FORK Fuling Global Inc

A. History and Development of the Company

Fuling Global Inc. (“FGI”) was incorporated in the Cayman Islands on January 19, 2015. FGI has an indefinite term. FGI, its subsidiaries and its variable interest entity (“VIE”) (collectively the “Company”) are principally engaged in the production and distribution of plastic and environmentally-friendly paper serviceware in the People’s Republic of China (“PRC” or “China”) and United States (“U.S.”). Most products are exported to the U.S., China and Europe and sold to major fast food chains and wholesalers.

The address of FGI’s principal place of business is 88 Jintang South Ave., East New District, Wenling, Zhejiang Province, People’s Republic of China 317509. FGI’s phone number is +86-576-86623058. We have appointed C T Corporation System (The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, DE 19801) as our agent to receive service of process with respect to any action brought against us in the courts of the State of Delaware under the federal securities laws of the United States or under the securities laws of the State of Delaware.

Taizhou Fuling Plastics Co., Ltd. (“Taizhou Fuling”) was established on October 28, 1992 as a Sino-Foreign joint venture under the laws of the People’s Republic of China (“China” or “PRC”) with initial registered capital of $510,000.

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

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

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

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

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

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

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

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

Taizhou Fuling has two wholly-owned subsidiaries, Fuling Plastic USA, Inc. (“Fuling USA”) and Direct Link USA LLC (“Direct Link”). Fuling USA was incorporated in the Commonwealth of Pennsylvania in 2014. Fuling USA has established the Company’s first production factory in the U.S. It principally engages in the production of cutlery and straw items and serves as import trading companies of Taizhou Fuling in the United States. Direct Link was incorporated in the State of Delaware in 2011. It engages in the distribution of our products in the U.S.

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

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

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

In November 2015, we completed our initial public offering, in which we offered and sold an aggregate of 4,038,423 ordinary shares. We received approximately US $20 million in proceeds before expenses. Our ordinary shares are listed on the Nasdaq under the symbol “FORK.”

In November 2015, Total Faith increased Taizhou Fuling’s registered capital from $11.11 million to $21.63 million.

In September 2016, Taizhou Fuling established Wenling Changli Import and Export Co., Ltd. (“Wenling Changli”) in China. Wenling Changli’s main business is to export materials from China to our Allentown facility.

We incorporated Great Plastics in China in March 2010 which principally engaged in the production of drinking straws, cup and plate items. In November 2018, Great Plastics signed sales contracts to sell the real properties previously used as one of its manufacturing factories in China (the “Sanmen Factory”) to Zhejiang Zhongye Packaging Technology Co. Ltd., an unrelated third party, for total cash consideration of RMB 40.2 million (approximately US$5.8 million). We have relocated most of related machines and equipment to our new Wenling Factory. We have dissolved Great Plastics in 2019.

We have set up manufacturing operation under the maquiladora model in Monterrey, Mexico (the “Mexico Factory”). In December 2018, we signed a building lease with Interpuerto Industrial Park in Monterrey, Mexico and a service agreement with a local shelter services company to help with administrative, accounting, compliance, import/export, human resources, etc., at the Mexico Factory. The local shelter services company established a shelter company which is not legally owned by us. We signed a maquila services agreement with this shelter company in January 2019 according to which the shelter company will operate the factory. We launched our commercial production there in the middle of August 2019. We expect that the first phase of the Mexico Factory will have an annual design capacity of 10,000 tons and will be primarily used for producing plastic straws and paper cups. All finished products are sold to Fuling USA and exported to the U.S. market.

In September 2019, Taizhou Fuling and Fuling USA established PT Fuling Food Packaging Indonesia (“Fuling Indonesia”) in Indonesia, with the equity ownership of 80% and 20%, respectively. Fuling Indonesia’s main business is to manufacture plastic straws, paper cups, paper bags and packaging boxes. In November 2019, Fuling Indonesia signed a 10-year lease on a property in Semarang City, Central Java, Indonesia, on which we plan to operate a 194,000 square-foot manufacturing and distribution facility (the “Indonesia Factory”). It began production of plastic straws in February 2020.

B. Business Overview

We have been in business since 1992. In the beginning, however, we did not produce the disposable serviceware products we produce today. Instead, for our first 10 years, we sold plastic household articles, baskets and other plastic products mainly in Europe. During this time, we were a relatively small company generating a few million dollars per year in revenue.

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

Many of our competitors turned away from an opportunity like this, since the production of disposable serviceware was seen as a low profit venture. Although the profit margins were lower, the revenues were significantly higher, allowing us to reach revenues of more than $10 million per year in 2003 and 2004.

Our customer was pleased with the quality of our products, and we began to increase our production levels to meet the new demand. There were, of course, some challenges along the way as we learned the requirements and increasing environmental sensitivities of our new industry. For example, we were initially unprepared for the audits conducted by QSR chains when the customer’s Shanghai branch first visited our factory. After failing that first inspection, we tirelessly worked to address all of the issues noted and succeeded in passing the audit just seven short days later.

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

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

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

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

1. Dealers

2. QSRs

3. Manufacturers

4. Retailers

Our Industry

Foodservice Disposables — Generally

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

Serviceware Segment

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

(The Freedonia Group, Inc.)

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

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

Raw Materials in Foodservice Disposables Industry

Foodservice disposables use a variety of materials, depending on the intended use of such disposables. Approximately 7.3 billion pounds of raw materials were used in manufacturing foodservice disposables in 2012:

(The Freedonia Group, Inc.)

Paper products are commonly used for bags, soda and coffee cups, napkins and wrapping papers. Aluminum foil products are often found in limited service restaurant take-out containers and foil/paper laminated wraps. Plastics (including a variety of polystyrene (“PS”), polypropylene (“PP”), polyethylenes and degradable resins) are seen in utensils, straws, clamshell containers, cups and container lids.

Plastics have an important role in the foodservice disposables industry, due to their impressive range of appropriate uses: keeping food hot, keeping food cold, low cost, light weight, water-tightness, clarity, flavor neutrality and malleability for different uses.

While we believe we are able to produce products that can be used for a variety of uses, we also recognize that specific products may be better suited for desired uses: for example, while we produce plastic drinking straws and are able to produce plastic wrappers for such straws, our customers typically prefer that we obtain paper wrappers for the straws we provide to them, both for cost reasons and also for safety reasons, as wet plastic wrappers may become pose accident risks on QSR floors.

Moreover, even where plastic products are well suited to specific uses, consumer preferences may affect demand. For example, few materials are better suited to keeping coffee warm (and avoiding burning the hands holding that coffee) than foamed polystyrene cups; however, due to environmental concerns some QSRs and other customers have chosen paper cups and cardboard sleeves as an alternative to foamed polystyrene. Indeed, some municipalities and states in the United States have proposed regulations that would prevent such cups from being sold.

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

Our Products

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

In addition to plastic serviceware, we also produce paper products such as paper straws and paper cups. We have been manufacturing paper cups in our Songmen factory since 2017. In 2018, we launched paper straw product after installing 35 paper straw production lines in our new Wenling factory.

Here are some of our products:

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

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

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

Our Environmental Stewardship Measures

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

We were selected as a Green Factory based on our compliance with national General Principles for Assessment of Green Factory (GB/T 36132-2018) in 2019. We have obtained several environmental stewardship-related certificates for our management systems such as the following one:

Production Strategy

Product Mix

While we will continue to improve our traditional serviceware segment offerings, we plan to grow our packaging segment. Our customers in this segment are mainly retailers and wholesalers. We launched clamshell product in 2018 after installing one clamshell production line in our new Wenling factory. While packaging materials currently constitute a small percentage of our sales revenue, we aim to achieve significant growth in this segment. Our decision is based on following reasons:

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

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

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

In addition, we launched paper straw product in 2018 after installing 35 paper straw production lines in our new Wenling factory. Our customers for this product involve retailers, wholesalers, QSRs and restaurants. As more and more fast food restaurants and coffee chains started using paper straws, we believe our sales on paper straws will grow in the future.

Manufacturing Locations

Indonesia Factory

Decision to Invest in Indonesia

We decided to start production in Indonesia for the following reasons:

1) The ongoing U.S.- China trade tensions cast uncertainties for our export business to the U.S. market, which accounted for 86% of our revenues during the year ended December 2019. Completion of our factory in Indonesia represents an important milestone in our strategy to become a global supplier of foodservice disposable products with international sourcing capability. Also, Indonesia has advantage of mature international seaport and relatively low sea transportation cost. Our Indonesia facility is close to Semarang Port, one of Indonesia’s main ports.

2) As the average worker’s salary kept increasing in China, we need to find cheaper replacement to control our cost. Indonesia has highly skilled and productive workforce and enables us to lower our labor cost.

3) Indonesia has a large population and is a significant consumer market. Middle class consumers are emerging and expanding. Once we establish a presence in Indonesia, we can explore the opportunities of entering the South East Asia markets a few years down the road.

Indonesia Project Plan

Schedule

In September 2019, we set up Fuling Indonesia. In November 2019, we signed a 10-year lease on a property in Semarang City, Central Java, Indonesia, on which we plan to operate a 194,000 square-foot manufacturing and distribution facility. We plan to install 64 production lines of manufacturing equipment in two phases during 2020, including 20 plastic straw production lines, 12 cup lid and packing box production lines, eight sauce cup production lines, and 24 paper cup production lines.

The first phase is a 97,000 square-foot plant, which is designed to produce plastic straws, paper cups and plastic cup lids. In February 2020, this factory officially opened and launched production of plastic straws. We have the capability to produce sauce cups, take-out boxes, paper bags and paper cups lines.

The second phase, which is another 97,000 square-foot plant, will be set up for production of disposable tableware, packaging containers and plates. We plan to start trial production in the second phase during the second quarter of 2020. Later this year, we plan to increase production to include paper bags. However, due to COVID-19, these plans may be adjusted from time to time.

When both phases are done and fully operational, we expect to have approximately 500 employees at this facility and achieve annual production scale of approximately US $60 million, assuming that we are not hardly hit by COVID-19 and have sufficient customer orders. Currently we do not know yet when both phases can be done and/or fully operational.

Estimate of the amount of expenditures

The total investment spent for the project will be roughly $7 million, including approximately $6 million of fixed asset investment, and $1 million of working capital. As of December 31, 2019, total investment amounted to approximately $1.9 million. We plan to add $5 million production line in 2020. If we choose to increase production capability, we will incur additional costs.

Production Capacity

We expect that the first phase of the Indonesia Factory will have an annual design capacity of 8000 tons and will be primarily used for producing plastic straws, paper cups, plastic cup lids, disposable tableware, packaging containers and plates serving the global market.

Environmental Considerations 

The major products that we plan to produce in the Indonesia Factory are straws, sauce cups, take-out boxes, paper bags and paper cups. More and more fast food restaurants are using paper bags and paper cups to protect the environment and our products conform to the trend.

We plan to strictly follow applicable environmental regulations and policies in Indonesia.

Location

Below is a diagram of the location of our Indonesia facility. It is close to Semarang port.

Facility

Our Indonesia facility structure consists of 194,000 square feet of building area:

Mexico Factory

Decision to Invest in Mexico

We decided to start production in Mexico for the following reasons:

1) The ongoing U.S.- China trade tensions cast uncertainties for our export business to the U.S. market, our largest market segment that accounted for 85% of our revenues during the first half of 2018. By contrast, Mexico has free-trade agreements with over 45 countries around the world, including U.S., making Mexico a perfect launch pad for global manufacturing. In addition, under the maquiladora (shelter) structure that we are using, we are exempt to pay taxes in Mexico because all of our products will be shipped to U.S. for sale.

2) Mexico is only hours or at most a few days from U.S. supply outlets and market; the value chain between these two countries is very short, reducing transportation costs and production time. Especially for the cups and straws or similar hollow products which cannot be packed as tightly as cutlery and cause shipping costs as a higher percentage of the total cost, producing them in Mexico instead of China and shipping them to U.S., especially to the south of U.S. will save us a lot of shipping fees.

3) Mexico also has highly skilled and productive workforce. The Mexican maquiladora, which we are using now, is capable of handling skilled manufacturing operations while maintaining a high rate of production.

4) Mexico has a large population and is a significant consumer market. In addition, it is the gateway to the markets in Latin America. Once we establish a presence in Mexico, we can explore the opportunities of entering the Latin American markets a few years down the road.

Mexico Project Plan

Schedule

On December 11, 2018, we signed a service agreement with Disenos E Ideas Mexicanos, S.A. DE C.V. (“DIMSA”), which provides services of administration, accounting, compliance, import/export, human resources, etc., for our Mexico operation. DIMSA is a Mexican shelter services provider that incorporates a separate shelter company, Mayenco, S. de R.L. de C.V., (“Mayenco”) in Mexico by providing a legal representative. Mayenco is owned by DIMSA from a legal standpoint and is contracted by Fuling USA to manufacturing products in Mexico and then ship to the U.S. for us to sell. The shelter program allows foreign companies to manufacture in Mexico without being required to organize and operate their own subsidiary, for example, as a Mexican corporation. The initial term of the shelter services agreement was agreed for 36 months from January 2019, when the first full services fee payment was made, to January 2022. Either party can terminate the agreement in advance with or without cause, upon a ninety-day prior notice in writing to the other party.

On December 20, 2018, we, as a guarantor, through Mayenco as the lessee signed a lease agreement for a piece of land and a building located in Interpuerto Monterrey Industrial Park, Mexico to use as our factory. The building is 7,804 ^m2 (approximately 84,002 square feet). The lease has a term of 50 months, expiring in February 2023, with an option to extend the lease for an additional two years. According to the lease, after the grace period from December 20, 2018 to February 14, 2019 during which we only needed to pay the maintenance fees, we started to pay the monthly rent from February 2019. For the first four months, the monthly rent was $20,899 plus tax. After four months, the monthly rent is $29,810.47 plus tax.

On January 2, 2019, we signed a maquila services agreement with Mayenco which is renewed automatically as it was not terminated in advance by any party. According to the agreement, we are obligated to provide the machinery, raw materials, technology and processes to manufacture our products and pay for all the expenses and costs. Mayenco is obligated to manufacture, assemble and deliver the products to us or to whom we appoint.

We finished the renovation, equipment installation and testing and worker recruitment in the mid-2019. In the mid-August of 2019, we started our production. In October 2019, we shipped our first run of plastic straws from Mexico to our U.S. customers. We produced 120 tons plastic straws and paper cups for U.S customers in 2019.

Currently we are producing plastic straws and paper cups for U.S. customers. We do not have any plan to add equipment to produce paper straws yet due to the uncertainties caused by COVID-19.

Estimate of the amount of expenditures

The total investment spent for the project was roughly $4 million, including approximately $2.5 million of fixed asset investment, and $1.5 million of working capital. We currently do not have plan of adding more production lines. If we choose to increase production capability, we will incur additional costs.

Production Capacity

Based on our current equipment that was installed, the annual production capacity for paper cups is 2,500 tons, and the annual production capacity for plastic straws is about 700 tons. We have not started manufacturing paper straws and do not have the plan yet.

Environmental Considerations

The major products that we plan to produce in the Mexico Factory include paper cups. In the U.S., more and more fast food restaurants are opting for eco-friendly alternatives for plastic cups, such as paper cups.

We expect to strictly follow applicable environmental regulations and policies in Mexico.

Location

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

Facility

Our Mexico facility structure consists of 84,002 square feet of building area:

Below are some pictures of our Mexican factory: 

Allentown Factory

Decision to Invest in U.S.

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

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

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

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

As a result of analyzing these factors, we determined that it was in the best interest of our company to invest in America, hire U.S. workers and produce certain of our products in Allentown. We are manufacturing drinking straws in our Allentown facility.

Decision to Invest in Allentown

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

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

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

Pennsylvania is home to fifty Fortune 500 companies. Pennsylvania’s 2017 total gross state product of $752 billion ranks the state 6^th in the nation. If Pennsylvania were an independent country, its economy would rank as the 18th largest in the world. Moreover, Pennsylvania has a beneficial taxation policy that was attractive to our company in deciding where to locate manufacturing operations. In Pennsylvania, personal income tax is a flat 3.07%. The corporate net income tax is 9.9% and is levied on federal taxable income, without the federal net operating loss deduction. In addition, Pennsylvania allows a 20-year net operating loss carry forward of up to $2 million a year.

Finally, Pennsylvania has a strong trade relationship with China. Other than Canada and Mexico, China was the largest destination for exports from Pennsylvania, with $2.7 billion in exports in 2017.

Allentown Project Plan

Estimate of the amount of expenditures

The total investment spent on the project was roughly $9.3 million, including approximately $4.3 million of fixed asset investment, and $5.0 million of working capital. If we choose to increase production capability, we will incur additional costs.

Schedule

We signed the lease of the factory and acquired property for our Allentown facility in 2013 for approximately $235,100. For the year ended December 31, 2019, we paid rental fees of approximately $35,000 per month, including tax and insurance. We paid approximately $1.9 million for factory renovations. In addition, we rented a warehouse of 17,000 square feet nearby for approximately $11,000 per month since June 2016.

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

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

From January 2015 to May 2015, we purchased and installed the initial six straw production lines at a cost of approximately $1 million. As of June 2016, we installed an additional six straw production lines at a total cost of about $610,000. All twelve production lines have been in full operation and running 24/7 with 4 shifts of operators throughout the remainder of 2016.

Instead of putting in another 12 straw production lines as we originally planned, we plan to diversify our product offering in Allentown and use the space to bring in other manufacturing processes. From March 2016 to February 2017, we successfully tested and installed six automated straw packaging machines – one machine for every two lines. As of the end of 2016, we installed a ten-silo raw material storage and automatic distribution system was installed that is able to hold 430 metric tons of resin.

In 2017, we only made minor capital expenditures. We completed the installation of a raw material distribution system that included construction of ten silos outside the factory building for storage of plastic materials. We focused on optimizing the utilization of our existing equipment in Allentown and increased productivity by about 30%. At the same time, we reduced our labor cost per ton output by 40% and caused Allentown operations to become profitable in the second half of 2017.

In 2018, we planned to initiate paper cup manufacturing at the Allentown facility with a $2.5 million projected investment on machinery. The project was delayed because our technical experts on paper cup in China did not get visas to come to the U.S. In addition, the U.S. tariff on importing paper boards, the major raw material to produce paper cups, increased in 2018. Then we shifted the focus to starting up Mexico operation.

In 2019, as the demands of straws did not increase substantially, we did not add straw production machines.

In 2020, as we started our Indonesia factory, we do not plan to add any straw capacity or expand to other products in Allentown factory.

Production Capacity

The designated annual capacity is 2,400 tons of straw series products with the 12 straw production lines put into operations. We consistently exceeded 100% capacity in 2019 producing 2,374 tons for the year, an increase of 3.1% from 2018. The plant operates 24/7 throughout the year except on holidays and days under unusual weather conditions. In 2020, we will continue to improve our efficiency and productivity and try to exceed the 2,400-ton designed capacity. However, if demands increase significantly, we will add new machines.

Environmental Considerations

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

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

Location

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

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

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

Facility

Our Allentown facility structure consists of 88,000 square feet on 7.7 acres of land:

The current build-out plan is as depicted below. The blue figures in the left lower corner represent our first 6 straw production lines that we installed in 2015. The green figures in the middle represent the second six straw production lines we installed in 2016. The red and green figures to the right represent paper cup manufacturing and plastic equipment we plan to install in the future.

Current Stage

We have installed (1) twelve straw production lines, (2) six automated straw packaging machines – one machine for every two lines; and (3) a ten-silo raw material storage and automatic distribution system. Our total investment in manufacturing equipment has reached approximately $2.3 million.

Wenling Factory

Decision to Build a New Factory in Wenling

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

1) By building a new factory, we can meet the growing demand for our products. The extent of utilization of our old factory in Songmen Town of Wenling reached 100% as expected. A new factory would allow us to expand our production capacity.

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

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

Wenling Project

The project construction period was budgeted from April 2016 to December 2019, divided into three phases. 

The total amount of expenditures is $61 million. We financed the expansion with IPO proceeds, self-generated cash flow and profits from operations. We spent approximately $52 million on purchase of land use right, construction of facilities and equipment purchase. The major equipment we installed includes 166 injection molding production lines and 60 vacuum thermoforming production lines in total. The 166 injection molding production lines produce cutlery, plates, cups and bowls. 30 of the 60 vacuum thermoforming production lines produce cups, and 30 of the vacuum thermoforming production lines produce plates, cup lids and various types of containers, such as vegetable containers, fruit containers and packaging containers. The production capacity increased by 59,000 tons after completion of the project.

The following chart shows the specific status of each phase of the project:

Environmental Considerations

The production lines that installed are capable of producing biodegradable products.

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

Facility

Our new Wenling facility structure consists of 107,800 square meters on 33.27 acres of land. The facility includes four workshop buildings, one warehouse, two dormitory buildings and one office building. The four workshop buildings and one warehouse occupy 74,700 square meters in total. The two dormitory buildings consist of 380 rooms and can accommodate 1,520 workers. Workers have moved into these dormitory buildings. The office building occupies 7,000 square meters.

Our New Workshop Building in Wenling

Seasonality

Our main business does not have significant seasonality.

Raw Materials

Our primary raw materials are (1) PP, PS which includes GPPS and HIPS, and PET, (2) plastic bags and membranes for packaging cutlery, (3) shipping cartons, (4) plastic colorants, (5) paper board for paper straws, (6) paper napkins, salt, pepper and wet wipes for inclusion in cutlery packages and (7) labeling materials. We purchase our raw materials from a variety of suppliers, including more than ten suppliers of our key raw material, granular plastic resin. As we have a variety of options to supply us with raw materials for our products and the technical demands of preparing such raw materials are relatively low, we do not anticipate any difficulties in obtaining raw materials to produce our products. We are not reliant on a single supplier for any of our raw materials, and we expect we would be easily able to replace any of our suppliers if we needed to do so.

Plastic resin constituted approximately 76.6% of our raw material purchases in 2019. Plastic costs have recently been volatile as a result of significant fluctuations in petroleum prices. The company considers only plastic resin cost fluctuations to be material, given resin price volatility and plastic’s percentage of the cost of our products. We have historically been able to pass price fluctuations on to our customers. We do this in two ways.

First, for orders of our products by customers without long-term supply agreements with our company, we simply base the price quoted to the customers on current commodity prices. As raw material prices increase and decrease, we are able to adjust the price of our products as necessary.

Second, for our supply agreements for customers that have long-term supply agreements, such as a QSR that sources straws in a five-year agreement, we provide adjustable pricing that will fluctuate in part based on changes in plastic resin costs. Our client website maintains commodity prices to enable both parties to track such fluctuations.

For these reasons, we believe we will be able to adjust our pricing of products to allow us to maintain margins, serve our clients, and to avoid shortages in raw materials in the event of price increases.

Marketing Channels

We mainly rely on our sales team to market our products. In addition, we attend trade fairs both in China and in U.S. frequently. We also market our products through our websites.

Distribution Channels

Geographic Distribution of Revenues

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

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

Markets and Customers

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

Distribution Channels

When we began to produce serviceware, we sold our products through distributors that had existing relationships with the ultimate customers looking to purchase our products. Beginning in 2009, we began to sell directly to such purchasers. For the years ended December 31, 2019, 2018 and 2017, approximately 28%, 34% and 33% of our sales were made directly to end-users and retailers, respectively, and approximately 63%, 46% and 46% of our sales were made to distributors including dealers, respectively. Although we believe we benefit from having direct relationships with QSRs, retailers and other end users, we also believe that strong relationships with distributors can allow us to penetrate smaller markets where we do not have the marketing resources to deliver our products directly.

Methods of Competition

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

Competitive Position

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

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

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

Nevertheless, we have been one of China’s largest exporters of disposable serviceware. We were rated one of top 10 enterprises of plastic industry (daily plastic household products) in China light industries in 2018 by China National Light Industry Council and China Plastic Processing Industry Association, based on our (1) revenue, (2) profit, (3) profit tax rate, and (4) business growth rate.

We have invested heavily ($10.2 million since 2017 to 2019) in research and development to increase our future competitive position, seeking to increase our use of environmentally-friendly materials, develop degradable and biodegradable materials, and reduce reliance on fossil raw materials. In addition, we have developed advanced robotics to produce our products more efficiently and at lower cost to be more competitive in the face of rising wages and higher quality demands.

Another important competition method of us is using DDP shipping terms in about half of our sales. With DDP, we take responsibility for all risk and fees of shipping goods until they reach their destination so that our clients do not need to worry about the risk of lost or damages products and only need to receive our products at their warehouses. Historically this arrangement provides us a margin higher than most of our Chinese competitors which mainly use FOB, by which they only deliver the goods at port. However, the increased tariffs between China and U.S. put us in a challenging position as our costs have increased accordingly. While we have taken some measures to alleviate the loss including operating a Mexico factory, we cannot guaranty our strategy will be successful. For more information, please see “Item 3-D. Risk Factors-Risks Related to Our Business and Industry-Changes in U.S. trade policies, including new and potential tariffs on goods and raw materials imported from China, have negatively affected us and may disrupt our business and have a material adverse effect on our financial condition and results of operations.”

Awards and Recognition

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

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

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

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

2019

2018

2017

2016

2015

2014

Regulations 

We are subject to a variety of PRC, U.S. Mexican and other foreign laws, rules and regulations across a number of aspects of our business. This section summarizes the principal PRC, U.S. and Mexican laws, rules and regulations relevant to our business and operations. Areas in which we are subject to laws, rules and regulations outside of the PRC include intellectual property, competition, taxation, anti-money laundering and anti-corruption.

PRC Regulations

Foreign Investment Restrictions Regulations

Historically, the principal regulation governing foreign ownership of businesses in the PRC was the Guidance Catalogue for Industrial Structure Adjustments (the “Guidance Catalogue”). The Guidance Catalogue classified various industries into three categories: encouraged, restricted and prohibited. The Guidance Catalogue has been replaced by the Special Administrative Measures (Negative List) for Foreign Investment Access (2018), effective July 28, 2018 (the “Negative List”). The Negative List specifies the prohibited and non-prohibited (similar to the restricted in the Guidance Catalogue) industries for foreign investment. For the industries not covered by the Negative List, the foreign investment and the domestic investment have equal access. Foreign investors may not invest in the prohibited industries specified by the Negative List. For the non-prohibited industries on the Negative List, a foreign investor must obtain an investment permit. There are certain requirements on the equity ownership and the executive officers of the foreign invested enterprises. If PRC has certain equity requirements in certain investment fields, no foreign-invested partnership may be established. For example, pursuant to the latest Negative List, the provision of telecommunications services and value-added telecommunications services fall in the prohibited industry and the percentage of foreign ownership cannot exceed 50% (except for e-commence).

According to the Negative List, our products are not prohibited. Therefore, our proportion of the foreign investment may be up to 100%. As a result, FGI’s investment in our Chinese subsidiaries is in compliance with the Negative List.

Intellectual Property Rights Regulations

The Trademark Law of the PRC was adopted by the Standing Committee of the National People’s Congress (“NPC”) on August 23, 1982 and was amended on February 2, 1993 and October 27, 2001. The PRC Trademark Law Implementation Rules, or the Implementation Rules, were promulgated by the State Council on August 2, 2002 and became effective on September 15, 2002. The PRC is a signatory country to the Madrid Agreement and the Madrid Protocol. These agreements provide a mechanism whereby an international registration produces the same effects as an application for registration of the trademark made in each of the countries designated by the applicant.

According to the Trademark Law, the National Trademark Bureau under the SAIC is responsible for the registration and administration of trademarks throughout the country. A “first-to-file” principle with respect to trademarks has been adopted. If trademark owners deem an infringement to their trademarks constituted, they can file the dispute with the competent court or the relevant administrative department. Should the case be so serious as to constitute a crime, trademark owners may lodge a complaint with the relevant public security organization.

If the registered trademark owners intend to assign their registered trademark, a registered trademark transfer agreement shall be entered into between the owner and the assignee. The owner and assignee shall together apply to the National Trademark Bureau for registration of such assignment as prescribed under the Trademark Law.

Registered trademark owners may license other to use their registered trademark by concluding the registered trademark license agreement and such license agreements shall be subject to filing recordation with the National Trademark Bureau according to the Trademark Law. The licensor shall supervise the quality of the commodities on which such registered trademark is used, and the licensee shall guarantee the quality of such commodities.

The Measures for the Administration of Domain Names for the Chinese Internet, or the Domain Names Measures, were promulgated by the Ministry of Information Industry on November 5, 2004 and became effective on December 20, 2004. The Domain Names Measures govern registration of domain names with the internet country code “.cn” and domain names in Chinese. We have one website (www.fulingplastics.com.cn) governed by the Domain Names Measures.

The Measures on Domain Names Dispute Resolution, or the Domain Names Dispute Resolution Measures, were promulgated by the China Internet Infrastructure Center on February 14, 2006 and became effective on March 17, 2006. The Domain Names Dispute Resolution Measures require domain name disputes to be submitted to institutions authorized by the China Internet Network Information Center for resolution.

Regulations on Tax

The Law of the People’s Republic of China on Enterprise Income Tax (the “EIT Law”), promulgated by NPC on March 16, 2007 and put into force on January 1, 2008, imposes a uniform enterprise income tax rate of 25% on all resident enterprises in China, including foreign-invested enterprises, on all their income and a tax rate of 10% on non-resident enterprises on their income from the jurisdiction of PRC.

Attention shall be paid to the fact that non-resident enterprises may be considered resident enterprises for the purpose of EIT if their de facto management bodies are located within the PRC territory and therefore their global income is subject to a tax rate of 25%. The Notice of the State Administration of Taxation on Issues Relevant to Foreign-registered Chinese-invested Holding Enterprises Determined as Resident Enterprises in Accordance with Actual Management Organization Standard (“Circular 82”), promulgated by the State Administration of Taxation (“SAT”), provides that, a foreign Chinese-invested enterprise, if it concurrently satisfies the following conditions, for the purpose of the EIT, shall be determined to be a non-domestically-registered resident enterprise when: (1) The places where the top managers and the top management departments that are responsible for implementing the routine production, management and operation of the enterprise, perform their duties within the territory of China; (2) The financial decisions (such as borrowing, lending, financing, financial risk management, etc.) and the personnel decisions (such as appointment, dismissal, remuneration payment, etc.) of the enterprise shall be made or be approved by the organization or the persons within the territory of China; (3) The primary properties, accounting books, company seals, summaries and archives of the board meetings and shareholders meetings shall be placed or kept within the territory of China; and (4) One half or more of the enterprise’s directors or top managers having rights to vote shall frequently reside within the territory of China. Our PRC counsel, Jingtian & Gongcheng Attorneys at Law advised that because we (“FGI”) are incorporated in Cayman Islands, we do not meet the conditions outlined in Circular 82, however, our tax residency status is subject to the discretion of the PRC tax authorities whose determination is hard to predict, so we will continue to monitor our tax residency status.

The implementation rules of the EIT Law provide that, (i) if the enterprise that distributes dividends is domiciled in the PRC or (ii) if gains are realized from transferring equity interests of enterprises domiciled in the PRC, then such dividends or capital gains are treated as China-sourced income. It is not clear how “domicile” may be interpreted under the EIT Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we are considered as a PRC tax resident enterprise for PRC tax purposes, any dividends we pay to our overseas shareholders which are non-resident enterprises as well as gains realized by such shareholders from the transfer of our shares may be regarded as China-sourced income and as a result become subject to PRC withholding tax at a rate of up to 10% unless any such non-resident individuals’ jurisdiction has a tax treaty with China that provides for a preferential tax rate or a tax exemption.

The Interim Regulations of the People’s Republic of China on Value-added Tax, promulgated by State Council on November 10, 2008 came into force on January 1, 2009, impose a Value-Added Tax at the rate of 17% on the revenues from sales of goods. According to the Notice of the Ministry of Finance and the State Administration of Taxation on Raising the Export Tax Rebate Rates for Certain Commodities, promulgated by the Ministry of Finance and SAT on June 3, 2009, the export tax rebate rate is 13% for certain plastic products. In 2014, 99.6% of our products benefitted from the 13% export tax rebate.

In April 2018, the Ministry of Finance and the State Administration of Taxation jointly issued the Notice on Adjusting the Tax Rate of Value-added Tax (Circular 32 of Finance and Taxation, 2018). The Notice clearly stipulates that, from May 1, 2018, for all taxpayers who have engaged in taxable sales of VAT or imported goods, where the original 17% and 11% tax rates were applied, the tax rates shall be adjusted to 16% and 10%, respectively. From April 1, 2019, the tax rates were further lowered to 13% and 9%. This can lighten the operation burden of enterprises to a certain extent.

Foreign Exchange Regulation

The Regulations of the People’s Republic of China on Foreign Exchange Control, promulgated by State Council on August 5, 2008, lays the legal framework for foreign exchange control in PRC. A number of notices, implementing rules, replies and circulars are promulgated thereunder to clarify the regulations on the foreign exchange. Under these regulations, payments of current account items, such as profit distributions, may be made in foreign currencies without prior approval from SAFE provided that certain procedure is complied with. Where, however, payments of capital account is involved, such as RMB is to be converted into foreign currency for the purpose of remitting out of China to retire foreign currency-denominated loans, approval from or registration with appropriate government authorities is required. According to the SAFE Circular 142 i.e., Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-funded Enterprises, promulgated by SAFE on August 29, 2008 and SAFE Circular 45, promulgated by SAFE on November 9, 2011, the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes falling within the business scope approved by the relevant authority and may not be used for equity investments within the PRC. The use of such RMB capital may not be altered without SAFE’s approval, and such RMB capital may not in any way be used to retire RMB loans where the proceeds of such loans have not been used.

The Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, promulgated by SAFE on November 19, 2012, materially amends and, therefore, simplifies the foreign exchange procedure then existing. Various special purpose foreign exchange accounts may be opened in different provinces, which was prohibited previously. The Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents, promulgated by SAFE in May 2013, provides for that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted through registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches.

We have obtained all material approvals and permits necessary for our operation in the PRC from SAFE and other PRC government authorities.

SAFE Circular 37

The Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, promulgated by SAFE on October 21, 2005 and designed to replace the former circular commonly known as “SAFE Circular 75”, requires registration of PRC residents with local branches of SAFE with respect to their direct establishment or indirect control of an offshore entity (referred to in SAFE Circular 37 as “special purpose vehicle”), where such offshore entity are established for the purpose of overseas investment or financing, provided that PRC residents contribute their legally owned assets or equity into such entity.

SAFE Circular 37 further requires amendment to the registration where any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, divestiture or other material event.

Any violation of these registration requirements may, among other liabilities that may be imposed under PRC laws governing evasion of foreign exchange controls, cause the PRC subsidiaries of the special purpose vehicle be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and may cause the special purpose vehicle’s ability to contribute additional capital into its PRC subsidiary be restricted.

Regulation of Dividend Distribution

The Company Law of the People’s Republic of China, promulgated by Standing Committee of the NPC on December 28, 2013 and came into force on March 1, 2014, and the Wholly Foreign-owned Enterprise Law, promulgated and came into force on October 31, 2000 by Standing Committee of the NPC, provide that dividend may only be paid out of accumulated profits as determined in accordance with applicable accounting standards provided that: (1) all losses from prior fiscal years have been offset; and (2) a general reserve has been established and which shall amount to the 50% of the registered capital.

Labor Laws and Social Insurance

The Labor Contract Law was promulgated by the Standing Committee of the NPC on June 29, 2007 and became effective on January 1, 2008.

The Labor Contract Law requires employers to enter into written contracts with their employees, restricts the use of temporary workers and aims to give employees long-term job security. Pursuant to the Labor Contract Law, employment contracts lawfully executed prior to the implementation of the Labor Contract Law and continuing as of the date of its implementation shall continue to be performed. If an employment relationship was established prior to the implementation of the Labor Contract Law with no written employment contract executed, a contract must be executed within one month after the implementation of the Labor Contract Law.

In addition, according to the PRC Social Insurance Law, social insurance in China includes basic pension insurance, basic medical insurance, work-related injury insurance, unemployment insurance and maternity insurance. Both employers and employees must pay basic pension insurance contributions based on the employee’s wage category, as required by the relevant regulations. Employees participating in basic pension insurance schemes are entitled to receive monthly basic pensions if their accumulated contribution period has reached or exceeded 15 years when they reach the statutory retirement age. A notice issued by the Social Assurance Authority provides that retirement is permitted at age of 60 for male employees and between 50 and 55 for female employees. Social insurance (including pension insurance) payment obligations end at such voluntary retirement ages.

In July 2018, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council issued the Reform Plan for the Taxation and Administration System of State Taxes and Local Taxes (hereinafter referred to as the Reform Plan). The Reform Plan clearly stipulates that from January 1, 2019, all social insurance premiums, such as basic old-age insurance premium, basic medical insurance premium, unemployment insurance premium, industrial injury insurance premium and maternity insurance premium, will be levied by the tax authorities. The Reform Plan makes the collection of social insurance fees more transparent and standardized, and reduces a certain degree of flexibility that enterprises can enjoy before. For enterprises that have not paid all the related fees before, the Reform Plan will increase the financial burden of enterprises, which may even face administrative penalties and illegal risks. The details of how to levy social insurance fees need to be clarified.

Company Law

The Company Law of the PRC, adopted at the Fifth Session of the Standing Committee of the Eighth National People’s Congress on December 29, 1993, was amended for the first time at the 13th Session of the Standing Committee of the Ninth National People’s Congress on December 25, 1999; amended for the second time at the 11th Session of the Standing Committee of the Tenth National People’s Congress on August 28, 2004; revised at the 18th Session of the Standing Committee of the Tenth National People’s Congress on October 27, 2005; and Revised at the 6th Session of the Standing Committee of the Twelfth National People’s Congress on December 28, 2013, takes effect on March 1, 2014 (the “Company Law”).

Pursuant to the Company Law, (1) the term “company” shall refer to a limited liability company or a Company Limited by Shares; (2) the shareholders of both Limited Liability Company and Company Limited by Shares shall only be subject to the liability of the company to the extent of the capital contributions they have subscribed; (3) the minimum amount of registered capital of a limited liability company and the minimum percent of cash contribution by shareholders have been eliminated by revision in 2014.

Wholly Foreign-Owned Enterprise Law

The Law of the PRC on Wholly Foreign-owned Enterprises, or the WFOE Law, was adopted by the NPC on April 12, 1986 and was amended on October 31, 2000. Moreover, the Implementation Regulation of the WFOE Law was promulgated on December 12, 1990 and amended on April 12, 2001.

The ratio between its registered capital and total amount of investment shall be in conformity with the relevant regulations of the PRC, and the difference between its registered capital and total amount of investment equal to the amount of foreign exchange loans that the WFOE is permitted to borrow from its foreign investor.

Environmental Protection

The Environmental Protection Law, promulgated by the Standing Committee of NPC on December 26, 1989 and came into force on December 26, 1989, lays the foundation of the legal framework for environmental protection in the PRC. The Ministry of Environmental Protection under the State Council is charged with the administration of The Environmental Protection Law.

The Law on Prevention and Control of Environmental Pollution by Solid Wastes (“the Solid Wastes Law”), promulgated by the NPC on December 29, 2004 and came into force on April 1, 2005, provides that any disposition of hazardous wastes shall be in compliance with relevant provisions promulgated by the State. Moreover, it is forbidden to supply or entrust hazardous wastes to entities that do not have business licenses and qualifications for the collection, storage, utilization and disposition of solid wastes. The Air Pollution Prevention Law, promulgated by the Standing Committee of the NPC on April 29, 2000 and came into force on September 1, 2000, The Water Pollution Prevention Law, promulgated by the Standing Committee of the NPC on May 11, 1984 and came into force on November 1, 1984 as amended on March 15, 1996 and February 28, 2008 are also important laws in this area.

Under these regulations, a number of requirements for handling, storage, treatment, transportation and disposal of regulated substances and wastes must be complied with and enterprise that discharge wastes into air or waters must obtain a permit and pay the waste treatment fees. Violation of these regulations may cause the violator to be subject to injunction and/or fine. We have obtained all material approvals necessary for our business operations.

Property

The Law of the PRC on Property, or the Property Law, was promulgated by the Standing Committee of the NPC on March 16, 2007 and became effective on October 1, 2007. Under the Property Law, any creation, modification, transfer or termination of property rights shall only become effective upon registration with the relevant government authorities. All lawful property of the State, collective organization and individual are protected by the Property Law against embezzlement and encroachment.

The Law of the PRC on Land Administration, or the Land Administration Law, was promulgated by the Standing Committee of the NPC on June 25, 1986 and became effective on January 1, 1987 and as amended on December 29, 1988 and August 28, 2004. According to the Land Administration Law, the lands within territory of the PRC are classified into two categories, state-owned land and collective-owned land. The use right of state-owned land can be obtained through either government allocation or grant with grant fees paid.

It further prescribes that any entity who intends to conduct construction must construct on the state-owned land except as otherwise provided under the Land Administration Law. The collective-owned land shall not be granted, assigned or leased for use of agriculture-unrelated-construction unless it otherwise falls in the scope permitted under the Land Administration Law. Violation of such provisions under the Administration Law may result in fines and confiscation of the buildings constructed on the land.

The Urban Real Estate Administration Law was promulgated by the Standing Committee of the NRC on July 5, 1994 and became effective on January 1, 1995 and as amended on August 30, 2007. According to the Urban Real Estate Administration Law, if the real estate is mortgaged to third party the land where such real estate occupies shall also be mortgaged together.

Product Liability

Under the current PRC laws, manufacturers and/or vendors of defective products in the PRC may incur liability for loss and injury caused by such defective products. Pursuant to the General Principles of the Civil Law of the PRC, or the PRC Civil Law, promulgated by the NPC on April 12, 1986, a defective product which causes property damage and/or physical injury to any person may subject the manufacturer and/or vendor of such defective product to civil liability for such damage and/or injury caused therefrom.

The Product Quality Law of the PRC, or the Product Quality Law, was promulgated by the Standing Committee of the NPC on February 22, 1993, to supplement the PRC Civil Law aiming to protect the legitimate rights and interests of the end-users and consumers and to strengthen the supervision and control over the quality of products. The Product Quality Law was revised on July 8, 2000. Pursuant to the revised Product Quality Law, manufacturers who produce defective products may be subject to civil or criminal liability and have their business licenses revoked.

The Law of Protection of the Rights and Interests of Consumers, or the Consumers Protection Law, was promulgated by the Standing Committee of the NPC on October 31, 1993, and became effective on January 1, 1994. The Consumers Protection Law provides further protection to the legal rights and interests of consumers in connection with the purchase or use of goods and services. At present, all business operations must observe and comply with the Consumers Protection Law when they provide their goods and/or services.

The Tort Law of the PRC, or the Tort Law, was adopted by the Standing Committee of the NPC and promulgated on December 26, 2009 and will become effective on July 1, 2010. The Tort Law establishes a separate chapter regarding product liability. Compared to previous laws and regulations in relation to product liability, the provisions of the Tort Law expressly provide that, in the event that any entity is clearly aware of the defects existing in the products but notwithstanding manufactures and distributes such defective products which finally cause others’ death or serious injury, those so infringed upon are entitled to claim punitive damages.

Mexican Regulations

Labor Law

The Mexican Federal Labor Law (the “FLL”) was promulgated in April 1^st, 1970 and regulates non-governmental employment relationships in Mexico. In May 2019, the Mexican Congress approved a reform that amended important matters to said law and added new obligations to the companies that have employees. The FLL and the labor justice system favor the employee over the employer in most cases. Employers are legally required to enroll all employees before the Mexican Social Security Institute and to make the required contributions under the Social Security Law.

International Trade and Customs

The Mexican Customs Law issued on December 15, 1995 and reformed on June 25, 2018 establishes that prior to importing or exporting raw materials and fixed assets into or from Mexican territory, several requirements must be met, such as government authorizations, non-tariff restrictions and engagement of customs brokers as legal representatives. In addition, Mexico has numerous strict and thorough laws, regulations and rules that a company that imports or exports products must observe.

The IMMEX program has several modalities including the shelter, under which a registered Mexican entity can serve as a legal entity that assumes legal risks and liability for manufacturers operating beneath its IMMEX registration. Foreign entities obtain the experienced partner’s knowledge of the local requirements and can thus focus on the manufacturing work). Said IMMEX program grants several benefits to its beneficiaries such as deferring general import duty and customs processing fee with a specific quota. If the relevant goods originating from a country with which Mexico has a Free Trade Agreement, the corresponding importations will be exempted from the General Import Duty and such duty should not be paid unless they are destined to stay in Mexico on a definitive basis. However, the IMMEX companies including us and our shelter company are forced to pay the Value Added Tax applicable for the importations of raw materials and fixed assets, unless a VAT Certification is requested.

Among other conditions, one condition of the IMMEX program is to export at least US $500,000 dollars’ worth of finished products on an annual basis, or 10% of yearly sales within a government mandated timeframe. Companies that operate under the IMMEX program in Mexico must also use an inventory control system under called “Anexo 24” of the foreign trade rules.

Tax Law

The Mexican regulations for tax matters is extensive. The federal jurisdiction includes the Federal Tax Code from December 31^st, 1981 and amended on January 9^th, 2020, Income Tax Law promulgated on December 11^th, 2013 and amended on December 9^th, 2019, and the Value Added Tax Law from December 29^th, 1978 and amended on December 9^th, 2019. These laws also have their own regulations, rules and decrees. Additionally, the shelter services company that we work with has to comply with the local tax regulation applicable in the state of Nuevo, Leon, Mexico, including the Tax Code of the State of Nuevo Leon and the Public Finance Law of the State of Nuevo Leon.

According to all of these laws and regulations, we have different obligations to meet before several authorities. These obligations include filing tax statements, pay different kinds of taxes whether federal or local, and account for any kind of transaction that could have a tax benefit for the company as a consequence.

Environmental Regulations

In Mexico, while federal authorities exclusively regulate some activities and subjects, competence to enforce environmental regulations are distributed between federal, state and municipal governments in the General Law on Ecological Equilibrium and Environmental Protection (LGEEPA by its acronym in Spanish). As a result, all states and many municipalities have issued local regulations with several degrees of complexity in some cases. Most companies will find themselves subject to comply with regulations for both federal and state government at the same time. Also, the Federal Law of Environmental Liability (LFRA by its acronym in Spanish), regarding environmental liability, established fault-based liability as a rule for damages caused to the environment. Ordinarily, if a company causes damage, the company itself is liable. However, directors and officers can be held liable or even criminally liable if they actively violate environmental regulations.

Anti-Corruption System

On May 27, 2015, Mexican Federal Government published a decree (the “Decree”) modifying, adding to and removing several anticorruption provisions set forth in the Mexican Constitution. With this Decree, the Government elevated to a Constitutional level the power to sanction institutions, including not only public officials involved in corrupt acts or practices, but also individuals and corporations. Also,

The General Law of Administrative Responsibilities (“GLAR”) entered into force on July 19, 2017, superseding the previous Federal Anticorruption Law in Public Contracting. GLAR includes for the first time in an administrative statute in Mexico, a catalogue of conducts considered as acts of corruption and their respective concepts. Those conducts are divided in two sections: i) Serious Administrative Offenses committed by public officials (“passive bribery”); and ii) actions committed by individuals or companies (“active bribery”). The GLAR punishes conducts considered as acts of corruption.

Criminal Law

The Criminal Code of Mexico City and analogue criminal codes of the rest of the States, in connection with the National Code for Criminal Procedures, provides corporations liability for criminal offenses committed on its behalf or for its benefit, through their legal representatives and/or officers.

Likewise, said laws establish that corporations will be also liable for the offenses committed by its staff under the direction of the legal representatives and/or officers in terms of a failure to exercise “proper control” over them.

U.S. Regulations

Federal, state and local governments mandate a variety of laws and regulations aimed at serviceware products and packaging products. At the federal level, the Food and Drug Administration (“FDA”), the Consumer Product Safety Commission and the Environmental Protection Agency (“EPA”), among other federal agencies, have promulgated regulations that directly or indirectly affect the products we produce.

For example, the FDA is charged with, among other responsibilities, regulating industry to ensure that food contact substances are safe, approving materials for use in foodservice disposables, and setting safety standards for products made with recycled content. Unlike many other industrialized nations, the U.S. does not currently have national packaging recycling laws in place; such laws, where they exist, are at the state level.

The Affordable Care Act (“Obamacare”) requires restaurant chains with over 20 locations to display the calorie content of each food and drink item it serves on signs and printed menus. Such regulation may indirectly affect our product usage as the intention of such regulation is to encourage healthier eating and better food choices, including a decrease in consumption of food from fast food restaurants and quick service restaurants.

State and local governments regulate restaurant cleanliness standards, with which foodservice disposables must comply. And a number of states, including large states such as California and Florida, as well as cities and counties have passed regulations governing consumer packaging materials. Polystyrene foam bans are particularly widespread among local governmental regulations, particularly in California, which has more than 50 cities and counties that have restricted or banned foamed polystyrene containers. Although no state has yet to impose a statewide ban on polystyrene, numerous bills that would accomplish such ban have been promoted in various state legislatures.

C. Organizational Structure

Below is a chart representing our current corporate structure:

Our registered office in the Cayman Islands is at Vistra (Cayman) Limited, P.O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KY1-1205, Cayman Islands, telephone +1.345.769.9372.

D. Property, Plant and Equipment

Property

There is no private land ownership in China. Individuals and entities are permitted to acquire land use rights for specific purposes. We were granted land use rights for our facilities in Songmen Town and Wenling City, which extend until between 2053 and 2066.

In the U.S., in October 2013, we committed with the Pennsylvania Department of Commerce to invest and build a factory in Allentown, Pennsylvania. On February 27, 2014, Fuling USA signed a lease of premises in Allentown, Pennsylvania for general office, manufacturing and warehousing purposes. The Allentown project contemplates construction of the factory, renovation of the rented premises in Allentown and the purchase and installation of 12 production lines of manufacturing equipment.

On December 20, 2018, we, as a guarantor, through Mayenco as the lessee, signed a lease agreement for certain property located in Interpuerto Monterrey Industrial Park, Mexico to use as our factory. The building is 7,804 m2 (approximately 84,002 square feet).

On September 20, 2019, we signed a 10-year lease on a property in Semarang City, Central Java, Indonesia, on which we plan to operate a 194,000 square-foot manufacturing and distribution facility.

Following is a list of our properties, including the first five, which we lease: