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 current 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 has been 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.
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.
The Company’s 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 the Company’s ordinary shares post-Reverse Stock Split is G3704F
110. The Company would round up to the next full share of the Company’s 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 2018, 2017 and
2016, the total cost of raw materials made up approximately 72.6%, 69.7% and 67.4% 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
80.1% and 19.9%, respectively, of our total cost of raw materials in 2018. 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, 2018, 2017 and 2016, approximately 86.4%, 80.9% and 83.5%, 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, 2018
|
|
|
Year Ended December
31, 2017
|
|
|
Year Ended December
31, 2016
|
|
Materials costs
|
|
|
72.6
|
%
|
|
|
69.7
|
%
|
|
|
67.4
|
%
|
Energy expense
|
|
|
8.5
|
%
|
|
|
11.0
|
%
|
|
|
12.6
|
%
|
Factory overhead
|
|
|
9.8
|
%
|
|
|
10.2
|
%
|
|
|
10.3
|
%
|
Packaging materials
|
|
|
4.6
|
%
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
Direct labor
|
|
|
4.5
|
%
|
|
|
4.6
|
%
|
|
|
5.2
|
%
|
Material Costs
As noted above, the raw materials
used in our BOPET film production are PET resin and additives, which made up approximately 80.1% and 19.9%, respectively of our
total materials costs in 2018.
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 2018, the depreciation
expense and repair and maintenance expenditure accounted for 70.2% and 18.5% 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
will generally become 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.
Inflation
According to the National Bureau
of Statistics of China, the change in the consumer price index in China was 2.1%, 1.6% and 2.0% in 2018, 2017 and 2016, 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, 2018, 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 RMB3.08 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
2018, 2017 and 2016 is as follows (in thousands):
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
RMB
|
|
Balance at beginning of year
|
|
|
2,467
|
|
|
|
359
|
|
|
|
3,213
|
|
|
|
747
|
|
Bad debt expense (recovery)
|
|
|
(620
|
)
|
|
|
(90
|
)
|
|
|
(746
|
)
|
|
|
2,466
|
|
Write-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
1,847
|
|
|
|
269
|
|
|
|
2,467
|
|
|
|
3,213
|
|
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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(% of Total Revenue)
|
|
Gross profit
|
|
|
16.4
|
|
|
|
9.3
|
|
|
|
7.0
|
|
Operating expenses
|
|
|
19.8
|
|
|
|
21.0
|
|
|
|
23.6
|
|
Other expense
|
|
|
(2.2
|
)
|
|
|
(3.9
|
)
|
|
|
(2.7
|
)
|
Income tax benefit (loss)
|
|
|
(1.1
|
)
|
|
|
(0.3
|
)
|
|
|
(2.1
|
)
|
Net income (loss)
|
|
|
(6.6
|
)
|
|
|
(15.8
|
)
|
|
|
(21.5
|
)
|
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 during the same period 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 made 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 made an increase of RMB33.6 million.
Overseas sales were RMB45.4 million or
US$6.6 million, or 13.6% of total revenues, compared with RMB55.6 million or 19.1% of total revenues in 2017. The increase of average
sales price caused an increase of RMB6.4 million and the reduction of sales volume factor made a decrease of RMB16.6 million.
The following is a breakdown of domestic
versus overseas sales for the periods ended December 31, 2018 and 2017 (amounts in thousands):
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
RMB
|
|
|
US$
|
|
|
% 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 (Loss) 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. 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.
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 Benefit (Expense)
Income tax expense during the year ended
December 31, 2018 was RMB3.6 million (US$0.5 million) compared to an income tax expense of RMB0.8 million during 2017, which was
mainly attributable to tax effect of changes in deferred tax during 2018. We only recognized deferred tax assets for the loss of
2018 after considering the possibility of realizing the benefits under the conservatism principle.
Fiscal year ended 2017 compared to fiscal year ended 2016
Revenues
Our revenue can be analyzed as follows (in thousands):
|
|
For the year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
RMB
|
|
|
US$
|
|
|
% of Total
|
|
|
RMB
|
|
|
% of Total
|
|
Stamping and transfer film
|
|
|
116,396
|
|
|
|
17,890
|
|
|
|
40.0
|
%
|
|
|
95,705
|
|
|
|
37.8
|
%
|
Printing film
|
|
|
24,779
|
|
|
|
3,808
|
|
|
|
8.5
|
%
|
|
|
20,366
|
|
|
|
8.0
|
%
|
Metallized film
|
|
|
8,431
|
|
|
|
1,296
|
|
|
|
2.9
|
%
|
|
|
7,391
|
|
|
|
2.9
|
%
|
Specialty film
|
|
|
108,089
|
|
|
|
16,613
|
|
|
|
37.2
|
%
|
|
|
96,091
|
|
|
|
37.8
|
%
|
Base film for other applications
|
|
|
33,011
|
|
|
|
5,074
|
|
|
|
11.4
|
%
|
|
|
34,373
|
|
|
|
13.5
|
%
|
|
|
|
290,706
|
|
|
|
44,681
|
|
|
|
100
|
%
|
|
|
253,926
|
|
|
|
100
|
%
|
During the fiscal year ended December 31,
2017, net revenues were RMB290.7 million (US$44.7 million), compared to RMB253.9 million during the same period in 2016, representing
an increase of RMB36.8 million or 14.5%. For further analysis of the factors causing revenue increase, the increase of average
sales price caused an increase of RMB32.0 million and sales volume factor made an increase of RMB4.8 million.
In 2017, sales of specialty films were
RMB108.1 million (US$16.6 million) or 37.2% of our total revenues as compared to RMB96.1 million or 37.8% in 2016, which was an
increase of RMB12.0 million, or 12.5%, as compared to the same period in 2016. The increase was due to the increased sales volume.
Overseas sales were RMB55.6 million or
US$8.5 million, or 19.1% of total revenues, compared with RMB41.8 million or 16.5% of total revenues in 2016. For further analysis
of the factors causing overseas sales increase, the increase of average sales price caused an increase of RMB5.5 million and sales
volume factor made an increase of RMB8.3 million.
The following is a breakdown of domestic
versus overseas sales for the periods ended December 31, 2017 and 2016 (amounts in thousands):
|
|
For the year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
RMB
|
|
|
US$
|
|
|
% of Total
|
|
|
RMB
|
|
|
% of Total
|
|
Sales in China
|
|
|
235,143
|
|
|
|
36,141
|
|
|
|
80.9
|
%
|
|
|
212,129
|
|
|
|
83.5
|
%
|
Sales in other countries
|
|
|
55,563
|
|
|
|
8,540
|
|
|
|
19.1
|
%
|
|
|
41,797
|
|
|
|
16.5
|
%
|
|
|
|
290,706
|
|
|
|
44,681
|
|
|
|
100.0
|
%
|
|
|
253,926
|
|
|
|
100.0
|
%
|
Cost of Goods Sold
Cost of goods sold during the year of 2017
totaled RMB263.6 million (US$40.5 million) as compared to RMB236.2 million in the prior year. This was RMB27.4 million or 11.6%
higher than the same period in 2016. For further analysis of the factors causing cost of goods sold increase, the increase of unit
cost of goods sold caused an increase of RMB22.9 million and sales volume factor made an increase of RMB4.5 million. The increase
of cost of goods was mainly due to the price increase of raw materials.
Gross (Loss) Profit
Our gross margin was 9.3% for the year
of 2017, as compared to a gross margin of 7.0% in 2016. Gross margin increased by 2.3 percentage points compared to the same period
in 2016. Our average unit sales price increased by 12.3% compared to last year. The unit sales cost increased by 9.5% 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 2017 compared with 2016, which contributed to the increase in our gross profit.
Operating Expenses
Our operating expenses during the year
ended December 31, 2017 were RMB61.0 million, an increase of RMB1.0 million, or 1.7%, as compared to 2016.
Other Expense
Total other expense is a combination result
of interest income, interest expense and others income (expense). Total other expense during the year ended December 31, 2017 was
RMB11.3 million (US$1.7 million), compared to total other expense of RMB6.9 million in 2016. This is mainly attributed to the increased
interest.
Income Tax Benefit (Expense)
Income tax expense during the year ended
December 31, 2017 was RMB0.8 million (US$0.1 million) compared to an income tax expense of RMB5.3 million during 2016, which was
mainly attributable to tax effect of changes in deferred tax during 2017. We only recognized deferred tax assets for the loss of
2017 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 2018 have been
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 2016 to 2018 ranged from 0% to 7.5%,
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, 2018, we had borrowing of RMB64.95 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, 2018, the principal
of this loan from Shandong SNTON was RMB86.80 million and the interest was RMB27.90 million.
The credit line amounting to RMB95.0 million
(US$13.8 million) was granted by Bank of Weifang. The term is from July 2018 to July 2019. It was secured by a pledge of plant
and land use right. The credit line was used to purchase raw materials. As of December 31, 2018, the amount of credit line granted
by Bank of Weifang was all used.
The main source of cash inflow for the
next twelve months will come from sales of products, and the estimated inflow is RMB382.34 million. The estimated cash outflow
is RMB364.08 million. The amount of cash used in the purchase of raw materials and packaging materials is estimated to be RMB239.62
million and RMB12.50 million, respectively. Cash used for power costs, labor costs, maintenance and renovation expenses is estimated
to be RMB35.68 million, RMB25.74 million and RMB14.04 million, respectively. Total cash used in sales expenses, financial expenses
and administrative expenses is estimated to be RMB36.50 million. The foregoing description has been prepared based on the information
available to us as of the date of this Annual Report on Form 20-F and there are numerous factors that could contribute to a different
result such as risks inherent in, the BOPET film industry in China; uncertainty as to future profitability and competition in the
BOPET film industry; growth of, and risks inherent in, the BOPET film industry in China and numerous other factors as more fully
disclosed in our reports filed with the U.S. Securities and Exchange Commission.
We believe that, after taking into consideration
our present and future banking facilities, borrowing from related party, existing cash and the expected cash flows to be generated
from our operations, we have adequate sources of liquidity to meet our short-term obligations and our working capital.
A summary of our cash flows for 2018, 2017
and 2016 is as follows (in thousands):
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
RMB
|
|
Net cash provided by (used in) operating activities
|
|
|
25,381
|
|
|
|
3,693
|
|
|
|
10,827
|
|
|
|
(23,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(4,591
|
)
|
|
|
(668
|
)
|
|
|
(2,926
|
)
|
|
|
(10,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(41,332
|
)
|
|
|
(6,012
|
)
|
|
|
(26,961
|
)
|
|
|
60,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes
|
|
|
(2,014
|
)
|
|
|
(866
|
)
|
|
|
1,760
|
|
|
|
2,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalent
|
|
|
(22,556
|
)
|
|
|
(3,853
|
)
|
|
|
(17,300
|
)
|
|
|
29,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent, restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of the year
|
|
|
69,464
|
|
|
|
10,676
|
|
|
|
86,764
|
|
|
|
57,570
|
|
At end of the year
|
|
|
46,908
|
|
|
|
6,823
|
|
|
|
69,464
|
|
|
|
86,764
|
|
Operating Activities
Net cash provided by operating activities
was RMB25.4 million for the year ended December 31, 2018 as compared to net cash provided by operating activities of RMB10.80 million
for the year ended December 31, 2017.
Net cash provided by operating activities
was RMB10.8 million for the year ended December 31, 2017 as compared to net cash used in operating activities of RMB23.2 million
for the year ended December 31, 2016.
Net cash used in operating activities was
RMB23.2 million for the year ended December 31, 2016 as compared to net cash used in operating activities of RMB27.0 million for
the year ended December 31, 2015.
Investing Activities
Net cash used in investing activities was
RMB4.6 million in 2018 mainly attributable to the increased expenditure of purchasing fixed assests.
Net cash used in investing activities was
RMB2.9 million in 2017 mainly attributable to the increased expenditure of purchasing fixed assests.
Net cash used in investing activities was
RMB0.1 million in 2016 mainly attributable to the increased expenditure of purchasing fixed assets.
Financing Activities
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.
Net cash provided by financing activities
was RMB60.1 million for the year ended December 31, 2016, which was mainly due to increased short-term loans from banks.
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 2018, 2017 and 2016, approximately 86.4%,
80.9%, and 83.5% 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 2018, 2017 and 2016 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 2018, 2017 and 2016 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 2018, 2017 and 2016 were as follows
(in thousands):
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Buildings
|
|
|
-
|
|
|
|
-
|
|
|
|
57
|
|
Plant and equipment
|
|
|
5,103
|
|
|
|
3,702
|
|
|
|
12,443
|
|
Motor vehicles
|
|
|
56
|
|
|
|
-
|
|
|
|
-
|
|
Assets under construction
|
|
|
4,819
|
|
|
|
3,003
|
|
|
|
65
|
|
Others (computer and furniture fittings)
|
|
|
748
|
|
|
|
628
|
|
|
|
76
|
|
Total
|
|
|
10,726
|
|
|
|
7,333
|
|
|
|
12,641
|
|
The following table summarizes our contractual
commitments as of December 31, 2018 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
|
|
|
64,950
|
|
|
|
64,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Interest(iii)
|
|
|
4,222
|
|
|
|
4,222
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Notes payable
|
|
|
48,000
|
|
|
|
48,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases(iv)
|
|
|
87
|
|
|
|
87
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
209,678
|
|
|
|
209,678
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
(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 RMB64.95 million as
of December 31, 2018. 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, 2018, our
principal of loans from related parties was RMB86.80 million and the interest was RMB27.90 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, 2018 plus an estimated risk premium on borrowing.
|
|
(iv)
|
The operating leases mainly relate to our rental of staff
dorms and offices. 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 2.1%, 1.6% and 2.0% in 2018, 2017 and 2016, respectively.
Recent Accounting Pronouncements
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. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
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 are evaluating the impact
on its 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.
Statement
of Cash Flows
In
November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash” (“ASU
2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash,
cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This update is effective in
fiscal years, including interim periods, beginning after December 15, 2017 and early adoption is permitted. The adoption of this
guidance will result in the inclusion of the restricted cash balances within the overall cash balance and removal of the changes
in restricted cash activity, as a result, the Company no longer presents transfers between cash and cash equivalents and restricted
cash in the statement of cash flows. Furthermore, an additional reconciliation will be required to reconcile Cash, cash equivalents,
and restricted cash reported within the Consolidated Balance Sheets to sum to the total shown in the Consolidated Statement of
Cash Flows. The Company has already disclosed the restricted cash separately on its Consolidated Statements of Financial Position.
Beginning the first quarter of 2018, the Company has adopted and included the restricted cash balances on the Consolidated Statement
of Cash Flows and reconciliation of Cash, cash equivalent, and restricted cash within its Consolidated Statements of Financial
Positions that sum to the total of the same such amounts shown in Consolidated Statement of Cash Flows. This guidance has been
applied retrospectively to the Consolidated Statement of Cash Flows for the year ended December 31, 2016 and 2017 which required
the Company to recast each prior reporting period presented. As a result, the Company no longer discloses transfers between cash
and restricted cash in the consolidated cash flow statements.
Other pronouncements issued
by the FASB or other authoritative accounting standards group with future effective dates are either not applicable or not significant
to our consolidated financial statements.
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 16 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 2019. 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
|
|
53
|
|
Chairman, Director and Chief Executive Officer
|
|
|
|
|
|
Benjie Dong
|
|
41
|
|
Chief Financial Officer and Director
|
|
|
|
|
|
Tee Chuang Khoo (1) (2)
|
|
73
|
|
Independent Director
|
|
|
|
|
|
Junying Liu(1) (2)(3)
|
|
66
|
|
Independent Director
|
|
|
|
|
|
Jianguo Zhang (3)Zhimei Liu
|
|
58
|
|
Independent Director
|
|
|
|
|
|
|
|
47
|
|
President of Shandong Fuwei
|
|
|
|
|
|
Yong Jiang
|
|
45
|
|
Board Secretary and Vice President of Shandong Fuwei
|
|
|
|
|
|
Xiaoming Wang
|
|
59
|
|
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.
|
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
has been Vice
President of Shandong Fuwei since January 2005 and is responsible for the management of our production facilities, production planning
and engineering until June 2014. From July 2014, Mr. Wang is 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, 2018 was approximately
RMB1.1 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.
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. Their annual salaries of each of Xiaoming Wang and Mr. Yong Jiang may be adjusted at the discretion of our Compensation
Committee. We may pay them 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, 2018
,
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:
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is a company that conducts its business outside the
Cayman Islands;
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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;
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does not have to make its register of shareholders
open to inspection; and
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may obtain an undertaking against the imposition of
any future taxation.
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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 Director
s
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 RMB86.80 million and the interest was RMB27.90 million.
We obtained three short-term loans from Bank of Weifang in June
2018 and July 2018 for the total amount of RMB64.95 million (US$9.45 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$13.8 million) granted by Bank of Weifang was from July 2018 to July 2019. 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, 2018, 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 2018 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 2018 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:
(a) 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
(b) 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.