The accompanying notes are an integral part
of these unaudited condensed consolidated statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per share
value)
(Unaudited)
NOTE 1 – BACKGROUND
Fuwei Films (Holdings) Co., Ltd. and its subsidiaries
(the “Company” or the “Group”) are principally engaged in the production and distribution of BOPET film,
a high-quality plastic film widely used in packaging, imaging, electronics, electrical and magnetic products in the People’s
Republic of China (the “PRC”). The Company is a holding company incorporated in the Cayman Islands, established on
August 9, 2004 under the Cayman Islands Companies Law as an exempted company with limited liability. The Company was established
for the purpose of acquiring shares in Fuwei (BVI) Co., Ltd. (“Fuwei (BVI)”), an intermediate holding company established
for the purpose of acquiring all of the ownership interest in Fuwei Films (Shandong) Co., Ltd. (“Shandong Fuwei”).
On August 20, 2004, the Company was allotted
and issued one ordinary share of US$1.00 in Fuwei (BVI) (being the entire issued share capital of Fuwei (BVI)), thereby establishing
Fuwei (BVI) as the intermediate investment holding company of the Company.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Principles
The accompanying unaudited condensed consolidated
financial statements have been prepared by the Company, pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission (the “SEC”) as applicable to smaller reporting companies, and generally accepted accounting principles for
interim financial reporting. The information furnished herein reflects all adjustments (consisting of normal recurring accruals
and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective
periods. Certain information and footnote disclosures normally presented in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted
pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 20-F for
the year ended December 31, 2017 filed on April 23, 2018 with the SEC. The results of the nine-month period ended September 30,
2018 are not necessarily indicative of the results to be expected for the full year ended December 31, 2018.
Principles of Consolidation
The condensed consolidated financial statements
include the financial statements of the Company and its three subsidiaries. All significant inter-company balances and transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of the condensed consolidated
financial statements in accordance with U.S. GAAP requires management of the Company to make a number of estimates and assumptions
relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates. On an ongoing basis, management reviews its estimates and assumptions, including those related
to the recoverability of the carrying amount and the estimated useful lives of long-lived assets, valuation allowances for accounts
receivable and realizable values for inventories. Changes in facts and circumstances may result in revised estimates.
FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per share
value)
(Unaudited)
Foreign Currency Transactions
The Company’s reporting currency is Chinese
Yuan (Renminbi or “RMB”).
Fuwei Films (Holdings) Co., Ltd. and Fuwei
(BVI) operate in Hong Kong as investment holding companies and their financial records are maintained in Hong Kong dollars,
being the functional currency of these two entities. Assets and liabilities are translated into RMB at the exchange rates at the
balance sheet date, equity accounts are translated at historical exchange rates and income, expenses, and cash flow items are translated
using the average rate for the period. The translation adjustments are recorded in accumulated other comprehensive income in the
statements of equity. The changes in the translation adjustments for the current period were reported as the line items of other
comprehensive income in the consolidated statements of comprehensive income.
Transactions denominated in currencies other
than RMB are translated into RMB at the exchange rates quoted by the People’s Bank of China (the “PBOC”) prevailing
at the dates of transactions. Monetary assets and liabilities denominated in foreign currencies are translated into RMB using the
applicable exchange rates quoted by the PBOC at the balance sheet dates. The resulting exchange differences are recorded in the
consolidated statements of comprehensive income.
RMB is not fully convertible into foreign currencies.
All foreign exchange transactions involving RMB must take place either through the PBOC or other institutions authorized to buy
and sell foreign currency. The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by
the PBOC which are determined largely by supply and demand.
Commencing July 21, 2005, the PRC government
moved the RMB into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies.
For the convenience of the readers, the third
quarter of 2018 RMB amounts included in the accompanying condensed consolidated financial statements in our quarterly report have
been translated into U.S. dollars at the rate of US$1.00 = RMB6.8680, on the last trading day of the third quarter of 2018 (September
30, 2018) as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB
amounts could have been, or could be, converted into U.S. dollar at that rate or at any other certain rate on September 30, 2018,
or at any other date.
Cash and Cash Equivalents and Restricted Cash
For statements of cash flow purposes, the Company
considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other highly-liquid
investments with maturities of three months or less, when purchased, maintained within the United States as well as in foreign
countries to be cash and cash equivalents. The Company maintains balances at financial institutions which, from time to time, may
exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States. Balances at financial institutions
within certain foreign countries are not covered by insurance.
FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per share
value)
(Unaudited)
Restricted cash refers to the cash balance
held by bank as deposit for Letters of Credit and Bank Acceptance Bill. The Company has restricted cash of RMB60,990 (US$8,880)
and RMB56,501 as of September 30, 2018 and December 31, 2017, respectively.
Trade Accounts Receivable
Trade accounts receivable are recorded at the
invoiced amount after deduction of trade discounts, value added taxes and allowances, if any, and do not bear interest. The allowance
for doubtful accounts is the Group’s best estimate of the amount of probable credit losses in the Group’s existing
accounts receivable. The Group determines the allowance based on historical write-off experience, customer specific facts and economic
conditions.
The Group reviews its allowance for doubtful
accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. All
other balances are reviewed on a pooled basis by aging of such balances. Account balances are charged off against the allowance
after all means of collection have been exhausted and the potential for recovery is considered remote.
Inventories
Inventories are stated at the lower of cost
or market value as of balance sheet date. Inventory valuation and cost-flow is determined using Moving Weighted Average Method
basis. The Group estimates excess and slow-moving inventory based upon assumptions of future demands and market conditions. If
actual market conditions are less favorable than projected by management, additional inventory write-downs may be required. Cost
of work in progress and finished goods comprises direct material, direct production cost and an allocated portion of production
overheads based on normal operating capacity.
Property, Plant and Equipment
Property, plant and equipment are stated at
cost less accumulated depreciation and impairment. Depreciation on property, plant and equipment is calculated on the straight-line
method (after taking into account their respective estimated residual values) over the estimated useful lives of the assets. They
are as follows:
|
|
Years
|
|
Buildings and improvements
|
|
25 - 30
|
|
Plant and equipment
|
|
10 - 15
|
|
Computer equipment
|
|
5
|
|
Furniture and fixtures
|
|
5
|
|
Motor vehicles
|
|
5
|
|
Depreciation of property, plant and equipment
attributable to manufacturing activities is capitalized as part of the inventory and expensed to cost of goods sold when inventory
is sold. Depreciation related to abnormal amounts from idle capacity is charged to general and administrative expenses for the
period incurred.
Construction in progress represents capital
expenditures with respect to the BOPET production line. No depreciation is provided with respect to construction in progress.
FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per share
value)
(Unaudited)
Leased Assets
An arrangement, comprising a transaction or
a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to use a specific
asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based
on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.
Classification of assets leased to the Group
.
Assets that are held by the Group under leases which transfer to the Group substantially all the risks and rewards of ownership
are classified as being held under capital leases. Leases which do not transfer substantially all the risks and rewards of ownership
to the Group are classified as operating leases.
Assets acquired under capital leases.
Where the Group acquires the use of assets under capital leases, the amounts representing the fair value of the leased asset, or,
if lower, the present value of the minimum lease payments, of such assets are included in property, plant and equipment and the
corresponding liabilities, net of finance charges, are recorded as obligations under capital leases. Depreciation is provided at
rates which write off the cost or valuation of the assets over the term of the relevant lease or, where it is likely the Group
will obtain ownership of the asset, the life of the asset. Finance charges implicit in the lease payments are charged to the consolidated
income statement over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining
balance of the obligations for each accounting period. Contingent rentals are charged to the consolidated income statement in the
accounting period in which they are incurred.
Operating lease charges
. Where the Group
has the use of assets held under operating leases, payments made under the leases are charged to the consolidated income statement
in equal installments over the accounting periods covered by the lease term, except where an alternative basis is more representative
of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognized in the consolidated income
statement as an integral part of the aggregate net lease payments made. Contingent rentals are charged to the consolidated income
statement in the accounting period in which they are incurred.
Sale and leaseback transactions.
Gains
or losses on equipment sale and leaseback transactions which result in capital leases are deferred and amortized over the terms
of the related leases. Gains or losses on equipment sale and leaseback transactions which result in operating leases are recognized
immediately if the transactions are established at fair value. Any loss on the sale perceived to be a real economic loss is recognized
immediately. However, if a loss is compensated for by future rentals at a below-market price, then the artificial loss is deferred
and amortized over the period that the equipment is expected to be used. If the sale price is above fair value, then any gain is
deferred and amortized over the useful life of the assets.
Lease Prepayments
Lease prepayments represent the costs of land
use rights in the PRC. Land use rights are carried at cost and charged to expense on a straight-line basis over the respective
periods of rights of 30 years. The non-current portion and current portion of lease prepayments have been reported in Lease Prepayments,
Prepayments and Other Receivables in the balance sheets, respectively.
FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per share
value)
(Unaudited)
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.
Revenue Recognition
Sales of plastic films are reported, net of
value added taxes (“VAT”), sales returns, and trade discounts. The standard terms and conditions under which the Company
generally delivers allow a customer the right to return product for refund only if the product does not conform to product specifications;
the non-conforming product is identified by the customer; and the customer rejects the non-conforming product and notifies the
Company within 30 days of receipt for both PRC and overseas customers. The Company recognizes revenue when products are delivered,
and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence
of an arrangement exists and the sales price is fixed or determinable.
In the PRC, VAT of 16% on the invoice amount
is collected with respect to the sales of goods on behalf of tax authorities. The VAT collected is not revenue of the Company,
instead, the amount is recorded as a liability on the consolidated balance sheet until such VAT is paid to the authorities.
Income Taxes
Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(Loss) Earnings Per Share
Basic (loss) earnings per share is computed
by dividing net earnings by the weighted average number of ordinary shares outstanding during the year. Diluted (loss) earnings
per share is calculated by dividing net earnings by the weighted average number of ordinary and dilutive potential ordinary shares
outstanding during the year. Diluted potential ordinary shares consist of shares issuable pursuant to the Company’s stock
option plan.
FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per share
value)
(Unaudited)
Share-Based Payments
The Company accounts for share based payments
under the modified-prospective transition method, which requires companies to measure and recognize the cost of employee services
received in exchange for an award of equity instruments based on the grant-date fair value.
Contingencies
In the normal course of business, the Company
is subject to contingencies, including legal proceedings and claims arising out of the business that relate to a wide range of
matters, including among others, product liability. The Company recognizes a liability for such contingency if it determines it
is probable that a loss has occurred, and a reasonable estimate of the loss can be made. The Company may consider many factors
in making these assessments including past history and the specifics of each matter.
Reclassification
For comparative purposes, the prior year’s
consolidated financial statements have been reclassified to conform to reporting classifications of the current year periods. These
reclassifications had no effect on net loss or total net cash flows as previously reported.
Going Concern Matters
The accompanying condensed consolidated financial
statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the
company as a going concern. However, as of September 30, 2018 and 2017, the Company had a working capital deficiency of RMB164,885
(US$24,008) and RMB176,150 and accumulated deficit of RMB18,715 (US$2,725) and RMB35,877 from net losses incurred during the first
nine months of 2018 and 2017. Confronted with the fierce competition in the BOPET industry in China, the Company may still witness
losses over the next twelve months. The ability of the Company to operate as a going concern depends upon its ability to obtain
loans from financial institutions and a related party and/or generate positive cash flow from operations. The Company accordingly
has obtained loans from financial institutions and related party to meet the need of working capital for our operation or debts.
At the same time, the Company will continue implementing strict cost reductions on both manufacturing costs and operating expenses
to improve profit margins. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability
and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company
be unable to continue as a going concern.
Recently Issued Accounting Standards
Revenue
Recognition:
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers
(Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued
ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective
date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective
date. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606):
Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08) which clarifies the implementation guidance
on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls
a specified good or service before it is transferred to the customers. The new revenue recognition standard was effective for us
in the first quarter of 2018. We adopted the new standard effective January 1, 2018 using the modified retrospective method.
FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per share
value)
(Unaudited)
Based
on the evaluation for our sales contracts under the ASC 606 requirement of following the five-step actions to judge revenue recognition,
we usually recognize our revenue when the film-products have been delivered to our customers and all the risks relating to the
goods have been transferred, and rights of payment for delivered goods have been vested as well.
Financial
Instrument
In January
2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities” (“ASU 2016-01”). The standard addresses certain aspects of recognition,
measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years, and interim periods
within those years, beginning after December 15, 2017, and early adoption is not permitted. Accordingly, the standard is effective
for us on September 1, 2018. The Company is currently evaluating the impact that the standard will have on the Company’s
consolidated financial statements.
Leases
In February
2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-2”), which provides guidance on lease amendments
to the FASB Accounting Standard Codification. This ASU will be effective for us beginning in May 1, 2019. The Company is currently
in the process of evaluating the impact of the adoption of ASU 2016-2 on the Company’s 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. The Company
is still evaluating the effect that this guidance will have on the Company’s consolidated financial statements and related
disclosures.
FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per share
value)
(Unaudited)
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.
NOTE 3 - ACCOUNTS AND BILLS RECEIVABLES
Accounts and bills receivables consisted of the
following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
Accounts receivable
|
|
|
15,255
|
|
|
|
2,222
|
|
|
|
18,588
|
|
Less: Allowance for doubtful accounts
|
|
|
(2,334
|
)
|
|
|
(340
|
)
|
|
|
(2,467
|
)
|
|
|
|
12,921
|
|
|
|
1,882
|
|
|
|
16,121
|
|
Bills receivable
|
|
|
2,653
|
|
|
|
386
|
|
|
|
4,002
|
|
|
|
|
15,574
|
|
|
|
2,268
|
|
|
|
20,123
|
|
The Group 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. These receivables are due within 7 to 90 days from the date of billing. Generally, the Group does not obtain
collateral from customers. Bills receivable are banker’s acceptance bills, which are guaranteed by the bank.
NOTE 4 - INVENTORIES
Inventories consisted of the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
Raw materials
|
|
|
17,688
|
|
|
|
2,576
|
|
|
|
19,626
|
|
Work-in-progress
|
|
|
1,594
|
|
|
|
232
|
|
|
|
1,277
|
|
Finished goods
|
|
|
11,820
|
|
|
|
1,721
|
|
|
|
9,195
|
|
Consumables and spare parts
|
|
|
612
|
|
|
|
89
|
|
|
|
600
|
|
Inventory--impairment
|
|
|
(6,120
|
)
|
|
|
(891
|
)
|
|
|
(6,120
|
)
|
|
|
|
25,594
|
|
|
|
3,727
|
|
|
|
24,578
|
|
FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per share
value)
(Unaudited)
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT,
NET
Property, plant and equipment consisted of
the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
Buildings
|
|
|
68,319
|
|
|
|
9,947
|
|
|
|
68,319
|
|
Plant and equipment
|
|
|
809,363
|
|
|
|
117,846
|
|
|
|
803,710
|
|
Computer equipment
|
|
|
3,045
|
|
|
|
443
|
|
|
|
3,075
|
|
Furniture and fixtures
|
|
|
13,822
|
|
|
|
2,013
|
|
|
|
13,815
|
|
Motor vehicles
|
|
|
1,824
|
|
|
|
266
|
|
|
|
1,936
|
|
|
|
|
896,373
|
|
|
|
130,515
|
|
|
|
890,855
|
|
Less: accumulated depreciation
|
|
|
(546,554
|
)
|
|
|
(79,580
|
)
|
|
|
(512,577
|
)
|
Less: impairment of plant and equipment
|
|
|
(7,219
|
)
|
|
|
(1,051
|
)
|
|
|
(7,219
|
)
|
|
|
|
342,600
|
|
|
|
49,884
|
|
|
|
371,058
|
|
Total depreciation for the nine-month periods
ended September 30, 2018 and 2017 was RMB33,271 (US$4,844) and RMB32,334, respectively. For the three-month periods ended September
30, 2018 and 2017, depreciation expenses were RMB11,144 (US$1,500) and RMB10,606, respectively.
NOTE 6 - CONSTRUCTION IN PROGRESS
Construction-in-progress represents capital
expenditure in respect to the BOPET production line. Construction in progress was RMB366 (US$53) as of September 30, 2018, and
RMB366 as of December 31, 2017, respectively.
NOTE 7 - LEASE PREPAYMENTS
Lease prepayments represent the costs of land
use rights in the PRC. Land use rights are carried at cost and charged to expense on a straight-line basis over the respective
periods of rights of 30 years. The current portion of lease prepayments has been included in prepayments and other receivables
in the balance sheet.
Lease prepayments consisted of the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
Lease prepayment - non current
|
|
|
16,429
|
|
|
|
2,392
|
|
|
|
16,830
|
|
Lease prepayment - current
|
|
|
524
|
|
|
|
76
|
|
|
|
524
|
|
|
|
|
16,953
|
|
|
|
2,468
|
|
|
|
17,354
|
|
Amortization of land use rights for the nine
months ended September 30, 2018 and 2017 was RMB400 (US$58) and RMB394, respectively. Amortization of land use rights for the three
months ended September 30, 2018 and 2017 was RMB134 (US$18) and RMB132, respectively.
FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per share
value)
(Unaudited)
Estimated amortization expenses for the next
five years after September 30, 2018 are as follows:
|
|
RMB
|
|
|
US$
|
|
1 year after
|
|
|
524
|
|
|
|
76
|
|
2 years after
|
|
|
524
|
|
|
|
76
|
|
3 years after
|
|
|
524
|
|
|
|
76
|
|
4 years after
|
|
|
524
|
|
|
|
76
|
|
5 years after
|
|
|
524
|
|
|
|
76
|
|
Thereafter
|
|
|
14,333
|
|
|
|
2,088
|
|
As of September 30, 2018, the amount of RMB524
(US$76) will be charged into amortization expenses within one year, and is classified as current asset under the separate line
item captioned as Prepayments and Other Receivables on balance sheets.
NOTE 8 - SHORT-TERM BORROWINGS AND LONG-TERM
LOAN
Short-term borrowings and long-term loan consisted
of the following:
|
|
Interest
rate per
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Lender
|
|
annum
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
BANK LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of Weifang.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- July 17, 2018 to July 15, 2019
|
|
|
6.5
|
%
|
|
|
20,000
|
|
|
|
2,912
|
|
|
|
-
|
|
- July 17, 2018 to July 17, 2019
|
|
|
6.5
|
%
|
|
|
29,950
|
|
|
|
4,361
|
|
|
|
-
|
|
- August 1, 2017 to July 28, 2018
|
|
|
6.5
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
- June 21, 2018 to June 19, 2019
|
|
|
6.5
|
%
|
|
|
15,000
|
|
|
|
2,184
|
|
|
|
-
|
|
Notes:
The principal amounts of the above loans are
repayable at the end of the loan period.
NOTE 9 - RELATED PARTY
TRANSACTIONS
Due to related parties
In April 2014, the Company obtained a loan
for a total amount of RMB105,000 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, the Company entered into a supplemental agreement with Shandong SNTON
pursuant to which the parties agreed that the Company will pay off the principal of this loan plus interest upon availability of
new loans from banks or other financial institutions.
As of September 30, 2018, the principal of
this loan from Shandong SNTON was RMB86,874 and the interest payable was RMB26,806.
FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per share
value)
(Unaudited)
As of September 30, 2018, the accounts payable
resulting from purchasing from related party was RMB78.
During the third quarter of 2018, the Company
purchased 249 Metric Tons of final products of BOPET from Shandong SNTON for a total amount of RMB2,525.
The related accounts payable as of September
30, 2018 and December 31, 2017 was RMB113,602 and RMB151,074, respectively.
NOTE 10 - NOTES PAYABLE
As of September 30, 2018 and December 31, 2017,
Shandong Fuwei had banker’s acceptances opened with a maturity from three to six months totaling RMB90,980 (US$13,247) and
RMB67,900, respectively, for payment in connection with raw materials for a total security deposits of RMB60,990 (US$8,880) and
RMB56,450 made to the SPD Bank and Bank of Weifang, respectively.
Notes payable consisted of the following:
Issuing bank
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
SPD Bank
|
|
|
-
|
|
|
|
-
|
|
|
|
37,900
|
|
Bank of Weifang
|
|
|
90,980
|
|
|
|
13,247
|
|
|
|
30,000
|
|
|
|
|
90,980
|
|
|
|
13,247
|
|
|
|
67,900
|
|
NOTE 11 - INCOME TAX
Income tax benefit
was RMB15 (US$2) and RMB54 for the three months ended September 30, 2018 and 2017, respectively.
Income tax benefit was RMB49 (US$7) and RMB168
for the nine months ended September 30, 2018 and 2017, respectively
NOTE 12 - LOSS PER SHARE
Basic and diluted net loss per share was RMB0.57
(US$0.08) and RMB3.70 for the three-month period ended September 30, 2018 and 2017, respectively.
Basic and diluted net loss per share was RMB5.73
(US$0.83) and RMB10.99 for the nine-month period ended September 30, 2018 and 2017, respectively.
NOTE 13 - MAJOR CUSTOMERS AND VENDORS
There were no major customers who accounted
for more than 10% of the total net revenue for the three-month periods ended September 30, 2018 and 2017.
FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per share
value)
(Unaudited)
The following are the vendors that supplied
10% or more of our raw materials for September 30, 2018 and 2017:
|
|
|
|
Percentage of total purchases (%)
|
|
Supplier
|
|
Item
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
PetroChina Company Limited Chemicals Sales North China Branch (“PetroChina”)
|
|
PET resin and Additives
|
|
|
38.1
|
%
|
|
|
-
|
|
Sinopec Yizheng Chemical Fibre Company Limited (“Sinopec Yizheng”)
|
|
PET resin and Additives
|
|
|
35.3
|
%
|
|
|
42.5
|
%
|
PetroChina Company Limited Chemicals Sales East China Branch (“PetroChina”)
|
|
PET resin and Additives
|
|
|
-
|
|
|
|
25.2
|
%
|
Weifang Power Supply Company.
|
|
Electric power
|
|
|
8.7
|
%
|
|
|
10.7
|
%
|
The balance of advance to supplier to Sinopec
Yizheng and PetroChina was RMB1,396 (US$203) and RMB5,611 as of September 30, 2018, respectively.
References to "dollars" and "US$"
are to United States Dollars. References to "we", "us", the "Company" or "Fuwei Films"
include Fuwei Films (Holdings) Co., Ltd. and its subsidiaries, except where the context requires otherwise.
In the third quarter of 2018, although sales
were higher, we continued to be adversely affected by enhanced competition and increased supply over demand in China’s BOPET
market.
We believe that in the remaining quarter of
2018, there will be a growing capacity of BOPET films in China and stronger competition in the market. Our ability to retain effective
control over the pricing of our products on a timely basis is limited due to the enhanced competition in the BOPET market.
On August 14, 2013, we announced the receipt
of 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. The beneficial ownership of 6,912,503 of our ordinary shares previously owned by the
Administration Company through Apex Glory Holdings Limited, a British Virgin Islands corporation, was bid on by Shandong SNTON
Optical Materials Technology Co., Ltd. (“Shandong SNTON”) through the public auction. Shandong SNTON received 6,912,503
(or 52.9%) of our outstanding ordinary shares at a price of RMB101,800,000 (approximately US$16,572,787) or approximately US$2.40
per ordinary share.
On May 12, 2014, we announced that we had learned
that the successful bidder, Shandong SNTON in the fifth public auction of 6,912,503 (or 52.9%) of our 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, we believe 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. (the “SNTON Group”). Mr. Xiusheng Wang, the chairman of the Board
of Directors of SNTON Group is also Hongkong Ruishang’s chairman.
On May 14, 2014, we announced that we had 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 our outstanding ordinary shares through Easebright. Mr.
Jingang Yang has been appointed as the director of Easebright.
Results of operations for the three-month periods
ended September 30, 2018 compared to September 30, 2017
The table below sets forth certain line items
from our Statement of Income as a percentage of revenue:
|
|
Three-Month Period Ended
|
|
|
Three-Month Period Ended
|
|
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
|
(as % of Revenue)
|
|
Gross profit (loss)
|
|
|
19.6
|
|
|
|
9.1
|
|
Operating expenses
|
|
|
(20.5
|
)
|
|
|
(22.1
|
)
|
Operating income (loss)
|
|
|
(0.9
|
)
|
|
|
(13.0
|
)
|
Other income (expense)
|
|
|
(1.3
|
)
|
|
|
(3.4
|
)
|
Provision for income taxes
|
|
|
0.02
|
|
|
|
0.07
|
|
Net income (loss)
|
|
|
(2.1
|
)
|
|
|
(16.4
|
)
|
Revenue
Net sales during the third quarter ended September
30, 2018 were RMB86.9 million (US$12.6 million), compared to RMB73.9 million during the same period in 2017, representing an increase
of RMB13.0 million or 17.6%. The increase of average sales price caused an increase of RMB18.6 million and the sales volume decrease
caused a decrease of RMB5.6 million.
In the third quarter of 2018, sales of specialty
films were RMB45.3 million (US$6.6 million) or 52.2% of our total revenues as compared to RMB28.5 million or 38.6% in the same
period of 2017, which was an increase of RMB16.8 million, or 58.9% as compared to the same period in 2017. The increase in average
sales price caused an increase of RMB2.9 million and the increase in the sales volume caused an increase of RMB13.9 million.
The following is a breakdown of commodity and
specialty film sales (amounts in thousands):
|
|
Three-Month Period Ended
September
30, 2018
|
|
|
% of Total
|
|
|
Three-Month Period Ended
September
30, 2017
|
|
|
% of Total
|
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
RMB
|
|
|
|
|
Stamping and transfer film
|
|
|
30,650
|
|
|
|
4,464
|
|
|
|
35.3
|
%
|
|
|
29,588
|
|
|
|
40.0
|
%
|
Printing film
|
|
|
6,293
|
|
|
|
916
|
|
|
|
7.2
|
%
|
|
|
7,068
|
|
|
|
9.6
|
%
|
Metallization film
|
|
|
773
|
|
|
|
112
|
|
|
|
0.9
|
%
|
|
|
1,874
|
|
|
|
2.5
|
%
|
Specialty film
|
|
|
45,325
|
|
|
|
6,599
|
|
|
|
52.2
|
%
|
|
|
28,487
|
|
|
|
38.6
|
%
|
Base film for other application
|
|
|
3,832
|
|
|
|
558
|
|
|
|
4.4
|
%
|
|
|
6,839
|
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,872
|
|
|
|
12,649
|
|
|
|
100.0
|
%
|
|
|
73,857
|
|
|
|
100.0
|
%
|
Overseas sales were RMB8.5 million or US$1.2
million, or 9.8% of total revenues, compared with RMB15.2 million or 20.6% of total revenues in the third quarter of 2017. The
increase in average sales price caused an increase of RMB2.3 million and the decrease in sales volume resulted in a decrease of
RMB9.0 million.
The following is a breakdown of PRC domestic and
overseas sales (amounts in thousands):
|
|
Three-Month
Period Ended
September 30, 2018
|
|
|
% of Total
|
|
|
Three-Month
Period Ended
September 30, 2017
|
|
|
% of Total
|
|
|
|
|
RMB
|
|
|
|
US$
|
|
|
|
|
|
|
|
RMB
|
|
|
|
|
|
Sales in China
|
|
|
78,369
|
|
|
|
11,411
|
|
|
|
90.2
|
%
|
|
|
58,614
|
|
|
|
79.4
|
%
|
Sales in other countries
|
|
|
8,503
|
|
|
|
1,238
|
|
|
|
9.8
|
%
|
|
|
15,243
|
|
|
|
20.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,872
|
|
|
|
12,649
|
|
|
|
100.0
|
%
|
|
|
73,857
|
|
|
|
100.0
|
%
|
Cost of Goods Sold
Our cost of goods sold comprises mainly of
material costs, factory overhead, power, packaging materials and direct labor. The breakdown of our cost of goods sold in percentage
is as follows:
|
|
Three-Month Period Ended
September
30, 2018
|
|
|
Three-Month Period Ended
September
30, 2017
|
|
|
|
% of total
|
|
|
% of total
|
|
Materials costs
|
|
|
73.6
|
%
|
|
|
68.2
|
%
|
Factory overhead
|
|
|
9.3
|
%
|
|
|
11.5
|
%
|
Energy expense
|
|
|
8.4
|
%
|
|
|
11.3
|
%
|
Packaging materials
|
|
|
4.7
|
%
|
|
|
4.4
|
%
|
Direct labor
|
|
|
4.0
|
%
|
|
|
4.5
|
%
|
Cost of goods sold during the third quarter
of 2018 totaled RMB69.8 million (US$10.2 million) as compared to RMB67.1 million in the same period of 2017. This was RMB2.7 million
or 4.0% higher than the same period in 2017. The increase in unit cost of goods sold caused an increase of RMB7.8 million and the
decrease in sales volume caused a decrease of RMB5.1 million.
Gross Profit (Loss)
Our gross profit was RMB17.1 million (US$2.5
million) for the third quarter ended September 30, 2018, representing a gross margin rate of 19.6%, as compared to a gross margin
rate of 9.1% for the same period in 2017. Correspondingly, gross margin rate increased by 10.5 percentage point compared to the
same period in 2017 mainly due to the increase of average sales price.
Operating Expenses
Operating expenses for the third quarter ended
September 30, 2018 were RMB17.8 million (US$2.6 million), which was RMB1.5 million, or 9.2% higher than the same period in 2017.
This increase was mainly due to increased expenses on research and development.
Other Expense
Total other expense is a combination result
of interest income, interest expense and others income (expense). Total other expense during the third quarter ended September
30, 2018 was RMB1.1 million (US$0.2 million), RMB1.4 million lower than the same period in 2017.
Income Tax Expense
The income tax benefit was RMB0.02 million
(US$0.002 million) during the third quarter ended September 30, 2018, compared to income tax benefit of RMB0.05 million during
the same period in 2017. This increase of income tax benefit was due to changes in deferred tax.
Net Loss
Net loss attributable to the Company during
the third quarter ended September 30, 2018 was RMB1.8 million (US$0.3 million) compared to net loss attributable to the Company
of RMB12.1 million during the same period in 2017, representing a decrease in loss of RMB10.3 million.
Results of operations for the nine-month periods
ended September 30, 2018 compared to September 30, 2017
The table below sets forth certain line items
from our Statement of Income as a percentage of revenue:
|
|
Nine-Month Period Ended
|
|
|
Nine-Month Period Ended
|
|
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
|
(as % of Revenue)
|
|
Gross profit(loss)
|
|
|
13.7
|
|
|
|
7.3
|
|
Operating expenses
|
|
|
(19.3
|
)
|
|
|
(20.9
|
)
|
Operating income (loss)
|
|
|
(5.6
|
)
|
|
|
(13.6
|
)
|
Other income (expense)
|
|
|
(2.1
|
)
|
|
|
(3.4
|
)
|
Provision for income taxes
|
|
|
0.02
|
|
|
|
0.1
|
|
Net income (loss)
|
|
|
(7.7
|
)
|
|
|
(16.9
|
)
|
Revenue
Our revenue is primarily derived from the manufacture
and sale of plastic films.
Net sales during the nine-month period ended
September 30, 2018 were RMB243.4 million (US$35.4 million), compared to RMB211.9 million, during the same period in 2017, representing
an increase of RMB31.5 million or 14.9%. The increase of average sales price caused an increase of RMB35.6 million and the decrease
in the sales volume caused a decrease of RMB4.1 million.
In the nine-month period ended September 30,
2018, sales of specialty films were RMB109.0 million (US$15.9 million) or 44.8% of our total revenues as compared to RMB75.8 million
or 35.8% in the same period of 2017, which was an increase of RMB33.2 million, or 43.8% as compared to the same period in 2017.
The increase of average sales price caused an increase of RMB2.8 million and the increase in the sales volume caused an increase
of RMB30.4 million.
The following is a breakdown of commodity and
specialty film sales (amounts in thousands):
|
|
Nine-Month Period Ended
September
30, 2018
|
|
|
% of Total
|
|
|
Nine-Month Period Ended
September
30, 2017
|
|
|
% of Total
|
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
RMB
|
|
|
|
|
Stamping and transfer film
|
|
|
90,930
|
|
|
|
13,239
|
|
|
|
37.3
|
%
|
|
|
83,038
|
|
|
|
39.2
|
%
|
Printing film
|
|
|
23,874
|
|
|
|
3,476
|
|
|
|
9.8
|
%
|
|
|
18,627
|
|
|
|
8.8
|
%
|
Metallization film
|
|
|
2,568
|
|
|
|
374
|
|
|
|
1.1
|
%
|
|
|
6,976
|
|
|
|
3.3
|
%
|
Specialty film
|
|
|
109,020
|
|
|
|
15,874
|
|
|
|
44.8
|
%
|
|
|
75,817
|
|
|
|
35.8
|
%
|
Base film for other applications
|
|
|
17,006
|
|
|
|
2,476
|
|
|
|
7.0
|
%
|
|
|
27,409
|
|
|
|
12.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243,398
|
|
|
|
35,439
|
|
|
|
100.0
|
%
|
|
|
211,867
|
|
|
|
100.0
|
%
|
Overseas sales during the nine months ended
September 30, 2018 were RMB36.1 million or US$5.3 million, or 14.8% of total revenues, compared with RMB44.2 million or 20.9% of
total revenues in the same period in 2017. This was RMB8.1 million lower than the same period in 2017. The decrease in sales volume
resulted in a decrease of RMB12.7 million and the increase of average sales price caused an increase of RMB4.6 million.
The following is a breakdown of PRC domestic and
overseas sales (amounts in thousands):
|
|
Nine-Month Period Ended
September 30, 2018
|
|
|
% of Total
|
|
|
Nine-Month Period Ended
September 30, 2017
|
|
|
% of Total
|
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
RMB
|
|
|
|
|
Sales in China
|
|
|
207,291
|
|
|
|
30,181
|
|
|
|
85.2
|
%
|
|
|
167,622
|
|
|
|
79.1
|
%
|
Sales in other countries
|
|
|
36,107
|
|
|
|
5,258
|
|
|
|
14.8
|
%
|
|
|
44,245
|
|
|
|
20.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243,398
|
|
|
|
35,439
|
|
|
|
100.0
|
%
|
|
|
211,867
|
|
|
|
100.0
|
%
|
Cost of Goods Sold
Our cost of goods sold comprises mainly of
material costs, factory overhead, power, packaging materials and direct labor. The breakdown of our cost of goods sold in percentage
is as follows:
|
|
Nine-Month Period Ended
September
30, 2018
|
|
|
Nine-Month Period Ended
September
30, 2017
|
|
|
|
|
%
of total
|
|
|
|
%
of total
|
|
Materials costs
|
|
|
72.7
|
%
|
|
|
69.4
|
%
|
Factory overhead
|
|
|
9.2
|
%
|
|
|
10.3
|
%
|
Energy expense
|
|
|
8.9
|
%
|
|
|
11.3
|
%
|
Packaging materials
|
|
|
4.8
|
%
|
|
|
4.4
|
%
|
Direct labor
|
|
|
4.4
|
%
|
|
|
4.6
|
%
|
Cost of goods sold during the first nine months
of 2018 totaled RMB210.1 million (US$30.6 million) as compared to RMB196.4 million in the same period of 2017. This was RMB13.7
million or 7.0% higher than the same period in 2017. The increase of unit cost of goods sold caused an increase of RMB17.5 million
and the decrease in sales volumes caused a decrease of RMB3.8 million.
Gross Profit
Our gross profit was RMB33.3 million (US$4.9
million) for the first nine months ended September 30, 2018, representing a gross margin of 13.7%, as compared to a gross margin
of 7.3% for the same period in 2017. Correspondingly, gross margin increased by 6.4 percentage. Our average product sales prices
increased by 17.2% compared to the same period last year while the average cost of goods sold increased by 9.1% compared to the
same period last year. Consequently, the amount of increase in sales price was higher than that in cost of goods sold during the
nine months ended September 30, 2018 compared with the same period in 2017, which resulted in an increase in our gross profit.
Operating Expenses
Operating expenses for the nine months ended
September 30, 2018 were RMB47.0 million (US$6.8 million), compared to RMB44.3 million in the same period in 2017, which was RMB2.7
million or 6.1% higher than the same period in 2017. This increase is mainly due to increased expenses on research and development.
Other Expense
Total other expense is a combination result
of interest income, interest expense and other income (expense). Total other expense during the first nine months of 2018 was RMB5.1
million (US$0.7 million), RMB2.2 million lower than the same period in 2017.
Income Tax Expense
The income tax benefit was RMB0.05 million
(US$0.007 million) during the nine months ended September 30, 2018, compared to income tax benefit of RMB0.2 million during the
same period in 2017. This increase of income tax expense was due to changes in deferred tax.
Net Loss
Net loss attributable to the Company during
the first nine-month period of 2018 was RMB18.7 million (US$2.7 million) compared to net loss attributable to the Company of RMB35.9
million during the same period in 2017, representing a decrease of RMB17.2 million from the same period in 2017 due to the factors
described above.
Liquidity and Capital Resources
Our capital expenditures have been financed
primarily through cash generated from our operations and borrowings from related parties, financial institutions, and entering
into sale-leaseback transactions. The interest rates of borrowings from financial institutions during the period from the third
quarter of 2017 to the third quarter of 2018 ranged from 5.22% to 7.50%.
In April 2014, we obtained a loan for a total
amount of RMB105,000 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, 2017, the principal of this
loan from Shandong SNTON was RMB104.71 million and the interest was RMB22.93 million.
As of September 30, 2018, the principal
of this loan from Shandong SNTON was RMB86,874 and the interest payable was RMB26,806. The main source of cash inflow for the
next twelve months will come from sales of products, and the estimated inflow is RMB432.4 million. The estimated cash outflow
is RMB343.06 million. The amount of cash used in the purchase of raw materials and packaging materials is estimated to be
RMB251.92 million and RMB13.56 million, respectively. Cash used for power costs, labor costs, maintenance and renovation
expenses is estimated to be RMB25.42 million, RMB16.56 million and RMB12.2 million, respectively. Total cash used in sales
expenses, financial expenses and administrative expenses is estimated to be RMB23.4 million. The foregoing description has
been prepared based on the information available to us as of the date of this report on Form 6-K 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 potential future loans from related parties and banking facilities, existing cash and the expected cash flows to
be generated from our operations, we will have adequate sources of liquidity to meet our short-term obligations and our working
capital requirements.
Operating Activities
Net cash provided by operating activities for
the nine months ended September 30, 2018 was RMB22.4 million (US$3.3 million) compared to net cash provided by operating activities
of RMB7.3 million for the nine months ended September 30, 2017. This increase in cash flows provided by operating activities was
primarily attributable to the decreased loss.
Investing Activities
Net cash flows used in investing activities
for the nine months ended September 30, 2018 was RMB9.3 million (US$1.4 million) compared to net cash used in investing activities
of RMB2.9 million for the nine months ended September 30, 2017. This increase in cash flows used in investing activities was primarily
attributable to the changes of restricted cash.
Financing Activities
Net cash provided by financing activities for
the nine months ended September 30, 2018 was RMB0.6 million (US$0.1 million) compared to net cash provided by financing activities
of RMB5.1 million for the nine months ended September 30, 2017, which is a decrease of RMB4.5 million (US$0.7 million). This decrease
in cash flows provided by financing activities was primarily attributable to changes of notes payable.
Working Capital
As of September 30, 2018 and December 31, 2017,
we had a working capital deficit of RMB164.9 million (US$24.0 million) and RMB172.9 million, respectively. Working capital deficit
decreased by RMB8.0 million (US$1.2 million), or 4.6% compared to the amount as of December 31, 2017. Our main current liability
was loans from a related party.
Contractual Obligations
The following table is a summary of our contractual
obligations as of September 30, 2018 (in thousands RMB):
Contractual Commitments
|
|
Total
|
|
|
Less than
1 Total
Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
More
than 5
Years
|
|
|
|
(RMB in thousands)
|
|
Equipment Purchase Contract
|
|
|
1,029
|
|
|
|
-
|
|
|
|
1,029
|
|
|
|
-
|
|
|
|
-
|
|
Due to related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Principal
|
|
|
86,874
|
|
|
|
86,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Interest
|
|
|
4,535
|
|
|
|
4,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Principal
|
|
|
64,950
|
|
|
|
64,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Interest
|
|
|
4,222
|
|
|
|
4,222
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Notes payable
|
|
|
90,980
|
|
|
|
90,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
216
|
|
|
|
216
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
252,806
|
|
|
|
251,777
|
|
|
|
1,029
|
|
|
|
-
|
|
|
|
-
|
|
Third Production Line Update
The third production line started its trial
operation at the end of January 2013. Our third production line manufactures high-performance electric insulation film, base film
for solar backsheet and TFT-LCD optical film with an annual design capacity of 23,000 metric tons and thickness between 38 and
250µm. It officially started its operation in September 2013. A sample diffusion film (a type of TFT-LCD optical film) was
preliminarily accepted by four customers after being delivered to them for testing. We supplied small batches of products according
to one of the four customer’s purchase order. In addition, a sample base film for solar backsheets was delivered to a customer
for initial testing and we received an initial feedback from this customer and are adjusting the formulas accordingly. The third
production line has not been able to continue its production since April 2015 due to lack of purchase orders. The total volume
of the third production line from January 2015 to March 2015 was 293 Metric Tons.
Legal Proceedings
From time to time, we may be subject to legal
actions and other claims arising in the ordinary course of business. Shandong Fuwei is currently a party to one legal proceeding
in China.
On July 9, 2012, a client filed a lawsuit in
Beijing Daxing District People’s Court against Shandong Fuwei claiming RMB953,113 plus interest over disputes arising from
a Procurement Contract between the parties. Shandong Fuwei raised a jurisdictional objection upon filing its plea, and Beijing
Daxing District People’s Court overruled the objection. Shandong Fuwei filed an appeal against the judgment in the First
Intermediate People’s Court of Beijing. The appeal was dismissed on January 23, 2013. On May 15, 2013, Beijing Daxing District
People’s Court heard the case and adjourned the hearing due to the fact that plaintiff failed to provide sufficient evidence.
On June 25, 2013, the case was heard in Beijing Daxing District People’s Court again and it was further adjourned due to
plaintiff’s failure to provide sufficient evidence. The case was then scheduled to be heard on August 7, 2013. However, on
the day prior to re-scheduled hearing, Shandong Fuwei was informed by Beijing Daxing District People’s Court that the hearing
was adjourned further for the same reason that plaintiff failed to provide sufficient evidence. On April 21, 2014, the case was
heard, and the plaintiff failed to provide sufficient evidence and the hearing was further adjourned. On May 28, 2014, the case
was heard and the plaintiff provided some evidence. On August 25, 2014, the case was heard again. On November 5, 2014, the court
accepted the withdrawal application from the plaintiff. On November 26, 2014, the plaintiff filed a second lawsuit in Beijing Daxing
District People’s Court against Shandong Fuwei over disputes arising from the Procurement Contract between the parties claiming
RMB618,230 plus interest as a result of non- payment. The case was heard on January 26, 2015, where the two parties testified over
the relevant evidence. The case was heard on March 3, 2015, October 26, 2015 and May 11, 2016. To date, the case has not been decided.
Exhibit Index
Exhibit No.
|
|
Description
|
99.1
|
|
Press Release dated November 27, 2018.
|