service Agreements
Executive Officers
Mr. Zengyong Wang has entered into Service Agreement with Shandong
SNTON Group Co., Ltd. (“SNTON Group”) since 1995 and his salary is paid by SNTON Group.
Ms. Zhimei Liu was appointed as the President
of Shandong Fuwei in December 2014. Ms. Zhimei Liu has entered into Service Agreement with Shandong SNTON Group Co., Ltd. (“SNTON
Group”). We paid Ms. Zhimei Liu annual salary of RMB220,000 in 2018.
Mr.
Benjie Dong has entered into Service Agreement with Shandong SNTON Group Co., Ltd. (“SNTON Group”) since 1996
and his salary is paid by SNTON Group.
We
have also entered into Service Agreements with our other executive officers. Mr. Yong Jiang renewed his service agreement with
the Company in December 2011 with an unspecified term. The initial term of Mr. Xiaoming Wang’s Service Agreement was three
years commencing from April 2, 2007. Upon expiration of his Service Agreement, it was renewed for two years to December
31, 2011. Mr. Wang’s Service Agreement was further renewed in December 2011 with an unspecified term. Mr. Xiaoming Wang resigned
from his position as the Vice President of Shandong Fuwei in June 2019.
We
may only terminate the Service Agreement prior to the expiry (except by mutual agreement and except as provided in the Service
Agreement) upon the occurrence of certain events including, without limitation, for cause, disability or personal bankruptcy. The
term of service of each of our executive officers will be renewed for successive periods of one year each after the expiration
of the initial period. The Service Agreement may be terminated by not less than three months’ notice in writing served by
either party to the Service Agreements. We have the option to pay the executive officer salary in lieu of any required period of
notice of termination.
Under
the terms of their respective Service Agreements, effective July 2014, Mr. Xiaoming Wang and Mr. Yong Jiang were entitled
to an annual salary of RMB300,000 and RMB280,000, respectively. Mr. Xiaoming Wang resigned from his position as the Vice President
of Shandong Fuwei in June 2019. The annual salary of Mr. Yong Jiang may be adjusted at the discretion of our Compensation Committee.
We may pay him discretionary management bonuses for any financial year, the payment and the amount of which are subject to the
approval of the Compensation Committee. Except for the payment in lieu of notice described above, there are no provisions for benefits
for termination of employment of our executive officers under the Service Agreements.
Share Option Plan
We plan to adopt a share option plan that
is a share incentive plan, the purpose of which is to recognize and acknowledge the contributions the eligible participants had
or may have made to our company. The share option plan will provide the eligible participants an opportunity to have a personal
stake in our company with the view to achieving the following objectives:
|
|
·
|
motivate the eligible participants to optimize their
performance efficiency for the benefit of our company; and
|
|
|
·
|
attract and retain or otherwise maintain an on-going
business relationship with the eligible participants whose contributions are or will be beneficial to our long-term growth.
|
Indemnification
Cayman
Islands law does not limit the extent to which a company’s articles of association may provide for indemnification
of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public
policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Pursuant to our memorandum
and articles of association, our directors and officers, as well as any liquidator or trustee for the time being acting in relation
to our affairs, will be indemnified and secured harmless out of our assets and profits from and against all actions, costs, charges,
losses, damages and expenses that any of them or any of their heirs, executors or administrators may incur or sustain by reason
of any act done, concurred in or omitted in or about the execution of their duties in their respective offices or trusts. Accordingly,
none of these indemnified persons will be answerable for the acts, receipts, neglects or defaults of each other; neither will they
be answerable for joining in any receipts for the sake of conformity, or for any bankers or other persons with whom any moneys
or effects belonging to us may have been lodged or deposited for safe custody, or for insufficiency or deficiency of any security
upon which any moneys of or belonging to us may be placed out or invested, or for any other loss, misfortune or damage which may
happen in the execution of their respective offices or trusts. This indemnity will not, however, extend to any fraud or dishonesty
that may attach to any of said persons.
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions,
we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
C. Board practices
Our Articles provide that our board of
directors will consist of not less than two directors. At each annual general meeting, one-third of the directors (or, if their
number is not a multiple of three, the number nearest to but not greater than one-third) shall retire from office by rotation except
that the chairman of the board and/or the managing director of our company shall not be required to retire whilst holding such
office nor be taken into account in determining the number of directors to retire in each year. A director who is appointed by
the board must retire at our next annual general meeting of the shareholders following his or her appointment. A retiring director
is eligible for re-election.
D. Employees
As
of December 31, 2019, our total staff consisted of 208 employees.
We do not have any collective bargaining
agreements with our employees. We have never experienced any material labor disruptions and are unaware of any current efforts
or plans to organize employees. We believe we have good relationships with our employees.
Item 10. Additional Information.
A. Share Capital.
Not applicable.
B. Memorandum and Articles of Association.
We
are a Cayman Islands company and our affairs are governed by our memorandum and articles of association and the Companies Law,
Cap.22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands, or the Companies Law. We have filed copies of our complete
Memorandum and Articles of Association as exhibits to our Annual Report on Form 20-F for the year ended 2006 filed with the SEC
on April 2, 2007.
As
of the date of this Annual Report, our authorized share capital consisted of 5,000,000 ordinary shares, par value US$0.519008
per share (reflecting the Reverse Stock Split). As of the date of this Annual Report, 3,265,837ordinary shares (reflecting the
Reverse Stock Split) were issued and outstanding, and no preference shares were issued and outstanding.
Ordinary Shares
We were incorporated under the laws of
the Cayman Islands as an exempted company. A Cayman Islands exempted company:
|
·
|
is a company that conducts its business outside the Cayman Islands;
|
|
·
|
is exempted from certain requirements of the Companies Law, including the filing of any annual return
of its shareholders with the Registrar of Companies or the Immigration Board;
|
|
·
|
does not have to make its register of shareholders open to inspection; and
|
|
·
|
may obtain an undertaking against the imposition of any future taxation.
|
The following summarizes the terms and
provisions of our share capital, as well as the material applicable laws of the Cayman Islands. This summary is not complete, and
you should read our amended and restated memorandum and articles of association, filed as exhibits to this Annual Report.
The following discussion primarily concerns
ordinary shares and the rights of holders of ordinary shares.
Protection of Minority Shareholders
The Grand Court of the Cayman Islands may,
on the application of shareholders holding not less than one fifth of our shares in issue, appoint an inspector to examine our
affairs and report thereon in a manner as the Grand Court shall direct.
Any shareholder may petition the Grand
Court of the Cayman Islands which may make a winding up order, if the court is of the opinion that it is just and equitable that
we should be wound up. Where any such petition has been presented by our shareholders, the Grand Court is permitted to make alternative
order to a winding-up order including orders regulating the conduct of our affairs in the future, requiring us to refrain from
doing an act complained of by the petitioner or for the purchase of our shares by us or another shareholder.
Claims against us by our shareholders must,
as a general rule, be based on the general laws of contract or tort applicable in the Cayman Islands or their individual rights
as shareholders as established by our amended and restated memorandum and articles of association.
The Cayman Islands courts ordinarily would
be expected to follow English case law precedents which permit a minority shareholder to commence a representative action against,
or derivative actions in our name to challenge:
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an act which is ultra vires or illegal;
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an act which constitutes a fraud against the minority shareholder and the wrongdoers are themselves in control of us; and
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an irregularity in the passing of a resolution which requires a qualified (or special) majority.
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Pre-emption Rights
There are no pre-emption rights applicable
to the issue of new shares under either Cayman Islands law or our amended and restated memorandum and articles of association.
Modification of Rights
Except with respect to share capital (as
described below) alterations to our amended and restated memorandum and articles of association may only be made by special resolution
of no less than two-thirds of votes cast at a meeting of the shareholders.
Subject to the Companies Law, all or any
of the special rights attached to shares of any class (unless otherwise provided for by the terms of issue of the shares of that
class) may be varied, modified or abrogated with the sanction of a special resolution passed at a separate general meeting of the
holders of the shares of that class.
The provisions of our amended and restated
articles of association relating to general meetings shall apply similarly to every such separate general meeting, but the quorum
for the purposes of any such separate general meeting or at its adjourned meeting shall be a person or persons together holding
(or represented by proxy) not less than one third in nominal value of the issued shares of that class. Every holder of shares of
the class shall be entitled on a poll to one vote for every such share held by such holder and that any holder of shares of that
class present in person or by proxy may demand a poll.
The special rights conferred upon the holders
of any class of shares shall not, unless otherwise expressly provided in the rights attaching to or the terms of issue of such
shares, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.
Alteration of Capital
We may from time to time by ordinary resolution:
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increase our capital by such sum, to be divided into shares of such amounts, as the resolution shall prescribe;
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consolidate and divide all or any of our share capital into shares of larger amount than our existing
shares;
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cancel any shares which at the date of the passing of the resolution have not been taken or agreed
to be taken by any person, and diminish the amount of our share capital by the amount of the shares so cancelled subject to the
provisions of the Companies Law;
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sub-divide our shares or any of them into shares of smaller amount than is fixed by our amended
and restated memorandum and articles of association, subject nevertheless to the Companies Law, and so that the resolution whereby
any share is subdivided may determine that, as between the holders of the share resulting from such subdivision, one or more of
the shares may have any such preference or other special rights, or may have such deferred rights or be subject to any such restrictions
as compared with, the others as we have power to attach to unissued or new shares; and
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divide shares into several classes and without prejudice to any special rights previously conferred
on the holders of existing shares, attach to the shares respectively as preferential, deferred, qualified or special rights, privileges,
conditions or such restrictions which, in the absence of any such determination in a general meeting, may be determined by our
directors.
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We may, by special resolution, subject
to any confirmation or consent required by the Companies Law, reduce our share capital or any capital redemption reserve in any
manner authorized by law.
Transfer of Shares
Subject
to any applicable restrictions set forth in our amended and restated memorandum and articles of association, any of our shareholders
may transfer all or any of his or her shares by an instrument of transfer in the usual or common form or in any form prescribed
by the NASDAQ Capital Market or in any other form which our directors may approve. You should note that, under Cayman Islands
law, a person whose name is entered on the register of members will be deemed to be a member or shareholder of our company. We
have designated American Stock Transfer and Trust Company as our share registrar. Under Cayman Islands law, a share certificate
constitutes admissible evidence as proof of title of its holder to the shares specified on such certificate.
Our directors may decline to register any
transfer of any share which is not paid up or on which we have a lien. Our directors may also decline to register any transfer
of any share unless:
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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 directors may reasonably require to show the right of the transferor to make the transfer;
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the instrument of transfer is in respect of only one class of shares;
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the instrument of transfer is properly stamped (in circumstances where stamping is required);
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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; and
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a fee of such maximum sum as the NASDAQ Global Market may at any time determine to be payable or such lesser sum as our directors
may from time to time require is paid to us in respect thereof.
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If our directors refuse to register a transfer,
they shall, within two months 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 notice being given by advertisement in such one or more newspapers or by any other means in accordance
with any requirements of the NASDAQ Capital Market, be suspended and the register closed at such times and for such periods
as our directors may from time to time determine; provided, however, that the registration of transfers shall not be suspended
nor the register closed for more than 30 days in any year as our directors may determine.
Share Repurchase
We
are empowered by the Companies Law and our amended and restated memorandum and articles of association to purchase our own shares,
subject to certain restrictions. Our directors may only exercise this power on our behalf, subject to the Companies Law, our amended
and restated memorandum and articles of association and to any applicable requirements imposed from time to time by the U.S. Securities
and Exchange Commission, the NASDAQ Capital Market, or by any recognized stock exchange on which our securities are listed.
Dividends
Subject to the Companies Law, we may declare
dividends in any currency to be paid to our shareholders. Dividends may be declared and paid out of our profits, realized or unrealized,
or from any reserve set aside from profits which our directors determine is no longer needed. Our board of directors may also declare
and pay dividends out of the share premium account or any other fund or account which can be authorized for this purpose in accordance
with the Companies Law.
Except in so far as the rights attaching
to, or the terms of issue of, any share otherwise provides (1) all dividends shall be declared and paid according to the amounts
paid up on the shares in respect of which the dividend is paid, but no amount paid up on a share in advance of calls shall be treated
for this purpose as paid up on that share and (2) all dividends shall be apportioned and paid pro rata according to the amounts
paid upon the shares during any portion or portions of the period in respect of which the dividend is paid.
Our directors may also pay any dividend
that is payable on any shares semi-annually or on any other dates, whenever our financial position, in the opinion of our directors,
justifies such payment.
Our directors may deduct from any dividend
or other money payable to any shareholder all sums of money (if any) presently payable by such shareholder to us on account of
calls or otherwise.
No dividend or other money payable by us
on or in respect of any share shall bear interest against us.
In
respect of any dividend proposed to be paid or declared on our share capital, our directors may resolve and direct that (1) such
dividend be satisfied wholly or in part in the form of an allotment of shares credited as fully paid up, provided that our shareholders
entitled thereto will be entitled to elect to receive such dividend (or part thereof if our directors so determine) in cash in
lieu of such allotment, or (2) the shareholders entitled to such dividend will be entitled to elect to receive an allotment
of shares credited as fully paid up in lieu of the whole or such part of the dividend as our directors may think fit. We may also,
on the recommendation of our directors, resolve in respect of any particular dividend that, notwithstanding the foregoing, it may
be satisfied wholly in the form of an allotment of shares credited as fully paid up without offering any right of shareholders
to elect to receive such dividend in cash in lieu of such allotment.
Any dividend, interest or other sum payable
in cash to any shareholder may be paid by check or warrant sent by mail addressed to the shareholder at his registered address,
or addressed to such person and at such addresses as the shareholder may direct. Every check or warrant shall, unless the shareholder
or joint shareholders otherwise direct, be made payable to the order of the shareholder or, in the case of joint shareholders,
to the order of the shareholder whose name stands first on the register in respect of such shares, and shall be sent at their risk
and payment of the check or warrant by the bank on which it is drawn shall constitute a good discharge to us.
All dividends unclaimed by shareholders
for one year after having been declared may be invested or otherwise made use of by our board of directors for the benefit of our
company until claimed. Any dividend unclaimed by shareholders after a period of six years from the date of declaration of such
dividend may be forfeited and, if so forfeited, shall revert to us.
Whenever our directors have resolved that
a dividend be paid or declared, our directors may further resolve that such dividend be satisfied wholly or in part by the distribution
of specific assets of any kind, and in particular of paid up shares, debentures or warrants to subscribe for our securities or
securities of any other company. Where any difficulty arises with regard to such distribution, our directors may settle it as they
think expedient. In particular, our directors may issue fractional certificates, ignore fractions altogether or round the same
up or down, fix the value for distribution purposes of any such specific assets, determine that cash payments shall be made to
any of our shareholders upon the footing of the value so fixed in order to adjust the rights of the parties, vest any such specific
assets in trustees as may seem expedient to our directors, and appoint any person to sign any requisite instruments of transfer
and other documents on behalf of a person entitled to the dividend, which appointment shall be effective and binding on our shareholders.
Untraceable Shareholders
We are entitled to sell any shares of a shareholder who is untraceable,
provided that:
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all checks or warrants in respect of dividends of such shares, not being less than three in number,
for any sums payable in cash to the holder of such shares have remained uncashed for a period of twelve years prior to the publication
of the advertisement and during the three months referred to in the third bullet point below;
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we have not during that time received any indication of the whereabouts or existence of the shareholder
or person entitled to such shares by death, bankruptcy or operation of law; and
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we have caused an advertisement to be published in newspapers in the manner stipulated by our amended
and restated memorandum and articles of association, giving notice of our intention to sell these shares, and a period of three
months has elapsed since such advertisement and the NASDAQ Global Market has been notified of such intention.
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The net proceeds of any such sale shall
belong to us, and when we receive these net proceeds we shall become indebted to the former shareholder for an amount equal to
such net proceeds.
Issuance of Additional Ordinary Shares or Preference Shares
Subject
to the Companies Law and the rules of the NASDAQ Capital Market and without prejudice to any special rights or restrictions
for the time being attached to any shares or any class of shares, our board of directors may issue additional ordinary shares from
time to time as our board of directors determines, to the extent of available authorized but unissued shares and establish from
time to time one or more series of preference shares and to determine, with respect to any series of preference shares, the terms
and rights of that series, including:
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the designation of the series;
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the number of shares of the series;
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the dividend rights, conversion rights, voting rights; and
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the rights and terms of redemption and liquidation preferences.
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Subject to the foregoing, our board of
directors may issue series of preference shares without action by our shareholders to the extent authorized but unissued. Accordingly,
the issuance of preference shares may adversely affect the rights of the holders of the ordinary shares. In addition, the issuance
of preference shares may be used as an anti-takeover device without further action on the part of the shareholders. Issuance of
preference shares may dilute the voting power of holders of ordinary shares.
Subject to applicable regulatory requirements,
our board of directors may issue additional ordinary shares without action by our shareholders to the extent of available authorized
but unissued shares. The issuance of additional ordinary shares may be used as an anti-takeover device without further action on
the part of the shareholders. Such issuance may dilute the voting power of existing holders of ordinary shares.
Our
ordinary shares are listed on the NASDAQ Capital Market under the symbol “FFHL”.
Committees of Board of Directors
Pursuant to our amended and restated articles
of association, our board of directors, we have established an audit committee, a compensation committee and a corporate governance
and nominating committee.
Differences in Corporate Law
The Companies Law is modeled after similar
laws in the United Kingdom but does not follow recent changes in United Kingdom laws. In addition, the Companies Law differs from
laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences
between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States,
such as in the State of Delaware.
Duties
and Directors
Under Cayman Islands law, at common law, members of a board
of directors owe a fiduciary duty to the company to act in good faith in their dealings with or on behalf of the company and exercise
their powers and fulfill the duties of their office honestly. This duty has four essential elements:
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a duty to act in good faith in the best interests of the company;
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a duty not to personally profit from opportunities that arise from the office of director;
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a duty to avoid conflicts of interest; and
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a duty to exercise powers for the purpose for which such powers were intended.
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In general, the Companies Law imposes various
duties on officers of a company with respect to certain matters of management and administration of the company. The Companies
Law contains provisions, which impose default fines on persons who fail to satisfy those requirements. However, in many circumstances,
an individual is only liable if he knowingly is guilty of the default or knowingly and willfully authorizes or permits the default.
In comparison, under Delaware law, the
business and affairs of a corporation are managed by or under the direction of its board of directors. In exercising their powers,
directors are charged with a fiduciary duty of care to protect the interests of the corporation and a fiduciary duty of loyalty
to act in the best interests of its shareholders. The duty of care requires that directors act in an informed and deliberative
manner and inform themselves, prior to making a business decision, of all material information reasonably available to them. The
duty of care also requires that directors exercise care in overseeing and investigating the conduct of the corporation’s
employees. The duty of loyalty may be summarized as the duty to act in good faith, not out of self-interest, and in a manner which
the director reasonably believes to be in the best interests of the shareholders.
Under Delaware law, a party challenging
the propriety of a decision of a board of directors bears the burden of rebutting the applicability of the presumptions afforded
to directors by the “business judgment rule”. If the presumption is not rebutted, the business judgment rule protects
the directors and their decisions, and their business judgments will not be second guessed. Where, however, the presumption is
rebutted, the directors bear the burden of demonstrating the entire fairness of the relevant transaction. Notwithstanding the foregoing,
Delaware courts subject directors’ conduct to enhanced scrutiny in respect of defensive actions taken in response to a threat
to corporate control and approval of a transaction resulting in a sale of control of the corporation.
Interested Directors
There are no provisions under the Companies
Law that require a director who is interested in a transaction entered into by a Cayman Islands company to disclose his interest.
However, under our amended and restated memorandum and articles of association, our directors are required to do so, and in the
event that they do not do so it may render such director liable to such company for any profit realized pursuant to such transaction.
In comparison, under Delaware law, such
a transaction would not be voidable if (a) the material facts as to such interested director’s relationship or interests
are disclosed or are known to the board of directors and the board in good faith authorizes the transaction by the affirmative
vote of a majority of the disinterested directors, even though the disinterested directors are less than a quorum, (b) such material
facts are disclosed or are known to the shareholders entitled to vote on such transaction and the transaction is specifically approved
in good faith by vote of the shareholders, or (c) the transaction is fair as to the corporation as of the time it is authorized,
approved or ratified. Under Delaware law, a director could be held liable for any transaction in which such director derived an
improper personal benefit.
Voting Rights and Quorum Requirements
Under Cayman Islands law, the voting rights
of shareholders are regulated by the company’s articles of association and, in certain circumstances, the Companies Law.
The articles of association will govern matters such as quorum for the transaction of business, rights of shares, and majority
votes required to approve any action or resolution at a meeting of the shareholders or board of directors. Under Cayman Islands
law, certain matters must be approved by a special resolution which is defined as two-thirds of the votes cast by shareholders
present at a meeting and entitled to vote or such higher majority as is specified in the articles of association; otherwise, unless
the articles of association otherwise provide, the majority is usually a simple majority of votes cast.
In comparison, under Delaware law, unless
otherwise provided in the corporation’s certificate of incorporation, each shareholder is entitled to one vote for each share
of stock held by the shareholder. Unless otherwise provided in the corporation’s certificate of incorporation or bylaws,
a majority of the shares entitled to vote, present in person or represented by proxy, constitutes a quorum at a meeting of shareholders.
In matters other than the election of directors, with the exception of special voting requirements related to extraordinary transactions,
the affirmative vote of a majority of shares present in person or represented by proxy at the meeting and entitled to vote is required
for shareholder action, and the affirmative vote of a plurality of shares is required for the election of directors.
Mergers and Similar Arrangements
A merger of two or more constituent companies
under Cayman Islands law requires a plan of merger or consolidation to be approved by the directors of each constituent company
and authorization by (a) a majority in number representing seventy-five percent (75%) in value of the shareholders voting together
as one class and (b) if the shares to be issued to each shareholder in the surviving company are to have the same rights and economic
value as the shares held in the constituent company, a special resolution of the shareholders voting together as one class.
A merger between a Cayman parent company
and its Cayman subsidiary or subsidiaries does not require authorization by a resolution of shareholders. For this purpose
a subsidiary is a company of which at least ninety percent (90%) of the issued shares entitled to vote are owned by the parent
company.
The consent of each holder of a fixed or
floating security interest over a constituent company is required unless this requirement is waived by a court in the Cayman Islands.
Save in certain circumstances, a dissentient
shareholder of a Cayman constituent company is entitled to payment of the fair value of his shares upon dissenting to a merger
or consolidation. The exercise of appraisal rights will preclude the exercise of any other rights save for the right to seek
relief on the grounds that the merger or consolidation is void or unlawful.
There are statutory provisions that facilitate
the reconstruction and amalgamation of companies, provided that the arrangement in question is approved by a majority in number
of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three fourths
in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by
proxy at a meeting, or meetings convened for that purpose.
The convening of the meetings and subsequently
the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder would have the right
to express to the court the view that the transaction should not be approved, the court can be expected to approve the arrangement
if it satisfies itself that:
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the company is not proposing to act illegally or ultra vires and the statutory provisions as to majority vote have been complied
with;
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the shareholders have been fairly represented at the meeting in question;
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the arrangement is such as a businessman would reasonably approve; and
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the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law or that would
amount to a “fraud on the minority”.
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When a takeover offer is made and accepted
by holders of 90% of the shares within four months, the offerer may, within a two-month period, require the holders of the remaining
shares to transfer such shares on the terms of the offer. An objection may be made to the Grand Court of the Cayman Islands but
is unlikely to succeed unless there is evidence of fraud, bad faith or collusion.
Cayman Islands laws do not require that
shareholders approve sales of all or substantially all of a company’s assets as is commonly adopted by U.S. corporations.
If the arrangement and reconstruction are
thus approved, any dissenting shareholders would have no rights comparable to appraisal rights, which would otherwise ordinarily
be available to dissenting shareholders of United States corporations, providing rights to receive payment in cash for the judicially
determined value of the shares.
Shareholders’ Suits
The Cayman Islands Grand Court Rules allow
shareholders to seek leave to bring derivative actions in the name of the Company against wrongdoers. In principle, we will normally
be the proper plaintiff and a derivative action may not be brought by a minority shareholder. However, based on English authorities,
who would in all likelihood be of persuasive authority in the Cayman Islands, exceptions to the foregoing principle apply in circumstances
in which:
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a company is acting or proposing to act illegally or beyond the scope of its authority;
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the act complained of, although not beyond the scope of its authority, could be effected duly if
authorized by more than a simple majority vote which has not been obtained; and
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those who control the company are perpetrating a “fraud on the minority.”
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Class actions and derivative actions generally
are available to shareholders under Delaware law for, among other things, breach of fiduciary duty, corporate waste and actions
not taken in accordance with applicable law. In such actions, the court generally has discretion to permit the winning party to
recover attorneys’ fees incurred in connection with such action.
Corporate Governance
Cayman
Islands laws do not restrict transactions with directors, requiring only that directors exercise a duty of care and owe a fiduciary
duty to the companies for which they serve. Under our amended and restated memorandum and articles of association, subject to any
separate requirement for audit committee approval under the applicable rules of the Nasdaq Stock Market, Inc. or unless
disqualified by the chairman of the relevant board meeting, so long as a director discloses the nature of his interest in any contract
or arrangement which he is interested in, such a director may vote in respect of any contract or proposed contract or arrangement
in which such director is interested and may be counted in the quorum at such meeting.
Cayman Islands law does not limit the extent
to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent
any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification
against civil fraud or the consequences of committing a crime. Our amended and restated memorandum and articles of association
provide for the indemnification of our directors, auditors and officers against all losses or liabilities incurred or sustained
by him or her as a director, auditor or officer of our company in defending any proceedings, whether civil or criminal, in which
judgment is given in his or her favor, or in which he or she is acquitted provided that this indemnity may not extend to any matter
in respect of any fraud or dishonesty which may attach to any of these persons.
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions,
we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities
Act and therefore is unenforceable.
We
are managed by our board of directors. Our amended and restated memorandum and articles of association provide that the number
of our directors shall not be less than two and there shall be no maximum number of our directors unless our shareholders in the
general meeting otherwise determine a maximum number. Currently we have set our board of directors to have 5 directors.
Any director on our board may be removed by way of an ordinary resolution of shareholders. At each annual general meeting, one
third of our directors for the time being (or, if their number is not a multiple of three, the number nearest to but not greater
than one-third) shall retire from office by rotation provided that the chairman of the Board and/or the managing director of the
Company shall not, whilst holding such office, be subject to retirement by rotation. Any vacancies on our board of directors or
additions to the existing board of directors can be filled by an ordinary resolution of our shareholders or the affirmative vote
of a majority of the remaining directors, although this may be less than a quorum where the number of remaining directors falls
below the minimum number fixed by our board of directors. Our directors are not required to hold any of our shares to be qualified
to serve on our board of directors.
Meetings of our board of directors may
be convened at any time deemed necessary by any one of our directors. Advance notice of a meeting is not required if each director
entitled to attend consents to the holding of such meeting.
A meeting of our board of directors at
which a quorum is present shall be competent to make lawful and binding decisions. At any meeting of our directors, each director
is entitled to one vote.
Questions arising at a meeting of our board
of directors are required to be decided by simple majority votes of the members of our board of directors present or represented
at the meeting. In the case of a tie vote, the chairman of the meeting shall have a second or deciding vote. Our board of directors
may also pass resolutions without a meeting by unanimous written consent.
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions,
we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities
Act and therefore is unenforceable.
Inspection of Corporate Records
Shareholders of a Cayman Islands company
have no general right under Cayman Islands law to inspect or obtain copies of a list of shareholders or other corporate records
of the company. However, these rights may be provided in the articles of association.
In comparison, under Delaware law, shareholders
of a Delaware corporation have the right during normal business hours to inspect for any proper purpose, and to obtain copies of
list(s) of shareholders and other books and records of the corporation and its subsidiaries, if any, to the extent the books and
records of such subsidiaries are available to the corporation.
Shareholder Proposals
The Companies Law does not provide shareholders
any right to bring business before a meeting or requisition a general meeting. However, these rights may be provided in the articles
of association.
Unless provided in the corporation’s
certificate of incorporation or bylaws, Delaware law does not include a provision restricting the manner in which shareholders
may bring business before a meeting.
Approval of Corporate Matters by Written Consent
The Companies Law allows a special resolution
to be passed in writing if signed by all the shareholders and authorized by the articles of association.
In comparison, Delaware law permits shareholders
to take action by written consent signed by the holders of outstanding stock having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting of shareholders.
Calling of Special Shareholders Meetings
The Companies Law does not have provisions
governing the proceedings of shareholders meetings that are usually provided in the articles of association.
In comparison, Delaware law permits the
board of directors or any person who is authorized under a corporation’s certificate of incorporation or bylaws to call a
special meeting of shareholders.
Staggered Board of Directors
The Companies Law does not contain statutory
provisions that require staggered board arrangements for a Cayman Islands company. Such provisions, however, may validly be provided
for in the articles of association.
In comparison, Delaware law permits corporations
to have a staggered board of directors.
Anti-takeover Provisions
Neither Cayman Islands nor Delaware law
prevents companies from adopting a wide range of defensive measures, such as staggered boards, blank check preferred, and removal
of directors only for cause and provisions that restrict the rights of shareholders to call meetings, act by written consent and
submit shareholder proposals.
C. Material Contracts.
In
April 2014, we obtained a loan for a total amount of RMB105 million from Shandong SNTON Optical Materials Technology Co.,
Ltd. (the “Shandong SNTON”) to pay off certain short-term loans due to Bank of Communications Co., Ltd. The interest
shall be calculated at the benchmark rate, plus an additional 20% of the said benchmark rate, for the loan of the same term announced
by the People’s Bank of China. The interest must be paid quarterly and settled in full at the end of the year. As of December
31, 2014, the principal of this loan and the interest have not been paid. In March 2015, we entered into a supplemental agreement
with Shandong SNTON pursuant to which the parties agreed that we will pay off the principal of this loan plus interest upon availability
of new loans from banks or other financial institutions.
As
of December 31, 2018, the principal of this loan from Shandong SNTON was RMB86.8 million and the interest was RMB32.5 million.
We
obtained three short-term loans from Bank of Weifang in June 2019 and July 2019 for the total amount of RMB65.0 million
(US$9.34 million). The principal amount of the above short-term loans is repayable at the end of the loan period, and is secured
by property, plant and equipment, and lease prepayments.
The
credit line amounting to RMB95.0 million (US$13.6 million) granted by Bank of Weifang was from July 2018 to July 2021. It was secured
by a pledge of plant and land use right. The credit line was used to purchase raw materials. As of December 31, 2019, the
amount of credit line granted by Bank of Weifang was all used.
D. Exchange Controls.
Chinese
government imposes control over the convertibility of RMB into foreign currencies. Under the current unified floating exchange
rate system, the People’s Bank of China publishes a daily exchange rate for RMB, or the PBOC Exchange Rate, based on the
previous day’s dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an authorized range above or below the PBOC Exchange Rate
according to market conditions.
Pursuant to the Foreign Exchange Control
Regulations issued by the State Council on January 29, 1996 and effective as of April 1, 1996 (and amended on January 14, 1997)
and the Administration of Settlement, Sale and Payment of Foreign Exchange Regulations which came into effect on July 1, 1996 regarding
foreign exchange control, or the Regulations, conversion of Renminbi into foreign exchange by foreign investment enterprises for
current account items, including the distribution of dividends and profits to foreign investors of joint ventures, is permissible
upon the proper production of qualified commercial vouchers or legal documents as required by the Regulations. Foreign investment
enterprises are permitted to remit foreign exchange from their foreign exchange bank account in China upon the proper production
of, inter alia, the board resolutions declaring the distribution of the dividend and payment of profits. Conversion of RMB into
foreign currencies and remittance of foreign currencies for capital account items, including direct investment, loans, security
investment, is still subject to the approval of the State Administration of Foreign Exchange, or SAFE, in each such transaction.
On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, an important
provision, as Article 5 provides that the State shall not impose restrictions on recurring international payments and transfers.
Under the Regulations, foreign investment
enterprises are required to open and maintain separate foreign exchange accounts for capital account items (but not for other items).
In addition, foreign investment enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct
foreign exchange business upon the production of valid commercial documents and, in the case of capital account item transactions,
document approval from SAFE.
Currently, foreign investment enterprises
are required to apply to SAFE for “foreign exchange registration certificates for foreign investment enterprises”.
With such foreign exchange registration certificates (which are granted to foreign investment enterprises, upon fulfilling specified
conditions and which are subject to review and renewal by SAFE on an annual basis) or with the foreign exchange sales notices from
the SAFE (which are obtained on a transaction-by-transaction basis), foreign-invested enterprises may enter into foreign exchange
transactions at banks authorized to conduct foreign exchange business to obtain foreign exchange for their needs.
E. Taxation.
United States Federal Income Taxation
General
The
following is a summary of the material U.S. federal income tax consequences of the acquisition, ownership, and disposition of our
ordinary shares, based upon laws and relevant interpretations thereof in effect as of the date of this Annual Report on
Form 20-F, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment
in our ordinary shares, such as the tax consequences under state, local or other tax laws.
The discussion below of the U.S. federal
income tax consequences to “U.S. Holders” will apply to a beneficial owner of our ordinary shares that is for
U.S. federal income tax purposes:
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an individual citizen or resident of the United States;
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a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized)
in or under the laws of the United States, any state thereof or the District of Columbia;
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an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
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a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons
are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a U.S. person.
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A
beneficial owner of our ordinary shares that is described above is referred to herein as a “U.S. Holder”. If a
beneficial owner of our ordinary shares is not described as a U.S. Holder and is not an entity treated as a partnership
or other pass-through entity for U.S. federal income tax purposes, such owner will be considered a “Non-U.S. Holder”.
The material U.S. federal income tax consequences applicable specifically to Non-U.S. Holders of owning and disposing of our ordinary
shares are described below under the heading “Non-U.S. Holders”.
This
summary is based on the Internal Revenue Code of 1986, as amended, or the Code, its legislative history, Treasury regulations promulgated
thereunder, published rulings and court decisions, all as currently in effect. These authorities are subject to change or
differing interpretations, possibly on a retroactive basis.
This
discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular holder based on
such holder’s individual circumstances. In particular, this discussion considers only holders that own and hold
our ordinary shares as capital assets within the meaning of Section 1221 of the Code, and does not address the potential application
of the alternative minimum tax. In addition, this discussion does not address the U.S. federal income tax consequences to holders
that are subject to special rules, including:
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financial institutions or financial services entities;
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persons that are subject to the mark-to-market accounting
rules under Section 475 of the Code;
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governments or agencies or instrumentalities thereof;
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regulated investment companies;
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real estate investment trusts;
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certain expatriates or former long-term residents
of the United States;
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persons that actually or constructively own 5% or
more of our voting shares;
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persons that acquired our ordinary shares pursuant
to an exercise of employee options, in connection with employee incentive plans or otherwise as compensation;
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persons that hold our ordinary shares as part of a
straddle, constructive sale, hedging, conversion or other integrated transaction;
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persons whose functional currency is not the U.S.
dollar;
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controlled foreign corporations; or
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passive foreign investment companies.
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This
discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or
non-U.S. tax laws or, except as discussed herein, any tax reporting obligations applicable to a holder of our ordinary shares.
Additionally, this discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who
hold our ordinary shares through such entities. If a partnership (or other entity classified as a partnership for U.S. federal
income tax purposes) is the beneficial owner of our ordinary shares, the U.S. federal income tax treatment of a partner in the
partnership will generally depend on the status of the partner and the activities of the partnership. This discussion also assumes
that any distribution made (or deemed made) by us on our ordinary shares and any consideration received (or deemed received) by
a holder in consideration for the sale or other disposition of our ordinary shares will be in U.S. dollars.
We
have not sought, and will not seek, a ruling from the Internal Revenue Service , or the IRS or an opinion of counsel as
to any U.S. federal income tax consequence described herein. The IRS may disagree with the description herein, and its determination
may be upheld by a court. Moreover, there can be no assurance that future legislation, regulations, administrative rulings or court
decisions will not adversely affect the accuracy of the statements in this discussion.
THIS
DISCUSSION IS ONLY A SUMMARY OF THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION
OF OUR ORDINARY SHARES. IT IS NOT TAX ADVICE. EACH HOLDER OF OUR ORDINARY SHARES IS URGED TO CONSULT ITS OWN TAX ADVISOR IN RESPECT
TO THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE
TAX TREATIES.
U.S. Holders
Taxation of Cash Distributions Paid on Ordinary Shares
Subject
to the passive foreign investment company or the PFIC rules discussed below, a U.S. Holder generally will be required to include
in gross income as ordinary income the amount of any cash dividend paid on our ordinary shares. A cash distribution
on our ordinary shares generally will be treated as a dividend for U.S. federal income tax purposes to the extent paid out of our
current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Such dividend generally
will not be eligible for the dividends-received deduction generally allowed to domestic corporations in respect of dividends received
from other domestic corporations. The portion of such distribution, if any, in excess of such earnings and profits generally
will constitute a return of capital that will be applied against and reduce (but not below zero) the U.S. Holder’s adjusted
tax basis in our ordinary shares. Any remaining excess generally will be treated as gain from the sale or other taxable disposition
of such ordinary shares and will be treated as described under “Taxation on the Disposition of Ordinary Shares”
below.
With
respect to non-corporate U.S. Holders, such cash dividends may be subject to U.S. federal income tax at the lower applicable regular
long term capital gains tax rate (see “-Taxation on the Disposition of Ordinary Shares” below) provided
that (a) our ordinary shares are readily tradable on an established securities market in the United States or, in the event we
are deemed to be a PRC “resident enterprise” under the relevant PRC tax laws, we are eligible for the benefits of the
Agreement between the Government of the United States of America and the Government of the People’s Republic of China for
the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income, or the U.S.-PRC Tax Treaty,
(b) we are not a PFIC, as discussed below, for either the taxable year in which the dividend was paid or the preceding taxable
year, and (c) certain holding period requirements are met. Under published IRS authority, shares are considered for purposes
of clause (a) above to be readily tradable on an established securities market in the United States only if they are listed on
certain exchanges, which presently include the NASDAQ Capital Market. Although our ordinary shares are currently listed and traded
on the NASDAQ Capital Market, U.S. Holders nonetheless should consult their own tax advisors regarding the availability of the
lower rate for any cash dividends paid in respect to our ordinary shares.
If
a PRC income tax applies to any cash dividends paid to a U.S. Holder on our ordinary shares, such tax may be treated as
a foreign tax eligible for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such
holder’s U.S. federal income tax liability (subject to applicable conditions and limitations). In addition, if such
PRC tax applies to any such dividends, a U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty if such
holder is considered a resident of the United States for purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax
Treaty. U.S. Holders should consult their own tax advisors regarding the deduction or credit for any such PRC tax and their
eligibility for the benefits of the U.S.-PRC Tax Treaty.
Taxation on the Disposition of Ordinary
Shares
Upon
a sale or other taxable disposition of our ordinary shares, and subject to the PFIC rules discussed below, a U.S. Holder generally
will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. Holder’s
adjusted tax basis in the ordinary shares.
The
regular U.S. federal income tax rate on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal
income tax rate on ordinary income, except that long-term capital gains recognized by non-corporate U.S. Holders generally
are subject to U.S. federal income tax at a maximum regular rate of 20%. Capital gain or loss will constitute long-term capital
gain or loss if the U.S. Holder’s holding period for our ordinary shares exceeds one year. The deductibility of capital
losses is subject to various limitations.
If
a PRC income tax applies to any gain from the disposition of our ordinary shares by a U.S. Holder, such tax may be treated as a
foreign tax eligible for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such
holder’s U.S. federal income tax liability (subject to applicable conditions and limitations). In addition, if such
PRC tax applies to any gain, such U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty if such holder
is considered a resident of the United States for purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax Treaty. U.S.
Holders should consult their own tax advisors regarding the deduction or credit for any such PRC tax and their eligibility for
the benefits of the U.S.-PRC Tax Treaty.
Passive Foreign Investment Company Rules
A
foreign (i.e., non-U.S.) corporation will be a PFIC if at least 75% of its gross income in a taxable year of the foreign
corporation, including its pro rata share of the gross income of any corporation in which it is considered to own at least 25%
of the shares by value, is passive income. Alternatively, a foreign corporation will be a PFIC if at least 50% of its assets in
a taxable year of the foreign corporation, ordinarily determined based on fair market value and averaged quarterly over the year,
including its pro rata share of the assets of any corporation in which it is considered to own at least 25% of the shares by value,
are held for the production of, or produce, passive income. Passive income generally includes dividends, interest, rents and royalties
(other than certain rents or royalties derived from the active conduct of a trade or business), and gains from the disposition
of passive assets.
Based
on the composition (and estimated values) of our assets and the nature of the income of us and our subsidiaries for our
2019 taxable year, we do not believe that we will be treated as a PFIC for such year. However, because we have not performed a
definitive analysis as to our PFIC status for our 2019 taxable year, there can be no assurance in respect to our PFIC status for
such taxable year. There also can be no assurance with respect to our status as a PFIC for our current taxable year (2019)
or any future taxable year. The determination of whether we are or have been a PFIC is primarily factual, and there is little administrative
or judicial authority on which to rely to make a determination of PFIC status. Accordingly, the IRS or a court considering the
matter may not agree with our analysis of whether we are or were a PFIC during any particular year.
If
we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder
of our ordinary shares, and, in the case of our ordinary shares, the U.S. Holder did not make either a timely qualified
electing fund, or QEF, election for our first taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold) our
ordinary shares, or a mark-to-market election, each as described below, such holder generally will be subject to special rules
for regular U.S. federal income tax purposes with respect to:
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any gain recognized by the U.S. Holder on the sale or other disposition of our ordinary shares; and
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any “excess distribution” made to the U.S. Holder (generally, any distributions to
such U.S. Holder during a taxable year of the U.S. Holder that are greater than 125% of the average annual distributions received
by such U.S. Holder in respect of the ordinary shares during the three preceding taxable years of such U.S. Holder or, if shorter,
such U.S. Holder’s holding period for the ordinary shares).
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Under these rules,
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the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s
holding period for the ordinary shares;
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the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized
the gain or received the excess distribution, or to the period in the U.S. Holder’s holding period before the first day of
our first taxable year in which we are qualified as a PFIC, will be taxed as ordinary income;
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the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will
be taxed at the highest tax rate in effect for that year and applicable to the U.S. Holder; and
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the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each
such other taxable year of the U.S. Holder.
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In
general, if we are determined to be a PFIC, a U.S. Holder may avoid the PFIC tax consequences described above in respect to our
ordinary shares by making a timely QEF election (or a QEF election along with a purging election). Pursuant to the QEF election,
a U.S. Holder generally will be required to include in income its pro rata share of our net capital gains (as long-term capital
gain) and other earnings and profits (as ordinary income), on a current basis, in each case whether or not distributed, in the
taxable year of the U.S. Holder in which or with which our taxable year ends if we qualified as a PFIC in that taxable year. However,
a U.S. Holder may make a QEF election only if we agree to provide certain tax information to such holder annually. At this time,
we do not intend to provide U.S. Holders with such information as may be required to make a QEF election effective.
Alternatively,
if a U.S. Holder, at the close of its taxable year, owns ordinary shares in a PFIC that are treated as marketable stock, the U.S.
Holder may make a mark-to-market election in respect to such ordinary shares for such taxable year. If the U.S. Holder makes
a valid mark-to-market election for the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed
to hold) ordinary shares and for which we are determined to be PFIC, such holder generally will not be subject to the PFIC rules
described above in respect to its ordinary shares as long as such shares continue to be treated as marketable stock. Instead,
in general, the U.S. Holder will include as ordinary income for each year that we are treated as a PFIC the excess, if any, of
the fair market value of its ordinary shares at the end of its taxable year over the adjusted tax basis in its ordinary shares.
The U.S. Holder also will be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted tax basis
of its ordinary shares over the fair market value of such shares at the end of its taxable year (but only to the extent of the
net amount of previously included income as a result of the mark-to-market election). The U.S. Holder’s adjusted tax basis
in its ordinary shares will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale or
other taxable disposition of the ordinary shares in a taxable year in which we are treated as a PFIC will be treated as ordinary
income. Special tax rules may also apply if a U.S. Holder makes a mark-to-market election for a taxable year after the first taxable
year in which the U.S. Holder holds (or is deemed to hold) our ordinary shares and for which we are determined to be PFIC.
The
mark-to-market election is available only for stock that is regularly traded on a national securities exchange that is registered
with the Securities and Exchange Commission, including the NASDAQ Capital Market, or on a foreign exchange or market
that the IRS determines has rules sufficient to ensure that the market price represents a legitimate and sound fair market value.
While our ordinary shares currently are listed and traded on the NASDAQ Capital Market, U.S. Holders nonetheless should consult
their own tax advisors regarding the availability and tax consequences of a mark-to-market election in respect to our ordinary
shares under their particular circumstances.
If
we are a PFIC and, at any time, have a foreign subsidiary that is classified as a PFIC, a U.S. Holder of our ordinary shares
should be deemed to own a portion of the shares of such lower-tier PFIC, and could incur liability for the deferred tax and
interest charge described above if we receive a distribution from, or dispose of all or part of our interest in, or the U.S. Holder
were otherwise deemed to have disposed of an interest in, the lower-tier PFIC. U.S. Holders are urged to consult their own
tax advisors regarding the tax issues raised by lower-tier PFICs.
A U.S.
Holder that owns (or is deemed to own) ordinary shares in a PFIC during any taxable year of the U.S. Holder may
have to file an IRS Form 8621 (whether or not a market-to-market election is or has been made) with such U.S. Holder’s
U.S. federal income tax return and provide such other information as may be required by the U.S. Treasury Department.
The rules dealing with PFICs and mark-to-market
elections are very complex and are affected by various factors in addition to those described above. Accordingly, U.S. Holders
of our ordinary shares should consult their own tax advisors concerning the application of the PFIC rules to our ordinary shares
under their particular circumstances.
Additional Taxes
Under
current law, U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds generally will be
subject to a 3.8% Medicare contribution tax on unearned income, including, without limitation, dividends on, and gains from
the sale or other taxable disposition of, our ordinary shares, subject to certain limitations and exceptions. U.S. Holders should
consult their own tax advisors regarding the effect, if any, of such tax on their ownership and disposition of our ordinary shares.
Non-U.S. Holders
Cash
dividends paid to a Non-U.S. Holder in respect to our ordinary shares generally will not be subject to U.S. federal income
tax, unless such dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within
the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed
base that such holder maintains or maintained in the United States).
In
addition, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other
taxable disposition of our ordinary shares unless such gain is effectively connected with its conduct of a trade or business in
the United States (and, if required by an applicable income tax treaty is attributable to a permanent establishment or fixed base
that such holder maintains or maintained in the United States) or the Non-U.S. Holder is an individual who is present in the United
States for 183 days or more in the taxable year of sale or other disposition and certain other conditions are met (in which case
such gain from U.S. sources generally is subject to U.S. federal income tax at a 30% rate or a lower applicable tax
treaty rate).
Cash
dividends and gains that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United
States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that
such holder maintains or maintained in the United States) generally will be subject to regular U.S. federal income
tax at the same regular U.S. federal income tax rates applicable to a comparable U.S. Holder and, in the case of a Non-U.S. Holder
that is a corporation for U.S. federal income tax purposes, may also be subject to an additional branch profits tax at a 30%
rate or a lower applicable tax treaty rate.
Backup Withholding and Information Reporting
In
general, information reporting for U.S federal income tax purposes should apply to cash distributions made on our ordinary
shares within the United States to a U.S. Holder (other than an exempt recipient) and to the proceeds from
sales and other dispositions of our ordinary shares by a U.S. Holder (other than an exempt recipient) to or through
a U.S. office of a broker. Payments made (and sales and other dispositions effected at an office) outside the United States will
be subject to information reporting in limited circumstances. In addition, certain information concerning a U.S. Holder’s
adjusted tax basis in its ordinary shares and adjustments to that tax basis and whether any gain or loss with respect to such ordinary
shares is long-term or short-term also may be required to be reported to the IRS, and certain holders may be required to file an
IRS Form 8938 (Statement of Specified Foreign Financial Assets) to report their interest in our ordinary shares.
Moreover, backup withholding of U.S. federal
income tax, at a rate of 24%, generally will apply to cash dividends paid on our ordinary shares to a U.S. Holder (other than an
exempt recipient) and the proceeds from sales and other dispositions of our ordinary shares by a U.S. Holder (other than an exempt
recipient), in each case who:
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fails to provide an accurate taxpayer identification number;
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is notified by the IRS that backup withholding is required; or
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in certain circumstances fails to comply with applicable certification requirements.
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A Non-U.S. Holder generally may eliminate
the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties
of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is not an additional
tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s
U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely
furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding and the
availability of and procedures for obtaining an exemption from backup withholding in their particular circumstances.
Other Non-United States Taxation Treatment
The following discussion is a summary of
certain anticipated PRC and Cayman Islands tax consequences of an investment in our ordinary shares. The discussion does not deal
with all possible tax consequences relating to an investment in our ordinary shares and does not purport to deal with the tax consequences
applicable to all categories of investors, some of which (such as dealers in securities, insurance companies and tax-exempt entities)
may be subject to special rules. In particular, the discussion does not address the tax consequences under state, local and other
national tax laws. Accordingly, each prospective investor should consult its own tax advisor regarding the particular tax consequences
to it of an investment in our ordinary shares. The following discussion 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.
China Taxation
There are significant uncertainties under
the new corporate income tax law of the PRC, or the New Tax Law, which became effective on January 1, 2008, regarding our PRC enterprise
income tax liabilities, such as a tax on any dividends paid to us by our PRC subsidiary. The New Tax Law also contains uncertainties
regarding possible PRC withholding tax on dividends we pay to our overseas shareholders and gains realized from the transfer of
our shares by our overseas shareholders.
We are a holding company incorporated in the Cayman Islands,
which indirectly holds, through Fuwei (BVI), our equity interest in Shandong Fuwei, our subsidiary and actual operating body in
the PRC. Our business operations are principally conducted through Shandong Fuwei.
Under the New Tax Law, enterprises established
under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered
to be PRC tax resident enterprises for tax purposes and subjected to the tax obligations of a PRC tax resident. If we
or Fuwei (BVI) is considered as a PRC tax resident enterprise under the New Tax Law, then our global income will be subject to
PRC enterprise income tax at the rate of 25%.
On April 22, 2009, the State Administration
of Taxation issued a Notice Regarding Recognition of Overseas Incorporated Enterprises Controlled by PRC Domestic Enterprises as
PRC Resident Enterprises Based on the De Facto Management Body Criteria (the “Tax Residency Notice”). Under the Tax
Residency Notice, which was retroactively effective as of January 1, 2008, an overseas enterprise will be deemed to be a PRC resident
enterprise and thus subject to Enterprise Income Tax of 25% on its global income if it satisfies four conditions: (i) the company’s
management team responsible for daily operations are located in China, or the location where the management team carries out their
responsibilities is in China; (ii) finance and personnel decisions are made or need approval by institutions or people in China;
(iii) the company’s major property, accounting ledger, company seal and minutes of board meetings and shareholder meetings
are kept in China; and (iv) at least half of the members of the board of directors with voting rights or the management team habitually
live in China.
Although
the Tax Residency Notice applies only to overseas registered enterprises controlled by PRC enterprises, not to those controlled
by PRC individuals, the determining criteria set forth in the Tax Residency Notice may reflect the State Administration of Taxation’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 or individuals. If we are deemed a PRC resident
enterprise, we may be subject to the Enterprise Income Tax at 25% on our global income. If we are considered a resident enterprise
and earn income other than dividends from our PRC subsidiaries, a 25% Enterprise Income Tax on our global income could significantly
increase our tax burden and materially and adversely affect our cash flow and profitability.
However, China-sourced income of foreign
enterprises, such as dividends paid by a PRC subsidiary to its overseas parent, will normally be subject to PRC tax.
Furthermore, the implementation rules of
the New Tax Law provide that (i) if the enterprise that distributes the 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 New Tax Law, and it may be
interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we are considered as a PRC resident
enterprise for PRC tax purposes, any dividends we pay to our overseas shareholders as well as gains realized by such shareholders
from the transfer of our shares may be regarded as China-sourced income and, thus, may be subject to PRC tax.
If
dividend payments from Shandong Fuwei and from Fuwei (BVI) to us are subject to PRC withholding tax, our financial condition and
results of operations and the amount of dividends available to pay our shareholders may be adversely affected. Also, if dividends
we pay to our overseas shareholders or gains realized by such shareholders from the transfer of our shares are subject to PRC tax,
it may materially and adversely affect your investment return and the value of your investment in us. There is an income tax
treaty in effect between the United States and China, so U.S. shareholders may be entitled to certain benefits under such treaty.
Cayman Island Taxation
The
Cayman Islands currently has no exchange control restrictions. 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 the Company levied by the government of the Cayman Islands, save
certain stamp duties which may be applicable, from time to time, on certain instruments executed in or brought within the jurisdiction
of the Cayman Islands. The Cayman Islands is not a party to any double tax treaties.
Pursuant to section 6 of the Tax Concessions
Law (1999 Revision) of the Cayman Islands, the Company has obtained an undertaking from the Governor in Cabinet:
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(a)
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that no law which is enacted in the Cayman Islands imposing
any tax to be levied on profits or income or gains or appreciation shall apply to the Company or its operations; and
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(b)
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in addition, that no tax is levied on profits, income,
gains or appreciation or no tax which is in the nature of estate duty or inheritance tax shall be payable by the Company:
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(i)
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on or in respect of the shares, debentures or other obligations of the Company; or
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(ii)
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by way of withholding in whole or in part of any relevant payment as defined in section 6(3) of
the Tax Concession Law (1999 Revision).
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The
undertaking is for a period of 20 years from August 24, 2004.
F. Dividends and Paying Agents.
Not applicable.
G.
Statement by Experts.
Not applicable.
H. Documents on Display
We are subject to the periodic reporting
and other informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange
Act, we are required to file reports and other information with the Securities and Exchange Commission. Specially, we are required
to file annually a Form 20-F no later than six month after the close of each fiscal year, which is December 31. Copies of reports
and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference
facilities maintained by the Securities and Exchange Commission at Judiciary Plaza, 100 F. Street, N.E., Washington, D.C. 20549.
The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330.
The SEC also maintains a Web site at www.sec.gov that contains reports, proxy and information statements, and other information
regarding registrants that make electronic filings with the SEC using its EDGAR system.
As a foreign private issuer, we are exempt
from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers,
directors and principal shareholders are exempt from the reporting requirements pursuant to Section 16 of the Exchange Act.
Documents concerning the Company that are
referred to in this document may also be inspected at our office, which is at No. 387 Dongming Road, Weifang Shandong 261061, People’s
Republic of China.
I.
Subsidiary Information.
Not applicable.