27.324.296.003.48326583732658373265837326583727.324.296.003.489.601.476.060.948.171.273.480.5527.324.29Fuwei Films (Holdings), Co. 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

           REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2021

OR

           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ___________________

OR

           SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

Date of event requiring this shell company report _______________

Commission file number: 001-33176

Fuwei Films (Holdings) Co., Ltd.

(Exact name of Registrant as specified in its charter)

(Translation of Registrant’s name into English)

Cayman Islands

(Jurisdiction of incorporation or organization)

No. 387 Dongming Road

Weifang Shandong

People’s Republic of China, Postal Code: 261061

(Address of principal executive offices)

Yong Jiang

Tel: +86 133 615 59266

fuweiir@fuweifilms.com

(Name, Telephone, E-mail, and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class

Trading Symbol

Name of each exchange on which registered

 

 

Ordinary Shares

FFHL

NASDAQ Capital Market

Securities registered or to be registered pursuant to Section 12(g) of the Act. None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None

As of December 31, 2021, there were 3,265,837 ordinary shares outstanding.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes   No

If this report is an annual or transition report, indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes   No

Note - Checking the box will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

Emerging Growth Company

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S. C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP

International Financial Reporting Standards as issued by
the International Accounting Standards Board 

Other 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

Item 17       Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

  Yes     No

TABLE OF CONTENTS

 

    

DESCRIPTION

    

PAGE

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

5

INTRODUCTION

6

CURRENCIES AND EXCHANGE RATES

PART I

Item 1

Identity of Directors, Senior Management, and Advisers

7

Item 2

Offer Statistics and Expected Timetable

7

Item 3

Key Information

7

Item 3A

Selected Financial Data

7

Item 3B

Capitalization and Indebtedness

9

Item 3C

Reasons for the Offer and Use of Proceeds

9

Item 3D

Risk Factors

9

Item 4

Information on the Company

22

Item 4A

Unresolved Staff Comments

38

Item 5

Operating and Financial Review and Prospects

38

Item 6

Directors, Senior Management, and Employees

54

Item 6A

Directors and Senior Management

54

Item 6B

Compensation

58

Item 6C

Board Practices

59

Item 6D

Employees

59

Item 7

Major Shareholders and Related Party Transactions

59

Item 7A

Major Shareholders

59

Item 7B

Related Party Transactions

60

Item 7C

Interests of Experts and Counsel

61

Item 8

Financial Information

61

Item 8A

Consolidated Statements and Other Financial Information

61

Item 8B

Significant Changes

62

Item 9

The Offer and Listing

62

Item 9A

Offer and Listing Details

62

Item 9B

Plan of Distribution

62

Item 9C

Markets

62

Item 9D

Selling Shareholders

62

Item 9E

Dilution

62

Item 9F

Expenses of the Issue

62

Item 10

Additional information

62

Item 10A

Share Capital

62

Item 10B

Memorandum and Articles of Association

62

Item 10C

Material Contracts

71

Item 10D

Exchange Controls

71

Item 10E

Taxation

72

Item 10F

Dividends and Paying Agents

79

Item 10G

Statement by Experts

79

Item 10H

Documents on Display

79

Item 10I

Subsidiary Information

79

Item 11

Quantitative and Qualitative Disclosures about Market Risk

80

Item 12

Description of Securities Other than Equity Securities

81

PART II

Item 13

Default, Dividend Arrearages, and Delinquencies

81

3

Item 14

Material Modifications to the Rights of Security Holders and Use of Proceeds

81

Item 15

Controls and Procedures

81

Item 16

[Reserved]

83

Item 16A

Audit Committee Financial Expert

83

Item 16B

Code of Ethics

83

Item 16C

Principal Accountant Fees and Services

83

Item 16D

Exemptions from the Listing Standards for Audit Committee

84

Item 16E

Purchase of Equity Securities by the Issuer and Affiliated Purchaser

84

Item 16F

Changes in Registrant’s Certifying Accountants

84

Item 16G

Significant Differences in Corporate Governance Practices

84

Item 16H

Mine Safety Disclosure

84

Item 16I

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

84

PART III

Item 17

Financial Statements

84

Item 18

Financial Statements

84

Item 19

Exhibits

86

4

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

This Annual Report contains many statements that are “forward-looking” and uses forward-looking terminology such as “anticipate,” “believe,” “expect,” “estimate,” “future,” “intend,” “may,” “ought to,” “plan,” “should,” “will,” negatives of such terms or other similar statements. You should not place undue reliance on any forward-looking statement due to its inherent risk and uncertainties, both general and specific. Although we believe the assumptions on which the forward-looking statements are based are reasonable and within the bounds of our knowledge of our business and operations as of the date of this annual report, any or all of those assumptions could prove to be inaccurate. As a result, the forward-looking statements based on those assumptions could also be incorrect. The forward-looking statements in this Annual Report include, without limitation, statements relating to:

our goals and strategies;
our future business development, results of operations, and financial condition;
our ability to protect our intellectual property rights;
expected growth of and changes in the PRC BOPET film industry and in the demand for BOPET film products;
projected revenues, profits, earnings, and other estimated financial information;
our ability to maintain and strengthen our position as a leading provider of BOPET film products in China;
our ability to maintain strong relationships with our customers and suppliers;
our planned use of proceeds;
effect of competition in China and demand for and price of our products and services; and
PRC governmental policies regarding the broader economy and our industry.

The forward-looking statements included in this Annual Report are subject to risks, uncertainties, and assumptions about our businesses and business environments. These statements reflect our current views with respect to future events and are not a guarantee of our future performance. Actual results of our operations may differ materially from information contained in the forward-looking statements as a result of risk factors, some of which are described under “Risk Factors” and elsewhere in this Annual Report. Risks, uncertainties, and assumptions include, among other things:

competition in the BOPET film industry;
growth of, and risks inherent in, the BOPET film industry in China;
unpredictable impact on the company’s revenue by price movements of crude oil in recent years;
uncertainty in our export due to trade protectionism around the world;
uncertainty as to future profitability and our ability to obtain adequate financing for our planned capital expenditure requirements;
uncertainty as to our ability to continuously develop new BOPET film products and keep up with changes in BOPET film technology;
risks associated with possible defects and errors in our products;
uncertainty as to our ability to protect and enforce our intellectual property rights;
uncertainty as to our ability to attract and retain qualified executives and personnel;
uncertainty as to our ability to attract and retain experienced financial reporting staff familiar with U.S. GAAP;
uncertainty in acquiring raw materials on time and on acceptable terms;
adverse effect on our business caused by adjustment of economic structure regulations of the Chinese government;
adverse effect on our business caused by the uncertainty in the economic recovery of major developed countries;
the adverse effects on our business and operations by a variety of events outside our control, including, but not limited to, outbreaks of infectious diseases such as the recent COVID-19 pandemic and political instability such as the recent conflict in Ukraine;
adverse effect on our business caused by extreme climate changes; and
changes in general market, political and economic conditions, including as a result of the current conflict between Russia and Ukraine.

5

These risks, uncertainties, and assumptions are not exhaustive. Other sections of this Annual Report include additional factors which could adversely impact our business and financial performance. The forward-looking statements contained in this Annual Report speak only as of the date of this annual report, or, if obtained from third-party studies or reports, the date of the corresponding study or report, and are expressly qualified in their entirety by the cautionary statements in this Annual Report. Since we operate in an emerging and evolving environment and new risk factors and uncertainties emerge from time to time, you should not rely upon forward-looking statements as predictions of future events. Except as otherwise required by the securities laws of the United States, we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this Annual Report or to reflect the occurrence of unanticipated events.

INTRODUCTION

This annual report on Form 20-F includes our audited consolidated financial statements as of December 31, 2021, and 2020 and for the years ended December 31, 2021, 2020, and 2019.

Our ordinary shares are listed on the Nasdaq Capital Market, or NASDAQ, under the symbol “FFHL.”

Except as otherwise required and for purposes of this Annual Report only:

“Fuwei”, “Company”, “us”, “our” or “we” refer to Fuwei Films (Holdings) Co., Ltd. The term “you” refers to holders of our ordinary shares.
“China” or “PRC” and the “Chinese government” refer to the People’s Republic of China and its government.
All references to “Renminbi,” or “RMB” are to the legal currency of China, all references to “U.S. dollars,” “dollars,” “$,” or “US$” are to the legal currency of the United States and all references to “Hong Kong dollars” or “HK$” are to the legal currency of Hong Kong. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.
“BOPET” refers to the Biaxially Oriented Polyester Film.

6

PART I

Item 1. Identity of Directors, Senior Management, and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A. Selected financial data.

The following selected financial data should be read in conjunction with Item 5 - the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Financial Statements and Notes thereto included elsewhere in this Annual Report.

The following selected historical statement of income data for the years ended December 31, 2021, 2020, and 2019 and the selected historical balance sheet data as of December 31, 2021, and 2020 have been derived from the Company’s audited consolidated financial statements included in this Annual Report on Form 20-F beginning on page F-1. The following selected historical statement of income data for the years ended December 31, 2018, and 2017, and the selected historical balance sheet data as of December 31, 2019, 2018, and 2017 have been derived from the Company’s audited financial statements not included in this Annual Report. The audited financial statements are prepared and presented in accordance with the United States’ generally accepted accounting principles, or U.S. GAAP.

7

Certain factors that affect the comparability of the information set forth in the following table are described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Financial Statements and related notes thereto are included elsewhere in this Annual Report.

For the year ended December 31,

2021

2020

2019

2018

2017

(in thousands, except per share data)

    

RMB

    

US$

    

RMB

    

RMB

    

RMB

    

RMB

Statement of Operations Data:

 

  

 

  

 

  

 

  

 

  

 

  

Revenues

 

396,799

 

62,266

 

336,755

 

335,620

 

333,522

 

290,706

Gross (loss) profit

 

148,897

 

23,365

 

136,699

 

83,610

 

54,688

 

27,100

Operating income (loss)

 

94,767

 

14,871

 

21,400

 

23,095

 

(11,268)

 

(33,934)

Interest expense

 

(5,054)

 

(793)

 

(8,490)

 

(8,892)

 

(9,766)

 

(9,453)

Income (loss) before income taxes

 

95,231

 

14,944

 

13,495

 

13,688

 

(18,554)

 

(45,195)

Net income (loss) attributable to the Company

 

89,213

 

14,000

 

19,610

 

11,363

 

(22,172)

 

(46,003)

Earnings (loss) per share

 

 

 

 

 

 

Basic

 

27.32

 

4.29

 

6.00

 

3.48

 

(6.79)

 

(14.09)

Diluted

 

27.32

 

4.29

 

6.00

 

3.48

 

(6.79)

 

(14.09)

Weighted average number of ordinary shares, Basic and diluted

 

 

 

 

 

 

Basic

 

3,265,837

 

3,265,837

 

3,265,837

 

3,265,837

 

3,265,837

 

3,265,837

Diluted

 

3,265,837

 

3,265,837

 

3,265,837

 

3,265,837

 

3,265,837

 

3,265,837

For the year ended December 31,

2021

2020

2019

2018

2017

(in thousands)

    

RMB

    

US$

    

RMB

    

RMB

    

RMB

    

RMB

Balance Sheet Data:

 

  

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

 

250,608

 

39,326

 

113,423

 

60,871

 

8,908

 

12,963

Accounts and bills receivable, net

 

29,225

 

4,586

 

32,393

 

26,960

 

22,627

 

20,123

Inventories

 

35,456

 

5,564

 

25,436

 

23,584

 

24,675

 

24,578

Total current assets

 

353,859

 

55,529

 

317,080

 

145,516

 

102,167

 

120,755

Property, plant and equipment, net

 

106,928

 

16,779

 

111,308

 

302,642

 

331,168

 

371,058

Total assets

 

475,699

 

74,648

 

445,656

 

465,971

 

454,682

 

517,480

Short-term bank loans

 

65,000

 

10,200

 

65,000

 

65,000

 

64,950

 

50,000

Total current liabilities

 

156,893

 

24,620

 

215,998

 

255,487

 

255,323

 

293,688

Total shareholders’ equity

 

317,017

 

49,747

 

227,804

 

208,194

 

196,831

 

221,029

Shandong Fuwei was entitled to preferential tax treatment at an EIT rate of 15% for the years ended December 31, 2011, 2012, and 2013 due to its status as a High-and-New Tech Enterprise since December 2009. In 2014, Shandong Fuwei failed to be designated as such, 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 again as a High-and-New Tech Enterprise and as a result, it was entitled to preferential tax treatment at an EIT rate of 15% for the years ended on December 31, 2016, 2017, and 2018. In 2019, Shandong Fuwei was designated again as a High-and-New Tech Enterprise and as a result, it was entitled to preferential tax treatment at an EIT rate of 15% for the years ended December 31, 2019, 2020 and will be entitled to preferential tax treatment at an EIT rate of 15% for the year ending on December 31, 2021.

Exchange Rate Information

On July 21, 2005, the Chinese government changed its policy of pegging the value of the Renminbi to the U.S. dollar. This revaluation of the Renminbi was based on a conversion of the Renminbi into United States dollars at an exchange rate of US$1.00=RMB8.11. Under the new policy, the Renminbi will be permitted to fluctuate within a band against a basket of certain foreign currencies. On December 31, 2021, this change in policy resulted in an approximately 21.4% appreciation in the value of the Renminbi against the U.S. dollar compared to 2005. The Company generates its revenue in the PRC in Renminbi and its overseas sales and U.S. dollars cash deposits are subject to foreign currency translations which will impact net income (loss).

8

B.Capitalization and indebtedness.

Not applicable.

C. Reasons for the offer and use of proceeds.

Not applicable.

D. Risk factors.

The following matters and other additional risks not presently known to us or that we deem immaterial, may have a material adverse effect on our business, financial condition, liquidity, results of operations or prospects, or otherwise. Reference to a cautionary statement in the context of a forward-looking statement or statements shall be deemed to be a statement that any one or more of the following factors may cause actual results to differ materially from those in such forward-looking statement or statements.

(a)

Risks Associated with Our Business

Our business may be adversely affected by the exchange rate fluctuation of RMB against the U.S. dollar and trade protection measures in place by several countries against exports of BOPET films from China.

Our business operation may be adversely affected due to the appreciation of RMB against the U.S. dollar, and more stringent trade protection measures in place, such as anti-dumping investigations conducted by several countries against exports of BOPET films originated from China.

A sharp fluctuation in the demand for raw materials may have a negative impact on our operations if we are unable to pass on all increases in the cost of raw materials to our customers on a timely basis.

The total cost of raw materials made up approximately 72.5%, 70.0%, and 74.3% of our production cost in 2021, 2020, and 2019, respectively. The main raw materials used in our production of BOPET film are polyethylene terephthalate (or PET) resin and additives, which respectively made up approximately 79.0% and 21.0% of our total cost of raw materials in the past three years on average.

The prices of PET resin and additives are, to a certain extent, affected by the price movement of crude oil. Currently, the PET resin is mainly used as a raw material in China’s textile industry. Therefore, the market prices of PET resin will fluctuate due to changes in supply and demand conditions in that industry. Any sudden shortage of supply or significant increase in demand for PET resin and additives may result in higher market prices and thereby increase our cost of sales.

In 2022, it is expected that there will be a significant capacity expansion within China. The oversupply plus price fluctuations of raw materials may continuously have an adverse impact on the results of our operations. Currently, we have no hedging transactions in place with respect to PET resin or any other petroleum product.

Rising competition caused by the soaring capacity of BOPET films may materially affect our operations and financial conditions.

We operate in a highly competitive and rapidly evolving field, and new developments are expected to continue at a rapid pace. Competitors may succeed by expanding their capacity or succeed in developing products that are more efficient, easier to use, or less expensive than those which have been or are being developed by us, or that would render our technology and products obsolete and non-competitive. Any of these actions by our competitors could adversely affect our sales.

In addition, several companies are developing similar and substitute products to address the same packaging field that we are targeting. These competitors may have greater financial and technical resources, productivity, marketing capabilities and facilities, cost-efficiency, and human resources, or they may have a better quality of products, service, and shorter lead time. The competition from these competitors may adversely affect our business.

An increase in competition could result in a slow increase in demand, selling price reductions, or loss of our market share, which could have an adverse material impact on our operations and financial condition, or result in losses to the Company.

9

The existing manufacturers and new entrants have been expanding their production capacity of the BOPET films since the second half of 2010, which have resulted in a substantial increase in the production of BOPET films from 2011 to 2021. This will have an adverse impact on our sales and operation. In the event that we are unable to compete successfully or retain effective control over the pricing of our products, our profit margins might decrease.

In addition, China has gradually lowered import tariffs after its entry into the World Trade Organization in December 2001. Aiming at the huge market for high value-added films in China, manufacturers from developed countries, including Japan and South Korea, started investing in China, and some of these facilities had been put into production. This may lead to increased competition from foreign companies in our industry, some of which are significantly larger and financially stronger than us. If we fail to compete effectively with these companies in the future, our current business and future growth potential would be adversely affected.

We may be subject to inventory risks that would negatively impact our operating results.

The possible price decline of our inventory may adversely affect the Company’s operation. The fluctuation of the market prices of our raw material inventory and end product inventory will also adversely affect the value of our inventory.

A significant portion of our revenue is derived from the flexible packaging industry and electronics industry in the PRC; our revenue might be adversely impacted if the flexible packaging industry and electronics industry are adversely affected.

A significant portion of our revenue is currently derived from the production and sale of BOPET films. Our BOPET films are mainly used in the flexible packaging industry for consumer products such as tobacco packaging, alcoholic beverages, food, cosmetics, PCB industry, and so on. The demand for our BOPET films is therefore affected by the demand for flexible packaging and the electronics industry.

Since the second half of 2011, supply has significantly outweighed demand in China. If this trend continues in the future, such as the continued slowdown of the market demand, or the increase of the demand continues to be less than that of the supply, it could continue to have an adverse impact on our financial condition and operation of our business.

We rely on key managerial and technical personnel, and failure to attract or retain such personnel may compromise our ability to perform our strategies, develop new products, or effectively carry on our research and development, or other efforts.

Our success to date has been largely attributable to the contributions of key management and experienced personnel, with whom we have entered into service agreements. The loss of their services might impede the implementation of our strategies and development objectives, and might damage the close business relationship we currently enjoy with some of our major customers. Our continued success is dependent, to a large extent, on our ability to attract or retain the services of these key personnel. Our future success will also depend on our continued ability to attract and retain highly motivated and qualified personnel. The rapid growth of the economy in China has caused intense competition to attract and retain qualified personnel. Considering the deficiency in the legal environment in China, we cannot assure you that we will be able to retain our key personnel or that we will be able to attract, train or retain qualified personnel in the future.

If our R & D team cannot effectively develop new products, or promote the market process, or we are unable to afford to continue to maintain this team, or are not able to hire eligible and talented personnel, our ability to conduct research and development, and our operating results and market competitiveness may be adversely affected.

10

Marketability of any of our new products is uncertain, and low acceptance levels of any of our new products will adversely affect our revenue and profitability.

The development of our products is based on complex technology and requires significant time and expertise in order to meet industry standards and customers’ specifications. Although we have developed some products that meet customers’ requirements in the past, there is no assurance that any of our research and development efforts will necessarily lead to any new or enhanced products or generate expected market share to justify commercialization. We must continually improve our current products and develop competitive new products to address the requirements of our customers. If our new products are unable to gain market acceptance, we would not be able to generate future revenue from our investment in research and development. In such an event, we would be unable to increase our market share, and achieve and sustain profitability. Our failure to further refine our technology to develop and introduce attractive new products to the market could cause our products to become less competitive or obsolete, which could reduce our market share and cause our sales to decline.

The circumstances under which we acquired ownership of our main productive assets may jeopardize our ability to continue as an operating business.

On September 24, 2004, the People’s Court of Weifang declared Shandong Neo-Luck bankrupt due to its financial difficulties. Shandong Neo-Luck pledged its main assets for the operation of the DMT production line to Weifang Commercial Bank before its bankruptcy.

The pledged DMT production line was auctioned on October 22, 2004, by the Shandong Neo-Luck Clearance Committee. DMT subsequently sought monetary damages from Shandong Neo-Luck for approximately US$1.25 million plus interest relating to a claim of partial non-payment for the DMT production line by way of application of the ICC arbitration; the hearing was held in Geneva in November 2007. Fuwei Shandong joined these discussions later as an interested party, in order to support a resolution of the pending dispute, and to achieve the resolution of certain outstanding service and spare part issues. All parties entered into a Settlement Agreement in March 2008, and the arbitration was withdrawn by the ICC. Under the Service Agreement entered into in connection with the Settlement Agreement, Shandong Fuwei would pay an amount of US$180,000 in two installments with respect to service and spare parts. The Company made its first payment in April 2008. As of December 31, 2021, Shandong Fuwei had paid US$135,000 and still owed US$45,000.

Under the Settlement Agreement, the Neoluck Group was obligated to pay an amount equal to US$900,000 in RMB by delivery of a bank draft to DMT. In April 2008, the Neoluck Group had not performed its obligation under the Settlement Agreement, and, the Neoluck Group and DMT entered into a Supplemental Agreement pursuant to which the Neoluck Group would pay the amount owed to DMT in two installments. The Neoluck Group paid the first installment equal to US$450,000 in April 2008. As agreed between Neoluck Group and DMT, the remaining US$450,000 was to be paid in installments by the end of December 2008. As of December 31, 2021, Neoluck Group had paid US$320,000 and still owed US$130,000 to DMT.

Substantially, all of our operating assets were acquired through two auction proceedings under relevant PRC law. We acquired the Brückner production line in 2003 as a result of a foreclosure proceeding enforced by an effective court judgment, and the DMT production in 2004 as a result of a commercial auction from a consigner who obtained such assets through a bankruptcy proceeding. In the opinion of our PRC counsel, Concord & Partners, these proceedings are both valid under Chinese auction and bankruptcy law based on certain factual assumptions. Our PRC counsel’s opinion solely relates to the legal procedure of the auctions and is based upon certain factual assumptions, our written representations, and written reports of the auction company and other related parties. There can be no assurance that relevant authorities or creditors of the predecessor owner of these assets will not challenge the effectiveness of these asset transfers based upon the facts and circumstances of these transfers, despite the existence of independent appraisals, and other facts and circumstances of the auctions that cannot be verified by our PRC counsel. Taking into consideration the facts known by our PRC counsel related to the auction of the Brückner production line and the significant difference in the price paid for the DMT production line at the two bankruptcy auctions involved in our purchase of that asset and, assuming the representations and reports received by our PRC counsel are true and correct in all material respects, our PRC counsel is of the opinion that the auctions of the Brückner and DMT production lines were valid under PRC law and the possibility of the creditors of Shandong Neo-Luck successfully exercising recourse, or claiming repayment with respect to our assets purchased in the bankruptcy proceeding should be remote. However, should any such challenge be brought in China (or elsewhere) and prevail, we may incur substantial liabilities and be required to pay substantial damages as a result of acquiring these assets, and this could materially affect our ability to continue our operation.

11

We have, in the past, experienced and may, from time to time, experience negative working capital. We also face risks associated with debt financing (including exposure to variation in interest rates).

As of December 31, 2021, we have pledged part of our property, plant, equipment, and lease prepayments as security for indebtedness of a credit line amounting to RMB95.0 million (US$14.9 million) granted by the Bank of Weifang. In the event that we default on all expired indebtedness, our lenders could foreclose on our assets. In the event that our assets are foreclosed, we will not be able to continue to operate our business.

Our obligations under our existing loans have been mainly met through the cash flow from our operations and our financing activities. We are subject to risks normally associated with debt financing, including the risk of significant increases in interest rates and the risk that our cash flow will be insufficient to meet the required payment of principal and interest. We may also underestimate our capital requirements and other expenditures or overestimate our future cash flows. In such an event, we may consider additional bank loans, issuing bonds, or other forms of financing to satisfy our capital requirements. If any of the aforesaid events occur and we are unable for any reason to raise additional capital, debt, or other financing to meet our working capital requirements, our business, operating results, liquidity, and financial position will be adversely affected. In addition, if we do not obtain financing or have negative working capital, there is a possibility that we may not be able to perform our contracts with our suppliers as a result of our inability to pay them back. The foregoing factors may have an adverse effect on our operation.

We may lose our competitive advantage, and our operations may suffer if we fail to prevent the loss or misappropriation of, or disputes over, our intellectual property.

As of December 31, 2021, we have received 17 patents from the PRC authorities. All these patents are related to our products and production processes. We may not be able to successfully obtain the approvals of the PRC authorities for the pending patent applications. In addition to the patents, proprietary techniques including processes, ingredients, and technologies are important to our business as they enable us to maintain our competitive advantage over our competitors. Furthermore, third parties may assert claims to our proprietary processes, ingredients, and technologies.

Our ability to compete in our markets and to achieve future revenue growth will depend, in significant measure, on our ability to protect our proprietary technology and operate without infringing upon the intellectual property rights of others. The legal regime in China for the protection of intellectual property rights is still at its early stage of development. Intellectual property protection became a national effort in China in 1979 when China adopted its first statute on the protection of trademarks. Since then, China has adopted its Patent Law, Trademark Law and Copyright Law and promulgated related regulations, such as the Regulation on Computer Software Protection, Regulation on the Protection of Layout Designs of Integrated Circuits, and Regulation on Internet Domain Names. China has also acceded to various international treaties and conventions in this area, such as the Paris Convention for the Protection of Industrial Property, Patent Cooperation Treaty, Madrid Agreement, and its Protocol Concerning the International Registration of Marks. In addition, when China became a party to the World Trade Organization in 2001, China amended many of its laws and regulations to comply with the Agreement on Trade-Related Aspects of Intellectual Property Rights. Despite many laws and regulations promulgated and other efforts made by China over the years with a view to tightening up its regulation and protection of intellectual property rights, the enforcement of such laws and regulations in China has not achieved the level in developed countries. Both the administrative agencies and the court system in China are not well-equipped to deal with violations or handle the nuances and complexities between compliant technological innovation and non-compliant infringement.

We rely on trade secrets, registered patents, and trademarks to protect our intellectual property. We have also entered into confidentiality agreements with our management and employees relating to our confidential, proprietary information. However, the protection of our intellectual properties may be compromised as a result of:

departure of any of our management member(s) or employee(s) in possession of our confidential, proprietary information;
breach by such resigned management member(s) or employee(s) of his or her confidentiality and non-disclosure undertaking to us;
expiration of the protection period of our registered patents or trademarks;
infringement by others of our proprietary technology and intellectual property rights; or
refusal by relevant regulatory authorities to approve our patent or trademark applications.

12

Any of these events or occurrences may reduce or eliminate any competitive advantage we have developed, causing us to lose sales or otherwise harm our business. There is no assurance that the measures that we have put into place to protect our intellectual property rights will be sufficient. As the number of patents, trademarks, copyrights, and other intellectual property rights in our industry increases, and as the coverage of these rights and the functionality of the products in the market further overlap, we believe that business entities in our industry may face more frequent infringement claims. Litigation to enforce our intellectual property rights could result in substantial costs and may not be successful. If we are not able to successfully defend our intellectual property rights, we might lose the rights to technology that we need to conduct and develop our business. This may seriously harm our business, operating results, and financial condition, and enable our competitors to use our intellectual property to compete against us.

Furthermore, if third parties claim that our products infringe upon their patents or other intellectual property rights, we might be required to devote substantial resources to defend against such claims. If we fail to defend against such infringement claims, we may be required to pay damages, modify our products, or suspend the production and sale of such products. We cannot guarantee that we will be able to modify our products on commercially reasonable terms.

We may incur capital expenditures in the future in connection with our growth plans and, therefore, may require additional financing.

To expand our business, we will need to increase our product mix and capacity, which will require substantial capital expenditures. Such expenditures are likely to be incurred in advance of any increase in sales. We cannot assure you that our revenue will increase after such capital expenditures are incurred. Any failure to increase our revenue after incurring capital expenditures to expand production capacity will reduce our profitability.

In addition, we may need to obtain additional debt or equity financing to fund our capital expenditures. Additional equity financing may result in a dilution of existing shareholders. Additional debt financing may be required, which, if obtained, may:

limit our ability to pay dividends or require us to seek consent for the payment of dividends;
increase our vulnerability to general adverse economic and industry conditions;
limit our ability to pursue our growth plan;
require us to dedicate a substantial portion of our cash flow from operations to pay for our debt, thereby reducing the availability of our cash flow to fund capital expenditures, working capital, and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and our industry; and/or
not assure that we will be able to obtain the additional financing on terms that are acceptable to us, if at all.

A disruption in the supply of utilities, fire, or other calamity at our manufacturing plant would disrupt the production of our products and adversely affect our sales.

Our BOPET films are manufactured solely at our production facilities located in Weifang City in the PRC. Any disruption in the supply of utilities, particularly electricity, water, or gas supply, or any outbreak of fire, flood, or other calamity resulting in significant damage at our facilities would severely affect our production of BOPET film and, as a result, we could incur on a substantial loss of equipment and properties.

While we maintain insurance policies covering losses with respect to damage to our properties, machinery, and inventories of raw materials and products, we cannot assure you that our insurance would be sufficient to cover all of our potential losses.

We have limited experience in operating outside mainland China, and failure to achieve our overseas expansion strategy may have an adverse effect on our business growth in the future.

Our future growth depends, to a considerable extent, on our ability to develop both the domestic and overseas markets. We are currently exploring new business opportunities outside mainland China for our BOPET film products. Our primary overseas customers are from Europe, Asia, and North America. However, we have limited experience in operating outside mainland China, and limited experience with foreign regulatory environments and market practices. As a result, we cannot guarantee that we will be able to penetrate any overseas market. Failure in the development of overseas market may have an adverse effect on our business growth in the future.

13

We have encountered anti-dumping investigations in South Korea and the United States and other trade protection measures, and our overseas expansion strategy in our future business growth may be adversely affected.

Since 2007, the manufacturers in China, India, and other countries have encountered anti-dumping investigations conducted by South Korea and the United States.

The Korean Trading Committee (KTC) announced the final results of anti-dumping investigations for enterprises in China and India on August 27, 2008. We finally received the anti-dumping duties (ADD) rate of 5.67%, which is much lower than the average rate of 23.60% for other enterprises in China. On June 22, 2011, the Ministry of Strategy and Finance of the Republic of Korea initiated a sunset review concerning the continued imposition of anti-dumping duty on imports of the BOPET Films originating from China and India. The rate for Shandong Fuwei, the subsidiary of Fuwei Films, was set at 11.72%, higher than one of its counterparts at 5.87%. Punitive duties of 25.32% will be imposed on the PET films manufactured by six Chinese firms. The rate for the remaining Chinese manufacturers was set at 23.61%. The anti-dumping duties imposed on the Company’s exported biaxially oriented polyethylene-terephthalate (BOPET) films to South Korea will be extended for three more years, beginning on May 25, 2012.

On January 15, 2015, the Ministry of Strategy and Finance of the Republic of Korea initiated a sunset review concerning the continued imposition of anti-dumping duty on imports of Polyethylene Terephthalate originating from China and India. Eight Chinese exporters, including Fuwei Films, were required to participate in this review. On January 13, 2016, the Ministry of Strategy and Finance announced that the rate for Shandong Fuwei, the subsidiary of Fuwei Films, was set at 12.92%, and it would be extended for three more years beginning on January 13, 2016. On September 12, 2018, the Ministry of Strategy and Finance of the Republic of Korea initiated a sunset review concerning the continued imposition of anti-dumping duty on imports of Polyethylene Terephthalate originating from China and India. Eight Chinese exporters, including Fuwei Films, were required to participate in this review. On September 11, 2019, the Ministry of Strategy and Finance announced that the rate for Shandong Fuwei, the subsidiary of Fuwei Films, was set at 36.98%, and it would be extended for three more years beginning September 12, 2019.

The US Department of Commerce conducted an anti-dumping investigation in October 2007, covering exporters in China, Brazil, Thailand, and the United Arab Emirates. A total of 41 exporters in China were under investigation. In October 2008, the anti-dumping judgments were announced. Although we received the lowest ADD rate of 3.49% among five exporters that received a duty, our exports to the United States, to a certain extent, were adversely affected by paying the ADD.

On January 23, 2010, the US Department of Commerce (“USDOC”) began a first-round annual review of Chinese BOPET exporters. Fuwei received the lowest anti-dumping duty (ADD) rate of 30.91% in this administrative review conducted by the USDOC, while the ADD rate of the other four Chinese companies reviewed by the USDOC exceeded 36.93%. In accordance with relevant laws and regulations in the US, the ADD rate of final results is retroactively applied to those US companies which imported Chinese-exported BOPET films, including Fuwei Films USA, LLC, during the period of the first review, so these US importers were obligated to pay a supplementary antidumping duty at this ADD rate. In March 2011, we submitted comments to the USDOC regarding perceived ministerial errors made in calculating the ADD applicable to us. As a result of a Court challenge brought on by Fuwei, in January 2013, the USDOC found that Fuwei did not dump goods in the United States market for the period from November 6, 2008, to October 31, 2009. The USDOC, after recalculating the rate, found that the level of dumping was “de minimis.” The de minimis rate is treated by the USDOC as a finding of zero. The final results of the second-round annual review were announced in March 2012, according to which an ADD rate of 8.48% was imposed on Fuwei Films, which was slightly higher than the lowest anti-dumping duty rate of 8.42% for all the Chinese exporters being reviewed.

14

On December 30, 2011, USDOC commenced its third routine annual review of BOPET films originated from China. In order to gain an opportunity to continue exporting to the United States, Fuwei Films, although not a mandatory respondent, actively responded to the review to the extent permitted by law and continued to seek the low rate which should have properly applied to its exports to the United States. In June 2013, the final results of the third round of annual review were issued, and an ADD rate of 12.80% was imposed on Fuwei Films. The preliminary results of the fourth-round annual review were announced in December 2013, according to which an ADD rate of 31.77% was imposed on Fuwei Films. In June 2014, the final results of the fourth-round annual review were announced, and Fuwei Films was imposed an ADD rate of 31.24%. There was no export to the United States in 2014. The preliminary results of the fifth-round annual review were announced in December 2014, which determined that Fuwei Films did not have any reviewable transactions during the fifth-round annual review, and no rate was assigned. On December 23, 2014, the USDOC initiated the sixth-round annual review. In February 2015, Fuwei Films filed a No Shipment Certification with USDOC as the Company had no exports to the U.S. during the sixth-round annual review. The domestic industry had withdrawn the request for the seventh-round annual review for the years 2015 and 2016, and as a result, the administrative review with respect to Fuwei was rescinded and no changes were made to the deposit rate.

In addition, if other countries or regions, such as the European Union, take trade protection measures against China’s BOPET film or downstream industries, our business may be adversely affected.

Changes in Applicable PRC Taxes may adversely affect the Company.

On October 18, 2010, the State Council issued a notice that the city maintenance and construction tax, as well as educational surcharges, were to be extended from Chinese companies to foreign-funded enterprises and citizens. Beginning December 1st, 2010, Interim Regulations on City Maintenance and Construction Tax of the People’s Republic of China and Decision of the State Council on Amending the Interim Provisions on the Collection of Educational Surcharges were applicable to foreign-funded enterprises, foreign enterprises, and foreign citizens, which meant they would no longer be exempt from such taxes. In accordance with the regulations, since December 1st, 2010, our subsidiary - Shandong Fuwei - became a taxpayer of city maintenance and construction tax as well as educational surcharges, which were be based on value-added tax, consumption tax, and business tax which stood at 12%. In July 2011, according to the new rules promulgated by the local government in China, Shandong Fuwei contributed to a fund for local water conservation projects, which were based on the actual value-added tax, consumption tax, and business tax with a rate of 1%. The rate of local water conservation project funds was adjusted to 0.5% since June 1, 2017. In August 2014, the local government promulgated a new regulation that adjusted the standard of urban land use tax, according to which the tax amount for Shandong Fuwei increased from RMB8 per square meter to RMB14 per square meter commencing July 1, 2014. In addition, the tax amount was further adjusted from RMB14 per square meter to RMB13 per square meter effective December 2016. Effective January 1, 2019, the tax amount was adjusted from RMB13 per square meter to RMB11.2 per square meter, and High-and-New Tech Enterprise could pay only 50%. Shandong Fuwei was designated as a High-and-New Tech Enterprise, and as a result, it was entitled to pay RMB5.6 per square. If the Chinese government changes its tax policies or adds new types of taxes in the future, our business may be adversely affected.

China’s actions to save energy and reduce emissions may adversely affect our business, by subjecting us to significant new costs and restrictions on our operations.

Recently, the Chinese government has tightened its control over energy saving and emission reduction. The Chinese government intends to reduce energy consumption for gross domestic products and water consumption for industrial added value. Some of our manufacturing plants that use significant amounts of energy, including electricity and gas, are likely to be affected by this plan. Therefore, our operation might be influenced by the energy saving and emission reduction measures of the Chinese government. Regulations for restricting greenhouse gas emissions may increase the prices of the electricity we purchase, increase costs for our use of natural gas, potentially restrict access to or the use of natural gas, or require us to purchase allowances to offset our emissions or result in an overall increase in our costs of raw materials, any of which could increase costs and negatively affect our business operations or financial results.

15

The current labor law changes in the PRC may have an adverse impact on our business and profitability.

The Company is of the view that the amended Labor Law of the People’s Republic of China (the “PRC”), which took effect on January 1, 2008, and contains certain heightened requirements with respect to employment law, does not constitute a material risk to the Company. The amended Labor Law contains new provisions which protect the interests of the employees, including provisions which stipulate that an employer shall enter into labor contracts with its employees and pay social welfare insurance which may increase our human resources costs. In addition, the amended Labor Law also states that upon expiry of the labor contract, under some circumstances, an employer shall compensate an employee if the labor contract is not renewed, which may increase our operating expenses. However, to the best of the Company’s knowledge, Shandong Fuwei constantly abides by the Labor Law of PRC, as amended, and therefore we do not believe the labor law provisions and any changes will have any material impact on its business or profitability. However, the Labor Law changes in the PRC in the future may have an adverse impact on our business and profitability.

Our primary source of funds for dividends and other distributions from our operating subsidiary in China is subject to various legal and contractual restrictions and uncertainties, and our ability to pay dividends or make other distributions to our shareholders is negatively affected by those restrictions and uncertainties.

We are a holding company established in the Cayman Islands and conduct our core business operations through our principal operating subsidiary, Shandong Fuwei, in China. As a result, our profits available for distribution to our shareholders are dependent on the profits available for distribution from Shandong Fuwei. If Shandong Fuwei incurs debt on its own behalf, the debt instruments may restrict its ability to pay dividends or make other distributions, which in turn, would limit our ability to pay dividends of our ordinary shares. Under the current PRC laws, because we are incorporated in the Cayman Islands, our PRC subsidiary, Shandong Fuwei, is regarded as a wholly foreign-owned enterprise in China. For dividends paid by foreign-invested enterprises, the PRC laws permit payment of dividends only out of net income as determined in accordance with PRC accounting standards and regulations. Determination of net income under PRC accounting standards and regulations may differ from determination under U.S. GAAP in significant respects, such as the use of different principles for recognition of revenues and expenses. In addition, the distribution of additional equity interests by our PRC subsidiary, Shandong Fuwei, to us (which is credited as fully paid through capitalizing its undistributed profits) requires additional approval from the PRC government. Under the PRC laws, Shandong Fuwei, a wholly foreign-owned enterprise, is required to set aside a portion of its net income each year to fund designated statutory reserve funds. These reserves are not distributable as cash dividends. As a result, our primary internal source of funds for dividend payments from Shandong Fuwei is subject to these and other legal and contractual restrictions and uncertainties, which in turn may limit or impair our ability to pay dividends to our shareholders. Moreover, any allotment of funds from us to Shandong Fuwei, either as a shareholder loan or as an increase in registered capital, is subject to registration with or approval by PRC governmental authorities. These limitations on the flow of funds between us and Shandong Fuwei could restrict our ability to act in response to changing market conditions.

Investor confidence and the market price of our shares may be adversely impacted if we are unable to issue an unqualified opinion on the adequacy of our internal controls over our financial reporting beginning as of December 31, 2021, as required by Section 404 of the U.S. Sarbanes-Oxley Act of 2002.

As a public company, we are required by section 404 of the Sarbanes-Oxley Act 2002 to include a report by management on our internal controls over financial reporting that contains our management’s assessment of the effectiveness of our internal controls in our annual report on Form 20-F. Based on our evaluation, our principal executive officer and principal financial officer previously concluded as of December 31, 2010, our internal controls over financial reporting were effective as of such date. However, in connection with the review of our Annual Report on Form 20-F by the Securities and Exchange Commission (“SEC”) and subsequent reconsideration of the conclusion regarding effectiveness originally expressed therein, our principal executive officer and principal financial officer have now revised their conclusions and believe that as of the Evaluation Date, our internal controls over financial reporting were ineffective as of December 31, 2010, and that such internal controls exhibited a “material weakness,” or a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified resulted from inadequate technical accounting staff with knowledge of and experience with the US generally accepted accounting principles, pursuant to which we prepared our consolidated financial statements to support stand-alone external financial reporting under public company or SEC requirements. The report of management contained in this Annual Report on Form 20-F also reflects the determination of the reviewing officers that as of December 31, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020 and 2021, we continued to have a material weakness in our internal controls over financial reporting.

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We have developed and implemented a remedial plan to address the deficiencies in the areas of personnel with knowledge of and experience with US generally accepted accounting principles, including recruiting a full-time reporting employee with U.S. GAAP experience and conducting training in U.S. GAAP principles for all the financial reporting staff of the Company. However, additional measures may be necessary, and the measures we expect to take to improve our internal controls may not be sufficient to address the issues identified, to ensure that our internal controls are effective, or to ensure that such material weakness or other material weaknesses would not result in a material misstatement of our annual or interim financial statements. In addition, other material weaknesses or significant deficiencies may be identified in the future. If we are unable to correct deficiencies in internal controls in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the SEC will be adversely affected. This failure could negatively affect the market price and trading liquidity of our common stock, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and financial condition.

There may be a change of business, management, and ownership control of our shares if the transaction contemplated by the Securities Purchase Agreement is completed.

On March 31, 2021, we announced that the Company has entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Enesoon New Energy Limited (“Enesoon”), a British Virgin Islands company, directly and indirectly, holding subsidiaries in China primarily engaged in green thermal energy storage businesses, and Enesoon’s shareholders. The Purchase Agreement will result in the issuance by the Company of 111,111,111 new ordinary shares in exchange for all outstanding shares of Enesoon. As a result of this transaction, the former shareholders of Enesoon will beneficially own, in the aggregate, approximately 97.1% of the Company’s outstanding shares.

The closing of the transaction contemplated under the Purchase Agreement is subject to various closing conditions, including approval of the issuance of Consideration Shares by the shareholders of the Company, receipt of NASDAQ approval, receipt by the Company of a satisfactory fairness opinion or valuation, and other customary conditions.

Although there is no assurance or guarantee that the transaction will close, in the event the transactions are completed, there will be a change of business, management, and ownership control of the Company. Upon closing, the new controlling shareholder will have substantial influence over the Company, and its interests may not be aligned with the interests of our shareholders, and as the controlling shareholder, it may take actions that are not in the best interests of our other shareholders.

(b)       Risks Relating to Business Operations in China

Changes in China’s political and economic policies and conditions could cause a substantial decline in the demand for our products and services.

Currently, we derive substantially most of our revenues from mainland China. We anticipate that mainland China will continue to be our primary production and sales base in the near future. In addition, substantially all of our current assets are located in China and most of our current services are performed in China. In 2021, 2020, and 2019, sales to our customers in the PRC accounted for approximately 90.1%, 92.0%, and 85.8%, respectively, of our total revenue. Accordingly, any significant slowdown in the PRC economy or decline in demand for our products from our customers in the PRC will have an adverse effect on our business, financial condition, and results of our operations. Furthermore, any unfavorable changes in the social and political conditions of the PRC may also adversely affect our business and operations.

Since the adoption of the “open door policy” in 1978 and the “socialist market economy” in 1992, the PRC government has been reforming and is expected to continue to reform its economic and political systems. Any changes in the political and economic policy of the PRC government may lead to changes in the laws and regulations or the interpretation of the same, as well as changes in the foreign exchange regulations, taxation, and import and export restrictions, which may in turn adversely affect our financial performance. While the current policy of the PRC government seems to be one of imposing economic reform policies to encourage foreign investments and greater economic decentralization, there is no assurance that such a policy will continue to prevail in the future. We cannot make any assurances that our operations would not be adversely affected should there be any policy changes.

The financial policies, such as bank reserve ratio and deposit and loan interest rates, are subject to adjustment in accordance with the economic development. These policy changes may adversely affect our business.

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A Chinese entity has substantial influence over our company and its interest may not be aligned with the interests of other holders of our ordinary shares.

Shanghai Meicheng Enterprise Management Co., Ltd., (“Shanghai Meicheng”), beneficially owns approximately 52.90% of our outstanding share capital through a transfer of shares from Shandong SNTON Group Co., Ltd. (the “SNTON Group”) to Shanghai Meicheng on June 23, 2020. We received a notification on July 2, 2020, from Shanghai Meicheng with respect to an ownership transfer from Shandong SNTON to Shanghai Meicheng. It was noted that SNTON Group transferred its equity in Hongkong Ruishang to Shanghai Meicheng on June 23, 2020, due to SNTON Group’s asset reorganization. As a result of this transfer, Shanghai Meicheng now indirectly owns the shares through Hongkong Ruishang. Shanghai Meicheng has substantial influence over our business, including decisions regarding mergers, consolidations, and the sale of all or substantially all of our assets, the election of directors, and other significant corporate actions. This concentration of ownership may discourage, delay, or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company, and might reduce the price of our ordinary shares. Alternatively, our controlling shareholder may cause a merger, consolidation, or change of control transaction even if it is opposed by other shareholders.

Our ordinary shares may be delisted under the Holding Foreign Companies Accountable Act if the US Public Company Accounting Oversight Board (PCAOB) is unable to inspect auditors who are located in China. The delisting of our ordinary shares, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.

On December 18, 2020, the Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted. The HFCA Act requires the SEC to prohibit securities of any foreign companies from being listed on U.S. securities exchanges or traded “over-the-counter” if a company retains a foreign accounting firm that cannot be inspected by the PCAOB for three consecutive years, beginning in 2021. On December 2, 2021, the SEC adopted final amendments implementing the disclosure and submission requirements of the HFCA Act) and established the SEC’s procedures for (i) determining whether a registrant is a “Commission-Identified Issuer” under the HFCA Act and (ii) prohibiting the trading of a Commission-Identified Issuer’s securities. A registrant will not be required to comply with the HFCA Act until the SEC has identified it as having a non-inspection year. On December 16, 2021, the PCAOB issued a report (Release No. 104-HFCAA-2021-001) naming our independent registered public accounting firm as located in and organized under the laws of the PRC and determining that the PCAOB is unable to inspect or investigate completely such firm. We are not required to comply with the HFCA Act until the SEC has identified us as having a “non-inspection” year. If we are identified by the SEC as a registrant that will have to comply with the HFCA Act, we will be subject to additional submission and disclosure requirements. For example, any identified registrant is required to submit documentation to the SEC establishing that the registrant is not owned or controlled by a governmental entity in that foreign jurisdiction, and will also require disclosure in a foreign issuer’s annual report regarding the audit arrangements of, and governmental influence on, such a registrant.

Whether the PCAOB will be able to conduct inspections of our auditors in the next three years, or at all, is subject to substantial uncertainty and depends on a number of factors out of our control. If we are unable to meet the PCAOB inspection requirement in time, we could be subject to additional submission and disclosure requirements, delisted from the Nasdaq Capital Market and our ordinary shares will not be permitted for trading “over-the-counter” either. If our securities are unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase our ordinary shares when you wish to do so, and the ongoing risk and uncertainty associated with delisting would have a negative impact on the price of our ordinary shares. Also, such a delisting would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition, and prospects.

The PCAOB’s inability to conduct inspections in China prevents it from fully evaluating the audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors in our ordinary shares are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our ordinary shares to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

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The discontinuation of any preferential tax treatments or other incentives currently available to us in the PRC could materially and adversely affect our business, financial condition, and results of operations.

Our subsidiary, Shandong Fuwei, was converted into a wholly foreign-owned enterprise in January 2005 and could enjoy certain special or preferential tax treatments regarding enterprise income tax in accordance with the “Income Tax Law of the PRC for Enterprises with Foreign Investment and Foreign Enterprises” at that time. Accordingly, at that time, it was 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) was exempt from income tax in the PRC and the profit for each of the subsequent three financial years was taxed at 50% of the prevailing tax rates set by the relevant tax authorities. Shandong Fuwei was designated as a High-and-New Tech Enterprise in December 2008 and was recertified in October 2011, and enjoys a favorable enterprise income tax rate of 15%. If there are any future changes in PRC tax laws, rules, and regulations or Shandong Fuwei will not be designated as a High-and-New Tech Enterprise, Shandong Fuwei will no longer enjoy the preferential tax treatment. In December 2014, Shandong Fuwei failed to be designated as a High-and-New Tech Enterprise. As a result, Shandong Fuwei is now subject to a 25% standard enterprise income tax rate since 2014. In 2016, Shandong Fuwei was designated again as a High-and-New Tech Enterprise, and as a result, it was entitled to preferential tax treatment at an EIT rate of 15% for the years ended December 31, 2016, 2017, and 2018. In 2019, Shandong Fuwei was designated as a High-and-New Tech Enterprise and as a result, it is entitled to preferential tax treatment at an EIT rate of 15% for the years ended December 31, 2019, 2020, and 2021.

In accordance with a notice issued by the PRC government in October 2010, since December 1st, 2010, Shandong Fuwei, our subsidiary, became a taxpayer of city maintenance and construction tax as well as educational surcharges, which are based on value-added tax, the consumption tax and business tax which stood at 12%. According to the new rules promulgated by the local government in China in July 2011, Shandong Fuwei contributed to a fund for local water conservation projects since July 1st, 2011, which is based on the actual value-added tax, consumption tax, and business tax with a rate of 1%. The rate of local water conservation projects fund has been adjusted to 0.5% since June 1st, 2017. The policy changes may have an adverse impact on our net profit.

We are subject to environmental laws and regulations in the PRC.

We are subject to environmental laws and regulations in the PRC. Any failure by us to comply fully with such laws and regulations will result in us being subject to penalties and fines or being required to pay damages. Any change in the regulations may require us to acquire equipment or incur additional capital expenditure or costs to comply with such regulations. Our profits will be adversely affected if we are unable to pass on such additional costs to our customers.

In recent years, there have been many newly-built residential buildings in close proximity to our factory. In March 2014 and November 2015, due to the noise caused by our production, Shandong Fuwei was fined RMB10,000 and RMB20,000, respectively, and was required to rectify and reform within a definite time. The complaints from nearby residents about the noise caused by our production may require us to take measures to lower noise, which will lead to additional costs. In the event that we are forced to suspend our production to take improvement measures, our operations and earnings may be adversely affected.

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Changes in foreign exchange regulations in China may affect our ability to pay dividends in foreign currencies.

We currently receive most of our operating revenues in Renminbi. Presently, Renminbi is not a freely convertible currency, and the restrictions on currency exchanges in China may limit our ability to use revenues generated in Renminbi to fund our business activities outside China or to make dividends or other payments in U.S. dollars. The PRC government strictly regulates the conversion of the Renminbi into foreign currencies. Over the years, the PRC government has significantly reduced its control over routine foreign exchange transactions under current accounts, including trade and service-related foreign exchange transactions, foreign debt service, and payment of dividends. In accordance with the existing foreign exchange regulations in China, our PRC subsidiary, Shandong Fuwei, can pay dividends in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. The PRC government may, however, at its discretion, restrict access in the future to foreign currencies for current account transactions and prohibit us from converting our Renminbi-denominated earnings into foreign currencies. If this occurs, our PRC subsidiary may not be able to pay dividends in foreign currency without prior approval from SAFE. In addition, the conversion of the Renminbi for most capital account items, including direct investments, is still subject to government approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. This restriction may limit our ability to invest the earnings of Shandong Fuwei.

Fluctuation in the value of the Renminbi could adversely affect our overseas sales and import of raw materials and the value of, and dividends payable on, our shares in foreign currency terms.

The value of the Renminbi is subject to various factors and depends to a large extent on China’s domestic and international economic, financial, and political developments, as well as the currency’s supply and demand in the local market. From 1994, the conversion of the Renminbi into foreign currencies, including the U.S. dollar, was based on exchange rates set and published daily by the People’s Bank of China, the PRC central bank, based on the previous day’s interbank foreign exchange market rates in China and exchange rates in the world financial markets. The official exchange rate for the conversion of Renminbi into U.S. dollars remained stable until the Renminbi was revalued in July 2005, and allowed to fluctuate by reference to a basket of foreign currencies, including the U.S. dollar. Under the new policy, Renminbi is permitted to fluctuate within a band against a basket of foreign currencies. This change in policy resulted initially in an approximately 2.0% appreciation in the value of the Renminbi against the U.S. dollar. The Chinese government may adopt a substantially more liberalized currency policy, which could result in a further and more significant fluctuation in the value of the Renminbi against the U.S. dollar. Since our income and profits are denominated in Renminbi, fluctuation in the value of the Renminbi could adversely affect our overseas sales and imports of raw materials and further negatively affect our revenue and net income. Any appreciation of the Renminbi would increase the value of, and any dividends payable on, our shares in foreign currency terms. Conversely, any depreciation of the Renminbi would decrease the value of, and any dividends payable on, our shares in foreign currency terms.

The uncertain legal environment in China could limit the legal protections available to you.

The PRC legal system is a civil law system based on written statutes. Unlike the common law system, the civil law system is a system in which decided legal cases have little precedential value. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations to provide general guidance on economic and business practices in China and to regulate foreign investment. Our PRC subsidiary, Shandong Fuwei, is a wholly foreign-owned enterprise and is subject to laws and regulations applicable to foreign investment in China in general and laws and regulations applicable to wholly foreign-owned enterprises in particular. China has made significant progress in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation, and trade. However, the promulgation of new laws, changes to existing laws, and abrogation of local regulations by national laws may have a negative impact on our business and prospects. In addition, as these laws, regulations, and legal requirements are relatively recent, and because of the limited volume of published cases and their non-binding nature, the interpretation and enforcement of these laws, regulations, and legal requirements involve significant uncertainties. These uncertainties could limit the legal protections available to foreign investors, including you. For example, it is not clear if a PRC court would enforce in China a foreign court decision brought by you against us in shareholders’ derivative actions. Moreover, the enforceability of contracts in China, especially with the government, is relatively uncertain. If counterparties repudiated our contracts or defaulted on their obligations, we may not have adequate remedies. Such uncertainties or the inability to enforce our contracts could materially and adversely affect our revenues and earnings.

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Outbreak of viruses such as SARS, H1N1, Coronavirus, now named as COVID-19, or other epidemics could materially and adversely affect our overall operations and results of operations.

From March to July 2003, mainland China, Hong Kong, Taiwan, and some other areas in Asia experienced an outbreak of a new and contagious form of atypical pneumonia known as a severe acute respiratory syndrome, or SARS. A recurrent outbreak, or an outbreak of a similarly contagious disease, such as the H1N1 avian flu, could potentially disrupt our operations to the extent that any one of our employees is suspected of having the infection or that any of our facilities is identified as a possible source of spreading the virus or disease. We may be required to quarantine employees who are suspected of having an infection. We may also be required to disinfect our facilities and therefore suffer a suspension of production of indefinite duration. Any quarantine or suspension of production at any of our facilities will adversely affect our overall operations. In addition, any such outbreak will likely restrict the level of economic activities in the affected areas, which could lead to a substantial decrease in our revenues accompanied by an increase in our costs.

We face business disruption and related risks resulting from the novel coronavirus 2019 (COVID-19) pandemic and political instability, such as the conflict between Russia and Ukraine, which could have a material adverse effect on our business and results of operations.

The spread of COVID-19 across the world resulted in the Director General of the World Health Organization declaring the outbreak of COVID-19 as a global pandemic in March 2020. The continued global spread of the COVID-19 pandemic - including the recent discovery of variant strains of the virus - and the responses thereto are complex and rapidly evolving, and the extent to which the pandemic impacts our business, financial condition, and results of operations, including the duration and magnitude of such impacts, will depend on numerous evolving factors that we may not be able to accurately predict or assess. COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, as well as reactions to future pandemics or resurgences of COVID-19, could also precipitate or aggravate the other risk factors that we identify in this Annual Report on Form 20-F, which in turn could materially adversely affect our business, financial condition, and results of operations. There may be other adverse consequences to our business, financial condition, and results of operations from the spread of COVID-19 that we have not considered or have not become apparent. As a result, we cannot assure you that if COVID-19 continues to spread, it would not have a further adverse impact on our business, financial condition, and results of operations. Moreover, unforeseen global events, such as the armed conflict between Russia and Ukraine, could adversely impact our business and operations. The invasion of Ukraine and the retaliatory measures that have been taken, or could be taken in the future, by the United States, NATO, and other countries have created global security concerns that could result in a regional conflict and also adversely affect our business and results of operations.

Regulations relating to offshore investment activities by PRC residents may limit our ability to acquire PRC companies and adversely affect our business and prospects.

The Chinese State Administration of Foreign Exchange (“SAFE”) has promulgated several regulations, including the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment through Offshore Special Purpose Vehicles, or Circular 75, effective on November 1, 2005, and its implementation rules. These regulations require PRC residents and PRC corporate entities to register with local branches of SAFE in connection with their direct or indirect offshore investment activities. These regulations are applicable to our shareholders, who are PRC corporate entities, and may be applicable to any offshore acquisitions that we make in the future. Under these foreign exchange regulations, PRC residents who make, or have prior to the implementation of these foreign exchange regulations made, direct or indirect investments in offshore special purpose vehicles, or SPVs, will be required to register such investments with SAFE or its local branches. In addition, any PRC corporate entities that are a direct or indirect shareholder of an SPV, is required to update its filed registration with the local branch of SAFE with respect to that SPV, to reflect any material change.

Circular of the State Administration of Foreign Exchange on Printing and Distributing on the Operating Rules for the Administration of Foreign Exchange with respect to the Financing and Round-tripping Investment of Domestic Residents via Overseas Special Purpose Companies (“Circular 19”) was promulgated by SAFE on May 20, 2011, and came into effect on July 1st, 2011. Circular 19 further clarifies the administration principles of Circular 75 and the relevant issues in its application and simplifies operating procedures. Circular 19 will benefit the offshore and round-tripping investment to a certain extent.

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Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors (Revised in 2009) (“Circular 6”) was promulgated by the Ministry of Commerce and came into effect on June 22, 2009. According to Circular 6, where a domestic company sets up a company with special-purpose abroad, it shall apply to the Ministry of Commerce for going through the examination and approval formalities. When merging or acquiring related domestic companies in the name of the companies in foreign countries legally established or controlled by them, the domestic companies, enterprises, or natural persons shall report to the Ministry of Commerce for approval.

Item 4. Information on the Company

Overview

We were formed as a Cayman Islands corporation in August 2004 under the name “Neo-Luck Plastic Holdings Co., Ltd.” and changed our name to “Fuwei Films (Holdings) Co., Ltd.” in April 2005. Our corporate headquarters, principal place of business, production, and ancillary facilities, occupy an area of approximately 74,251 square meters at No. 387 Dongming Road, Weifang Shandong 261061, People’s Republic of China. Our agent for service in the United States is CT Corporation System, located at 111 Eighth Avenue, NY, NY 10011.

We develop, manufacture, and distribute high-quality plastic film using the biaxially-oriented stretch technique, otherwise known as BOPET film (biaxially-oriented polyethylene terephthalate). The film is lightweight, non-toxic, odorless, transparent, glossy, temperature, and moisture-resistant, making it suitable for many forms of flexible packaging, printing, laminating, aluminum-plating, and other applications. In addition, it retains high dielectric strength and volume resistance even at high temperatures, which are essential qualities for electrical and electronic uses. Our BOPET film is widely used in consumer-based packaging (such as food, pharmaceutical, cosmetics, tobacco, and alcohol industries), imaging (such as printing plates and microfilms), electronics and electrical industries (such as PCB products, capacitors, and motor insulation), as well as in magnetic products (such as audio and videotapes). We market our products under our brand name of “Fuwei Films.” Our main products are as below:

Dry film is generally used in circuit boards (PCB & FPC) production and sometimes used for nameplate and crafts etching;
Chemically treated film used to enhance properties including barrier resistance, printing properties, and electrostatic resistance;
Stamping foil base film and transfer base films used for packaging of luxury items of cigarettes and alcohol to increase the aesthetic presentation of the item and improve environmental performance;
Printing base film used in printing and lamination;
Metalized film or aluminum plating base film used for vacuum aluminum plating for flexible plastic lamination;
High-gloss film used for aesthetically enhanced packaging purposes;
Heat-sealable film used for construction, printing, and making heat-sealable bags;
Laser holographic base film used as an anti-counterfeit film for food, medicine, cosmetics, cigarettes, and alcohol packaging; and,
Heat shrinkable film is widely used for special-shaped packaging for beverages and cosmetics.

Since our establishment, a significant portion of our revenues have been derived from the sales of BOPET film, particularly our printing film, stamping film, transfer film and chemical pretreated film, high-gloss film, heat sealable film, dry film, and heat shrinkable film and so on.

We operate two production lines as of December 31, 2021. The first line is a Brückner 6.3 m (in width) production line with an annual design capacity of 13,000 metric tons of BOPET film. The second line is a DMT production line which is three-layer co-extruded with 6.7 m (in width) and has an annual design capacity of 16,100 metric tons of BOPET film. The third production line had not been started up ever since April 2015. On December 20, 2020, the Company sold its third production line through open bidding. The successful bidder was Huizhou Yidu Yuzheng Digital Technology Co. LTD. (“Huizhou Yidu Yuzheng”). On January 16, 2021, the Company entered into Purchase Agreements with Huizhou Yidu Yuzheng. As of December 31, 2021, the third production line and the trial production line, which was made by Mitsubishi for R & D were dismantled and moved.

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Our top five customers in the year ended December 31, 2021, were Hunan Wujo Hi-Tech Materials Co., Ltd., Zhuhai Ruiming Technology Co., Ltd., Eternal Photo Electronic Materials (Guangzhou) Co., Ltd., Kolon Electronic Materials (Huizhou) Co., Ltd., and Eternal Electronic (Suzhou) Co., Ltd. We sell most of our BOPET film products to customers in the coastal region of China. In addition, we expect to continue to expand our product portfolio to exploit opportunities in different market sectors, such as the electronics industry. In 2021, 2020, and 2019, our sales to our overseas customers constituted approximately 9.9%, 8.0%, and 14.2% of our total revenue, respectively.

Competitive Strengths

We believe that our competitive strengths have enabled us over the years to meet the needs of our customers and become a leading provider of BOPET film products in China. We also believe that our strengths will continue to help us grow in the BOPET film industry in both China and internationally. Our principal strengths include the following:

We have the capability to expand our product range and markets by introducing new products required by customers.

We believe that our experience in the industry and personnel will enable us to continue to provide new BOPET film products required by customers, and we have already developed a series of new products. Our R&D team comprises of five full-time research personnel in total.

We have an established brand name and are recognized for our product quality in the PRC.

Our products are marketed under our brand name, “Fuwei Films.” We believe that this brand name is well known in the BOPET film market in the PRC, and, although our selling prices sometimes exceed those of our competitors, our products have achieved significant market acceptance because of their high quality and our superior customer service. In January 2011, Fuwei Films was recognized as a “Shandong Famous Brand.” In January 2014, Fuwei Films was awarded once more as “Shandong Famous Brand” for the fifth consecutive year since it was reviewed.

We manufacture high-quality products that can be customized for our clients.

We implement and enforce stringent quality controls on our production process and products. As part of our production process, we formulate different blends of PET resins and additives to produce films with specific properties for our customers based on their requirements. In addition, we have developed a special production process, and we believe using these formulas will produce products that will meet our customers’ requirements in quality.

We have an experienced management team with extensive industry experience.

Our management team has extensive management experience, and most of them have many years of experience in the R&D, manufacturing, and marketing of BOPET films.

We can continually renovate or update our production lines according to the market trends, and our R & D facilities are advanced in the PRC.

Our first production line was German-made and manufactured by Brückner, and the second was made by DMT in France. We continually renovate or update these production lines according to the market trends to enable these lines to produce competitive and premium products.

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Awards and Certifications

Our subsidiary, Shandong Fuwei, has received the following awards and certificates, each of which, we believe, is an indication of our achievements, the quality of our products, making us more attractive to our potential customers, and, therefore, more competitive in both e local and international markets:

 Date

   

Award/Certificate

   

Issuing Authority

 

 

 

September 2004(1)

ISO 9001:2000 Certificate

China Certification Center for Quality Mark

 

 

 

July 2006(2)

ISO 14001 Certificate

SGS

 

 

 

December 2007 (3)

Key High-Tech Enterprise of the National Torch Program

Ministry of Science and Technology

 

 

 

December 2008 (4)

High-and-New Tech Enterprise

Shandong Department of Science and Technology, National and Local Taxation Bureau of Shandong Province, and Shandong Province Financial Bureau

 

 

 

May 2009

“Advanced Enterprise of Chinese plastic industry”

China Plastic and Packaging Association

 

 

 

August 2009

Technological Innovation Award

Shandong Province enterprise technological innovation promotion association

 

 

 

June 2010(5)

A-Category taxpayer

The National Taxation Bureau and the Local Taxation Bureau of Shandong Province

 

 

 

October 2010 (6)

Shandong Engineering Technology Research Center

Department of Science & Technology of Shandong Province

 

 

 

January 2011 (7), (8)

Award for Cooperative and Innovative Manufacturing, Study and Research of SME

SME Productivity Promotion Center of Shandong Province

 

 

 

 January 2011

First Award of Private SME Innovation of Shandong Province

SME Innovative Committee of Technological Promotion of Shandong Province

 

 

 

January 2011

Award of Tax Contribution of the Year of 2010

Weifang Municipal Finance Bureau

 

 

 

January 2011 (9)

“Fuwei Films” was awarded as Famous Shandong Brand

Shandong Provincial Quality Supervision Bureau

 

 

 

February 2011 (10)

Scientific Innovative Enterprise of Shandong Province

Department of Science & Technology of Shandong Province

October 2011

Creditable Private Enterprise of Weifang 2011

Weifang SME Advocacy Office

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October 2011(3)

Key High-Tech Enterprise of the National Torch Program

Ministry of Science and Technology

October 2011(4)

High-and-New Tech Enterprise

Shandong Department of Science and Technology, National and Local Taxation Bureau of Shandong Province, and Shandong Province Financial Bureau

December 2011

Award for Enhanced Productivity

SME Productivity Promotion Center of Shandong Province

December 2011(11)

Famous Brand

SME Productivity Promotion Center of Shandong Province

February 2012(11)

Outstanding Brand of Plastic Packaging Industry in China in 2011 and 2012

China Packaging Federation

June 2012(12)

OHSAS 18001:2007 Occupational Health and Safety Management Systems

SGS

December 2012

Reliable Enterprise of Weifang

Weifang Administration for Industry & Commerce

December 2012

Best Employer of Weifang

Weifang Enterprise Confederation

March 2013(11)

Private Economy Famous Brand of Shandong Province

Private Economy Brand Promotion Center of Shandong Province, SME Productivity Promotion Center of Shandong Province

March 2013

Award for Enhanced Productivity in 2012

SME Technology Innovation Promotion Association of Shandong Province, SME Productivity Promotion Center of Shandong Province

March 2013(7), (8)

Award for Cooperative and Innovative Manufacturing, Study and Research of SME for the Year of 2012

SME Technology Innovation Promotion Association of Shandong Province, SME Productivity Promotion Center of Shandong Province

March 2013

First Award of Private SME Innovation of Shandong Province for the Year of 2012

SME Technology Innovation Promotion Association of Shandong Province, SME Productivity Promotion Center of Shandong Province

April 2013

2012 Human Resources and Social Security Credibility Demonstration Enterprise

Weifang Municipal Human Resources and Social Security Bureau

May 2013(5)

AA-Category taxpayer

The National Taxation Bureau and the Local Taxation Bureau of Shandong Province

25

July 2013(11)

the Most Competitive Brand in the Market of Shandong Province

Shandong Province Economic and Information Technology Committee

August 2013(13)

The Third Award of Patent for BOPET and Manufacturing in Weifang City

Weifang Municipal Government

October 2013

The Most Significant Innovation Awarded for Dry Film Resist

Weifang Enterprises Confederation, Weifang Enterprisers Association.

January 2014(9)

“Fuwei Films” was awarded as Famous Shandong Brand

Shandong Provincial Quality Supervision Bureau

January 2014(14)

Five -Star Enterprise in Statistical Work

Shandong Provincial Bureau of Statistics

January 2015(15)

Advanced Work Unit in Making National Standard for BOPET Film

China Packaging Federation

May 2015

One of the Top Ten Outstanding Enterprises in 2014 for All products in Shandong

Shandong Provincial Plastic Association

December 2015

Famous Trademark in Shandong Province

Shandong Provincial Administration for Industry & Commerce

December 2016(16)

High-and-New Tech Enterprise

Shandong Department of Science and Technology, National and Local Taxation

Bureau of Shandong Province, and Shandong Province Financial Bureau

March 2017

Permission Certificate of Radiation Safety

o
Environmental Protection Bureau

o

March 2017

Grade A Unit of Labor Secured and Law-abiding Integrity for the year 2016

Weifang Labor and Social Security Supervision Office

April 2018

Grade A Unit of Labor Secured and Law-abiding Integrity for the year 2017

Weifang Labor and Social Security Supervision Office

December 2019

High-and-New Tech Enterprise

Shandong Department of Science and Technology, National and Local Taxation

Bureau of Shandong Province, and Shandong Province Financial Bureau

September 2020(17)

The hidden champion in Weifang City

Weifang Bureau of Industry and Information Technology

(1) ISO 9000 certification has become an international reference for quality management requirements in business-to-business dealings. This certification enables us to compete in many more markets around the world and provides our customers with assurances about our quality, safety, and reliability.
(2) After strict examination and approval by SGS, Fuwei Films (Shandong) Co., Ltd. successfully passed the ISO14001 Environmental Administration System in July 2006.
(3) Fuwei Films (Shandong) Co., Ltd. was awarded as Key High-Tech Enterprise of the National Torch Program in December 2007 and October 2011. This title is recertified every two years.

26

(4) In December 2008 and October 2011, Fuwei Films was awarded as High-and-New Tech Enterprises by the Shandong Department of Science and Technology, National and Local Taxation Bureau of Shandong Province, as well as from the Shandong Province Finance Bureau.
(5) The A-Category is at the top of the four ratings for corporate taxpayers in China. Candidates eligible for the category are reviewed and designated by the authorities every two years.
(6) This center is mainly engaged in researching and developing new polyester materials and high-tech products. Currently, it has made more than ten R&D achievements and plays a positive leading role in the development of the BOPET industry.
(7) Fuwei Films starts technological cooperation with Chinese colleges and hired South Korean experts to research and develop new products, techniques, and processes.
(8) Fuwei Films has already developed and applied more than ten new products, including laser anti-counterfeit film, chemical pretreated film, heat-sealable film, dry film, and heat-shrinkable film. All these have been widely used in production.
(9) The “Fuwei Films” brand has been honored as a famous brand resulting in visibility, credibility, reputation, and continued growth.
(10) Under the fierce competition, Fuwei Films is encouraged by the government to develop new products.
(11) All these awards show that our established brand name “Fuwei Films” is recognized for our product quality in the PRC.
(12) OHSAS 18001 is an internationally recognized assessment specification for occupational health and safety management systems. OHSAS promotes a safe and healthy working environment by providing a framework that allows organizations to reduce the potential for accidents and improve overall performance. We believe this distinction will ensure a safe environment for our workers, and it will be attractive to global companies looking for BOPET suppliers in China.
(13) We have been focusing on R&D as a key differentiator to gain a competitive advantage in the market.
(14) The statistical work refers to the collecting, sorting, and analyzing work of social-economic phenomena. It is a kind of social investigation activity.
(15) Fuwei participates in and plays an active role in making the National Standard of BOPET film.
(16) Shandong Fuwei was designated as a High-and-New Tech Enterprise in 2016, 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. Shandong Fuwei was designated again as a High-and-New Tech Enterprise in 2019, and as a result, it is entitled to preferential tax treatment at an EIT rate of 15% for the years ended December 31, 2019, 2020, and 2021.
(17) This reward is required to have an annual operating income of more than 20 million yuan, with an average growth rate of more than 10% in the last three years, and the proportion of R&D investment in the operating income of more than 2.6%. The company has been engaged in the professional industry for more than four years, with stable customers and a core technology research and development team. The technical level of enterprise subdivided products has reached the leading level of similar products at home and abroad. The enterprise has its own brand, which has been included in the priority scope of national and provincial quality, trademark, famous brand, and other awards.

Business Prospects

In 2021, the condition of oversupply over demand in China’s BOPET market improved, and our purchase orders increased. Although anti-dumping measures taken by the USA and South Korea, and COVID-19 caused bad influence but our orders from international markets still increased.

Business Development Strategies

As a primary part of our business strategy, we will speed up the R&D of high value-added products. We believe that we have the ability to increase our sales and expand our markets. We will continue to improve our products by developing new functions and applications of the BOPET films and enhancing our products mix. Meanwhile, we will continue to secure opportunities to develop new domestic and overseas customers, especially in the Japanese market. We believe that expanding the overseas business is a key part of our business strategy.

Our future plans include: Expansion into overseas markets

We believe that the overseas markets hold significant potential for future growth. We believe that our venture into the overseas markets, which began in 2004, has been successful. We have identified Europe, Asia, and North America as our primary overseas markets.

27

Our overseas sales were affected by the anti-dumping investigations conducted by South Korea and the United States against BOPET manufacturers originating from China, India, and other countries and the fluctuation of the Renminbi. However, we still believe there is great potential in the overseas BOPET market. Therefore, we will continue to carry out marketing in the overseas market, especially the Japanese market, to attract new clients and sell our specialty films.

Investment in research and development

As one of our key strategies, we continue to invest substantially in R&D. We also intend to expand our R&D team by hiring more senior research personnel from both China and foreign countries. We attach great importance to intellectual property. To date, 17 patents have been granted by National Intellectual Property Administration, PRC.

Our Products and Services

We are principally engaged in the manufacture and distribution of BOPET film.

BOPET is a high-quality plastic film manufactured using the biaxially-oriented stretch (transverse and machine direction) technique. Our advanced production process improves the physical properties of the plastic film, such as its tensile strength, resistance to impact, resistance to tearing, and malleability. The high dimensional stability of the film over a wide range of humidity and temperature fulfills the basic requirements for flexible packaging. The film is lightweight, non-toxic, odorless, transparent, glossy, moisture-resistant, and retains high barrier resistance, making it suitable for flexible packaging, printing, laminating, aluminum-plating, and other forms processes. In addition, it retains high dielectric strength even at high temperatures, which are essential qualities for electrical and electronic uses. The three-layer co-extruded structure enables us to develop high-quality BOPET products.

BOPET film has been widely used in flexible packaging (such as food, pharmaceutical, cosmetics, cigarettes, alcohol), imaging (such as printing plates and microfilms), and electronics and electrical (such as PCB products, capacitors, and motor insulation). Due to its unique qualities, it has become a popular choice as a flexible packaging material in these industries in recent years.

We market our products under our brand name “Fuwei Films.” Our operations are based primarily in Shandong Province, PRC, where we manufacture our products for sale to customers engaged in flexible packaging businesses and the PRC’s electronics industry, particularly in the coastal region. We also export our products to end-users and distributors mainly in Europe, Asia, and North America.

Our BOPET film is mainly used in the flexible packaging industry for consumer products (relating to processed foods, pharmaceutical products, cosmetics, tobacco, and alcohol) and the electronics industry. Our products may be sub-divided into five main categories constituting the following percentages of our total revenue for each of the twelve months ended 2021, 2020, and 2019:

Category

    

2021

    

2020

    

2019

Stamping and transfer film

20.3

%

28.3

%

34.8

%

Printing film

4.8

%

6.5

%

10.1

%

Metalized film

1.2

%

1.2

%

1.6

%

Specialty film

69.9

%

60.8

%

48.4

%

Base film for other applications

3.8

%

3.2

%

5.1

%

The above categorizes BOPET base film products by application.

Stamping and transferring film

This film displays excellent thermal stability and tensile strength and is used in metalized film and laser stamping foil and transfer.

Printing film

This is a high transparency film that is corona treated on one side to provide excellent adhesion to ink. This is primarily used in printing and lamination.

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Metalized film

This type of aluminum plating base film displays good thermal stability and tensile strength and provides good adhesion between the film and aluminum layer. This is applied to flexible plastic lamination.

Specialty film

We mainly produce the following types of specialty film:

Dry film: Generally used in circuit boards (PCB & FPC) production, and sometimes used for nameplate and crafts etching;
Chemically treated film is used to enhance properties including barrier resistance, printing properties, and electrostatic resistance;
Heat-sealable film: Film with a three-layer structure. The heat-sealable film is primarily used in construction, printing, and making heat-sealable bags;
High-gloss film: Film with high levels of reflection approaching a mirror-like surface, used for aesthetically enhanced packaging purposes; and,
Heat shrinkable film is widely used for special-shaped packaging for beverages and cosmetics.

Base film for other applications

Base films for other applications are ordinary commodity polyester films with applications other than for the usages mentioned above.

Production

BOPET film is manufactured from polyethylene terephthalate (PET) resin. BOPET film is produced by melting the granulated PET resin and extruding it into a flat sheet. This sheet is stretched to 3.0 to 3.6 times its original length, then horizontally from 3.0 to 3.6 times its width, before being heat set and finally wound into reels. The orientation process (stretching during the application of heat) gives the film its mechanical strength, barrier, and optical properties (clarity and gloss). The main steps of our manufacturing process involve:

Dosing and Mixing

PET resin is dosed and mixed with relevant additives to achieve its desired characteristics. In the case of producing three-layer co-extruded BOPET film, the materials are dosed and mixed separately for each of the core and outer layers.

Extrusion/Co-extrusion

The mixed material is melted and plasticized to achieve the required homogenous state with the requisite characteristics, and then it is filtered and transported to the die unit. Our DMT production line has one main extruder and two auxiliary extruders to allow us to produce multiple-layer co-extruded BOPET film.

Die Casting

The respective mixed materials are extruded from the die unit, which produces a flat layered cast sheet and cast on the chill roll, which is cooled by the pinning system.

Machine Direction Orientation (vertical stretching)

The cast sheet is then heated and stretched by machine direction before annealing the cast sheet, which is a process of heat-setting to control the shrinkage of the sheet after the vertical stretching.

29

Transversal Direction Orientation (horizontal stretching)

After the machine direction stretching, the cast sheet is horizontally stretched before annealing again.

Pull Roll Station

The stretched sheet is trimmed and measured for thickness. For the production of base film for printing, the surface is treated by corona treatment. Corona treatment is the process that enables the BOPET film to become receptive to printing. At the pull roll station, continuous feedback on the thickness of the BOPET film is also relayed back to the die unit, ensuring consistency in the thickness of the BOPET film.

Winder

The final BOPET film is then wound up into metal rolls in the mill roll by the winder.

Slitter

The wound BOPET film is then unwound from the metal rolls, divided to the requisite width and length, and rewound into paper or plastic core for delivery to customers.

Inventory Management

Our warehousing facilities are located in the Shandong Province, PRC. Our warehouses are guarded by security personnel, our inventory loss is covered under our insurance policies. As of December 31, 2021, our total inventories amounted to approximately RMB35.5 million, and our raw materials, work-in-progress, finished goods and spare parts (including consumables) made up approximately 41.4%, 2.8%, 38.1%, and 17.7% of our inventories, respectively.

To ensure an accurate inventory record and monitor aging inventory, we conduct monthly stock counts. We usually maintain raw materials which can be used for one or two weeks of production. Typically, we start manufacturing such goods upon receiving orders from our customers.

Our inventory turnover periods (in days) for 2021, 2020, and 2019 were 44.8, 44.7, and 34.9, respectively. Inventory turnover is calculated as 365 days times inventory at the period/year end date divided by the cost of sales in respect of the financial period/year.

In 2021, there were no provisions for inventory obsolescence and inventory write-off. As of December 31, 2021, we accrued RMB7.4 million for inventory falling price reserves.

Manufacturing Facilities and Utilization Rates

As of December 31, 2021, the following production lines are in operation:

Production Line

    

Design Capacity

    

Estimated Remaining Life Span

 

Brückner Production Line

13,000 tons per annum

Approximately 0 year

DMT Production Line

16,100 tons per annum

Approximately 1 year

30

The manufacturer’s design capacity is determined based on the assumption of the production of a specific mix of BOPET films of varying thicknesses. Our Brückner and DMT production lines have been in use since 2003 and 2004, respectively. The production lines are depreciated on the straight-line method over their respective estimated useful lives.

Our approximate annual production volumes and the average annual utilization rates for our facilities for 2021, 2020, and 2019, based on our estimated operational production capacities were as follows.

Approximate Annual Production Volume 

(tons)

    

Average Annual Utilization Rate

 

Production Line

    

2021

    

2020

    

2019

    

2021

    

2020

    

2019

 

Brückner Production Line

11,663

11,877

11,559

89.7

%  

91.4

%  

88.9

%

DMT Production Line

 

14,292

 

13,942

 

14,286

 

88.8

%  

86.6

%  

88.7

%

There are currently no regulatory requirements that may materially affect our property, plant, and equipment utilization rates. However, certain of the fixed assets relating to our production lines have been mortgaged in respect of certain of our bank loans as described under “Properties” for further details.

Quality Control

The quality and reliability of our products are essential for our continued success. We adopt strict measures for quality control in the entire production process of all our products, from the purchase and selection of raw materials, to each stage of the manufacturing processes and final inspection of end products. Our quality control procedures were certified for ISO 9001:2000 compliance in September 2004, while the review is conducted every three years. Our quality control procedures were certified for ISO 9001:2015 compliance in May 2021, while the review is conducted every three years.

As of December 31, 2021, our product inspection and quality control department is comprised of 17 employees. We have one manager, 13 quality inspectors, two procurement inspectors, and one after-sale personnel. Members of our quality control departments have had relevant training in quality control following ISO 9001:2000 procedures. Our product inspection and quality control department ensure that our production process, raw materials, and end products are of the quality to our customers’ satisfaction.

Raw Materials

We adopt and adhere to quality inspection procedures and internal controls for the procurement, selection, and quality checks of raw materials. Different types of assessments are utilized for different categories of raw materials. Our suppliers are also required to meet our internal qualification criteria, such as the quality and pricing of their suppliers, their ability to meet our requirements, and timely delivery. We conduct batch inspections for raw materials delivered to us before being accepted and stored in our warehouses. Defective materials are returned to our suppliers for necessary corrective action to ensure that no defective materials are used for production.

Production Process

We have established standard operating procedures and implementation rules for each stage of the production process to ensure that our products comply with and adhere to our stringent quality control standards and optimize our productivity. We only permit employees who have undergone and completed the relevant training to work on our production lines. At each stage of the production process, our inspectors check and ensure that our production process complies with our quality standards, while our quality control department monitors and ensures that our products-in-process and final products comply with our internal and international standards of quality control by carrying out random sampling of the products.

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Finished Products

To ensure that our products fulfill our quality criteria established by our product inspection and quality control department, our products undergo final quality inspection upon production, labeling, and packaging. Our product inspection and quality control department continue to monitor and ensure that our products are properly handled and stored in our warehouses. Prior to delivering to our customers, our products are inspected one final time to ensure that they are in good condition and not damaged.

Maintenance

Our maintenance engineers regularly maintain and repair our machinery and equipment to ensure that they are in good working order and functioning properly. We also conduct periodic maintenance of all our machinery on a rotation basis. On an average basis, we replace our filter disks every 30 days, and this replacement process takes about six to eight hours, during which we will conduct routine maintenance. And each year, we will conduct one comprehensive maintenance project for each production line which will cost five to ten days, varying according to different maintenance projects. We believe that due to our stringent maintenance policies, our equipment is still in good condition. Our average downtime for 2021 (primarily for maintenance) was 4.6% of our overall production time.

32

New Products

Through years of R&D endeavors, we have introduced various BOPET film products. The following are some of the new products for which commercial production has begun:

Product

    

Achievement

 

Chemical pretreated film

Our film is pretreated in-line and coated, which results in a strong adhesion to ink and aluminum.

Heat-sealable film

The heat-sealable film is a three-layers co-extruded Biaxially oriented polyester film with an amorphous polyester heat seal layer. Available with corona treatment on the non-seal side to improve adhesion to typical packaging inks and metalizing. Not only can it provide permanent seals to itself for package bags, but also to APET, CPET, PETG, and others. The heat-sealable film can be aluminized, printed, and composited with other films. It is applied to packaging for food, construction, and other applications.

Heat sealable film for steel

To improve the heat-sealable strength between the film and steel and adjust the stretchable capability to be more suitable for steel’s heat sealing. They are mainly used to protect and decorate colorful armor plates for home appliances.

High-gloss film

Using special raw chips and processes provides very high gloss, uniform thickness, good mechanical properties, and surface smoothness. It can be used under -70~200°C for packaging food, cigarettes, alcohol, laser embossing, holographic anti-fake, metallic yarn, and others.

DFR base film

Generally used in circuit boards (PCB & FPC) production, sometimes used for nameplate and crafts etching.

Heat shrinkable film

To change the heat shrinkage rate by enlarging the draw ratio. It is mainly used for PET beverage bottle shrinkable tags. Heat shrinkable film uses PET structure, which is the substitute for PVC shrinkable tags, which is also in line with environmental protection and recyclable requirements.

Smooth heat sealable film

Excellent smoothness widely used in packaging of mosquito-repellent incense.

Anti-static film

Featuring low static electricity with surface resistance below 1010Ω/sqm applied to printing and packaging, which require films with excellent anti-static properties.

Reinforced coated printing film

Excellent adhesion to UV ink and UV gloss oil suitable for high-end printing.

Metal-adhesion improved film

To improve the peel strength after metalized sealing. They are mainly used for liquid packages.

Uvioresistant film

To prolong the yellowing resistance time and hence increase the film duration of use.

Uvioresistant Heat-sealable film used for FRP

Increase duration of use of heat-sealable film used for FRP

33

Our expenditure on research and development in 2021, 2020, and 2019 were as follows (in thousands):

    

Year Ended

    

Year Ended

    

Year Ended

    

December 31,

December 31,

December 31,

2021

2020

2019

RMB

RMB

RMB

Research and Development Expenses

 

12,811

(1)

11,413

(2)

9,449

(3)

(1) & (2) & (3) In addition to the above-mentioned expenses in 2021, 2020 and 2019 of RMB12,811, RMB11,413, and RMB9,449, respectively, the R&D capital expenditure was zero, RMB300, and zero, respectively.

We view research and development as an essential part of our business. We believe that higher investment in our R&D center’s equipment, the development of new products, and upgrading existing products will enhance our ability to compete.

Sales, Marketing, and Key Customers

As of December 31, 2021, our sales department is comprised of nine employees in the domestic sales division, three employees in the overseas sales division, and one for sales support. Our sales department is responsible for market penetration, such as cultivating new customers and businesses, and market development, such as developing existing accounts through better service support and customer relationship. Our marketing department is responsible for market research, development and promotion. Our management is actively involved in overseeing and supervising our sales and marketing activities and often visits our clients together with the sales personnel. They have established and maintained a close business relationship with our key customers.

Customers and Markets

Over the past years, we have established good working relationships with our customers in the flexible packaging industry. Our products are mainly used in the packaging of consumer products, such as those relating to processed foods, pharmaceutical products, cosmetics, tobacco, and alcohol. In addition, we maintain a good relationship with major dry films customers in Mainland China.

The majority of our domestic customers are located in the coastal region of the PRC. Our overseas customers are mostly based in Europe, Asia, North America, and others. In 2021, sales from our domestic and overseas customers constituted approximately 90.1% and 9.9% of our annual revenue, respectively.

The following are our top five customers and their respective percentages of contribution to our total revenue for each of the years ended December 31, 2021, 2020, and 2019:

Percentage of

Total Revenue (%)

    

2021

    

2020

    

2019

Hunan Wujo Hi-Tech Materials Co., Ltd.

17.7

8.8

0.2

Zhuhai Ruiming Technology Co., Ltd.

 

6.6

 

4.5

 

3.3

Eternal Photo Electronic Materials (Guangzhou) Co., Ltd.

 

5.0

 

4.5

 

5.1

Kolon Electronic Materials (Huizhou) Co., Ltd.

 

5.0

 

5.2

 

3.6

Eternal Electronic (Suzhou) Co., Ltd.

 

3.4

 

3.6

 

3.4

Hunan Wujo Hi-Tech Materials Co., Ltd. accounted for 17.7% of our total revenue in 2021.

None of our directors, principal shareholders, or any of their affiliates has any interest, direct or indirect, in any of our customers listed above.

34

Sales

Because of our broad range of product offerings and customers, our sales and marketing efforts are generally specific to particular product types, customers, or geographic regions. Most of our products are sold by our own direct sales force. These salespeople, including our management, maintain close relationships with our customers by paying visits to them from time to time to understand their needs and obtain their feedback and suggestions. Our sales personnel provide technical support to our customers when required. We also regularly invite our existing and potential customers to our manufacturing facilities for visits as we believe that such visits enable our customers to better understand our production processes and operations and enhance our customers’ confidence in us.

We adopt a risk assessment model to our customer credit management system, and we offer different credit terms to our customers based on criteria such as working relationship, payment history, creditworthiness, and financial position. We offer our domestic customers credit terms of 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 a basic salary and commission package for our sales personnel. The commission payable is dependent on a number of factors such as sales targets completion, debt collection, and marketing cost allocation.

Customer Service

We place great emphasis on good, fast, and effective pre-sales and after-sales customer support services. As such, all our sales personnel have undergone stringent training and have sufficient knowledge and understanding of our products. Our sales personnel are responsible for coordinating and providing after-sales services, which include following through with our customers’ orders, maintaining relationships with our customers, handling complaints effectively, ensuring that our customers’ needs are met, and understanding the future needs of our customers. Our quality department supports our customer service and is responsible for explaining questions related to the usage of our products to customers. If there are complaints as to our product quality, they are responsible for receiving and settling complaints on our customers’ site.

We accept returned defective products from customers or compensate our customers for the losses incurred from our defective products. For 2021, our losses due to returned products from our customers were approximately 0.2% of our total sales.

Marketing

We have the following marketing channels:

we regularly attend trade fairs and exhibitions as we believe they serve as a good platform for us to exhibit our new products and expand our sales network. In addition, we participate in seminars, fairs, and exhibitions to network with our potential and existing customers and to obtain up-to-date information on new products, market trends, and consumer demand;
referrals from existing customers as well as business associates to generate sales opportunities; and,
promotion through our corporate website. Information on our products and services is also found on our corporate website, which allows us to reach out to potential domestic and overseas customers.

Our marketing personnel also conduct PRC domestic and overseas market surveys, and research. The statistics, findings, and information obtained from such surveys and research are then passed on to our management and production department for their analysis of the demand for and supply of our products, which allows them to adjust our production and sales targets as well as our marketing strategies.

35

Suppliers and Raw Materials

Suppliers

We purchase raw materials according to the relevant technical specifications and production requirements. We select our suppliers based on the following considerations and/or methods:

the consistency of the quality of raw materials supplied and any relevant certifications;
our inspection of the supplier’s quality control system;
positive feedback from the supplier’s other customers;
pricing of raw materials;
timely delivery of raw materials;
the supplier’s financial position and viability;
the service provided by the supplier;
qualifying suppliers by sample testing and batch purchasing of their raw materials; and,
annual evaluation and review of our suppliers.

The following are the suppliers that supplied 10% or more of our purchases of raw materials and supplies for each of the years ended December 31, 2021, 2020, and 2019:

    

Percentage of total purchases (%)

Supplier

    

Item

    

2021

    

2020

    

2019

Sinopec Yizheng Chemical Fibre Company Limited

 

PET resin and Additives

 

53.9

 

48.1

 

58.3

Hefei Lucky Technology Industry Co., LTD. Jiangyin Branch

 

PET resin and Additives

 

1.0

 

6.2

 

10.3

Weifang Power Supply Company.

 

Electric power

 

8.4

 

10.4

 

8.3

We purchase the majority of our PET resin from Sinopec Yizheng, and Lucky Jiangyin as the quality of its supply of PET resin consistently meets our requirements. We currently have annual supply agreements with Sinopec Yizheng pursuant to which Sinopec Yizheng has agreed to supply us with fixed quantities of PET resin monthly at the prevailing market prices. Such supply agreements are renewable annually. We have not entered into any long-term supply contracts with any other supplier. Our purchases of raw materials are on a cash basis. There are several suppliers of PET resin at home and abroad that can consistently meet our quality and quantity requirements on a timely basis.

None of our directors, principal shareholders, or any of their affiliates has any interest, direct or indirect, in any of our customers listed above.

Raw Materials

The main raw materials that we purchase from our suppliers are as follows:

Percentage of each category within main raw

material purchases (%)

Main Raw Material

    

2021

    

2020

    

2019

    

Country

PET resin

81.0

79.0

77.1

PRC

Additives

19.0

21.0

22.9

PRC

The market prices for PET resin and additives may fluctuate due to changes in supply and demand conditions. Any sudden supply shortage or significant increase in demand for PET resin and additives may result in higher market prices and thereby increase our costs of sales. The prices of PET resin and additives are, to a certain extent, affected by the price movement of crude oil. The average price for PET resin in 2021 will increase by 23.7% compared to that in 2020.

36

As we cannot predict the price movements of such raw materials and to minimize the impact of such price fluctuations on our cost, we generally purchase such raw materials in quantities sufficient for our production process for approximately one or two weeks. Based on orders from our customers, we may increase or reduce the inventory of our raw materials.

Competition

We face intense competition in the PRC plastic film industry. We believe that there are currently many plastic film manufacturers in the PRC, and we expect further entrants into this market in the future. Among the flexible packaging industries, particularly those involving packaging of processed food and pharmaceutical products, the primary types of plastic films in the packaging products include BOPET, Biaxially oriented polyester (BOPP); and Biaxially oriented polyamide (BOPA).

The following table gives a general comparison of the key differences in the technical specifications and usage of the above types of plastic films.

Comparison of BOPP Film, BOPET Film and BOPA Film(1)

Features

    

BOPP

    

BOPET

    

BOPA

 

Water vapor barrier

Excellent

Fair

Poor

Gas barrier properties

Poor

Excellent

Excellent

Break down voltage

Poor

Excellent

Excellent

Machine-ability

Fair

Excellent

Excellent

Printability

Fair

Excellent

Fair

Suitability for Metalizing

Poor

Excellent

Fair

Density (gm/cc)

Low (0.91)

High (1.39)

Medium (1.15)

Tensile strength

Poor

Excellent

Excellent

(1) This comparison is based on the book of Biaxially Oriented Plastics Film, edited by Yanping Yin and published by China Chemical Press in August 1999. The Company did not notice updated technical specifications subsequently as of December 31, 2021.

We believe that we are one of the few BOPET film manufacturers in the PRC with research and development capabilities.

We believe that the major competitive factors in our industry include:

research and development capability;
quality and reliability of products;
technical/manufacturing capability;
industrial reputation; and,
production cost and sales prices.

We believe that our major competitors in BOPET manufacturing are currently:

Dupont Hongji Films Foshan Co., Ltd.;
Yihua Toray Polyester Film Co., Ltd.; and
Shandong Fenghua Plastic Technology Co., Ltd.

37

We believe that we have established a good reputation and management track record as a manufacturer of BOPET film and are able to offer quality products.

C. Organizational structure.

The following table sets forth the details of our subsidiaries as of the date of this Annual Report:

Name

    

Country of
Incorporation

    

Ownerships Interests

    

Direct Parent

 

 

 

 

 

 

 

Fuwei Films (Shandong) Co., Ltd.

 

Weifang Shandong, China

 

100% wholly owned by Direct Parent

 

Fuwei Films (BVI) Co., Ltd.

 

 

 

 

 

 

 

Fuwei Films (BVI) Co., Ltd.

 

British Virgin Islands

 

100% wholly owned by Direct Parent

 

Fuwei Films (Holdings) Co., Ltd.

 

 

 

 

 

 

 

D. Property, plant, and equipment.

Our corporate headquarters and production and ancillary facilities occupy an area of approximately 74,251 square meters in Weifang City, Shandong Province. Land use rights held by us cover the land at our facilities. The land-use rights for the land upon which our buildings and facilities are located have terms of 50 years, the earliest of which expires in November 2050. Our corporate headquarters conduct our research and development, manufacturing, warehousing, and administrative functions. The total gross floor area of production and other facilities owned by us is approximately 46,196 square meters. We own all the buildings and facilities on the premises. Parts of our land use rights, plant, and office buildings have been mortgaged to the banks in the PRC. As of December 31, 2021, the mortgaged floor area of facilities and land use right to the bank is 46,196 square meters and 74,251 square meters, respectively. The total net value of the mortgaged property is RMB97.1 million.

Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and Financial Review and Prospects

38

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 most of our BOPET film products to domestic customers in China, with the minority sold to Europe, Asia, North America, and other overseas markets.

Our Corporate Structure and Operating History

The diagram below illustrates our corporate structure:

Graphic

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 producing BOPET film, initially renting the necessary fixed assets from Shandong Neo-Luck, a company involved in BOPET film production in which Mr. Xiaoming Wang, our former executive officer, served as executive officer at the time.

Shandong Fuwei subsequently acquired these fixed assets through two auction proceedings, the first in October of 2003 and the second in December 2004. At the first auction proceeding in October 2003, Shandong Fuwei acquired assets related to the Brückner production line that it rented from Shandong Neo-Luck. Shandong Neo-Luck had previously mortgaged this line 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, the Bank of China brought a series of legal actions in the 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 whollyforeign-owned enterprise pursuant to PRC law.

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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 tremendous potential risk involved, the auction was 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, 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 the 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 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 has been questioned 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 12.54% 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.

40

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 the 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 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 12.54% 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 12.54% of the Company’s outstanding ordinary shares through Easebright. Mr. Jingang Yang was appointed as the director of Easebright. This disclosure is based solely on information contained in a Schedule 13D filed by Shandong Fuhua with the SEC on December 30, 2014. Easebright informed Fuwei that Mr. Qingxin Dong had been the director since 2018.

Renaissance Technologies LLC owns 6.63% of the Company’s outstanding ordinary shares. This disclosure is based solely on information contained in a Schedule 13G amendment filed by Renaissance Technologies LLC with the SEC on February 11, 2022.

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 opening of business on December 6, 2016.

On July 2, 2020, we received a notification from Shanghai Meicheng Enterprise Management Co., Ltd., (“Shanghai Meicheng”) with respect to an ownership transfer from Shandong SNTON Group Co., Ltd. (the “SNTON Group”) to Shanghai Meicheng of our 52.9% controlling outstanding ordinary shares (the “Shares”). It is noted that SNTON Group transferred its equity in Hongkong Ruishang to Shanghai Meicheng on June 23, 2020, due to SNTON Group’s asset reorganization. As a result of this transfer, Shanghai Meicheng now indirectly owns the Shares through Hongkong Ruishang.

On March 31, 2021, we announced that the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Enesoon New Energy Limited (“Enesoon”), a British Virgin Islands company, directly and indirectly, holding subsidiaries in China primarily engaged in green thermal energy storage businesses, and Enesoon’s shareholders. The Purchase Agreement will result in the issuance by the Company of 111,111,111 new ordinary shares (“Consideration Shares”) in exchange for all outstanding shares of Enesoon. As a result of this transaction, the former shareholders of Enesoon will beneficially own, in the aggregate approximately 97.1% of the Company’s outstanding shares.

The closing of the transactions contemplated under the Purchase Agreement is subject to various closing conditions, including approval of the issuance of Consideration Shares by the shareholders of the Company, receipt of NASDAQ approval, receipt by the Company of a satisfactory fairness opinion or valuation, and other customary conditions.

Our ordinary shares began to trade on the NASDAQ Stock Market on the post-Reverse Stock Split basis under the symbol “FFHL” at the opening of business on December 6, 2016. The new CUSIP number for our ordinary shares post-Reverse Stock Split is G3704F 110. We would round up to the next full share of our ordinary shares any fractional shares that result from the Reverse Stock Split.

41

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 2021, 2020, and 2019, the total cost of raw materials made up approximately 72.5%, 70.0%, and 74.3% 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 81.0% and 19.0%, respectively, of our total cost of raw materials in 2021. 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 the 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 with 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, transfer films, and metalized 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 that require higher technical expertise, our revenue will be affected, to a 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 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 and electronics industry such as the light-resistant dry film used in printed circuit boards also significantly increased. In the fiscal years ended December 31, 2021, 2020, and 2019, approximately 90.1%, 92.0%, and 85.8%, 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 decrease the demand for our products.

Production Capacity and Utilization Rates

Our operational annual production capacity limits our sales volume, and this depends largely on supply and 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, among other things on capital availability to meet expansion needs or production lines upgrades.

42

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 in our industry, and the current BOPET film manufacturers may expand their production capacity. We believe that our major competitors in the BOPET manufacturing market in the PRC currently 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 for 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

    

Year Ended December

    

Year Ended December

 

    

31, 2021

    

31, 2020

    

31, 2019

Materials costs

72.5

%  

70.0

%  

74.3

%

Energy expense

 

9.7

%  

11.2

%  

8.9

%

Factory overhead

 

7.6

%  

7.6

%  

9.4

%

Packaging materials

 

4.0

%  

5.0

%  

4.0

%

Direct labor

 

6.2

%  

6.2

%  

3.4

%

 Material Costs

As noted above, the raw materials used in our BOPET film production are PET resin and additives, which made up approximately 81.0% and 19.0%, respectively, of our total materials costs in 2021.

Energy expense

Energy expense includes electricity, gas, and water costs, in which electricity is the main energy consumed.

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Factory Overhead

Factory overhead comprises primarily of depreciation, electricity and water charges, and repair and maintenance of our machinery and equipment, etc. In 2021, the depreciation expense and repair and maintenance expenditure accounted for 53.9% and 22.5% of factory overhead, respectively.

Packaging Materials

Our packaging materials mainly comprise 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, government policies or laws changes, and the demand and supply of skilled labor.

Operating Expenses

Our operating expenses comprise administrative expenses, distribution expenses, and other operating expenses.

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 freight costs, travel expenses, marketing and promotion expenses, and salaries and commissions 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 mainly comprise interest expenses relating to our loans, capital lease obligations, exchange deficit, and bank charges.

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.

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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 1st, 2008 (the “New Tax Law”). Under the New Tax Law, domestic enterprises and foreign-invested enterprises generally became subject to a unified enterprise income tax rate of 25%, except those enterprises incorporated prior to March 16, 2007, may continue to enjoy existing preferential tax treatments until January 1st, 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 1st, 2011, to December 31, 2013, pursuant to Enterprise Income Tax Law. In December 2014, Shandong Fuwei failed to be designated as a High Technology Enterprise, and it became subject to a standard enterprise income tax at a rate of 25% in 2014 and 2015. In 2016, Shandong Fuwei was designated as a High-and-New Tech Enterprise and as a result, it is entitled to preferential tax treatment at an EIT rate of 15% for the years ended December 31, 2016, 2017, and 2018. In 2019, Shandong Fuwei was designated as a High-and-New Tech Enterprise and as a result, it is entitled to preferential tax treatment at an EIT rate of 15% for the years ended December 31, 2019, 2020, and 2021.

Inflation

According to the National Bureau of Statistics of China, the change in the consumer price index in China was 0.9%, 2.5%, and 2.9% in 2021, 2020, and 2019, 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 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 understanding our financial statements as their application assists management in making their business decisions.

Goodwill Impairment Goodwill represents the excess 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 reporting unit’s carrying amount 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 up to 30-45 days in the PRC credit term. 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 relationships, payment history, creditworthiness, and 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 receivables.

45

As of December 31, 2021, our largest trade debtor was Hunan Wujo Hi-Tech Materials Co., Ltd., a company based in China. The balance of trade receivables from Hunan Hori New Materials Co., Ltd. was RMB7.5 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 an allowance for doubtful accounts based on our best estimate of the number 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 considering 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 2021, 2020, and 2019, is as follows (in thousands):

December 31, 2021

    

December 31, 2020

    

December 31, 2019

    

RMB

    

US$

    

RMB

    

RMB

Balance at beginning of the year

 

485

 

76

 

833

 

1,847

Bad debt expense (recovery)

 

(303)

 

(48)

 

(348)

 

(1,014)

Write-offs

 

 

 

 

Balance at end of the year

 

182

 

28

 

485

 

833

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 the occurrence of a triggering event necessitates an analysis, the Company uses assumptions, which are predominately identified from the Company’s strategic long-range plans, in determining the impairment amount. In calculating 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 asset group carrying amount 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. When available, 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 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,

    

2021

    

2020

    

2019

(% of Total Revenue)

Gross profit

 

37.5

 

40.6

 

24.9

Operating expenses

 

13.6

 

34.2

 

18.0

Other expense

 

0.1

 

(2.3)

 

(2.8)

Income tax benefit (loss)

 

(1.5)

 

1.8

 

(0.7)

Net income (loss)

 

22.5

 

5.8

 

3.4

46

Fiscal year ended 2021 compared to the fiscal year ended 2020

Revenues

Our revenue can be analyzed as follows (in thousands):

For the year ended December 31,

2021

2020

    

RMB

    

US$

    

% of Total

    

RMB

    

% of Total

    

Stamping and transfer film

80,288

12,599

20.3

%  

95,459

28.3

%

Printing film

19,239

3,019

4.8

%  

21,968

6.5

%

Metalized film

4,801

753

1.2

%  

3,927

1.2

%

Specialty film

277,336

43,520

69.9

%  

204,686

60.8

%

Base film for other applications

15,135

2,375

3.8

%  

10,715

3.2

%

396,799

62,266

100

%  

336,755

100

%

During the fiscal year ended December 31, 2021, net revenues were RMB396.8 million (US$62.3 million), compared to RMB336.8 million in 2020, representing an increase of RMB60.0 million, or 17.8%. The increase in average sales price caused an increase of RMB39.3 million, and an increase of RMB20.7 million resulted from the increase in sales volume.

In 2021, sales of specialty films were RMB277.3 million (US$43.5 million), or 69.9% of our total revenues as compared to RMB204.7 million, or 60.8% in 2020, which increased RMB72.6 million, or 35.5% higher than 2020. The increase in sales volume led to an increase of RMB59.0 million, and an increase of RMB13.6 million resulted from the increase in average sales price.

Overseas sales were RMB39.4 million (US$6.2 million) or 9.9% of total revenues, compared with RMB27.0 million or 8.0% of total revenues in 2020. The increase in average sales price caused an increase of RMB2.5 million, and the increase in sales volume caused an increase of RMB9.9 million.

The following is a breakdown of domestic versus overseas sales for the years ended December 31, 2021, and 2020 (amounts in thousands):

For the year ended December 31,

2021

2020

    

RMB

    

US$

    

% of Total

    

RMB

    

% of Total

    

Sales in China

357,396

56,083

90.1

%  

309,801

92.0

%

Sales in other countries

39,403

6,183

9.9

%  

26,954

8.0

%

396,799

62,266

100.0

%  

336,755

100.0

%

Cost of Goods Sold

The cost of goods sold during 2021 totaled RMB247.9 million (US$38.9 million) as compared to RMB200.1 million in the prior year. This was RMB47.8 million, or 23.9% higher than 2020. The increase in the unit cost of goods sold caused an increase of RMB35.5 million, and the increase in sales volume led to an increase of RMB12.3 million.

Gross Profit

Our gross profit for the year ended December 31, 2021, was RMB148.9 million (US$23.4 million), compared to RMB 136.7 million in 2020. Our average unit sales price increased by 11.0% compared to last year. The unit sales cost increased by 16.7% due to the price increase of main raw materials. Consequently, the increase in the cost of goods sold per unit in product exceeded that of sales price during 2021 compared with 2020, which contributed to the decrease in our gross margin. Our gross margin was 37.5% for the year 2021, compared to a gross margin of 40.6% in 2020.

47

Operating Expenses

Our operating expenses during the year ended December 31, 2021, were RMB54.1 million, a decrease of RMB61.2 million, or 53.1%, as compared to 2020. The decrease was mainly due to the decrease in loss on impairment of assets held for sale and depreciation of property, plant, and equipment.

Other Expense

Total other expense is a combination of interest income, interest expense, and other income (expense). Total other income during the year ended December 31, 2021, was RMB0.5 million (US$0.1 million), compared to total other expenses of RMB7.9 million in 2020. This increase was mainly attributed to the increased interest income and decreased interest expense.

Income Tax Expense

Income tax expense during the year ended December 31, 2021, was RMB6.0 million (US$0.9 million) compared to an income tax benefit of RMB6.1 million during 2020, which was mainly attributable to tax effect change in deferred tax during 2021. We did not recognize deferred tax assets for the loss of previous years after considering the possibility of realizing the benefits under the conservatism principle.

Fiscal year ended 2020 compared to the fiscal year ended 2019

Revenues

Our revenue can be analyzed as follows (in thousands):

For the year ended December 31,

2020

2019

    

RMB

    

US$

    

% of Total

    

RMB

    

% of Total

    

Stamping and transfer film

95,459

14,629

28.3

%  

116,681

34.8

%

Printing film

21,968

3,367

6.5

%  

33,877

10.1

%

Metalized film

3,927

602

1.2

%  

5,493

1.6

%

Specialty film

204,686

31,370

60.8

%  

162,432

48.4

%

Base film for other applications

10,715

1,642

3.2

%  

17,137

5.1

%

336,755

51,610

100

%  

335,620

100

%

During the fiscal year ended December 31, 2020, net revenues were RMB336.8 million (US$51.6 million), compared to RMB335.6 million in 2019, representing an increase of RMB1.2 million, or 0.4%. The decrease in average sales price caused a decrease of RMB0.5 million, which was more than offset by an increase of RMB1.7 million that resulted from the sales volume increase.

In 2020, sales of specialty films were RMB204.7 million (US$31.4 million), or 60.8% of our total revenues as compared to RMB162.4 million, or 48.4% in 2019, which increased by RMB42.3 million, or 26.0% over 2019. The increase in sales volume led to an increase of RMB49.2 million, which was partially offset by an RMB6.9 million decrease that resulted from the decline in average sales price.

Overseas sales were RMB27.0 million (US$4.1 million), or 8.0% of total revenues, compared with RMB47.6 million, or 14.2% of total revenues in 2019. The increase in average sales price caused an increase of RMB0.6 million, and the decrease in sales volume caused a decrease of RMB21.2 million.

48

The following is a breakdown of domestic versus overseas sales for the years ended December 31, 2020, and 2019 (amounts in thousands):

For the year ended December 31,

2020

2019

    

RMB

    

US$

    

% of Total

    

RMB

    

% of Total

    

Sales in China

309,801

47,479

92.0

%  

288,066

85.8

%

Sales in other countries

26,954

4,131

8.0

%  

47,554

14.2

%

336,755

51,610

100.0

%  

335,620

100.0

%

Cost of Goods Sold

The cost of goods sold during 2020 totaled RMB200.1 million (US$30.7 million) as compared to RMB252.0 million in the prior year, resulting in a decrease of RMB51.9 million, or 20.6% below 2019. The decline in the unit cost of goods sold caused a decrease of RMB53.2 million, and the increase in sales volume led to an increase of RMB1.3 million. The decrease in the cost of goods was mainly due to the price decrease of raw materials.

Gross Profit

Our gross profit for the year ended December 31, 2020, was RMB136.7 million (US$21.0 million), compared to RMB 83.6 million in 2019. Our average unit sales price decreased by 0.2% compared to last year. The unit sales cost decreased by 21.0% due to the price decrease in main raw materials. Consequently, the decrease in the cost of goods sold per unit in product exceeded that of sales price during 2020 compared with 2019, which increased our gross profit. Our gross margin was 40.6% for the year 2020, compared to a gross margin of 24.9% in 2019. The gross margin increased by 15.7 percentage points compared to the same period in 2019.

Operating Expenses

Our operating expenses during the year ended December 31, 2020, were RMB115.3 million, an increase of RMB54.8 million, or 90.6%, compared to 2019. The increase was mainly due to the increased loss on impairment of assets held for sale.

Other Expense

Total other expense is a combination of interest income, interest expense, and other income (expense). The total other expense during the year ended December 31, 2020, was RMB7.9 million (US$1.2 million), compared to the total other expense of RMB9.4 million in 2019. This decrease was mainly attributed to the increased interest income and decreased interest expense.

Income Tax Expense

Income tax profit during the year ended December 31, 2020, was RMB6.1 million (US$0.9 million) compared to income tax expense of RMB2.3 million during 2019, which was mainly attributable to the tax effect change in deferred tax during 2020. We did not recognize deferred tax assets for the loss of previous years after considering the possibility of realizing the benefits under the conservatism principle.

Liquidity and Capital Resources

Since inception, our sources of cash were mainly from cash generated from our operations and loans from financial institutions, and capital contributed by our shareholders.

Our capital expenditures in 2021 were primarily financed through operating activities, short-term loans from financial institutions, and related parties. The interest rates of short-term loans from financial institutions during the three-year period from 2019 to 2021 ranged from 5.22% to 6.5%, and these loans may not be paid prior to maturity.

49

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, 2021, we had a loan of RMB65.0 million from the 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 lender’s 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 RMB105.0 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 the availability of new loans from banks or other financial institutions.

On June 23, 2020, Shandong SNTON Group Co., Ltd. (the “SNTON Group”) transferred its equity in Hongkong Ruishang International Trade Co., Ltd. (“Hongkong Ruishang”) to Shanghai Meicheng Enterprise Management Co., Ltd., (“Shanghai Meicheng”). SNTON Group previously held the Company’s 52.9% controlling outstanding ordinary shares (the “Shares”) indirectly through Hongkong Ruishang. As a result of this transfer, there is no longer relationship between the Company and Shandong SNTON.

According to the credit of assignment agreement between Shandong SNTON and Shandong Shengjia Industrial Park Operation and Management (“Shandong Shengjia”), Shandong SNTON transferred its right of credit in the Company to Shandong Shengjia. Shandong Shengjia further transferred it to Shanghai Meicheng. As of December 31, 2021, we have paid off all the principal and interest to Shanghai Meicheng.

The credit line amounting to RMB95.0 million (US$14.9 million) was granted by the Bank of Weifang. The term ranges from July 2021 to July 2026. It was secured by a pledge of plant and land use rights. The credit line was used to purchase raw materials. As of December 31, 2021, the amount of credit line granted by the Bank of Weifang was all used.

We believe that, after taking into consideration our present and future banking facilities, loan from a 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.

50

A summary of our cash flows for 2021, 2020, and 2019 is as follows (in thousands):

2021

2020

2019

    

RMB

    

US$

    

RMB

    

RMB

Net cash provided by (used in) operating activities

79,949

12,544

117,536

54,366

Net cash (used in) provided by investing activities

116,475

18,278

(11,257)

(12,559)

Net cash provided by (used in) financing activities

(38,445)

(6,033)

(71,726)

(2,344)

Effect of foreign exchange rate changes

445

(1)

Net increase (decrease) in cash and cash equivalent

157,979

25,234

34,552

39,463

Cash and cash equivalent, restricted cash

  

  

At the beginning of the year

120,923

18,532

86,371

46,908

At the end of the year

278,902

43,766

120,923

86,371

Operating Activities

Net cash provided by operating activities was RMB79.9 million for the year ended December 31, 2021.

Net cash provided by operating activities was RMB117.5 million for the year ended December 31, 2020.

Net cash provided by operating activities was RMB54.4 million for the year ended December 31, 2019.

Investing Activities

Net cash provided by investing activities was RMB116.5 million in 2021, mainly attributable to the sale of fixed assets.

Net cash used in investing activities was RMB11.3 million in 2020, mainly attributable to the increased expenditure on purchasing fixed assets.

Net cash used in investing activities was RMB12.6 million in 2019, mainly attributable to the increased expenditure on purchasing fixed assets.

Financing Activities

Net cash used in financing activities was RMB38.4 million for the year ended December 31, 2021, which was mainly due to changes in the amount of notes payable and loans from a related party.

Net cash used in financing activities was RMB71.7 million for the year ended December 31, 2020, which was mainly due to changes in the amount of notes payable and loans from a related party.

Net cash used in financing activities was RMB2.3 million for the year ended December 31, 2019, mainly due to changes in the amount of notes payable and loans from related parties.

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.

51

Transactions

To a certain extent, we are 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 2021, 2020, and 2019, approximately 90.1%, 92.0%, and 85.8%, respectively, of our revenue was denominated in RMB and the remainder in US dollar. The proportion of raw materials purchased within the PRC during 2021, 2020, and 2019 were 100%, 100%, and 100.0%, respectively.

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 converting 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 2021, 2020, and 2019 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 consider hedging any material foreign exchange exposure should such a need arise.

Capital Expenditures and Contractual Commitments

Capital Expenditures

Our capital expenditures in 2021, 2020, and 2019 were as follows (in thousands):

For the year ended December 31,

2021

2020

2019