UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2009
or
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _____________
Commission File No. 333-134073
CHINA XD PLASTICS COMPANY LIMITED
(Exact name of registrant as specified issuer in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
04-3836208
(I.R.S. Employer Identification No.)
No. 9 Qinling Road, Yingbin Road Centralized Industrial Park, Harbin Development Zone,
Heilongjiang, P.R. China
(Address of principal executive offices)
150078
(Zip Code)
Registrant’s telephone number, including area code: 86-451-84346600
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock, par value $0.0001
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1934. Yes
o No
x
Indicate by checkmark whether the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Exchange Act. Yes
o No x
Indicate by checkmark 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 x
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted 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 and post such files). Yes o No x
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
o
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large
accelerated filer,” "accelerated filer,” and "smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(do not check if a smaller reporting company)
Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
o No
x
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2009 is approximately $19,871,383.
As of April 8, 2010, there were 44,007,589 issued and outstanding shares of the issuer’s common stock.
Explanatory Note
This Annual Report on Form 10-K contains a restatement of our Consolidated Balance Sheet as of December 31, 2008 and our Consolidated Statements of Income and Other
Comprehensive Income, Stockholders’ Equity and Cash Flows for the year ended December 31, 2008, and Selected Consolidated Financial Data as of and for each of the three
quarters in the year ended December 31, 2009.
During the routine course of internal review and internal audit, we have identified and determined a non-cash error regarding the accounting for recognition of stock options
granted to our Chairman and CEO, Mr. Jie Han (the "Options”), pursuant to the requirements of Financial Accounting Standards Board Accounting Standards Codification
("ASC”) Topic 718. As previously disclosed, our Chairman and CEO, Mr. Jie Han entered into an option agreement with Ellie Qiuyao Piao ("Ms. Piao”), the sole shareholder of
XD Engineering Plastics Company Limited ("XD Engineering”), which was the principal shareholder of our subsidiary Favor Sea Limited ("Favor Sea BVI”) before the reverse
merger on May 16, 2008. Pursuant to the option agreement, the Options were granted to Mr. Han by Ms. Piao. The agreement provides that Mr. Han may purchase from Ms.
Piao for a nominal price all of the outstanding equity in XD Engineering if, on a consolidated basis, the consolidated revenue of Favor Sea BVI, which indirectly owns our
operating subsidiaries Harbin Xinda Macromolecule Material Co., Ltd. and Harbin Xinda Macromolecule Material Research Institute achieves certain revenue thresholds. Mr.
Han may purchase 25% of the total outstanding equity in XD Engineering if Favor Sea BVI’s consolidated revenue during the first three quarters of 2008 exceeds $40 million.
He may purchase 14% of the total outstanding equity in XD Engineering if Favor Sea BVI’s consolidated revenue during the first three quarters of 2009 exceeds $70 million. He
may purchase 61% of the total outstanding equity in XD Engineering if Favor Sea BVI’s consolidated revenue during the first three quarters of 2010 exceeds $110 million. The
purpose of the Options is to enable Mr. Han to re-acquire ultimately the legal ownership of China XD Plastics Company Limited in compliance with the laws and regulations of
the People’s Republic of China.
In accordance with ASC Topic 718, the Options should have been accounted for in the Company’s consolidated financial statements as share-based payments awarded to an
employee by a related party as compensation for services rendered.
Our consolidated retained earnings as of December 31, 2008 and June 30, 2009 incorporate a non-cash charge of approximately $5.5 million and $8.6 million, respectively,
accounted for the above mentioned option grant arrangement. The stock-based compensation expenses of $5.5 million and $3.1 million, respectively, have been recorded to
general and administrative expenses in the Consolidated Statements of Income and Other Comprehensive Income for the year ended December 31, 2008 and second quarter in
the year ended December 31, 2009.
All financial information contained in this Annual Report on Form 10-K gives effect to the restatements of our Consolidated Financial Statements as described above. We have
not amended, and we do not intend to amend, our previously filed Annual Reports on Form 10-K for the fiscal year of 2008 or Quarterly Reports on Form 10-Q for each of fiscal
quarters of 2009. Financial information included in reports that we previously filed or furnished for the periods from December 31, 2008 through September 30, 2009 should not
be relied upon and are superseded by the information in this Annual Report on Form 10-K.
CHINA XD PLASTICS COMPANY LIMITED
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Table of Contents
PART I
PART II
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Exhibits, Financial Statement Schedules
PART IV
Financial Statements
Index of Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income and Other Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
As used herein, "China XD,” "we,” "us,” "our” and the "Company” refers to China XD Plastics Company Limited.
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F-1
F-2 to F-3
F-4
F-5
F-6
F-7
F-8 to F-
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ITEM 1. BUSINESS.
PART I
China XD Plastics Company Limited ("China XD Plastics”), formerly known as NB Telecom, Inc ("NB Telecom”). was originally incorporated as NB Payphones Ltd. under the
laws of the state of Pennsylvania on November 16, 1999. On December 27, 2005, we migrated our state of organization to the state of Nevada and effective March 23, 2006, our
name changed to NB Telecom.
On December 24, 2008, NB Telecom acquired all of the outstanding capital stock of Favor Sea Limited ("Favor Sea BVI”), a British Virgin Islands corporation, whose assets,
held through its subsidiaries, are 100% of the registered capital of Harbin Xinda Macromolecule Material Co., Ltd. ("Harbin Xinda”), a limited liability company established
under the laws of the People’s Republic of China ("China” or "PRC”) and Harbin Xinda’s wholly-owned subsidiary, Harbin Xinda Macromolecule Material Research Institute
(the "Research Institute”). Harbin Xinda is a manufacturer and developer of modified plastics. Harbin Xinda is a high-tech company that was founded in September 2004 under
the laws of the PRC with registered capital of 20 million RMB (USD$2,416,451). Harbin Xinda’s executive offices and manufacturing facilities are located at No. 9 Qinling Road,
Yingbin Road Centralized Industrial Park and No. 9 Dalian North Road, Haping Road Centralized Industrial Park, Harbin Development Zone, Heilongjiang Province, in northeast
China. Harbin Xinda engages in the development, manufacture, and distribution of modified plastic, primarily for use in automobiles. The technology that has enabled Harbin
Xinda to become China’s leading producer of automotive modified plastics derives from our wholly-owned research laboratory, the Research Institute, a subsidiary established
in 2007. The Research Institute has developed into a leader in research and development for China’s macromolecular industry. The Research Institute is outfitted with more
than 80 sets of testing, analytical and production equipment used to analyze the physical and mechanical properties of the heat resistances, durability, stability, and
environmental performance exhibited by modified plastics.
In connection with the acquisition, the Company entered into an Agreement and Plan of Merger (the "Agreement”) by and among the NB Telecom, Favor Sea BVI, and the
shareholders of Favor Sea BVI including the principal shareholder, XD Engineering Plastics Company Limited ("XD Engineering”), a British Virgin Islands corporation. The
Company acquired all of the outstanding capital stock of Favor Sea BVI. In connection with the acquisition, and in exchange for the outstanding stock of Favor Sea BVI, the
shareholders of Favor Sea BVI received 50,367,778 shares of the common stock of the Company and 1,000,000 shares of convertible Series A preferred stock of the Company,
and XD Engineering individually received 1,000,000 shares of Series B preferred stock of the Company (the "Merger”). Subsequent to the Merger and as a direct consequence,
the name of the Company was changed to "China XD Plastics Company Limited” pursuant to Chapter 92A the Revised Nevada Statutes in connection with the Merger. The
50,367,778 shares of common stock were converted into 405,802 shares post a reverse stock split of 124.1 for 1 pursuant to Nevada Revised Statutes Section 78.207 for both the
total number of authorized shares of common stock and the total number of issued and outstanding shares of common stock. The 1,000,000 shares of convertible Series A
preferred stock of the Company are convertible into approximately 1:38.2 into 38,194,072 shares of the common stock of the Company. Assuming the conversion of the Series A
preferred stock of the Company, the shareholders of Favor Sea BVI will own approximately 99% of the Common Stock of the Company.
Modified plastic is produced by changing the physical and/or chemical characteristics of ordinary resin materials. In order for plastics to be used in the automobile
environment, they must satisfy certain physical criteria in terms of electro-magnetic characteristics, reaction to light and heat, durability, flame resistance, and mechanical
functionality. Harbin Xinda’s unique formulas and processing techniques enable us to produce low-cost high-quality modified plastic materials, which have been accepted by
many of the major automobile manufacturers in China. In addition, we also provide specially engineered plastics and environment-friendly plastics for use in the assembly of
equipment for oilfields, mining, ship power, power station equipment, and other industries.
Harbin Xinda’s primary market is the rapidly expanding Chinese automotive industry. In 2009, 13.6 million automobiles were sold in China, which increased by 44.7% from the
previous year. It is estimated that the Chinese auto market will grow by 15% annually in the coming years. Each automobile requires 100 kg to 150 kg of modified plastic, which
means that by 2010 the demand for modified plastic in the Chinese automobile industry will be approximately 1.6 million tons annually. Harbin Xinda’s existing facility has an
annual production capacity of 100,000 tons.
Our specialized plastics are utilized in the exterior and interior trim and in the functional components of more than 30 automobile brands manufactured in China, including Audi,
Red Flag, Volkswagen and Mazda. At present, 145 of 263 Harbin Xinda’s automotive-specific modified plastic products have been certified for use by one or more of the
automobile manufacturers in China. The automotive applications for our plastics include exteriors (automobile bumpers, rear- and side- view mirrors, license plate), interiors
(door panels, dashboard, steering wheel, glove compartment and safety belt components), and functional components (air conditioner casing, heating and ventilation casing,
engine covers, and air ducts).
2
Our products are organized into seven categories, based on their physical characteristics:
Modified Polypropylene:
•
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COMPNIPER: a form of modified polypropylene that exhibits high fluidity and impact resistance. These products are primarily used for the interior automobile parts,
such as the inner panels, instrument panels, and box lids. 45 of these products have been certified for use in the Chinese auto industry.
COMPWIPER: a form of modified polypropylene that exhibits low-temperature-resistance and impact resistance. These products are primarily used for external
automobile parts, such as the front and back bumpers and mudguards. 25 of these products have been certified for use in the Chinese auto industry.
COMPGOPER: a form of modified polypropylene that exhibits high-temperature-resistance and resistance to static. These products are used primarily for automobile
functional components, such as the unit heater shells and air conditioner shells. 38 of these products have been certified for use in the Chinese auto industry.
Modified ABS:
•
MOALLOLY: a form of modified ABS (acrylonitrile butadiene styreme) plastic that exhibits high gloss, high rigidity, and size stability. These products are primarily
used for automobile functional components, such as the heat dissipating grid and wheel covers. 7 of these products have been certified for use in the Chinese auto
industry.
Modified Nylon:
•
POLGPAMR: a form of modified nylon that exhibits high wear and heat resistance. These products are primarily used for automotive parts requiring high flame and
heat resistance. 10 of these products have been certified for use in the Chinese auto industry.
Engineering Plastic:
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MOAMIOLY: a wear-resistant form of engineering plastic. These products are primarily used for the engine hood, intake manifold, and bearings. 9 of these products
have been certified for use in the Chinese auto industry.
Alloy Plastic:
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BRBSPCL: a form of alloy plastic. These products are used primarily for the rearview mirror, grille, automotive electronics and other components. The products can
also be used in computers, plasma TVs, mobile phones and other electronic and electrical consumer products. 6 of these products have been certified for use in the
Chinese auto industry.
Environment-friendly Modified Plastic:
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POLGBSMR: an environment-friendly form of modified plastic, is used in automobiles with environmental standard requirements. 5 of these products have been
certified for use in the Chinese auto industry.
Modified Plastic for Special Engineering:
•
PEEK: a special engineering form of modified plastic that can be used in communication and transportation, electronic and electric appliance, machinery, medical
equipment and analytical equipment. Harbin Xinda is developing products in this field based on years of research findings. However, none of these products have
been certified for use in the auto industry.
Raw Materials
The principal raw materials used for the production of the Company’s products are plastic resins such as polypropylene, ABS and nylon. Nearly 50% of these raw materials
come from overseas petrochemical enterprises, and 50% from domestic petrochemical enterprises. All of our contracts for raw materials are one-year renewable contracts.
3
•
•
•
Polypropylene is a chemical compound manufactured from petroleum.
Acrylonitrile Butadiene Styrene (ABS) is a common thermoplastic used to make light, rigid, molded products such as automotive body parts and wheel
covers.
Nylon is a thermoplastic silky material.
Currently we have adequate access to these raw materials by dealing with major suppliers in the industry. Harbin Xinda has one-year renewable contracts with its major
suppliers. Because the raw materials are mostly petroleum products, the rise of oil price will directly affect the cost for the raw materials. However, in that event, we should be
able to pass the cost to our customers by raising the price for our products.
Because raw materials constitute a substantial part of the cost of our products, we seek to reduce the cost of raw materials by dealing with two major suppliers: Dalian Free
Trade Zone Mankeri International Trade Co., Ltd. ("Mankeri”), and Dalian Lanhai International Trade Co., Ltd ("Dalian Lanhai”). During the year ended on December 31, 2009,
Harbin Xinda purchased approximately 48.4% of its raw materials from Mankeri and 49.7% from Dalian Lanhai. In 2008 we purchased 65.6% of our raw materials from Mankeri,
and 29.5% from Dalian Lanhai . By dealing with these major suppliers, Harbin Xinda obtains reduced prices for raw materials, and thus reduces the cost of our products. If we
were unable to purchase from Mankeri or Dalian Lanhai, we would still have adequate sources of raw materials from other petrochemical dealers at similar cost.
Intellectual Property
Our Research Institute, Xinda Macromolecule Material Research Institute, was organized to provide us with ongoing additions to our technology, which represents the key to
our competitive success. Our goal is to utilize state-of-the-art methods and equipment to produce plastics of the highest quality that are cost-efficient for our customers.
Toward this end, we have staffed the Research Institute with 77 researcher employees, over 90% of whom have advanced degrees or specialized undergraduate training.
To supplement the efforts of our Research Institute, we have developed cooperative research programs with a number of the leading technology centers in China, including the
Changchun Institute of Applied Chemistry of the Chinese Academy of Science, the Beijing Chemical Engineering Institute, the Harbin Institute of Technology, the Northeast
Forestry University, Jilin University, and Changchu University of Technology. Besides providing specialized research and development skills, these relationships help us to
formulate cutting edge research programs aimed at addressing developing issues in plastics engineering.
All our significant research and development activities are overseen by the members of our Scientific Advisory Board, which we have assembled from among the leaders in
China’s chemical engineering industry. Currently, the members of the Scientific Advisory Board are:
•
•
•
•
•
•
Wu Zhongwen: Director of the Research Institute of Special Plastics Engineering of Jilin University.
Zheng Kai: Secretary General of China’s Plastics Engineering Industry Association.
Zhang Huixuan: Vice Principal of Changchun University of Technology.
Li Bin: Dean of the Science Department at Eastern Forest Industry University.
Xing Yuqing: Director of the Teaching and Research Section of the Chemical Engineering Department at Harbin Institute of Technology.
Jiang Zhenhua: Director of the Engineering Research Center of the Special Plastics Engineering Education Department of Jilin University.
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Patents
As a result of our collection of academic and technological expertise, we have a portfolio of 11 patents for which we have applications pending in China which are set forth in
the following table.
No.
Patent Name
Patent Application No.
Application Date and Status
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Measures for efficient recycling and circulating usage of waste
and old plastics
Special engineering plastics dedicated to military industry
products
Special materials for wall tubes of polyethylene winding
structure of tube inbuilt technology without opening tank lid
Stuffing master batch material dedicated to polypropylene
resin
200510010540.9
November 15, 2005, pending
200510010543.2
November 15, 2005, pending
200510010541.3
November 15, 2005, pending
200510010542.8
November 15, 2005, pending
Special materials for air inflow manifold of automobile engine
200710072563.1
July 25, 2007, pending
High-luster low shrinkage ratio nano polypropylene modified
compound and its manufacturing methods
Strengthened toughened aging resistant polypropylene/nano
calcium carbonate compound material and its manufacturing
methods
200510010539.6
November 15, 2005, pending
200510010538.1
November 15, 2005, pending
Green inflaming-retardant ABS alloy
200610009836.3
March 21, 2006, pending
Compound nano special materials dedicated to automobile
bumper
High-performance special polypropylene materials dedicated
to automobile
Carbon fibre reinforced nylon composites for centralizer in the
application of oil field
200510010066.x
June 6, 2005, pending
200610009837.8
March 21, 2006, pending
200910071782.7
April 15, 2009, pending
Trademark
We own the trademarks for our graphic logo and Chinese characters of "Xinda”, which we use in packaging our products and marketing ourselves.
Marketing
Currently Harbin Xinda’s sales network mainly covers the northeastern region of China. In 2009 and 2008, approximately 80% and 91% of our sales were derived from the
northeastern market, with continuing expansion into the northern and eastern regions of China.
Harbin Xinda sells directly to its customers or indirectly through its distributors and provides full after-sale services to all customers. These customers are usually the major
automobile parts manufacturers who relies on our product certifications granted by major automobile manufacturers.
5
We enter into Sales Agency Agreements with local agents in areas where large automobile manufacturers are located. The sales agents are responsible for developing the
markets for our products and collecting payments from our customers. In distributing our products during the agency period, the agents are required to use Harbin Xinda’s
product certificate, brand and package standards set by us. They must also reimburse us the amount of payment that the customers fail to make within our collection period.
After the termination of the agency relationship, the customers developed by the agents are proprietary to Harbin Xinda.
Sales to one major distributor accounted for approximately 83% and 81% of the Company’s sales for the years ended December 31, 2009 and 2008, respectively.
During the past three years, the Company has sold most of its products in the three northeastern provinces of China: Heilongjiang, Jilin, and Liaoning. In addition, the
Company has supplied to customers in Northern part of China, including Beijing, Tianjin, and Hebei province in 2009. We expect to develop more customers in the cities and
provinces located in the Northern and Eastern part of China, such as Shanghai and Zhejiang Province.
No single customer accounted for more than 10% of our sales during the years ended on December 31, 2009 or 2008.
Competition
Currently Harbin Xinda’s primary Chinese competitor in the automobile industry is a large industrial company named Guangzhou Kingfa Science & Technology Co., Ltd.
("Guangzhou Kingfa”). Guangzhou Kingfa entered the market in 2006 and its facilities have a manufacturing capacity of 100,000 tons. Guangzhou Kingfa has much larger
financial resources than Harbin Xinda. Currently, however, it has fewer certified products and sells less modified plastic to the automobile industry than Harbin Xinda.
The Chinese auto market is dominated, however, by modified plastic manufactured overseas or in factories controlled by foreign companies. Almost 60% of the modified plastic
used in Chinese automobiles is manufactured by non-Chinese fabricators, primarily manufacturers from Germany, the Netherlands and Japan. Although Harbin Xinda and its
Chinese competitors compare very favorably with these foreign competitors in terms of price, service and delivery times, the lack of production capacity in the Chinese
modified plastics industry has allowed the foreign competition to remain dominant in that industry.
Employees
Harbin Xinda’s operations are organized into seven operational departments such as technologies, sales, supply, R&D and finance. There are currently 396 employees,
including 153 in manufacturing, 77 in research and development, 47 in management, 17 in financial department, 30 in sales, purchasing and marketing and 72 in other
departments. 87 out of the 396 employees are temporary hires as reserve for full-time positions.
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Item 1A.
Risk Factors
You should carefully consider the risks described below before buying our common stock. If any of the risks described below were realized, that event could cause the
trading price of our common stock to decline, and you could lose all or part of your investment.
Risks related to doing business in China
Our business operations are conducted entirely in China. Because China’s economy and its laws, regulations and policies are different from those typically found in the west
and are continually changing, we will face risks including those summarized below.
China is a developing nation governed by a one-party government and may be more susceptible to political, economic, and social upheaval than other nations.
China is a developing country governed by a one-party government. China is also a country with an extremely large population, widening income gaps between rich and poor
and between urban and rural residents, minority ethnic and religious populations, and growing access to information about the different social, economic, and political systems
to be found in other countries. China has also experienced extremely rapid economic growth over the last decade, and its legal and regulatory systems have changed rapidly to
accommodate this growth. These conditions make China unique and may make it susceptible to major structural changes. Such changes could include a reversal of China’s
movement to encourage private economic activity, labor disruptions or other organized protests, nationalization of private businesses, internal conflicts between the police or
military and the citizenry, and international political or military conflict. If any of these events were to occur, it could shut down China’s economy and cause us to temporarily
or permanently cease operations.
The PRC’s laws, regulations and policies, and changes to them, may limit our ability to operate profitably or prevent us from operating at all.
Our stores and distribution centers, as well as our suppliers and the agricultural producers on whom they depend, are located in China. The PRC government has exercised and
continues to exercise substantial control over virtually every sector of the Chinese economy, including the production, distribution and sale of our merchandise. In particular,
we are subject to regulation by local and national branches of the Ministries of Commerce and Transportation, as well as the General Administration of Quality Supervision, the
State Administration of Foreign Exchange, and other regulatory bodies. In order to operate under PRC law, we require valid licenses, certificates and permits, which must be
renewed from time to time. If we were to fail to obtain the necessary renewals for any reason, including sudden or unexplained changes in local regulatory practice, we could be
required to shut down all or part of our operations temporarily or permanently.
Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to agriculture, taxation, land use rights and other matters. Such
changes could be made at the national or local level and in the form of: farm subsidies; corporate tax rates; employee benefits; leaseholder or land-use rights; enforceability of
contracts; intellectual property; or retail pricing. The effects of such changes on our business cannot be predicted but could be significant.
All of our assets are located in China. So any dividends or proceeds from liquidation are subject to the approval of the relevant Chinese government agencies.
Our assets are located inside China. Under the laws governing FIEs in China, dividend distribution and liquidation are allowed but subject to special procedures under the
relevant laws and rules. Any dividend payment will be subject to the decision of the board of directors and subject to foreign exchange rules governing such repatriation. Any
liquidation is subject to both the relevant government agency’s approval and supervision as well the foreign exchange control. This may generate additional risk for our
investors in case of dividend payment or liquidation.
Because our funds are held in banks which do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.
Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. As a result, in the event of a bank failure, we may not have access to
funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not
able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.
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Anti-inflation measures may be ineffective or harm our ability to do business in China.
In recent years, the PRC government has instituted anti-inflationary measures to curb the risk of an overheated economy characterized by debilitating inflation. These measures
have included devaluations of the renminbi, restrictions on the availability of domestic credit, and limited re-centralization of the approval process for some international
transactions. These austerity measures may not succeed in slowing down the economy’s excessive expansion or control inflation, or they may slow the economy below a
healthy growth rate and lead to economic stagnation or recession; in the worst-case scenario, the measures could slow the economy without curbing inflation. The PRC
government could adopt additional measures to further combat inflation, including the establishment of price freezes or moratoriums certain projects or transactions. Such
measures could harm the economy generally and hurt our business by limiting the income of our customers available to purchase our merchandise, by forcing us to lower our
profit margins, and by limiting our ability to obtain credit or other financing to pursue our expansion plans or maintain our business.
Governmental control of currency conversions may affect the value of your investment.
All of our revenue is earned in renminbi, and any future restrictions on currency conversions may limit our ability to use revenue generated in renminbi to make dividend or
other payments in U.S. dollars. Although the PRC government introduced regulations in 1996 to allow greater convertibility of the renminbi for current account transactions,
significant restrictions still remain, including primarily the restriction that foreign-invested enterprises like us may buy, sell or remit foreign currencies only after providing valid
commercial documents at a PRC banks specifically authorized to conduct foreign-exchange business.
In addition, conversion of renminbi for capital account items, including direct investment and loans, is subject to governmental approval in the PRC, and companies are
required to open and maintain separate foreign-exchange accounts for capital account items. There is no guarantee that PRC regulatory authorities will not impose additional
restrictions on the convertibility of the renminbi. Such restrictions could prevent us from distributing dividends and thereby reduce the value of our stock.
The fluctuation of the exchange rate of the renminbi against the dollar could reduce the value of your investment.
The value of our common stock will be affected by the foreign exchange rate between U.S. dollars and renminbi. For example, to the extent that we need to convert U.S. dollars
we receive from an offering of our securities into renminbi for our operations, appreciation of the renminbi against the U.S. Dollar could reduce the value in renminbi of our
funds. Conversely, if we decide to convert our renminbi into U.S. dollars for the purpose of declaring dividends on our common stock or for other business purposes and the
U.S. dollar appreciates against the renminbi, the U.S. dollar equivalent of our earnings from The Company, our subsidiary in China, would be reduced. In addition, the
depreciation of significant U.S. Dollar-denominated assets could result in a charge to our income statement and a reduction in the value of these assets.
On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the renminbi to the U.S. Dollar. Under the new policy, the renminbi is permitted to
fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an appreciation of the renminbi against the
U.S. dollar of approximately 18% from July 21, 2005 to December 31, 2009. While the international reaction to the renminbi revaluation has generally been positive, there remains
significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the
renminbi against the U.S. Dollar.
We receive all of our revenues in renminbi. The PRC government imposes controls on the convertibility of renminbi into foreign currencies and, in certain cases, the remittance
of currency out of the China. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy
foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest
payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange ("SAFE”) by
complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where renminbi are to be converted into foreign
currency and remitted out of the PRC to pay capital expenses, such as the repayment of bank loans denominated in foreign currencies.
The PRC government could also restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from
obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain expenses as they become due.
8
Recently-modified SAFE regulations may restrict our ability to remit profits out of China as dividends.
SAFE Regulations regarding offshore financing activities by PRC residents have recently undergone a number of changes which may increase the administrative burdens we
face. The failure of our stockholders who are PRC residents to make any required applications and filings pursuant to these regulations may prevent us from being able to
distribute profits and could expose us and our PRC-resident stockholders to liability under PRC law.
SAFE issued a public notice (the "October Notice”), effective as of November 1, 2005, and implementation rules in May 2007, which require registration with SAFE by the PRC-
resident stockholders of any foreign holding company of a PRC entity. These regulations apply to our stockholders who are PRC residents. In the absence of such registration,
the PRC entity cannot remit any of its profits out of the PRC as dividends or otherwise.
In the event that our PRC-resident stockholders have not followed the procedures required under the October Notice and its implementation rules, we could lose the ability to
remit monies outside of the PRC and would therefore be unable to pay dividends or make other distributions, and we could face liability for evasion of foreign-exchange
regulations. Such consequences could affect our good standing under PRC regulations and our ability to operate in the PRC, and could therefore diminish the value of your
investment.
China’s legal and judicial system may not adequately protect our business and operations and the rights of foreign investors.
China’s legal and judicial system may negatively impact foreign investors. In 1982, the National People’s Congress amended the Constitution of China to authorize foreign
investment and guarantee the "lawful rights and interests” of foreign investors in the China. However, the China’s system of laws is not yet comprehensive. The legal and
judicial systems in the China are still rudimentary, and enforcement of existing laws is inconsistent. Many judges in China lack the depth of legal training and experience that
would be expected of a judge in a more developed country. Because the China judiciary is relatively inexperienced in enforcing the laws that do exist, anticipation of judicial
decision-making is more uncertain than would be expected in a more developed country. It may be impossible to obtain swift and equitable enforcement of laws that do exist, or
to obtain enforcement of the judgment of one court by a court of another jurisdiction. The China’s legal system is based on civil law, or written statutes; a decision by one
judge does not set a legal precedent that must be followed by judges in other cases. In addition, the interpretation of Chinese laws may vary to reflect domestic political
changes.
As a matter of substantive law, the foreign-invested enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full
enjoyment of the benefits of corporate articles and contracts to foreign-invested enterprise participants. These laws, however, do impose standards concerning corporate
formation and governance, which are qualitatively different from the general corporation laws of the United States. Similarly, the PRC accounting laws mandate accounting
practices that are not consistent with U.S. generally accepted accounting principles. PRC accounting laws require that an annual "statutory audit” be performed in accordance
with PRC accounting standards and that the books of account of foreign-invested enterprises are maintained in accordance with Chinese accounting laws. Article 14 of the
PRC Wholly Foreign-Owned Enterprise Law requires a wholly foreign-owned enterprise to submit certain periodic fiscal reports and statements to designated financial and tax
authorities, at the risk of business license revocation. Our subsidiary, Harbin Xinda Macromolecule Material Co, Ltd., is a wholly foreign-owned enterprise and is subject to
these regulations.
As a matter of enforcement, although the enforcement of substantive rights may appear less clear than in the U.S., foreign-invested enterprises and wholly foreign-owned
enterprises are PRC-registered companies, which enjoy the same status as other PRC-registered companies in business-to-business dispute resolution. Because the Articles of
Association of the Company do not specify a method for the resolution of business disputes, the Company and other parties involved in any business dispute are free to
proceed either in the Chinese courts or, if they are in agreement, through arbitration. Under PRC law, any award rendered by an arbitration tribunal is enforceable in accordance
with the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Therefore, PRC laws relating to business-to-business dispute resolution
should not work to the disadvantage of foreign-invested enterprises such as the Company.
However, the PRC laws and regulations governing our current business operations are sometimes vague and uncertain. There are substantial uncertainties regarding the
interpretation and application of PRC laws and regulations, including but not limited to the laws and regulations governing our business and the enforcement and performance
of our arrangements with suppliers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. We and any future subsidiaries are considered
foreign persons or foreign-invested enterprises under PRC laws, and as a result, we are required to comply with PRC laws and regulations. These laws and regulations are
sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly
enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed
future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.
9
In addition, some of our present and future executive officers and directors, most notably Mr. Jie Han, may be residents of the PRC and not of the United States, and
substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors to effect service of process in the United States,
or to enforce a judgment obtained in the United States against us or any of these persons.
Risks related to our business
Our limited operating history makes it difficult to evaluate our future prospects and results of operations.
We have a limited operating history. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early-stage companies in
evolving markets such as China. Some of these risks and uncertainties relate to our ability to:
•
•
•
•
•
•
•
•
offer new products to attract and retain a larger customer base;
increase awareness of our brand and continue to develop customer loyalty;
respond to competitive market conditions;
respond to changes in our regulatory environment;
manage risks associated with intellectual property rights;
maintain effective control of our costs and expenses;
raise sufficient capital to sustain and expand our business; and
attract, retain and motivate qualified personnel
Because we are a relatively new company, we may not be experienced enough to address all the risks in our business or in our expansion. If we are unsuccessful in addressing
any of these risks and uncertainties, our business may be materially and adversely affected.
We expect to incur costs related to our planned expansion and growth into new plants and ventures which may not prove to be profitable. Moreover, any delays in our
expansion plans could cause our profits to decline and jeopardize our business.
We anticipate that our proposed expansion of our plants may include the construction of new or additional facilities. Our cost estimates and projected completion dates for
construction of new production facilities may change significantly as the projects progress. In addition, our projects will entail significant construction risks, including
shortages of materials or skilled labor, unforeseen environmental or engineering problems, weather interferences and unanticipated cost increases, any of which could have a
material adverse effect on the projects and could delay their scheduled openings. A delay in scheduled openings will delay our receipt of increased sales revenues, which,
when coupled with the increased costs and expenses of our expansion, could cause a decline in our profits.
Our plans to finance, develop, and expand our facilities will be subject to the many risks inherent in the rapid expansion of a high growth business enterprise, including
unanticipated design, construction, regulatory and operating problems, and the significant risks commonly associated with implementing a marketing strategy in changing and
expanding markets. These projects may not become operational within their estimated time frames and budgets as projected at the time the Company enters into a particular
agreement, or at all. In addition, the Company may develop projects as joint ventures in an effort to reduce its financial commitment to individual projects. The significant
expenditures required to expand our production plants may not ultimately result in increased profits.
10
Our business and operations are growing rapidly. If we fail to effectively manage our operation, our business and operating results could be harmed.
To date we have experienced, and continue to experience, rapid growth in our operations. This has placed, and will continue to place, significant demands on our management,
and on our operational and financial infrastructure. If we do not effectively manage our operations, the quality of our products and services will suffer, which would negatively
affect our operating results. If the necessary funding can be obtained, we will be able to improve our operational, financial and management controls and our reporting systems
and procedures. The complexity of this undertaking means that we are likely to face many challenges, some of which are not yet foreseeable. Problems may occur with our raw
material acquisition, with the roll-out of efficient manufacturing processes, and with our ability to sell our products to our customers. If we are not able to obtain the necessary
funding and operate efficiently, our business plan may fall short of its goals, and our ability to manage our growth could be hurt.
We operate in a highly competitive marketplace, which could adversely affect our sales and financial condition.
We compete on the basis of quality, price, product availability and security of supply, product development and customer service. Some competitors are larger than us in
certain markets and may have greater financial resources that allow them to be in a better position to withstand changes in the industry. Our competitors may introduce new
products based on more competitive alternative technologies that may be causing us to lose customers which would result in a decline in our sales volume and earnings. Our
customers demand high quality and low cost products and services. The cost and availability of energy and strategic raw materials may continue to deteriorate domestically
while improving in the international market, thus advantaging our foreign competition. Any such change in the global market could adversely impact the demand for our
products. Competition could cause us to lose market share and certain lines of business, or increase expenditures or reduce pricing, each of which would have an adverse
effect on our results of operations, cash flows and financial condition.
An inability to protect our intellectual property rights could reduce the value of our products, services and brand.
Our unique technologies and techniques are important assets for us. We have applied to the Chinese government for intellectual property right protection for some of the
technologies that we own. However, this legal effort may sometimes not be sufficient or effective, due to the lack of effective legal enforcement in China. Any significant
impairment of our intellectual property rights could harm our business or our ability to compete. In addition, since protection of our intellectual property rights is costly and
time consuming, any unauthorized use of our to-be-patented technologies could increase our cost of business and eventually harm our operating results. Moreover, since we
only registered intellectual property rights for our technologies in China, our technologies may not be well protected in other countries in which our products may be sold in
the future.
An increase in raw material prices could increase Harbin Xinda’s costs and decrease its profits.
Changes in the cost of raw materials could significantly affect Harbin Xinda’s business. Since cost for raw materials constitute a substantial part of our product price, increase
in the cost of raw materials will decrease our profit margin. Although we may offset such deduction of our profit by increasing the price for our products, unforeseeable events
in the market may occur to prevent the effectiveness of this method. We also rely on two major suppliers to provide such raw materials. Failure to maintain business
relationship with these two major suppliers may make the raw materials inaccessible, and thus hurt our operation result.
Our performance and planned growth depend on raw material supply and related costs.
We rely on Mr. Jie Han, Our Chairman and Chief Executive Officer, for the management of our business, and the loss of his services could significantly harm our business
and prospects.
We depend, to a large extent, on the abilities and participation of our current management team, but have a particular reliance upon Mr. Jie Han, our Chairman and Chief
Executive Officer and President, for the direction of our business. The loss of the services of Mr. Han for any reason could have a material adverse effect on our business and
prospects. We cannot assure you that the services of Mr. Han will continue to be available to us, or that we will be able to find a suitable replacement for Mr. Han. We can not
guarantee Mr. Han’s continuing to manage the Company. We do not have key man insurance on Mr. Han, and if he were to die and we were unable to replace him for a
prolonged period of time, we could be unable to carry out our long-term business plan, and our future prospects for growth, and our business, could be harmed.
11
Difficulties with hiring, employee training and other labor issues could disrupt our operations.
We may not be able to successfully hire and train new team members or integrate those team members into the programs and policies of the Company. Any such difficulties
would reduce our operating efficiency and increase our costs of operations.
Increased environmental regulation in China could increase our costs of operation.
Certain processes utilized in the production of modified plastics result in toxic by-products. To date, the Chinese government has imposed only limited regulation on the
production of these by-products, and enforcement of the regulations has been sparse. Recently, however, there is a substantial increase in focus on the Chinese environment,
which has inspired considerable new regulation. Because Harbin Xinda plans to export plastics to the U.S. and Europe in coming years, Harbin Xinda has developed sufficient
safeguards in its manufacturing processes to assure compliance with the environmental regulations imposed by European and U.S regulators. This compliance regimen brings
us into compliance with all Chinese environmental regulations. Additional regulation, however, could increase our cost of doing business, which would impair our profitability.
We may have difficulty establishing adequate management and financial controls in China.
The People’s Republic of China has only recently begun to adopt the management and financial reporting concepts and practices that investors in the United States are familiar
with. We may have difficulty in hiring and retaining employees in China who have the experience necessary to implement the kind of management and financial controls that
are expected of a United States public company. If we cannot establish such controls, we may experience difficulty in collecting financial data and preparing financial
statements, books of account and corporate records and instituting business practices that meet U.S. standards.
We may incur significant costs to ensure compliance with U.S. corporate governance and accounting requirements.
We may incur significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements,
including requirements under the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, and other rules implemented by the Securities and Exchange Commission. We expect all of
these applicable rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect that
these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept
reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain
qualified individuals to serve on our board of directors, on committees of our board of directors or as executive officers.
As a public company, we are required to comply with rules and regulations of the SEC, including expanded disclosure, accelerated reporting requirements and more complex
accounting rules. This will continue to require additional cost management resources. We will need to continue to implement additional finance and accounting systems,
procedures and controls as we grow to satisfy these reporting requirements. In addition, we may need to hire additional legal and accounting staff with appropriate experience
and technical knowledge, and we cannot assure you that if additional staffing is necessary that we will be able to do so in a timely fashion. If we are unable to complete the
required annual assessment as to the adequacy of our internal control over financial reporting or if our independent registered public accounting firm is unable to provide us
with an unqualified report as to the effectiveness of our internal controls over financial reporting in the future, we could incur significant costs to become compliant.
We rely on highly skilled personnel and, if we are unable to retain or motivate key personnel or hire qualified personnel, we may not be able to grow effectively.
Our performance largely depends on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop,
motivate and retain highly skilled personnel for all areas of our organization. Our continued ability to compete effectively depends on our ability to attract new technology
developers and to retain and motivate our existing contractors.
We have limited business insurance coverage.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our
knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption
insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption,
litigation or natural disaster might result in substantial costs and diversion of resources.
12
Risks related to an investment in our common stock
Our Chief Executive Officer has a large degree of control on us through his position and stock ownership and his interests may differ from other stockholders.
Our Chief Executive Officer, Mr. Jie Han, has options on shares of XD Engineering, which is a major shareholder of China XD Plastics. As a result, Mr. Han will be able to
influence the outcome of stockholder votes on various matters, including the election of directors and extraordinary corporate transactions such as business combinations. Mr.
Han’s interests may differ from that of other stockholders.
Risks related to Series B Preferred Stock.
There are now 1,000,000 Series B Preferred Stock issued to China XD Plastics with 40% of the total voting power of the Company’s common stock put together and other
consent rights on mergers and acquisitions, significant acquisition or disposition of assets and change of control, among others. This gives China XD Plastics significant
voting power. Such voting power may enable China XD Plastics to block actions that may benefit the common stockholders thus reduce the value of their holdings.
We do not intend to pay cash dividends to common stockholders in the foreseeable future.
We currently intend to retain all future earnings for use in the operation and expansion of our business. We do not intend to pay any cash dividends in the foreseeable future
but will review this policy as circumstances dictate. Should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations
depends upon the receipt of dividends or other payments from our operating subsidiaries based in the PRC. Our operating subsidiaries, from time to time, may be subject to
restrictions on its ability to make distributions to us, including restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory
restrictions. See "Risks related to doing business in the People’s Republic of China” above.
Our common stock may be subject to the Penny Stock Regulations.
Our common stock is, and may be subject to the SEC’s "penny stock” rules to the extent that the price falls below $5.00 per share. Those rules, which require delivery of a
schedule explaining the penny stock market and the associated risks before any sale, may further limit your ability to sell your shares.
The SEC has adopted regulations which generally define "penny stock” to be an equity security that has a market price of less than $5.00 per share. Our common stock, when
and if a trading market develops, may fall within the definition of penny stock and subject to rules that impose additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding
$200,000 or $300,000, together with their spouse).
For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s
prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the
transaction, of a risk disclosure document mandated by the Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to
both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose
this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Consequently, the "penny stock” rules may restrict the ability of broker-dealers to sell our common stock and
may affect the ability of investors to sell their common stock in the secondary market.
Our common stock is illiquid and subject to price volatility unrelated to our operations.
The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth,
quarterly operating results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial
markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a
significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our
common stock.
13
A large number of shares of common stock will be issuable for future sale which will dilute the ownership percentage of our current holders of common stock. The availability
for public resale of those shares may depress our stock price.
Also as a result, there will be a significant number of new shares of common stock on the market in addition to the current public float. Sales of substantial amounts of common
stock, or the perception that such sales could occur, and the existence of warrants to purchase shares of common stock at prices that may be below the then current market
price of the common stock, could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities.
Enforcement against us or our directors and officers may be difficult.
Because our principal assets are located outside of the U.S. and some or all our directors and officers, both present and future, reside outside of the U.S., it may be difficult for
you to enforce your rights based on U.S. federal securities laws against us and our officers and some directors or to enforce a U.S. court judgment against us or them in the
PRC.
In addition, our operating company is located in the PRC and substantially all of its assets are located outside of the U.S. It may therefore be difficult for investors in the U.S. to
enforce their legal rights based on the civil liability provisions of the U.S. Federal securities laws against us in the courts of either the U.S. or the PRC and, even if civil
judgments are obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear if extradition treaties now in effect between the U.S. and the PRC would
permit effective enforcement against us or our officers and directors of criminal penalties under the U.S. Federal securities laws or otherwise.
Item 1B.
Unresolved Staff Comments
Not applicable.
Item 2.
Properties
Physical Plant and Production
Our executive offices and production facilities are located in the Harbin Development Zone in the City of Harbin, which is the provincial capital of Heilongjiang Province in
northeast China. Our owned facility has a total usable area of 7,359 square meters (79,212 square feet). The facility includes six buildings with one office building attached by
one workshop, one workshop, one storage room, one transformer station, and two guard rooms. All the company’s properties are insured by China Pacific Property Insurances
Co., Ltd.
The land on which our owned facility is located measures 14,715 square meters (158,391 square feet). The land use right was issued to Harbin Xinda by the City of Harbin. The
right will expire in 2053. We also have a long-term lease of the production facilities with Harbin Xinda High-Tech Co., Ltd. ("Xinda High-Tech”), a related party. The land on
which our leased facility is located measures 16,537 square meters (178,009 square feet). The facility we rent includes three buildings with two office buildings attached by one
workshop respectively, two workshops and one guard room. Compliance with Chinese environmental regulations currently cost us 30,000 RMB (USD$4,392) annually.
However during 2008 we engaged in a ground remediation project to comply with new regulations. The remediation project was already completed and we do not expect any
additional cost related to environmental regulation in 2010.
The process of manufacturing modified plastic consists of modifying a standard plastic (polypropylene, ABS, PA6, PA66, etc.) by adding various agents and additives that will
alter the physical and/or functional characteristics of the plastic. Catalysts are added that facilitate the desired chemical reactions, all of which occurs in a specially designed
equipment. The resulting plastics are then extracted from the equipment by an extraction technique that is proprietary to Harbin Xinda. Further processing may involve
additional blending, extrusion, cooling and cutting, homogenizing and packing, as needed to meet the customer’s requirements.
In addition to its unique extraction technology, Harbin Xinda has developed its own techniques and equipment for many of the steps in the production process. Among the
aspects of production for which Harbin Xinda has proprietary technology are product formulae, a technique for combining extruder screws, and certain stuffing techniques.
With these unique formulas and techniques, our products can satisfy often clients’ standard requirements at a lower cost than competitive products.
Our facilities have been certified under the following international qualifications criteria: ISO9001: 2000 quality management system certification and ISO/TS16949: 2002
international auto parts industry quality systems certification. The government of China has designated Harbin Xinda as a National Torch Project and a National Spark Plan
Project, and has given Harbin Xinda the "Most Valuable High Tech in China” award. Harbin Xinda is an executive member of the Council of the Chinese Automobile Parts
Association, a member of the Chinese Modified Plastics Professional Committee, and a member of the Chinese Plastics Engineering Committee.
14
Item 3.
Legal Proceedings
None.
Item 4.
Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Prior to November 27, 2009, our common stock was quoted on the Over-the-Counter Bulletin Board ("OTCBB”) under the symbol "CXDC.” On November 27, 2009, we
terminated our listing on OTCBB and listed our common stock on NASDAQ Global Market also under the symbol "CXDC.” The following table sets forth, for the indicated
periods, the high and low sales prices for our common stock, as reported on NASDAQ, and prior to November 27, 2009, as reported on the OTCBB. The quotations represent
inter-dealer prices without retail markup, markdown or commission, and may not necessarily represent actual transactions.
First Quarter
Second Quarter
Third Quarter
Forth Quarter
Year Ended December 31, 2009
Year Ended December 31, 2008
High
Low
High
Low
$
$
$
$
6.00
4.25
6.90
11.25
$
$
$
$
0.03
1.30
2.00
5.20
$
$
$
$
0.05
0.02
0.01
0.01
$
$
$
$
0.06
0.05
0.02
0.01
On April 8, 2010, the closing price for our common stock, as reported by the Nasdaq, was $6.38 per share and there were approximately 397 stockholders of record.
Interwest Transfer Company Inc. is the registrar and transfer agent for our common shares. Its address is 1981 Murray Holladay Road, Suite 100, Salt Lake City, UT 84117 USA,
telephone: (801)272-9294.
Dividend Policy
We have not paid any cash dividends since our inception and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We expect to retain
our earnings, if any, to provide funds for the expansion of our business. Future dividend policy will be determined periodically by the Board of Directors based upon
conditions then existing, including our earnings and financial condition, capital requirements and other relevant factors.
Securities Authorized for Issuance Under Equity Compensation Plans
The Company adopted the 2009 Stock Incentive Plan (the "2009 Plan”) on May 26, 2009, which reserved 7,800,000 shares of common stock for issuance under the 2009 Plan.
The 2009 Plan allows the Company to issue awards of incentive non-qualified stock options and stock bonuses to directors, officers, employees and consultants of the
Company, which may be subject to restrictions.
Recent Sales of Unregistered Securities
Other than as disclosed in our Current Report on Form 8-K dated December 3, 2009, no securities were sold by the Company during the fiscal year ended December 31, 2009
that were not registered under the Securities Act.
Item 6.
Selected Financial Data
Not applicable.
15
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
We make forward-looking statements in this report, in other materials we file with the Securities and Exchange Commission (the "SEC”) or otherwise release to the public, and
on our website. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media and others. Statements concerning our
future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings) and demand for our products and services, and
other statements of our plans, beliefs, or expectations, including the statements contained in this Item 7, "Management’s Discussion and Analysis or Plan of Operation,”
regarding our future plans, strategies and expectations are forward-looking statements. In some cases these statements are identifiable through the use of words such as
"anticipate,” "believe,” "estimate,” "expect,” "intend,” "plan,” "project,” "target,” "can,” "could,” "may,” "should,” "will,” "would” and similar expressions. We intend such
forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the "Securities Act”) and in
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act”). You are cautioned not to place undue reliance on these forward-looking statements
because these forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause
actual results to differ materially from those suggested by these forward-looking statements. Thus, our ability to predict results or the actual effect of future plans or strategies
is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: economic
conditions generally and the automotive modified plastics market specifically, legislative or regulatory changes that affect our business, including changes in regulation, the
availability of working capital, the introduction of competing products, and other risk factors described herein. These risks and uncertainties, together with the other risks
described from time-to-time in reports and documents that we filed with the SEC should be considered in evaluating forward-looking statements and undue reliance should not
be placed on such statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected
or implied in the forward-looking statements and the variances may be material. We expressly disclaim any obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, except as required by law.
General
We were originally incorporated as NB Payphones Ltd. under the laws of the state of Pennsylvania on November 16, 1999. On December 27, 2005, we migrated our state of
organization to the state of Nevada and effective March 23, 2006, our name changed to NB Telecom, Inc.
On December 24, 2008, NB Telecom acquired all of the outstanding capital stock of Favor Sea BVI, a British Virgin Islands corporation, through China XD Plastics, a Nevada
corporation wholly owned by the Company. Favor Sea BVI is a holding company whose only asset, held through a subsidiary, is 100% of the registered capital of Harbin
Xinda.
Harbin Xinda is a manufacturer and developer of modified plastics. We believe that Harbin Xinda is one of the primary modified plastics manufacturers for automotive
applications in the PRC, developing and producing made-to-order modified plastics and providing after-sales services to such automotive brands as Audi, Red Flag, VW Golf,
and Mazda6.
16
Results of Operations
The following table sets forth information from our statements of operations for the years ended December 31, 2009 and 2008, in dollars:
Net sales
Cost of sales
Gross profit
Operating expenses
Operating income
Other income
Interest expense, Net
Net income
Comprehensive income
The Year Ended December 31,
2009
2008
(Restated)
$
$
$
$
$
$
$
$
$
135,745,329
105,160,568
30,584,761
12,950,793
17,633,968
107,999
$
$
$
$
$
$
75,765,428
58,431,799
17,333,629
8,323,199
9,010,430
28,283
(1,418,395)
$
(687,659)
4,023,266
4,018,965
$
$
8,213,583
9,121,652
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net sales
During the year ended December 31, 2009, we had net sales of $135,745,329, as compared with net sales of $75,765,428 during the year ended December 31, 2008, an increase of
$59,979,901 or 79.2% due to our increased and expanded sales both in volume and of new variety of products to our existing and new customers.
Cost of sales & gross margin
During the year ended December 31, 2009, we had cost of sales of $105,160,568, as compared with cost of sales of $58,431,799 during the year ended December 31, 2008, an
increase of approximately $46,728,769 or 80.0%, reflecting the increase in net sales. The gross profit rose to $30,584,761 in 2009, or a 76.4% increase during the year ended
December 31, 2009 compared with $17,333,629 during the year ended December 31, 2008. Our gross margin decreased slightly from 22.9% during the year ended December 31,
2008 to 22.5% during the year ended December 31, 2009. The decrease was mainly attributed to the slight increase of raw material price and the slight increase of percentage of
lower margin products in response to increasing demand of modified plastics used by economy vehicle models in China. Such increase in demand was spurred by the sales tax
cuts and government subsidies for economy vehicle models.
17
Operating Expenses
Our operating expenses were $12,950,793 during the year ended December 31, 2009, compared with $8,323,199 (restated) during the year ended December 31, 2008, an increase
of $4,627,594 or approximately 55.6%. The increase in operating expenses was principally due to the increase in stock-based compensation expense, incentive option
amortization expense, depreciation expenses and payroll expenses. Selling expenses increased slightly from $322,650 during the year ended December 31, 2008 to $400,731
during the year ended December 31, 2009 as we increased our efforts to obtain more customers. General and administrative expenses increased from $7,221,555 (restated) during
the year ended December 31, 2008 to $11,220,406 for the year ended December 31, 2009, reflecting the increase in stock-based compensation expense. Research and
development expenses increased from $778,994 during the year ended December 31, 2008 to $1,329,656 during the year ended December 31, 2009 reflecting our increased efforts
in new product development. As a result, our operating income increased to $17,633,968 during the year ended December 31, 2009 from $9,010,430 (restated) during the year
ended December 31, 2008.
Interest Expense, Net
Interest expense increased $730,736 from $687,659 during the year ended December 31, 2008 to $1,418,395 for the year ended December 31, 2009. The increase in interest
expense resulted from the increase in our loans during 2009, as we borrowed to fund the rapid growth in our sales.
Changes in Fair Value of Warrants and Derivative Liabilities
During the year ended December 31, 2009, we had a non-cash charge of $12,221,972, which resulted from the changes in the fair value of the warrants and embedded
conversion feature of the convertible preferred stock issued to investors in December 2009.
Net Income
As a result of the factors described above, we had net income of $4,023,266 during the year ended December 31, 2009, compared with $8,213,583 (restated) during the year
ended December 31, 2008.
Comprehensive Income
As a result of a currency translation adjustment, our comprehensive income was $4,018,965 during the year ended December 31, 2009, compared with $9,121,652 (restated)
during the year ended December 31, 2008.
Liquidity and Capital Resources
As of December 31, 2009, we had $6,850,784 in cash and cash equivalents, compared to only $3,869,035 as of December 31, 2008. There was a net increase in cash and cash
equivalent of $2,981,749 for the year ended December 31, 2009. The net increase in cash and cash equivalents for the year was mainly due to cash generated from operations,
more specifically net income offset by increase in purchase of property, plant and equipment and repayments of bank acceptance note payable and related party loans.
Operations
For the year ended December 31, 2009, cash provided by operations was $17,137,502 as opposed to $4,874,185 used in operating activities for the year ended December 31,
2008. Increase in our cash liquidity is mainly due to the increase in accounts payable and other payables, decrease in accounts receivable and increase in non-cash expenses
such as changes in fair value of warrants and embedded derivatives, depreciation and amortization expense and stock-based compensation expense.
Investments
Cash used in investing activities was $13,782,468 for the year ended December 31, 2009 as compared to $11,926,327 for the year ended December 31, 2008. We have invested
heavily in purchases of new production equipment, which accounted for the majority of the cash used in investing activities in 2009.
18
Financing
For the year ended December 31, 2009, net cash used in financing activities was $378,480 as compared to $20,509,249 provided for the same period in 2008. Decrease in cash
provided by financing activities is due to the net effect of proceeds received from the issuance of Series C convertible redeemable preferred stock offset by the repayment of
bank acceptance notes payable and related party loans.
The primary sources of cash in 2009 were from operating activities. For the year ended December 31, 2009, cash provided by operations was $17,137,502.
Based on past performance and current expectations, we believe our cash and cash equivalents and cash generated from operations will satisfy our working capital needs,
capital expenditures and other liquidity requirements associated with our operations for at least the next 12 months.
The majority of the Company’s revenue and expenses were denominated primarily in Renminbi ("RMB”), the currency of the People’s Republic of China. There is no assurance
that exchange rates between the RMB and the U.S. Dollar will remain stable. The Company does not engage in currency hedging. Inflation has not had a material impact on the
Company’s business.
Off-Balance Sheet Arrangements
Neither us, nor any of our subsidiaries has any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on their financial condition
or results of operations.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8.
Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Company and its subsidiaries as of December 31, 2009 and 2008, including the notes thereto, together with the report of Moore
Stephens Hong Kong and Bagell Josephs Levine & Company, LLC ("BJL”) are presented beginning on page F-1 of this report.
Item 9.
Changes In and Disagreements With Accountants On Accounting and Financial Disclosure
On November 2, 2009, the Company changed its principal independent accountants. On such date, BJL was dismissed from serving as the Company’s principal independent
accountants and the Company retained Moore Stephens Hong Kong ("MSHK”) as its principal independent accountants. The decision to change accountants was approved
by the Company’s Board of Directors.
The Dismissal of Bagell Joseph Levine & Company, LLC
BJL was the independent registered public accounting firm for the Company from December 31, 2008 to November 2, 2009. None of BJL’s reports on the Company’s financial
statements from December 31, 2008 to November 2, 2009, (a) contained an adverse opinion or disclaimer of opinion, (b) was modified as to uncertainty other than mentioned
below, audit scope, or accounting principles, or (c) contained any disagreements on any matters of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements, if not resolved to the satisfaction of BJL, would have caused it to make reference to the subject matter of the
disagreements in connection with its reports. None of the reportable events set forth in Item 304(a)(1)(ii) of Regulation S-K occurred during the period in which BJL served as
the Company’s principal independent accountants.
In accordance with Item 304(a)(3), the Company has provided BJL with a copy of this disclosure as previously made on the Current Report on Form 8-K filed with the Securities
and Exchange Commission on November 6, 2009 and has requested that BJL furnish it with a letter addressed to the Securities and Exchange Commission stating whether it
agrees with the above statements, and if not, stating the respects in which it does not agree. A copy of the letter from BJL addressed to the Securities and Exchange
Commission dated November 4, 2009 was filed as an exhibit to the Current Report on Form 8-K on November 6, 2009.
The Engagement of Moore Stephens Hong Kong
During the fiscal years ended December 31, 2008 and 2007 and through November 2, 2009, the Company did not consult with MSHK on (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on the Company’s financial statements, and MSHK did
not provide either in a written report or oral advice to the Company that was an important factor considered by the Company in reaching a decision as to any accounting,
auditing, or financial reporting issue; or (ii) the subject of any disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions, or a reportable
event within the meaning set forth in Item 304 (a)(1)(v) of Regulation S-K.
19
Item 9A.
Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company’s management has evaluated, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the
effectiveness of the design and operations of the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)), as of the end of the
period covered by this annual report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the evaluation of the
effectiveness of our disclosure controls and procedures was completed; our disclosure controls and procedures were not effective.
(b) Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further,
because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.
A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the company’s ability to initiate, authorize, record, process, or
report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the
company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. An internal control material weakness is a significant
deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will
not be prevented or detected.
We have evaluated the effectiveness of our internal control over financial reporting as of December 31, 2009. This evaluation was performed using the Internal Control –
Evaluation Framework developed by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO”). Based on such evaluation, management identified
deficiencies that were determined to be a material weakness.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Because of the material weakness described below,
management concluded that our internal control over financial reporting was not effective as of December 31, 2009.
The specific material weakness and significant deficiency identified by the Company’s management as of December 31, 2009 is described as follows:
Material Weakness
Inadequate US GAAP expertise — The current staff in the accounting department are inexperienced in US GAAP and they were primarily engaged in ensuring compliance with
PRC accounting and reporting requirements for our operating subsidiaries are not required to meet or apply US GAAP requirements. They need substantial training to meet the
higher demands of a US public company. The accounting skills and understanding necessary to fulfill the requirements of US GAAP-based reporting, including the preparation
of financial statements and consolidation, are inadequate. Such inexperience with US GAAP has caused us to restate our consolidated financial statement for the year ended
December 31, 2008, with respect to the accounting treatment of certain options under ASC Topic 718 which should have been accounted for in the Company’s consolidated
financial statements as share-based payments awarded to an employee by a related party as compensation for services rendered.
20
The Company did not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of US
GAAP commensurate with the Company’s financial reporting requirements, which resulted in a number of internal control deficiencies that were identified as being significant.
The Company’s management believes that the number and nature of these significant deficiencies, when aggregated, was determined to be a material weakness.
Significant Deficiency
The Company lacks qualified resources to perform the internal audit functions properly. In addition, the scope and effectiveness of the Company’s internal audit function are
yet to be developed. We are committed to establishing the internal audit functions but due to limited qualified resources in the region, we were not able to hire sufficient
internal audit resources before the end of 2009. However, internally we have started the process to recruit more senior qualified people in order to improve our internal control
procedures. Externally, we also seek a qualified consultant to assist the Company in improving the Company’s internal control system based on COSO Framework. We also will
increase our efforts to hire the qualified resources.
Remediation Initiative
In 2009, the Company engaged Ernst & Young (China) Advisory Limited, Beijing Branch Office to assist in improving the Company’s internal control system based on the
COSO Framework. Internally, the Company has recruited more senior qualified people in order to improve the internal control procedures. The Company believes that it will be
able to be in SOX compliance in 2010.
On May 1, 2009, the Board of Directors appointed Mr. Taylor Zhang as the Chief Financial Officer of the Company. Mr. Zhang has over seven years of experience in finance
and operations in a broad range of industries. Immediately prior to joining China XD Plastics, Mr. Zhang served as CFO of Advanced Battery Technologies, Inc (Nasdaq:
ABAT). From 2007 to 2008, he served as Executive Vice President of Finance of China Natural Gas, Inc. (Nasdaq: CHNG). From 2005 to 2007, Mr. Zhang worked as a research
analyst in New York Private Equity. From 2000 to 2002 he was employed as Finance Manager by Datong Thermal Power Limited. He holds a MBA from University of Florida
and a Bachelor’s Degree in mechanical and electronic engineering from Beijing Technology and Business University. In addition, the Company hired Ms. Xuan (Donna) Zhou,
a CPA licensed in both New York and Virginia, as finance manager in July 2009 in its US office.
Conclusion
Despite the material weakness and deficiencies reported above, the Company’s management believes that its consolidated financial statements included in this report fairly
present, in all material respects, the Company’s financial condition, results of operations and cash flows for the years presented and that this report does not contain any
untrue statement of a material fact or omit to state a material fact necessary to make the statements misleading, in light of the circumstances under which such statements were
made during the years covered by this report.
(c) Changes in Internal Control over Financial Reporting
Except as described above, there were no other changes in its internal controls over financial reporting in connection with its fourth quarter evaluation that would materially
affect, or are reasonably likely to materially affect, its internal control over financial reporting.
Item 9B.
None.
Other Information
21
Item 10.
Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
PART III
Each director is elected for until the next annual meeting of shareholders and their successor is elected and qualified.
The following is a list of the names and ages of our directors and executive officers:
Name
Jie Han
Taylor Zhang
Qingwei Ma
Junjie Ma
Yong Jin
Lawrence W. Leighton
Cosimo J. Patti
Linyuan Zhai
Age
44
31
35
34
74
75
59
60
Positions with the Company
Chairman of the Board of Directors and Chief Executive Officer
Chief Financial Officer and Director
Chief Operating Officer and Director
Chief Technology Officer
Director
Director
Director
Director
All directors hold office until the next annual meeting of our shareholders and until their successors have been elected and qualified. Officers serve at the pleasure of the Board
of Directors.
Jie Han. Mr. Han co-founded Harbin Xinda in 2004, and has been employed by Harbin Xinda since that time. In January 2008 Mr. Han was appointed Chairman and Chief
Executive Officer of Harbin Xinda. Prior to organizing Xinda High-Tech, which was founded in 2003, Mr. Han had been associated with the Harbin Xinda Nylon Factory, which
he founded in 1985. With 24 years of experiences in the industry, Mr. Jie Han is an expert in the management and financial works dealing with the manufacture and distribution
of modified plastic products. Mr. Han currently serves as an executive director of China Plastic Processing Industry Association and is also a director of the Heilongjiang
Industry and Commerce Association. In addition, Mr. Han serves as a deputy to the Harbin Municipal People’s Congress.
Taylor Zhang. Mr. Zhang has over seven years of experience in finance and operation in a broad range of industries. Immediately prior to joining China XD Plastics, Mr. Zhang
served as CFO of Advanced Battery Technologies, Inc (Nasdaq: ABAT). From 2007 to 2008, he served as Executive Vice President of Finance of China Natural Gas, Inc.
(Nasdaq: CHNG). From 2005 to 2007, Mr. Zhang worked as a research analyst in New York Private Equity. From 2000 to 2002 he was employed as Finance Manager by Datong
Thermal Power Limited. He holds a MBA from University of Florida and a Bachelor’s Degree in mechanical and electronic engineering from Beijing Technology and Business
University.
Qingwei Ma. Mr. Ma has been employed as General Manager of Harbin Xinda since it was founded in 2004. In 2008 he was promoted to Chief Operating Officer and appointed
Director to the Board in 2008. Prior to joining Harbin Xinda, Mr. Ma was employed for six years by Harbin Xinda Nylon Factory as Manager of Quality Assurance, then as
Manager of Research and Development, and finally as Production Manager. In 1997 Mr. Ma was awarded a bachelor’s degree by the Northern China Technology University,
where he specialized in the chemical engineering of high polymers. Mr. Ma has 11 years of experiences in the industry. He also published two articles in China’s key journals in
the areas of modified plastic industry. In 2001 Mr. Ma was selected as "Harbin Quality Work Advanced Enterprise and Advanced Worker”; in 2004 he was awarded the
Heilongjiang First Professional Manager Qualification Certificate. One of his inventions, "compound nano modified materials dedicated to the automobile bumper” won the
"Science and Technology Progress Awards” issued by Harbin Municipality.
Junjie Ma. Mr. Ma graduated from Beijing University of Science and Technology, majored in Polymer materials and engineering. He was appointed acting Chief Technology
Officer of China XD Plastics in 2009 and Director of the Board in 2008. He resigned as Director of the Board in 2009. He was a technician of Harbin Longjiang Electrical Plant
from 1997 to 2004 and was a supervisor and manager of Harbin Xinda Macromolecule Material Inc. from 2004 to 2007. Since 2008, he was elected to be Head of Research
Institute of Harbin Xinda Macromolecule Material Co., Ltd. Mr. Junjie Ma is a polymer materials engineers and has developed more than 120 plastic additives, modified plastics
for automobiles and engineering plastics among which 50 products have been approved by auto enterprises. A number of products have been awarded as the National Torch
Program projects, Spark Projects and Harbin City Important New Products project.
22
Yong Jin. Mr Jin, a professor at Tsinghua University and an academician of the Chinese Academy of Engineering, is an executive member of Chemical Industry and
Engineering Society of China and Chinese society of particuology, vice chairman of China Institute of Ecological Economy, director of Industrial Ecology Economy and
Technology Committee, Council Convenor of the Chemical discipline in the State Council Academic Degrees Committee, professional advisers for Beijing Municipal
Government, Lectureship Award recipient in fluidization by American Institute of Chemical Engineers (AIChE), the world's leading organization for chemical engineering
professionals, with more than 40,000 members from 93 countries, consultant for the Germany magazine "Chemical engineering & technology". Mr. Jin has published and
presented more than 350 papers in important journals and conferences domestically and internationally, 138 of which were included in Science. Mr. Jin also has more than 30
patent applications.
Lawrence W. Leighton. Mr. Leighton has had an extensive 40-year international investment banking career. Mr. Leighton received his BSE degree in engineering from
Princeton University and an MBA degree from Harvard Business School. His previous positions include Co-Head of the Corporate Finance Department at Clark, Dodge & Co.,
Limited Partner of Bear Stern, Managing Director of JPMorgan Chase Bank and CEO of the U.S. investment bank of Credit Agricole, the major French Bank. Mr. Leighton has
been an Independent Director of China Natural Gas, Inc. (NASDAQ: CHNG) since August 2008.
Cosimo J. Patti. Mr. Patti’s previous positions include roles as Senior Director of Strategy Management, Director of Business Strategy, and Senior Vice President of Lehman
Brothers. He is an Arbitrator of SEC and National Association of Securities. Mr. Patti has been an Independent Director of American Oriental Bioengineering Inc. (NYSE: AOB)
since 2004. Mr. Patti has been an Independent Director of American Oriental Bioengineering, Inc and Advanced Battery Technologies, Inc.
Linyuan Zhai. Mr. Zhai worked for China FAW Group Corporation for 37 years with abundant experience in terms of technology, production, and business management. He is
a Senior Expert in the auto industry. Mr. Zhai served as general manager of automobile manufacturing, successfully led Four Ring Company, a subsidiary of FAW group, to go
public in China. He is one of the pioneers and outstanding contributors of FAW group’s success.
Meetings of the Board of Directors
The Board of Directors held ten meetings during fiscal year 2009, one of which were regularly scheduled meetings and two of which were special meetings. The Board also
acted seven times by unanimous written consent. Each of the foregoing directors attended at least 75% of the aggregate number of meetings of our Board of Directors and the
committees on which each director served during fiscal year 2009 and was eligible to attend.
Board Leadership Structure
The Board of Directors believes that Mr. Han’s service as both Chairman of the Board and Chief Executive Officer is in the best interest of the Company and its stockholders.
Mr. Han possesses detailed and in-depth knowledge of the issues, opportunities and challenges facing the Company and its business and is thus best positioned to develop
agendas that ensure that the Board’s time and attention are focused on the most critical matters. His combined role enables decisive leadership, ensures clear accountability,
and enhances the Company’s ability to communicate its message and strategy clearly and consistently to the Company’s shareholders, employees, customers and suppliers.
Family Relationships
There are no family relationships between or among any of our current directors, executive officers or persons nominated or charged by the Company to become directors or
executive officers. There are no family relationships among our officers and directors and the officers and directors of our direct and indirect subsidiaries.
Involvement in Certain Legal Proceedings
None of our directors or executive officers has, during the past ten years:
(a) Had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within
two years prior to that time;
(b) Been convicted in a criminal proceeding or subject to a pending criminal proceeding;
(c) Been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or any federal or state authority,
permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking
activities; and
(d) Been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have
violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
23
Committees of the Board of Directors
Our board of directors formed its committees and adopted its corporate governance charters and policies at the May 26, 2009 meeting. At this meeting, the board adopted
Corporate Governance Guidelines and formed three committees, the Audit, Nominating and Compensation Committees. Charters were approved for each of the committees.
The Board of Directors has the following standing committees: (1) Audit Committee, (2) Nominating Committee and (3) Compensation Committee. The Board of Directors has
adopted a written charter for each of these committees, copies of which can be found on our website at www.chinaxd.net in the Investor Relations section of our website. All
members of the committees appointed by the Board of Directors are non-employee directors and are independent directors within the meaning set forth in the NASDAQ rules,
as currently in effect.
The following chart details the current membership of each committee:
Name of Director
Lawrence Leighton
Cosimo Patti
Linyuan Zhai
Yong Jin
M=Member
C=Chair
Audit Committee.
Audit
C
M
M
Nominating
M
M
C
M
Compensation
M
C
M
On May 26, 2009, the Board of Directors appointed an Audit Committee chaired by Mr. Leighton with Mr. Patti and Mr. Zhai as committee members. On July 27, 2009, the Board
adopted a charter which provides that the Audit Committee, (i) oversees our accounting, financial reporting and audit processes; (ii) appoints, determines the compensation of,
and oversees, the independent auditors; (iii) pre-approves audit and non-audit services provided by the independent auditors; (iv) reviews the results and scope of audit and
other services provided by the independent auditors; (v) reviews the accounting principles and practices and procedures used in preparing our financial statements; and
(vi) reviews our internal controls, a copy of which is available on our website at www.chinaxd.net in the Investor Relations section.
The Audit Committee works closely with management and our independent auditors. The Audit Committee also meets with our independent auditors without members of
management present, on a regular basis, following completion of our auditors’ annual audit and prior to our earnings announcements, to review the results of their work. The
Audit Committee also meets with our independent auditors to approve the annual scope and fees for the audit services to be performed.
Each of the Audit Committee members is an independent director within the meaning set forth in the rules of the SEC, as currently in effect. In addition, the Board of Directors
has determined that Mr. Leighton is an "audit committee financial expert” as defined by SEC rules.
The Audit Committee held two meetings during fiscal year 2009. Each director who is a member of the Audit Committee attended at least 75% of the aggregate number of
meetings of the Audit Committee during fiscal year 2009.
AUDIT COMMITTEE REPORT
The following is the report of the Audit Committee of the Board of Directors. The Audit Committee has reviewed and discussed our audited financial statements for the fiscal
year ended December 31, 2009 with our management. In addition, the Audit Committee has discussed with Moore Stephens Hong Kong, our independent auditors, the matters
required to be discussed by Statement on Auditing Standards No. 61, as amended (Communications with Audit Committee). The Audit Committee also has received the written
disclosures and the letter from Moore Stephens Hong Kong as required by the Public Company Accounting Oversight Board Rule 3526 "Communications with Audit
Committees Concerning Independence” and the Audit Committee has discussed the independence of Moore Stephens Hong Kong with that firm.
Based on the Audit Committee’s review of the matters noted above and its discussions with our independent auditors and our management, the Audit Committee
recommended to the Board of Directors that the financial statements be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
Respectfully submitted by:
Lawrence Leighton (Chair)
Cosimo Patti
Linyuan Zhai
24
Nominating Committee
On May 26, 2009, the Board of Directors appointed a Nominating Committee chaired by Mr. Zhai with Mr. Patti and Mr. Jin as committee members. On July 27, 2009, the Board
adopted a charter which provides that the Nominating Committee (i) assisting the Board by identifying individuals qualified to become Board members and recommending to
the Board director candidates to stand for election at the next annual meeting of stockholders; (ii) making recommendations to the Board as to the independence of each
director; (iii) monitoring significant developments in the law and practice of corporate governance and of the duties and responsibilities of directors of public companies; (iv)
leading the Board in any annual performance self-evaluation, including establishing criteria to be used in connection with such evaluation; and (v) developing and
recommending items for Boar; meeting agendas.
Each current member of the Governance, Compensation and Nominating Committee is an independent director within the meaning set forth in the rules of the Nasdaq Stock
Market, as currently in effect.
The Nominating Committee considers properly submitted stockholder recommendations for candidates for membership on the Board of Directors as described below under
"Identification and Evaluation of Nominees for Directors.” In evaluating such recommendations, the Nominating Committee seeks to achieve a balance of knowledge,
experience and capability on the Board of Directors and to address the membership criteria set forth under "Director Qualifications.” Any stockholder recommendations
proposed for consideration by the Nominating Committee should include the candidate’s name and qualifications for membership on the Board of Directors and should be
addressed to the attention of our Corporate Secretary — re: stockholder director recommendation.
Director Qualifications. The Nominating Committee does not have any specific, minimum qualifications that must be met by a Nominating Committee-recommended nominee,
but uses a variety of criteria to evaluate the qualifications and skills necessary for members of our Board of Directors. Under these criteria, members of the Board of Directors
should have the highest professional and personal ethics and values. A director should have broad experience at the policy-making level in business, government, education,
technology or public interest. A director should be committed to enhancing stockholder value and should have sufficient time to carry out their duties, and to provide insight
and practical wisdom based on their past experience. A director’s service on other boards of public companies should be limited to a number that permits them, given their
individual circumstances, to perform their director duties responsibly. Each director must represent the interests of the Company’s stockholders.
Identification and Evaluation of Nominees for Directors. The Governance, Compensation and Nominating Committee utilizes a variety of methods for identifying and
evaluating nominees for director. The Governance, Compensation and Nominating Committee regularly assesses the appropriate size of the Board of Directors, and whether
any vacancies on the Board of Directors are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Governance,
Compensation and Nominating Committee considers various potential candidates for director. Candidates may come to the attention of the Governance, Compensation and
Nominating Committee through current members of the Board of Directors, professional search firms, stockholders or other persons. These candidates are evaluated at regular
or special meetings of the Nominating Committee, and may be considered at any point during the year. The Nominating Committee considers properly submitted stockholder
recommendations for candidates for the Board of Directors. In evaluating such recommendations, the Nominating Committee uses the qualifications standards discussed
above and seeks to achieve a balance of knowledge, experience and capability on the Board of Directors.
A copy of the Committee’s written charter is available in the Investor Relations section of our website at www.chinaxd.net.
The Nominating Committee held two meetings during fiscal year 2009. Each director who is a member of the Nominating Committee attended at least 75% of the aggregate
number of meetings of the Committee during fiscal year 2008.
25
Compensation Committee
On May 26, 2009, the Board of Directors appointed a Compensation Committee chaired by Mr. Patti with Mr. Leighton and Mr. Zhai as committee members. On July 27,
2009, the Board adopted a charter which provides that the Compensation Committee shall discharge the Board's responsibilities relating to compensation of the
Company’s executive officers. The Committee has overall responsibility for approving and evaluating the executive officer compensation plans, policies and programs of
the Company. A copy of the charter is available on our website at www.chinaxd.net in the Investor Relations section.
The Compensation Committee held two meetings during fiscal year 2009. Each director who is a member of the Compensation Committee attended at least 75% of the aggregate
number of meetings of the Committee during fiscal year 2009.
Code of Ethics
On July 27, 2009 we adopted a Code of Business Conduct, and an Insider Trading policy. Copies of these policies are available on our corporate web site at www.chinaxd.net.
We will disclose amendments to, or waivers from, our policies on our corporate web site at www.chinaxd.net.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors and persons who own more than 10% of a registered class of our
equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning
their ownership of our common stock and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required
by the Securities and Exchange Commission regulations to furnish our Company with copies of all Section 16(a) reports they file. One late Form 3 was filed by each of Messrs.
Jie Han, Junjie Ma, Qingwei Ma, Meijuan He, Taylor Zhang, Patti Cosmo and a 10% stockholder, XD Engineering Plastics Company Limited. Other than as set forth above, we
believe that, during fiscal 2009, our directors, executive officers and 10% stockholders complied with all Section 16(a) filing requirements. In making this statement, we have
relied upon examination of the copies of Forms 3, 4 and 5, and amendments thereto, provided to the Company and the written representations of its directors and executive
officers.
Item 11.
Executive Compensation
The following table is a summary of the compensation paid to our executive officers for the two years ended December 31, 2009 and 2008.
SUMMARY COMPENSATION TABLE
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
-
-
-
3,065,388 (2)
5,473,907 (2)
-
-
-
-
-
-
-
Total
($)
3,082,955
5,577,539
72,000
-
-
-
-
Name and Principal
Position
Year
Salary
($)
Bonus
($)
Jie Han,
CEO
2009
2008
17,567
103,632
Taylor Zhang, CFO
(1)
2009
2008
72,000
-
-
-
-
(1) Mr. Zhang was appointed as our CFO on May 1, 2009.
(2)
The options were issued pursuant to an Incentive Option Agreement dated May 16, 2008 between Ms. Piao and Mr. Han whereby Ms. Piao granted Mr. Han 40,000
options to purchase all the shares of XD Engineering, the controlling shareholder of the Company, subject to the Company achieving certain financial performance
targets, which the Company believes should be accounted for as share-based compensation awarded to an employee by a related party as compensation for services
rendered in accordance to ASC Topic 718.
26
The following is a summary of all options, unvested stock and equity incentive plans for our Executive Officers for the year ended December 31, 2009.
Outstanding Equity Awards at Fiscal Year-End
Option Awards
Equity
incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options
(#)
-
Number of
securities
underlying
unexercised
options
(#)
unexercisable
-
Name of
securities
underlying
unexercised
options
(#)
exercisable
-
Name
Jie Han, CEO
Taylor Zhang,
CFO
Option
exercise
price
($)
-
Option
expiration
date
-
Number of
shares or
units of stock
that have not
vested
(#)
-
Market value
of shares or
units of stock
that have not
vested
(#)
-
Stock Awards
Equity incentive
plan awards:
Number of
unearned
shares, units or
other rights
that have not
vested
(#)
-
-
Equity incentive
plan awards:
Market or
payout value of
unearned
shares, units or
other rights
that have not
vested
($)
-
-
-
-
-
-
-
-
-
The above table does not include the options granted pursuant to an Incentive Option Agreement dated May 16, 2008, whereby Ms. Piao granted 40,000
options to Mr. Jie Han to purchase all the shares of XD Engineering, the controlling shareholder of the Company.
The following is a summary of the compensation paid to our non-employee Directors for the year ended December 31, 2009. Our employee directors do not receive
compensation for their services to the Company as directors.
DIERCTOR COMPENSATION
Fees earned or
paid in cash
($)
24,000
24,000
3,513
3,513
Stock awards
($)
51,269
51,269
7,502
7,502
Option awards
($)
-
-
-
-
Non-equity
incentive plan
compensation
($)
-
-
-
-
Nonqualified
deferred
compensation
earnings
($)
-
-
-
-
All other
compensation
($)
-
-
-
-
Total
($)
75,269
75,269
11,015
11,015
Name
Lawrence Leighton
Cosimo Patti
Yong Jin
Linyuan Zhai
Employment Agreements
All of our officers and directors serve on an at-will basis.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table lists, as of April 8, 2010, the number of shares of common stock beneficially owned by (i) each person or entity known to the Company to be the beneficial
owner of more than 5% of the outstanding common stock; (ii) each officer and director of the Company; and (iii) all officers and directors as a group. Information relating to
beneficial ownership of common stock by our principal stockholders and management is based upon information furnished by each person using "beneficial ownership”
concepts under the rules of the Securities and Exchange Commission. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares
voting power, which includes the power to vote or direct the voting of the security, or investment power, which includes the power to vote or direct the voting of the security.
The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Under the Securities and
Exchange Commission rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of
securities as to which he or she may not have any pecuniary beneficial interest. Except as noted below, each person has sole voting and investment power.
The Certificate of Change to effectuating the 124.1 for 1 reverse split of the issued and outstanding shares of common stock, while correspondingly reducing the Company’s
authorized capital, was filed with the Secretary of State of Nevada on January 6, 2009. As of such date, the Company had 110,000,000 shares of stock authorized, of which
100,000,000 shares of common stock were authorized, issued and outstanding and 10,000,000 shares of preferred stock were authorized, of which 1,000,000 shares of Series A
Preferred Stock were issued and outstanding and 1,000,000 shares of Series B Preferred Stock were issued and outstanding.
27
As of December 31, 2009, there are 15,188 shares of Series C preferred stock, 1,437,957 shares of warrants convertible into 3,301,739 and 1,437,957 shares of the Company’s
common stock, respectively.
Name and Address of
Beneficial Owner(1)
Jie Han
Qingwei Ma
Junjie Ma
Taylor Zhang
Cosimo J. Patti
Lawrence W. Leighton
Linyuan Zhai
Yong Jin
All officers and directors
as a group (1 person)
XD. Engineering Plastics Company Limited
P.O. Box 957, Offshore Incorporations Centre
Road Town, Tortola, British Virgin Islands
*Less than 1%
Amount and Nature
of Beneficial
Ownership(2)
Percentage
of Class(3)
8,127,533
-
-
-
8,734
8,734
1,278
1,278
8,147,557
25,382,598 (4)
18.47%
*
-
*
*
*
*
*
18.51%
57.68%
(1)
(2)
(3)
(4)
Except as otherwise noted, each shareholder’s address is No. 9 Qinling Road, Yingbin Road Centralized Industrial Park, Harbin Development Zone, Heilongjiang,
China 150078.
Except as otherwise noted, all shares are owned of record and beneficially.
Percentage of beneficial ownership is based upon 44,007,589 shares of Common Stock outstanding as of April 8, 2010.
Includes 1,000,000 shares of Series B Preferred Stock which has voting power equivalent to 40% of the total voting power of the Company.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Related Party Transactions
Prior to the reverse merger, Ms. Piao owned 100% of Favor Sea (BVI) indirectly via XD Engineering, the former sole shareholder of Favor Sea (BVI). Xinda High-Tech and
Heilongjiang Xinda Hyundai Engineering Plastics Co., Ltd. are affiliate companies owned by the spouse of Mr. Han, who was the major shareholder of Harbin Xinda before the
ownership was transferred to HK Engineering Plastics.
On September 20, 2008, Harbin Xinda ("Buyer”) signed an agreement ("Agreement”) with Xinda High-Tech ("Seller”) to acquire all of the assets of Xinda High-Tech, including
plant and buildings, land use rights, machinery and equipment for a total amount of RMB240,000,000 (approximately $35,136,006 at date of signing). Harbin Xinda was required
to make two installment payments of the full purchase price of RMB50,000,000 by the end of December 31, 2008 and the remaining balance of RMB190,000,000 by the end of
September 30, 2009 if all assets purchased are transferred to the Company. On May 1, 2009, Harbin Xinda and Xinda High-Tech agreed to rescind the Agreement.
Prior to signing of the above-mentioned Agreement, the Company rented the buildings and equipment of Xinda High-Tech for the purpose of its production expansion. The
lease term was from May 1, 2008 to April 30, 2011. The lease payment was for a total of RMB2,000,000 per year. The lease contract was cancelled when Harbin Xinda and Xinda
High-Tech rescinded the Agreement on May 1, 2009 and at the same time, Harbin Xinda and Xinda High-Tech re-signed a new lease agreement for the office and factory space
at No. 9 Dalian North Road, Haping Road Centralized District, Harbin Development Zone, Harbin, Heilongjiang, China. The leased space is 23,893.53 square meters and the term
of the lease is from May 1, 2009 to April 30, 2012. The lease payment remains at RMB2,000,000 per year. In the years ended December 31, 2009 and 2008, the Company recorded
and paid $292,954 and $119,945, respectively for the rent expenses.
28
Item 14.
Principal Accountant Fees and Services
For the fiscal years ended December 31, 2009 and December 31, 2008, Moore Stephens Hong Kong and Bagell Josephs, Levine & Company, LLC, respectively, have billed us
the following fees for services rendered in connection with the audit and other services in respect to these years:
Audit Fees (1)
Audit-Related Fees
Total Audit and Audit-Related Fees
Tax Fees (2)
All Other Fees (3)
Total for independent public audit firms
2009
2008
$
$
109,819
-
109,819
-
7,500
$
117,319
$
95,000
-
95,000
-
2,500
97,500
(1) Services rendered for the audit of our annual financial statements included in our report on Form 10-K and the reviews of the financial statements included in our reports on
Form 10-Q filed with the SEC.
(2) Services in connection with the preparation of tax returns and the provision of tax advice.
(3) Services related to other miscellaneous securities filings
All (100%) of the fees described above were approved by our Board of Directors.
Item 15.
Exhibits, Financial Statement Schedules
Exhibit No.
3.1
Description of Exhibit
Certificate of Incorporation
Footnote
3.2
3.3
3.4
4.0
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Amended and Restated Certificate of Incorporation
By-laws
Certificate of Designation for Series C Convertible Preferred Stock
Stock Certificate
2009 Stock Option Plan
Form of Series A Warrant
Form of Series B Warrant
Agreement and Plan of Merger dated December 24, 2008 among the Company and the shareholders of Favor Sea
Limited
Designation Certificate of Series A Preferred Stock
Designation Certificate of Series B Preferred Stock
Asset Purchase Agreement dated September 20, 2008 between Harbin Xinda Macromolecule Material Co., Ltd. and
Harbin Xinda High-Tech Co., Ltd.
First Amendment to the Asset Purchase Agreement dated September 20, 2008
Termination Agreement by and between Harbin Xinda Macromolecule Material Co., Ltd. and Xinda High-Tech Co.,
Ltd. dated as of May 1, 2009
Lease Agreement dated May 1, 2009
Securities Purchase Agreement dated November 27, 2009
Registration Rights Agreement dated November 27, 2009
10.10
Form of Lock-Up Agreement
29
(1)
(1)
(1)
(1)
(5)
(7)
(7)
(2)
(2)
(2)
(2)
(3)
(4)
(4)
(7)
(7)
(7)
16.1
16.2
21.1
23.1
23.2
31.1
31.2
32.1
32.2
*
+
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Letter, dated December 31, 2008, from Robison, Hill & Co. to the Securities and Exchange Commission
Letter, dated November 4, 2009 from Bagell Josephs Levine & Company, LLC, to the Securities and Exchange
Commission
Subsidiaries of Registrant
Consent of Bagell Josephs, Levine & Company, LLC, Independent Auditors
Consent of Bagell Josephs, Levine & Company, LLC, Independent Auditors
Certification of Principal Executive Officer Required Under Section 302 of Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer Required Under Section 302 of Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officer and Principal Financial Officer Required Under Section 906 of Sarbanes-
Oxley Act of 2002
Certification of Principal Financial Officer and Principal Financial Officer Required Under Section 906 of Sarbanes-
Oxley Act of 2002
(2)
(6)
*
(7)
(8)
*
*
*
*
Filed herewith.
Management contract or compensatory plan or arrangement.
Filed as an exhibit to the Company’s registration statement on Form SB-2, as filed with the Securities and Exchange Commission on May 12, 2006, and
incorporated herein by this reference.
Filed as an exhibit to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on December 31, 2008, and incorporated
herein by this reference.
Filed as an exhibit to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on February 27, 2009, and incorporated
herein by this reference.
Filed as an exhibit to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on May 1, 2009, and incorporated herein
by this reference.
Filed as an exhibit to the Company’s registration statement on Form S-8, as filed with the Securities and Exchange Commission on May 29, 2009, and
incorporated herein by this reference.
Filed as an exhibit to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on November 6, 2009, and incorporated
herein by this reference.
Filed as an exhibit to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on November 30, 2009, and incorporated
herein by this reference.
Filed as an exhibit to the Company’s registration statement on Form S-3, as filed with the Securities and Exchange Commission on December 24, 2009, and
incorporated herein by this reference.
30
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: April 14, 2010
SIGNATURES
China XD Plastics Company Limited
/s/ Jie Han
Jie Han
Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jie Han, and each of them, his true and lawful
attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or
their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
/s/ Jie Han
Jie Han
/s/ Taylor Zhang
Taylor Zhang
/s/ Qingwei Ma
Qingwei Ma
/s/ Lawrence Leighton
Lawrence Leighton
/s/ Cosimo Patti
Cosimo Patti
/s/ Yong Jin
Yong Jin
/s/ Linyuan Zhai
Linyuan Zhai
Title
Chairman/Chief Executive Officer
(Principal Executive Officer and Director)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
31
Date
April 14, 2010
April 14, 2010
April 14, 2010
April 14, 2010
April 14, 2010
April 14, 2010
April 14, 2010
Financial Statements
Index of Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income and Other Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
F-2 to F-3
F-4
F-5
F-6
F-7
F-8 to F-43
F-1
To the Board of Directors and Shareholders of
China XD Plastic Company Limited
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of China XD Plastics Company Limited and subsidiaries (the "Company") as of December 31, 2009, and the
related consolidated statements of income and other comprehensive income, changes in stockholders' equity and cash flows for the year then ended, as well as the effect of the
adjustment for the correction of the error described in Note 3 as of and for the year ended December 31, 2008. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We were not engaged to audit, review,
or apply any procedures to the consolidated financial statements of the Company for the year ended December 31, 2008 other than with respect to the aforementioned
adjustment and, accordingly, we do not express an opinion or any other form of assurance on the consolidated financial statements for the year ended December 31, 2008,
taken as a whole.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2009, and the results
of its operations and its cash flows for the year then ended, as well as the effect of the adjustment for the correction of the error described in Note 3 as of and for the year
ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
/s/ Moore Stephens
Certified Public Accountants
Hong Kong
April 14, 2010
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
China XD Plastics Company Ltd
(Formerly NB Telecom, Inc)
We have audited the accompanying consolidated balance sheets of China XD Plastics Company Ltd (formerly NB Telecom, Inc) as of December 31, 2008 and 2007 and the
related consolidated statements of income and other comprehensive income, changes in stockholders’ equity, and cash flows for the years ended December 31, 2008 and 2007.
China XD Plastics Company Ltd’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards established by the Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China XD Plastics Company Ltd as of
December 31, 2008 and 2007 and the results of its operations, changes in stockholders’ equity, and cash flows for the years ended December 31, 2008 and 2007 in conformity
with accounting principles generally accepted in the United States of America.
/s/ Bagell Josephs, Levine & Company, LLC
Bagell Josephs, Levine & Company, LLC
Marlton, New Jersey
March 9, 2009
This report is a copy of the previously issued report.
The predecessor auditor has not reissued this report.
F-3
CHINA XD PLASTICS COMPANY LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2009 AND 2008
ASSETS
Note
2009
2008
(Restated - note 3)
Current assets:
Cash and cash equivalents
Restricted cash
Notes receivable
Accounts receivable - net of allowance for doubtful receivables of
$166,095 and $99,669, respectively
Prepaid expenses and other receivables
Inventories
Advances to employees
Advances to suppliers
Taxes receivable
Total current assets
Property, plant and equipment, net
Other assets:
Deferred charges
Intangible assets, net
Total other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term loans
Bank acceptance notes payable
Accounts payable
Other payables
Accrued expenses
Taxes payable
Due to related parties
Deferred revenue
Dividends payable
Total current liabilities
Other liabilities:
Embedded conversion feature liabilities
Common stock warrant purchase liabilities
Total other liabilities
Total liabilities
Series C convertible redeemable preferred stock 15,188 and -0-
shares issued and outstanding as of December 31, 2009 and 2008, respectively
Commitments and contingencies
Stockholders' equity
Preferred Stock, $0.0001 par value, 50,000,000 and 10,000,000 shares authorized
as of December 31, 2009 and 2008, respectively
Series A Preferred Stock, - 0 - and 1,000,000 shares issued and outstanding
as of December 31, 2009 and 2008, respectively
Series B Preferred Stock, 1,000,000 shares issued and outstanding as of
December 31, 2009 and 2008, respectively
Common Stock, $0.0001 par value, 500,000,000 and 100,000,000 shares authorized,
40,867,050 and 805,802 shares issued and outstanding as of December 31, 2009 and 2008, respectively
Additional paid-in-capital
Retained earnings
Statutory surplus reserve fund
Accumulated other comprehensive income
Total stockholders' equity
4
5
6
7
2
8
9
10
12
13
11
15
15
15
20
17
17
17
21
$
$
$
$
6,850,784
-
407,487
8,558,172
253,172
18,371,485
512,745
20,245,861
406,755
55,606,461
31,083,389
-
241,945
241,945
3,869,035
3,664,346
303,437
11,234,507
21,917
12,438,782
92,329
13,131,074
-
44,755,427
19,332,712
378,073
247,681
625,754
86,931,795
$
64,713,893
$
21,678,565
-
1,258,459
714,504
648,358
4,134
148,397
300,296
77,396
24,830,109
18,798,059
7,892,513
26,690,572
20,520,337
8,061,561
113,232
106,232
820,625
17,777
7,542,950
3,469,796
-
40,652,510
-
-
-
$
51,520,681
$
40,652,510
13,891,477
-
-
100
4,087
15,360,949
2,160,621
2,471,007
1,522,873
21,519,637
100
100
81
7,956,693
14,577,235
-
1,527,174
24,061,383
Total liabilities and stockholders' equity
$
86,931,795
$
64,713,893
The accompanying notes are an integral part of these consolidated financial statements
F-4
CHINA XD PLASTICS COMPANY LIMITED
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Sales
Cost of sales
Gross profit
Operating expenses
Research and development expenses
Selling expenses
General and administrative expenses
Total operating expenses
Operating income
Other income (expenses)
Interest income (expenses)
Other income
Other expense
Changes in fair value of warrants and embedded derivatives
Total other expense
Income before income taxes
Provision for income taxes
Net income
Other comprehensive income (loss)
Foreign currency translation adjustment
Comprehensive income
Net income
Dividends to Series C preferred stockholders
Deemed Series C preferred stock dividends
Net income (loss) attributable to common shareholders
Basic and diluted earnings (loss) per common share
Basic
Diluted
Weighted average common share outstanding
Basic
Diluted
Note
2009
2008
(Restated - note 3)
$
135,745,329
$
75,765,428
(105,160,568)
30,584,761
1,329,656
400,731
11,220,406
12,950,793
17,633,968
(1,418,395)
107,999
(11,085)
(12,221,972)
(13,543,453)
4,090,515
(67,249)
4,023,266
$
(4,301)
4,018,965
$
4,023,266
$
(77,396)
(13,891,477)
(9,945,607)
(0.36)
(0.36)
$
$
(58,431,799)
17,333,629
778,994
322,650
7,221,555
8,323,199
9,010,430
(687,659)
28,283
(102,139)
-
(761,515)
8,248,915
(35,332)
8,213,583
908,069
9,121,652
8,213,583
-
-
8,213,583
19.81
0.21
27,789,044
27,789,044
414,569
38,608,641
2
15
14
19
19
19
19
19
19
19
19
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements
F-5
Balance at
December 31,
2007
Shares issued in
connection with
reverse merger
Stock options
issued to a director
(note 3)
Net income for the
year (restated -
note 3)
Foreign currency
translation
adjustments
Balance at
December 31,
2008 (restated -
note 3)
Stock issued from
series A preferred
stock conversion
Stock options
issued to a director
(note 3)
CHINA XD PLASTICS COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Commen Stock, Par value
$ 0.0001
Preferred Stock A, Par
value $ 0.0001
Preferred Stock B, Par
value $ 0.0001
Shares
Amount
Shares
Amount
Shares
Amount
Additional
Paid-in-
Capital
Statutory
Surplus Retained
Reserve
Fund
Earnings
Accumulated
Other
Comprehensive
Income
Total
405,802
$
41
1,000,000
$
100
1,000,000
$
100
$ 2,482,826
$
-
$ 6,363,652
$
619,105
$ 9,465,824
400,000
40
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(40)
-
5,473,907
-
-
-
-
-
-
-
-
-
-
-
-
-
$ 5,473,907
8,213,583
-
8,213,583
-
908,069
$
908,069
805,802
$
81
1,000,000
$
100
1,000,000
$
100
$ 7,956,693
$
-
$ 14,577,235
$
1,527,174
$ 24,061,383
38,194,072
3,819
(1,000,000) $
(100)
-
-
Shares issued in
connection with
stock compensation 1,790,000
179
Shares issued to
directors
Warrant issued for
services
Net income for the
year
Cash dividends
payable ($180 per
series C preferred
share)
Deemed Series C
preferred stock
dividends
Appropriation of
statutory surplus
reserve fund
Foreign currency
translation
adjustments
Balance at
December 31,
2009
20,024
57,152
-
-
-
-
-
2
6
-
-
-
-
-
40,867,050
$
4,087
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(3,719)
-
3,065,388
-
4,217,321
79,012
46,254
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
-
$ 3,065,388
-
$ 4,217,500
-
$
79,014
-
$
46,260
4,023,266
-
$ 4,023,266
(77,396)
-
$
(77,396)
-
(13,891,477)
-
$ (13,891,477)
-
2,471,007
(2,471,007)
-
$
-
-
-
-
(4,301) $
(4,301)
-
$ 1,000,000
$
100
$ 15,360,949
$ 2,471,007
$ 2,160,621
$
1,522,873
$ 21,519,637
The accompanying notes are an integral part of these consolidated financial statements
F-6
CHINA XD PLASTICS COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation & amortization
Stock-based compensation expense
Allowance for doubtful receivables
Changes in fair value of warrants and embedded derivatives
Loss on disposals of property, plant and equipment
Changes in assets and liabilities:
(Increase) decrease in -
Restricted cash
Notes receivables
Accounts receivable
Prepaid expenses and other receivables
Inventories
Advance to employees
Advances to suppliers
Taxes receivable
Deferred charge
Increase (decrease) in -
Accounts payable and other payables
Accrued expenses
Taxes payable
Deferred revenue
Net cash provided by (used in) operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Proceeds from sales of property, plant and equipment
Collection on due from related party
Net cash used in investing activities
Cash flows from financing activities
Proceeds from short term loans
Proceeds from bank acceptance notes
Repayment of bank acceptance notes payable
Proceeds from issuance of series C preferred stock
Repayment to related party loans
Proceeds from related party loans
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosures of cash flow information:
Interest paid
Income taxes paid
Non-cash investing and financing activities:
Common stock issued for services
Placement agent warrants
Warrants issued for consulting service
Stock options granted to a director
2009
2008
(Restated - note 3)
$
4,023,266
$
8,213,583
2,009,533
7,985,285
66,426
12,221,972
9,413
3,659,730
(104,188)
2,601,377
(231,652)
(5,937,387)
(420,249)
(7,119,221)
(406,512)
377,595
1,752,596
(171,552)
(13,621)
(3,165,309)
17,137,502
(13,798,468)
16,000
-
(13,782,468)
1,171,113
-
(8,051,406)
13,891,477
(7,596,292)
206,628
(378,480)
5,195
2,981,749
3,869,035
$
$
$
$
$
$
$
6,850,784
$
1,402,661
61,943
4,296,514
577,123
46,260
3,065,388
$
$
$
$
$
$
967,105
5,473,907
6,450
-
-
2,101,449
(293,656)
(5,684,397)
22,462
(6,347,868)
37,740
(11,061,383)
-
(371,266)
(497,713)
759,716
(1,509,948)
3,309,634
(4,874,185)
(12,037,135)
-
110,808
(11,926,327)
18,711,534
20,582,687
(26,196,147)
-
-
7,411,175
20,509,249
72,843
3,781,580
87,455
3,869,035
700,260
13,282
-
-
-
5,473,907
The accompanying notes are an integral part of these consolidated financial statements
F-7
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 1. ORGANIZATION AND BASIS OF PRESENTATION
China XD Plastics Company Limited ("China XD Plastics”), formerly known as NB Telecom, Inc. ("NB Telecom”), was originally incorporated as NB Payphones Ltd. under the
laws of the state of Pennsylvania on November 16, 1999. On December 27, 2005, we migrated our state of organization to the state of Nevada and effective March 23, 2006, the
name was changed to NB Telecom.
On December 24, 2008, NB Telecom acquired all of the outstanding capital stock of Favor Sea Limited ("Favor Sea (BVI)”), a British Virgin Islands corporation, whose assets,
held through its subsidiaries, are 100% of the registered capital of Harbin Xinda Macromolecule Material Co., Ltd. ("Harbin Xinda”), a limited liability company established
under the laws of the People’s Republic of China ("China” or "PRC”) and Harbin Xinda’s wholly-owned subsidiary, Harbin Xinda Macromolecule Material Research Institute
(the "Research Institute”). Harbin Xinda is engaged in the development, manufacture and marketing of modified plastics, primarily for use in the automotive industry. Harbin
Xinda’s offices and manufacturing facilities are located in China.
· In connection with the acquisition, the following transactions took place:
China XD Plastics issued 10 shares of the common stock which constituted no more than 10% ownership interest in China XD Plastics and 1,000,000 shares of
convertible Series A preferred stock of China XD Plastics to the shareholders of Favor Sea (BVI), and also 1,000,000 shares of Series B preferred stock to XD
Engineering Plastics Company Limited ("XD Engineering”), a British Virgin Islands corporation, the principal shareholder of Favor Sea (BVI), in exchange for all of the
outstanding stock of Favor Sea (BVI) (the "Share Exchange” or "Merger”). The 10 shares of the common stock were converted into approximately 50,367,778 shares of
the common stock of NB Telecom prior to and approximately 405,802 post a reverse stock split of 124.1 for 1 pursuant to Nevada Revised Statutes Section 78.207 for
both the total number of authorized shares of common stock and the total number of issued and outstanding shares of common stock ("Reverse Split”), and the
1,000,000 shares of convertible Series A preferred stock of NB Telecom shall convert approximately at a rate of 1:38.2 into 38,194,072 shares of the common stock of NB
Telecom after the completion of the Merger so that eventually the shareholders of Favor Sea (BVI) own approximately 99% of the common stock of NB Telecom.
· The record date for the Reverse Split was set for December 31, 2008. The record holders of NB Telecom’s common stock on the date of December 31, 2008 should be
subject to a 124.1:1 reverse split with fractional shares to be rounded up to one hundred round lot, with the round-up shares to be deducted from certain designated
shareholders by NB Telecom.
F-8
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 1. ORGANIZATION AND BASIS OF PRESENTATION (Continued)
· In connection with the acquisition of Favor Sea (BVI), former officers and directors of NB Telecom resigned and executive officers of Favor Sea (BVI) were appointed
as China XD Plastic’s new officers and directors.
· As part of the Merger, the name of the company was changed from NB Telecom to China XD Plastics.
As a result of these transactions, the shareholders of Favor Sea (BVI) owned majority of the equity in China XD Plastics.
The acquisition was accounted for as a reverse merger under the purchase method of accounting since there had been a change of control. Accordingly, Favor Sea (BVI) and
its subsidiaries are treated as the continuing entities for accounting purposes.
Favor Sea (BVI) was incorporated under the laws of the British Virgin Islands on May 2, 2008.
On August 11, 2008, Favor Sea (BVI) acquired a 100% interest in Hong Kong Engineering Plastics Company Limited ("HK Engineering Plastics”), a limited liability company
incorporated under the laws of the Hong Kong Special Administrative Region on May 27, 2008.
Favor Sea (US) Inc. ("Favor Sea (US)”), wholly owned by Favor Sea (BVI), was incorporated in the state of New York in the U.S. on December 15, 2008.
HK Engineering Plastics, in turn, owns 100% interest of Harbin Xinda, a company established in the PRC on September 23, 2004.
China XD Plastics, through its indirectly owned subsidiary, Harbin Xinda is primarily engaged in the business of research and development, manufacture, and distribution of
modified and engineering plastic pellets used in automotive parts through its manufacturing facility and its wholly owned research laboratory, the Research Institute, a
separate entity established in the PRC on November 9, 2007.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements for the years ended December 31, 2009 and 2008 include the accounts of China XD Plastics, Favor Sea (BVI), Favor Sea (US), HK
Engineering Plastics, Harbin Xinda and the Research Institute, collectively referred to as the "Company”. The Company’s consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP”). All significant inter-company balances and transactions
are eliminated in consolidation.
F-9
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
In preparing the financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the
reporting periods. Significant estimates, required by management, include share-based compensation and fair value of derivatives. Actual results could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As
of December 31, 2009 and 2008, the Company did not have any cash equivalents.
Accounts Receivable
Accounts receivable consist primarily of receivables resulting from sales of products, and are stated at net realizable value.
Allowance for Doubtful Receivables
The Company recognizes an allowance for doubtful receivables to ensure accounts and other receivables are not overstated due to uncollectability. Allowance for doubtful
receivables is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical
experience. An additional allowance for individual accounts is recorded when the Company becomes aware of a customer’s or other debtor’s inability to meet its financial
obligation, such as in the case of bankruptcy filings or deterioration in the customer’s or other debtor’s operating results or financial position. If circumstances related to
customers or debtors change, estimates of the recoverability of receivables would be further adjusted (See Note 5).
Inventories
Inventories comprise raw materials, packing materials, work in progress and finished goods. Inventories are valued at the lower of cost or market with cost determined by the
weighted average method. Management periodically compares the cost of inventories with the market value and an allowance is made to write down the inventories to their
respective market values, if lower than cost. No allowance for inventories was considered necessary for the years ended December 31, 2009 and 2008.
F-10
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present
working condition and locations for its intended use. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets.
Management estimates that property, plant and equipment have a 5% residual value. The estimated useful lives are as follows:
Plant and buildings
Machinery, equipment and automobiles
39 years
5-10 years
Expenditure for maintenance and repairs is charged to expense as incurred. Additions, renewals and betterments are capitalized.
The gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets, and, if any, is
recognized in the statement of income and other comprehensive income.
Advances to Suppliers
Advances to suppliers represent payments made and recorded in advance for goods and services. The Company makes advance payments to raw materials suppliers. In order
to maintain a long-term relationship with the suppliers, the Company frequently makes advance payments from one and a half month to three months ahead. The advances to
suppliers were $20,245,861 and $13,131,074 as of December 31, 2009 and 2008, respectively.
Impairment of Long-lived Assets
Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an
asset to the estimated undiscounted future cash flows expected to be generated by the assets. If the carrying amounts of assets exceed their estimated undiscounted future
cash flows, an impairment charge is recognized by the amount by which the carrying amounts of the assets exceed the fair value of the assets. Fair value is generally
determined using the asset’s expected future discounted cash flows or market value, if readily determinable. No impairment loss was recorded for the years ended December 31,
2009 and 2008, respectively.
F-11
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible Asset
Intangible asset consists of land use right which is stated at cost less amortization. Amortization is computed using the straight-line method, based on the period over which
the right is granted by the relevant authorities in Heilongjiang Province, PRC.
Stock Based Compensation
The Company accounts for stock-based compensation arrangements using the fair value method in accordance with Statement of Financial Accounting Standards ("SFAS”)
No. 123 (revised 2004) "Share-Based Payment”, which is now codified as Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC”) 718
"Compensation-Stock Compensation”. FASB ASC 718 requires that the fair value of share awards issued, modified, repurchased or cancelled after implementation, under share-
based payment arrangements, is measured as of the date the award is issued, modified, repurchased or cancelled. The resulting cost is then recognized in the statement of
income and comprehensive income over the service period.
The Company estimates fair value of restricted stock based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant.
The fair value of stock options and warrants is estimated using the Black-Scholes option-pricing model. The Company’s expected volatility assumption is based on similar
public entities for which share and option price information was available, and considered the historical volatilities of those public entities’ share prices in calculating the
expected volatility appropriate to the Company. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of
grant.
The Company measures compensation expense for its non-employee stock-based compensation under FASB Emerging Issues Task Force (EITF) Issue No. 96-18, "Accounting
for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, which is now codified as FASB ASC 718.
The fair value of the stock issued is used to measure the transaction, as this is more reliable than the fair value of the services received. Fair value is measured as the value of
the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair
value of the equity instrument is charged directly to compensation expense.
F-12
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Based Compensation (Continued)
Stock compensation expense recognized is based on awards expected to vest, and there were no estimated forfeitures as the current options outstanding were only issued to
founders and senior executives of the Company, which have very low turnover. FASB ASC 718 requires forfeitures to be estimated at the time of grant and revised in
subsequent periods, if necessary, if actual forfeitures differ from those estimates.
Derivative Financial Instruments
Derivative financial instruments are accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities”, which is now codified as FASB ASC
815 "Derivatives and Hedging”. Under FASB ASC 815, all derivative instruments are recorded on the balance sheet as assets or liabilities and measured at fair value. Changes
in the fair value of derivative instruments are recorded in current earnings.
Income Taxes
The Company accounts for income taxes under SFAS No.109 "Accounting for Income Taxes", which is now codified as FASB ASC 740 "Income Taxes". Under FASB ASC
740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under FASB ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
The Company reviewed the differences between the tax bases under PRC tax laws and financial reporting under US GAAP, and no material differences were found.
FASB ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and it prescribes a recognition threshold and
measurement attributable for the financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return. FASB ASC 740 also provides
guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosures and transitions. Interest and penalties from tax assessments, if any,
are included in general and administrative expenses in the consolidated statements of operations.
The Company recognizes that virtually all tax positions in the PRC are not free of some degree of uncertainty due to tax law and policy changes by the PRC government.
However, the Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current PRC government officials.
F-13
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of December 31, 2009 is not
material to its results of operations, financial condition or cash flows. The Company also believes that the total amount of unrecognized tax benefits as of December 31, 2009, if
recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on
current Chinese tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next 12 months producing, individually or in the aggregate,
a material effect on the Company’s results of operations, financial condition or cash flows.
Under current PRC tax laws, 10% withholding tax is imposed in respect to distributions paid to foreign owners. As the subsidiaries in the PRC have no intention to pay
dividends in the foreseeable future, no withholding tax on undistributed earnings has been accrued as of December 31, 2009.
Revenue Recognition
The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin No. 101, as revised by No.104, issued by the United States Securities and
Exchange Commission, or U.S SEC, which is now codified as FASB ASC 605. In accordance with FASB ASC 605, revenues are recognized when the four following criteria are
met: (i) persuasive evidence of an arrangement exists, (ii) the delivery is completed, (iii) the fees are fixed or determinable, and (iv) collectability is reasonably assured.
Revenue from sales of products is recognized when the title is passed to customers upon delivery and when collectability is reasonably assured. The Company does not
provide its customers with the right of return (except for quality). All sales are based on firm customer orders with fixed terms and conditions, which generally cannot be
modified.
Research and Development Expenses
Research and development expenses are costs associated with developing the Company’s intellectual property. Research and development costs are expensed as incurred.
The costs of equipment that are acquired or constructed for research and development activities and have alternative future uses are classified as plant and equipment and
depreciated over their estimated useful lives. The research and development expenses for the years ended December 31, 2009 and 2008 were $1,329,656 and $778,994,
respectively.
F-14
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments” which is now codified as FASB ASC 825 "Financial Instruments”, requires disclosing fair value to the
extent practicable for financial instruments that are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.
The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, notes and other receivables, accounts payable, accrued
expenses, notes payable and other payables approximate fair value due to the short-term nature of these items. The carrying amounts of short-term loans from bank
approximate the fair value based on the Company's expected borrowing rate for debt with similar remaining maturities and comparable risk.
Earnings (Loss) per Share
The Company computes earnings (loss) per share ("EPS’) in accordance with SFAS No. 128, "Earnings per Share” and SEC Staff Accounting Bulletin No. 98 ("SAB 98”), which
is now codified as FASB ASC 260. FASB ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income
divided by the weighted average common shares outstanding for the year.
Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they
had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase
income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains or losses
resulting from currency translations of foreign subsidiaries.
F-15
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and accounts receivable. The Company does not require
collateral or other security to support these receivables. The Company conducts periodic reviews of its customers' financial condition and customer payment practices to
minimize collection risk on accounts receivable. As of December 31, 2009 and 2008, the Company had credit risk exposure of uninsured cash in banks of approximately
$6,850,784 and $7,533,381, respectively.
Risks and Uncertainties
The Company’s operations in the PRC are subject to special consideration and significant risks not typically associated with companies in North America and Western Europe.
These include risks associated with, among others, political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely
affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures,
currency conversion, remittances abroad, and rates and methods of taxation, among other things.
Foreign Currency Translation
The functional currency of the Company is Renminbi, and its reporting currency is U.S. dollars. In accordance with SFAS No. 52, "Foreign Currency Translation” which is now
codified as FASB ASC 830 "Foreign Currency Matters”. The Company’s balance sheet accounts are translated into U.S. dollars at the year-end exchange rates and all revenue
and expenses are translated into U.S. dollars at the average exchange rates prevailing during the periods in which these items arise. Translation gains and losses are deferred
and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations from
transactions denominated in a currency other than the functional currency are included in the consolidated statement of income as incurred.
The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a
material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.
Segment Reporting
The Company has only one business segment. All customers are located in the PRC. The majority of assets are located in the PRC. No segment reporting disclosure has been
made.
F-16
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Profit Appropriation
In accordance with PRC regulations, the PRC subsidiaries are required to make appropriations to the statutory surplus reserve fund, based on after-tax net income determined
in accordance with PRC GAAP. Appropriation to the statutory surplus reserve fund should be at least 10% of the after-tax net income determined in accordance with PRC
GAAP until the reserve is equal to 50% of the entity’s registered capital. Statutory surplus reserve fund is non-distributable other than in liquidation.
Recent Accounting Pronouncements
In April 2008, the FASB issued ASC 350-30-35-1. FASB ASC 350-30-35-1 amends the factors that should be considered in developing renewal or extension assumptions used
to determine the useful life of a recognized intangible asset under FASB ASC 350-30-35-1, Goodwill and Other Intangible Assets. FASB ASC 350-30-35-1 is intended to improve
the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure the fair value of the asset under other applicable
accounting literature. FASB ASC 350-30-35-1 is effective for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The adoption of FASB ASC 350-30-35-
1 had no material effect on the Company’s financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. This FSP
gives guidance on the computation of earnings per share and the impact of share-based instruments that contain certain non-forfeitable rights to dividends or dividend
equivalents. The FSP is effective for fiscal years beginning after December 31, 2008 and is now codified as FASB ASC 718 "Compensation-Stock Compensation” effective for
interim and annual periods ending after September 15, 2009. The adoption of FASB ASC 718 did not have a material impact on the Company’s financial position, results of
operations and cash flows.
In April 2009, the FASB issued three related staff positions to clarify the application of FASB ASC 820 to fair value measurements in the current economic environment, modify
the recognition of other-than-temporary impairments of debt securities, and require companies to disclose the fair value of financial instruments in interim periods. The final
staff positions are effective for interim and annual periods ending after March 15, 2009. The adoption had no material effect on the Company’s financial statements.
In April 2009, the FASB issued FASB ASC 820. FASB ASC 820 clarifies when markets are illiquid or that market pricing may not actually reflect the "real” value of an asset. If a
market is determined to be inactive and market price is reflective of a distressed price then an alternative method of pricing can be used, such as a present value technique to
estimate fair value. FASB ASC 820 identifies factors to be considered when determining whether or not a market is inactive. FASB ASC 820 would be effective for interim and
annual periods ending after June 15, 2009, with early adoption permitted for periods ending after June 15, 2009 and shall be applied prospectively. The adoption of FASB ASC
820 had no material effect on the Company’s financial statements.
F-17
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In May 2009, the FASB issued FSP SFAS 165 "Subsequent Events”. The objective of this statement is to establish general standards of accounting for and disclosures of
events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for the interim and annual periods
ending after June 15, 2009, which is now codified as FASB ASC 855 "Subsequent Events”. The adoption of FASB ASC 855 did not have a material impact on the Company’s
financial position, results of operations and cash flows. Effective February 24, 2010, the Company adopted Accounting Standards Update ("ASU”) No. 2010-09, "Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements”, which removes the requirement to disclose the date through which subsequent events
have been evaluated. The adoption of the ASU did not have a material impact on the Company’s financial position, results of operations and cash flows.
In June 2009, the FASB issued FASB ASC 105, which establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized
by the FASB to be applied in the preparation of financial statements in conformity with generally accepted accounting principles. FASB ASC 105 explicitly recognizes rules and
interpretive releases of the Securities and Exchange Commission ("SEC”) under federal securities laws as authoritative GAAP for SEC registrants. FASB ASC 105 is effective
for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification is effective for the Company for the year ended December 31,
2009. Adoption of FASB ASC 105 did not have a material impact on the Company’s consolidated financial statements.
In June 2009, the FASB issued FASB ASC 860, which eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of
a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. FASB
ASC 860 will be effective for transfers of financial assets in fiscal years beginning after November 15, 2009, and in interim periods within those fiscal years with earlier adoption
prohibited. FASB ASC 860 is not expected to have a material effect on the Company’s financial condition or results of operations.
In June 2009, the FASB issued ASC 810, which addressed the elimination of the concept of a qualifying special purpose entity. FASB ASC 810 also replaces the quantitative-
based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying
which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the
entity. Additionally, FASB ASC 810 provides more timely and useful information about an enterprise’s involvement with a variable interest entity. FASB ASC 810 shall be
effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. FASB ASC 810 is not expected to have a material effect on the Company’s
financial condition or results of operations.
F-18
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In August 2009, the FASB issued Accounting Standards Update No. 2009-02 ("ASU 2009-03”), SEC update – Amendments to various topics containing SEC Staff Accounting
Bulletins to update cross-references to Codification test. ASU 2009-03 did not have a material effect on the Company’s financial condition or results of operations.
In August 2009, the FASB issued Accounting Standard Update No.2009-05 ("ASU 2009-05”), FASB ASC 820 "Measuring Liabilities at Fair Value”. ASU 2009-5 applies to all
entities that measure liabilities at fair value within scope of FASB ASC 820. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to measure fair value using one or more valuation techniques.
The amendments in ASU 2009-05 also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other
inputs relating to the existence of a restriction that prevents the transfer of the liability. It also clarifies that both a quoted price in an active market for the identical liability at
the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are
required are Level 1 fair value measurements. The guidance provided in ASU 2009-05 is effective for the first reporting period beginning after issuance. The adoption of ASU
2009-5 is not expected to have a material effect on the Company’s financial condition or results of operations.
In September 2009, the FASB issued Accounting Standards Update No. 2009-07 ("ASU 2009-07”), "Accounting for Various Topics”. ASU 2009-07 represents technical
corrections to various topics containing SEC guidance based on external comments received. The adoption of this guidance did not have a material effect on the Company’s
financial condition or results of operations.
In September 2009, the FASB issued Accounting Standards Update No. 2009-12 ("ASU 2009-12”), "Fair Value Measurements and Disclosures (Topic 820), Investments in
Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent)”. ASU 2009-12 provides amendments to Subtopic 820-10, "Fair Value Measurements and
Disclosures — Overall”, for the fair value measurement of investments in certain entities that calculate net asset value per share. This ASU also requires disclosures by major
category of investment about the attributes of investments within the scope of the amendments in this Update. The amendments in this Update are effective for interim and
annual periods after December 15, 2009. The adoption of this guidance is not expected to have a material effect on the Company’s financial condition or results of operations.
F-19
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 3. RESTATEMENT TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008
The Company has restated the consolidated financial statements for the year ended December 31, 2008 as a result of a non-cash error regarding the accounting for stock
options granted to a director, Mr. Jie Han ("Mr. Han”) (the "Options”) pursuant to the requirements of ASC Topic 718.
Pursuant to an incentive option agreement dated May 16, 2008, Ms. Qiuyao Piao ("Ms. Piao”) granted 40,000 Options to Mr. Han to purchase shares of XD Engineering
Plastics Company Limited ("XD Engineering”) at a nominal price if certain performance targets are met. Ms. Piao is the sole shareholder of XD Engineering, which is the
Company’s controlling shareholder. Mr. Han may purchase 25% of the total outstanding equity in XD Engineering if the Company’s consolidated revenue during the first three
quarters of 2008 exceeds $40,000,000. He may purchase 14% of the total outstanding equity in XD Engineering if the Company’s consolidated revenue during the first three
quarters of 2009 exceeds $70,000,000. Finally, he may purchase 61% of the total outstanding equity in XD Engineering if the Company’s revenue during the first three quarters
of 2010 exceeds $110,000,000.
In accordance with ASC Topic 718, the Options should have been accounted for in the Company’s consolidated financial statements as share-based payments awarded to an
employee by a related party as compensation for services rendered.
The Company’s restated its consolidated financial statements for the year ended December 31, 2008 to incorporate the additional stock-based compensation expense in respect
of the options granted to Mr. Han of $5,473,907. The impact on previously reported net income for the year ended December 31, 2008 is presented below.
As previously reported
Adjustment for stock-based compensation
As adjusted
Net income for
the year ended
December 31, 2008
Retained earnings
as of
January 1, 2009
13,687,490
(5,473,907)
8,213,583
20,051,142
(5,473,907)
14,577,235
F-20
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 3. RESTATEMENT TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 (Continued)
The following table reconciles the previously filed consolidated statement of income to the restated consolidated statement of income for the year ended December 31, 2008
specified below.
General and administrative expenses
Total operating expenses
Operating income
Income before income taxes
Net income
Comprehensive income
Earnings per share-basic:
Earnings per share-diluted:
Weighted average number of shares:
Basic:
Diluted:
As previously
reported
US$
Adjustment
US$
As restated
US$
1,747,648
2,849,292
14,484,337
13,722,822
13,687,490
14,595,559
33.02
0.35
414,569
38,608,641
5,473,907
5,473,907
(5,473,907)
(5,473,907)
(5,473,907)
(5,473,907)
(13.21)
(0.14)
7,221,555
8,323,199
9,010,430
8,248,915
8,213,583
9,121,652
19.81
0.21
-
-
414,569
38,608,641
The following table reconciles the previously filed consolidated balance sheet to the restated consolidated balance sheet as of December 31, 2008 specified below.
Additional paid-in-capital
Retained earnings
As previously
reported
US$
Adjustment
US$
As restated
US$
2,482,786
20,051,142
5,473,907
(5,473,907)
7,956,693
14,577,235
The following table reconciles the previously filed consolidated statement of cash flows to the restated consolidated statement of cash flows for the year ended December 31,
2008 specified below.
Net income
Stock-based compensation expense
As previously
reported
US$
Adjustment
US$
As restated
US$
13,687,490
-
(5,473,907)
5,473,907
8,213,583
5,473,907
F-21
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 3. RESTATEMENT TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 (Continued)
The following tables reconcile the previously filed quarterly results to the restated quarterly results for the three months ended March 31, 2009 specified below.
Additional paid-in-capital
Retained earnings
As previously
reported
US$
Adjustment
US$
As restated
US$
2,482,786
24,067,785
5,473,907
(5,473,907)
7,956,693
18,593,878
The following tables reconcile the previously filed quarterly results to the restated quarterly results for the six months ended June 30, 2009 specified below.
General and administrative expenses
Total operating expenses
Operating income
Income before income taxes
Net income
Comprehensive income
Earnings per share-basic:
Earnings per share-diluted:
Weighted average number of shares:
Basic:
Diluted:
Additional paid-in-capital
Retained earnings
As previously
reported
US$
Adjustment
US$
As restated
US$
2,161,053
2,765,269
9,659,556
9,019,494
9,013,033
8,985,637
0.56
0.23
16,070,273
39,298,420
2,912,981
29,064,174
3,065,388
3,065,388
(3,065,388)
(3,065,388)
(3,065,388)
(3,065,388)
(0.19)
(0.08)
-
-
8,539,295
(8,539,295)
5,226,441
5,830,657
6,594,168
5,954,106
5,947,645
5,920,249
0.37
0.15
16,070,273
39,298,420
11,452,276
20,524,879
F-22
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 3. RESTATEMENT TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 (Continued)
The following tables reconcile the previously filed quarterly results to the restated quarterly results for the nine months ended September 30, 2009 specified below.
General and administrative expenses
Total operating expenses
Operating income
Income before income taxes
Net income
Comprehensive income
Earnings per share-basic:
Earnings per share-diluted:
Weighted average number of shares:
Basic:
Diluted:
Additional paid-in-capital
Retained earnings
Note 4. RESTRICTED CASH
As previously
reported
US$
Adjustment
US$
As restated
US$
5,768,050
6,860,563
13,981,484
13,000,313
12,969,672
12,923,066
0.54
0.33
23,797,701
39,206,884
5,670,316
33,020,813
3,065,388
3,065,388
(3,065,388)
(3,065,388)
(3,065,388)
(3,065,388)
(0.12)
(0.08)
-
-
8,539,295
(8,539,295)
8,833,438
9,925,951
10,916,096
9,934,925
9,904,284
9,857,678
0.42
0.25
23,797,701
39,206,884
14,209,611
24,481,518
For the years ended December 31, 2009 and 2008, the Company had restricted cash of nil and $3,664,346, respectively. The Company’s lenders require the Company to maintain
with the lending banks a cash balance of a minimum of 40% -50% of the balance of the bank acceptance notes payable (See Note 13) as collateral for the Company’s obligations
to the lenders. The Company maintained a cash balance of $3,224,624 for bank acceptance notes with the lending banks. The Company repaid the entirety of the bank
acceptance notes payable in September 2009. The Company also pledged cash of $439,722 for a short term loan (See Note 12). The short-term loan was repaid in April 2009.
Note 5. ACCOUNTS RECEIVABLE
Accounts receivable consists of trade receivables resulting from sales of products during the normal course of business. Accounts receivable as of December 31, 2009 and
2008 amounted to $8,558,172 and $11,234,507, respectively.
The Company collaborates directly with its end users on new product development, product certifications and post-sales support. Sales contracts are usually signed directly
between the Company and its end users. Due to the nature of this industry, the Company also regularly uses distributors to sell its products to various end users. This
arrangement can greatly assist to ensure timely collections of its accounts receivable and reduce its selling and administrative costs. The Company believes that all of the
accounts receivable outstanding from these distributors are collectible (See Note 18).
F-23
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 5. ACCOUNTS RECEIVABLE (Continued)
The changes in allowance for doubtful receivables are summarized as follows:
Balance, beginning of year
Additions
Balance, end of year
The allowance for doubtful receivables was recorded in general and administrative expenses.
Note. 6 INVENTORIES
Inventories consist of the following:
Raw materials
Work-in-progress
Finished goods
Packing supplies
Total
As of
December 31,
2009
US$
December 31,
2008
US$
99,669
66,426
166,095
93,219
6,450
99,669
As of
December 31,
2009
US$
December 31,
2008
US$
5,760,957
12,030,860
570,701
8,967
708,768
213,362
11,511,308
5,344
18,371,485
12,438,782
No allowance for inventories was made for the years ended December 31, 2009 and 2008.
Note 7. ADVANCES TO EMPLOYEES
Advances to employees represent cash advances to employees to purchase raw materials or equipment and other supplies for normal business purposes. The balance also
included the proceeds receivable from employees in regard to company automobiles sold to them during the year (See Note 9). Advances to employees as of December 31, 2009
and 2008 amounted to $512,745 and $92,329, respectively.
F-24
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 8. PROPERTY, PLANT AND EQUIPMENT, NET
The details of property, plant and equipment are as follows:
Machinery & equipment
Automobiles
Plant & buildings
Total
Less: accumulated depreciation
Construction in progress
Total
As of
December 31,
2009
US$
December 31,
2008
US$
30,455,968
402,690
3,863,746
34,722,404
17,007,972
142,674
2,373,619
19,524,265
(3,667,959)
(1,684,241)
28,944
1,492,688
31,083,389
19,332,712
Depreciation expense for the years ended December 31, 2009 and 2008 was $2,003,964 and $961,627, respectively. Certain property, plant and equipment have been pledged for
short term loans (See Note 12).
Note 9. DEFERRED CHARGES
Deferred charges related to automobiles purchased by the Company for senior management members. The beneficiaries signed employment contracts with the Company and
they are obliged to work for the Company for a service period of 7 to 10 years. Once they serve the full contract term, the vehicles are for them to keep. If they leave before the
service contracts expire, they are required to reimburse the full price of the vehicle at the time of the purchase. The Company amortizes the payment of the automobile expenses
based on the services performed by those employees. During the year, the Company sold all automobiles to the employees at cost (See Note 7).
Note 10. INTANGIBLE ASSET
Intangible asset consists of land use right only. All land in the PRC is government owned and cannot be sold to any individual or company. Instead, the government grants the
user a land use right ("the Right”) to use the land.
The Company has the right to use the land for 50 years and amortizes the Right on a straight-line basis over the remaining useful life of 48 years from 2007 to 2055. The land use
right was originally acquired in May 2005 for the amount of $226,281.
F-25
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 10. INTANGIBLE ASSET (Continued)
Net intangible asset as of December 31, 2009 and 2008 was as follows:
Land use right
Less: accumulated amortization
Total
As of
December 31,
2009
US$
December 31,
2008
US$
267,486
(25,541)
241,945
267,663
( 9,982)
247,681
Amortization expense for the years ended December 31, 2009 and 2008 amounted to $5,569 and $5,478, respectively. Amortization expenses for the next five years amount to
approximately $5,500 each year. The land use right has been pledged for short term loans (See Note 12).
Note 11. RELATED PARTY TRANSACTIONS
Amounts due to directors/affiliates are as follows:
Harbin Xinda High-Tech Co., Ltd.
("Xinda High-tech)
Ms. Piao
Mr. Ma Qingwei
Mr. Han
Total
The Company also has sales and purchases to and from its affiliated companies. The details are as follows:
Xinda High-Tech
Heilongjiang Xinda Hyundai Engineering
Plastics Co., Ltd
Sales to Xinda High-Tech
F-26
As of
December 31,
2009
US$
December 31,
2008
US$
148,397
-
-
-
148,397
6,975,196
214,951
20,520
332,283
7,542,950
December 31, 2009
US$
-
-
-
December 31,
2008
US$
869,491
223,455
60,008
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 11. RELATED PARTY TRANSACTIONS (Continued)
Prior to the reverse merger, Ms. Piao owned 100% of Favor Sea (BVI) indirectly via XD Engineering, the former sole shareholder of Favor Sea (BVI). Xinda Hi-Tech and
Heilongjiang Xinda Hyundai Engineering Plastics Co., Ltd. are affiliate companies owned by the spouse of Mr. Han, who was the major shareholder of Harbin Xinda before the
ownership was transferred to HK Engineering Plastics.
On September 20, 2008, Harbin Xinda ("Buyer”) signed an agreement ("Agreement”) with Xinda High-Tech ("Seller”) to acquire all of the assets of Xinda High-Tech, including
plant and buildings, land use rights, machinery and equipment for a total amount of RMB240,000,000 (approximately $35,136,006 at date of signing). Harbin Xinda was required
to make two installment payments of the full purchase price of RMB50,000,000 by the end of December 31, 2008 and the remaining balance of RMB190,000,000 by the end of
September 30, 2009 if all assets purchased are transferred to the Company. On May 1, 2009, Harbin Xinda and Xinda High-Tech agreed to rescind the Agreement.
Prior to signing of the above-mentioned Agreement, the Company rented the buildings and equipment of Xinda High-Tech for the purpose of its production expansion. The
lease term was from May 1, 2008 to April 30, 2011. The lease payment was for a total of RMB2,000,000 per year. The lease contract was cancelled when Harbin Xinda and Xinda
High-Tech rescinded the Agreement on May 1, 2009 and at the same time, Harbin Xinda and Xinda High-Tech re-signed a new lease agreement for the office and factory space
at No. 9 Dalian North Road, Haping Road Centralized District, Harbin Development Zone, Harbin, Heilongjiang, China. The leased space is 23,893.53 square meters and the term
of the lease is from May 1, 2009 to April 30, 2012. The lease payment remains at RMB2,000,000 per year. In the years ended December 31, 2009 and 2008, the Company recorded
and paid $292,954 and $119,945, respectively for the rent expenses.
F-27
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 12. SHORT TERM LOANS
The short-term loans include the following:
a) Loan payable to Bank of Communications one year term from December 8, 2009 to December 8,
2010 bears interest of 10% above the prime rate* set by Central Bank of China
b) Loan payable to Bank of Communications one year term from December 26, 2008 to December 21,
2009 bears interest of 10% above the prime rate* set by Central Bank of China
c) Loan payable to Bank of Communications one year term from December 8, 2009 to December 8,
2010 bears interest of 10% above the prime rate* set by Central Bank of China
d) Loan payable to Harbin Bank one year term from February 24, 2009 to February 23, 2010 bears a
fixed interest rate of 7.124% per year
e) Loan payable to Harbin Bank one year term from April 3, 2009 to April 2, 2010 bears a fixed
interest rate of 7.124% per year
f) Loan payable to Harbin Bank three months term from December 25, 2009 to March 24, 2010 bears a
fixed interest rate of 6.504% per year
g) Loan payable to Harbin Bank one year term from February 25, 2008 to February 21, 2009 bears a
fixed interest rate of 10.152% per year
h) Loan payable to Anhui Yiyang Metal Materials Co., Ltd one year term from November 1, 2008 to
October 31, 2009 with interest to be accrued starting from January 1, 2009 at 30% above the prime rate
set by Central Bank of China
i) Loan payable to Harbin Bank five months term from December 2, 2008 to April 28, 2009 bears a
fixed interest rate of 6.752% per year
j) Lo an payable to Harbin Bank one year term from December 9, 2008 to December 8, 2009 bears a
fixed interest rate of 7.507% per year
As of
December 31, 2009
US$
4,394,304
-
1,464,768
4,394,304
10,692,805
732,384
-
-
-
-
Total
21,678,565
* The prime rate set by Central Bank of China as of December 31, 2009 was 5.31%.
F-28
December 31, 2008
US$
-
4,397,215
-
-
-
4,397,215
4,397,215
5,862,954
4,397,215
1,465,738
20,520,337
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 12. SHORT TERM LOANS (Continued)
The one-year short term loan of $4,394,304 between Harbin Xinda and Bank of Communications for the period of December 8, 2009 to December 8, 2010 is guaranteed by Mr.
Han and his wife and secured by Xinda High-Tech’s pledge of its land use right and buildings and Harbin Xinda’s land use right, buildings and machinery as collateral to
secure the loan.
The one-year short term loan of $1,464,768 between Harbin Xinda and Bank of Communications for the period of December 8, 2009 to December 8, 2010 is secured by Harbin
Xinda pledging its machinery as collateral to secure the loan and guaranteed by Mr. Han and his wife.
The one-year short term loan of $4,394,304 between Harbin Xinda and Harbin Bank for the period of February 24, 2009 to February 23, 2010 was guaranteed by Mr. Han and his
wife and Xinda High-Tech. Harbin Xinda and Xinda High-Tech pledged its equipment and machinery as collateral to secure the loan.
The one-year short term loan of $10,692,805 between Harbin Xinda and Harbin Bank for the period of April 3, 2009 to April 2, 2010 was secured by land use right and buildings
of Yuxiang Real Estate Development controlled by Xinda High-Tech, a corporate guarantee from Xinda High-Tech and guaranteed by Mr. Han and his wife.
The three months short term loan of $732,384 between Harbin Xinda and Harbin Bank for the period of December 25, 2009 to March 24, 2010 was indirectly guaranteed by Xinda
High-Tech.
Interest expense for the Company’s short term loans totaled $1,402,661 and $700,260 for the years ended December 31, 2009 and 2008, respectively.
The Company provided certain assets as collateral for the short-term bank loans, which were as follows:
Net book value
Land use right
Machinery and equipment
Plant and buildings
Cash
Accounts receivable
Note 13. BANK ACCEPTANCE NOTES PAYABLE
December 31, 2009
US$
241,945
16,450,374
2,073,514
-
-
18,765,833
December 31, 2008
US$
247,517
8,541,317
2,131,294
439,722
6,397,655
17,757,505
The Company had bank acceptance notes payable in the amount of nil and $8,061,561 as of December 31, 2009 and 2008 respectively. The notes were guaranteed to be paid by
the banks and usually for a short-term period of three (3) to six (6) months. The Company is required to maintain cash deposits at a minimum 40%-50% of the total balance of
the notes payable with the banks, in order to ensure future credit availability. The Company repaid the entirety of the bank acceptance notes payable in September 2009.
F-29
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 14. INCOME TAXES
(a) Corporation Income Tax ("CIT”)
No provision for income tax for China XD Plastics and Favor Sea (US) has been made as they incurred losses for the years ended December 31, 2009 and 2008.
HK Engineering Plastics’ income is subject to taxation in Hong Kong at 16.5%. No provision for Hong Kong income tax has been made as HK Engineering Plastics has had no
assessable profit since its incorporation.
Favor Sea (BVI) is not subject to income tax in any tax jurisdiction.
The subsidiaries operating in the PRC are subject to income taxes as described below:-
Prior to January 1, 2008, Foreign Investment Enterprises were subject to the Foreign Enterprise Investment Income Tax ("FEIT”). Under that law, Foreign Investment
Enterprises were generally subject to an income tax rate of 33% on all income, including foreign income. Qualified Foreign Investment Enterprises would receive a reduced
national tax rate of 24% or 15%. Qualifying Foreign Investment Enterprises in the manufacturing sector were exempted from the FEIT for two years starting in the first year they
became profitable, and received a 50% reduction in the FEIT for the subsequent three years, or a "two plus three” tax holiday. As such Harbin Xinda was exempt from paying
the FEIT for 2007 and 2006.
Under the Enterprise Income Tax ("EIT,”) a uniform tax rate of 25% is applicable to both domestic and Foreign Investment Enterprises starting from January 1, 2008. For existing
Foreign Investment Enterprises, the increased tax rate will be phased in. In addition to the rate increase, a majority of the favorable tax treatments currently enjoyed by Foreign
Investment Entities are abolished, including the two plus three tax holiday, tax rate reductions relating to businesses located in specified regions of the country and income tax
refunds for re-investments in China. Under the new law, Harbin Xinda is subject to the new tax rates and will lose the "two plus three” tax holiday that Harbin Xinda would
have been entitled to under the old law. However, as a recipient of the High-Technology Enterprise Certificate from the Chinese government, Harbin Xinda is entitled to a
rebate of a portion of the EIT. This rebate will reduce Harbin Xinda’s effective EIT tax rate to 15% from January 1, 2008 to December 31, 2010.
Income for the Research Institute is exempt from income tax under the current tax laws in the PRC.
F-30
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 14. INCOME TAXES (Continued)
Corporation Income Tax ("CIT”) (Continued)
The following table reconciles the statutory rates to the Company’s effective tax rate for the years ended December 31, 2009 and 2008:
US statutory rates
Effect of tax rates in different jurisdiction
Effect of non-deductible expenses
Changes in valuation allowance
Effect of tax exemption of PRC subsidiaries
Effective income tax rate
December 31, 2009
34.00%
(27.56%)
118.42%
26.2%
(149.40%)
1.64%
December 31, 2008
As restated
34.00%
7.94%
-
-
(41.51%)
0.43%
As of December 31, 2009, China XD Plastics and Favor Sea (US) had accumulated net operating loss carryforwards for United States federal tax purposes of approximately
$658,006, that are available to offset future taxable income. Realization of the net operating loss carryforwards is dependent upon future profitable operations. In addition, the
carryforwards may be limited upon a change of control in accordance with Internal Revenue Code Section 382, as amended. Accordingly, management has recorded a
valuation allowance to reduce deferred tax assets associated with the net operating loss carryforwards to zero at December 31, 2009. The net operating loss carryforwards
expire in years 2027 through 2029.
As of December 31, 2009, deferred tax assets consist of:-
Net operating loss carry forwards
Vested stock compensation
Less: valuation allowance
Net
(b) Value Added Tax ("VAT”)
December 31, 2009
US$
223,722
885,360
(1,109,082)
-
Enterprises or individuals who sell commodities, engage in repairs and maintenance or import or export goods in the PRC are subject to a value added tax in accordance with
the PRC laws. The value added tax standard rate is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw
materials used in the production of the Company’s finished products can be used to offset the VAT due on the sales of the finished products.
F-31
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 15. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK
On December 1, 2009 (the "Closing Date”), China XD Plastics entered into a securities purchase agreement (the "Purchase Agreement”), with several investors, including
institutional, accredited and non-US person and entities (the "Investors”), pursuant to which China XD Plastics sold units, comprised of 6% Series C convertible redeemable
preferred stock, par value $0.0001 per share (the "Series C preferred stock”), and two of warrants, for a purchase price of $4.60 per unit (the "December 2009 Financing”). The
Company sold 15,188 units in the aggregate, which included (i) 15,188 shares of Series C preferred stock, (ii) Series A warrants to purchase 1,320,696 shares of common stock at
an exercise price of $5.50 per share with a five-year term, and (iii) Series B warrants to purchase 1,178,722 shares of common stock at an exercise price of $0.0001 with a five-year
term. Net proceeds were approximately $13,891,477, net of issuance costs of approximately $719,400 in cash and warrants to placement agent valued at $577,123. Rodman
Renshaw acted as placement agent and received (i) a placement fee in the amount equal to 5% of the gross proceeds and (ii) warrants to purchase up to 117,261 shares of
common stock at an exercise price of $5.50, with a five-year term ("Placement Agent Warrants” and together with the Series A warrants and Series B warrants, the "Warrants”
or "Investor Warrants”).
Key terms of the Series C preferred stock sold by the Company in December 2009 financing are summarized as follows:
Dividends
Dividends on the Series C preferred stock shall accrue and be cumulative from and after the issuance date. For each outstanding share of Series C preferred stock, dividends
are payable at the per annum rate of 6% of the liquidation preference amount of the Series C preferred stock. Dividends are payable quarterly on the business day following the
last business day of each December, June, and September of each year (each, a "Dividend Payment Date”), and continuing until such stock is fully converted or redeemed.
Voting Rights
The Series C preferred stock holders are entitled to vote separately as a class on matters affecting the Series C preferred stock and with regard to certain corporate matters set
forth in the Series C Certificate of Designation, so long as any shares of the Series C preferred stock remain outstanding. Holders of the Series C preferred stock are not,
however, entitled to vote on general matters along with holders of common stock.
F-32
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 15. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK (Continued)
Liquidation Preference
In the event of the liquidation event, the holders of the Series C preferred stock then outstanding shall be entitled to receive in cash out of the assets of the Company available
for distribution to its stockholders, an amount equal to $1,000 per share of the Series C preferred stock, plus any accrued but unpaid dividends thereon, whether or not
declared, together with any other dividends declared but unpaid thereon, as of the date of liquidation before any payment shall be made or any assets distributed to the
holders of the common stock or any other junior stock. If upon the occurrence of liquidation, the assets thus distributed among the holders of the Series C preferred stock shall
be insufficient to permit the payment to such holders of the full Series C preferred stock amount, then the entire assets of the Company legally available for distribution shall be
distributed ratably among the holders of the Series C preferred stock.
Conversion Rights
i) Voluntary Conversion
At any time on or after the date of the initial issuance of the Series C preferred stock, the holder of any such shares of Series C preferred stock may, at such holder’s option,
convert any whole number of preferred shares, plus the amount of any accrued but unpaid dividends per preferred share then remaining, into fully paid and nonassessable
shares of common stock at the initial conversion price of $4.60 per share. The initial conversion price may be adjusted for stock splits and combinations, dividend and
distributions, reclassification, exchange or substitution, reorganization, merger, consolidation or sales of assets as stimulated in the Certification of Designations.
ii) Mandatory Redemption
If any preferred shares remain outstanding on the maturity date on December 1, 2012, the Company shall redeem such preferred shares in cash in an amount equal to the
outstanding conversion amount for each such preferred share.
Conversion Restriction
Holders of the Series C preferred stock may not convert the preferred stock to common stock if the conversion would result in the holder beneficially owning more than 4.99%
of the Company’s outstanding shares of common stock. That limitation may be waived by a holder of the Series C preferred stock and an increase or decrease in the maximum
percentage to any other percentage not in excess of 9.99% may be specified in such notice by sending a written notice to the Company on not less than 61 days prior to the
date that they would like to waive the limitation.
F-33
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 15. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK (Continued)
Registration Rights Agreement
In connection with the financing, the Company entered into a registration rights agreement (the "RRA”) with the investors in which the Company agreed to file a registration
statement (the "Registration Statement”) with the SEC to register the shares of common stock underlying the Series C preferred stock and the Warrants, thirty (30) days after
the closing of the financing. The Company has agreed to use its best efforts to have the Registration Statement declared effective within 60 calendar days after filing, or 180
calendar days after filing in the event Cutback Shares are required and the Additional Registration Statement is required to cover Additional Registrable Securities.
The Company is required to keep the Registration Statement continuously effective under the Securities Act until such date as is the earlier of the date when all of the
securities covered by that Registration Statement have been sold or the date on which such securities may be sold without any restriction pursuant to Rule 144 (the "Financing
Effectiveness Period”). The Company will pay liquidated damages of 2% of each holder’s initial investment in the Units sold in the Financing, payable in cash, if the
Registration Statement is not filed or declared effective within the foregoing time periods or ceases to be effective prior to the expiration of the Financing Effectiveness
Period. In the event the Company fails to make Registration Delay Payments in a timely manner, such Registration Delay Payments shall bear interest at the rate of one and
one-half percent (1.5%) per month (prorated for partial months) until paid in full. However, no liquidated damages shall be paid with respect to any securities being registered
that the Company are not permitted to include in the Financing Registration Statement due to the SEC’s application of Rule 415.
The Company evaluated the contingent obligation related to the RRA liquidated damages in accordance with Financial Accounting Standards Board Staff Position No. EITF
00-19-2 "Accounting for Registration Payment Arrangements” which is now codified as FASB ASC 825-20, which requires the contingent obligation to make future payments
or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or
other agreement, to be separately recognized and measured in accordance with SFAS No. 5, "Accounting for Contingencies”, which is now codified as FASB ASC 450. The
Company concluded that such obligation was not probable to incur based on the best information and facts available as of December 31, 2009. Therefore, no contingent
obligation related to the RRA liquidated damages was recognized as of December 31, 2009.
The Company’s registration statement filed with the SEC in connection with the issuance of Series C preferred stock was declared effective on February 19, 2010.
F-34
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 15. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK (Continued)
Accounting for the Series C preferred stock
The Series C preferred stock is mandatorily redeemable on December 1, 2012, at a conversion amount equal to the stated value plus the additional amount. The additional
amount is a formula based on the 6% dividend rate and the time that the preferred stock is outstanding. The Company used the guidance of FASB ASC 480-10-S99,
"Distinguishing Liabilities from Equity” which states that equity instruments with redemption features that are not solely within the control of the issuer to be classified
temporary equity. The Company’s Series C preferred stock is contingently redeemable as it is convertible until the end of the third anniversary.
Embedded Conversion Feature
FASB ASC 815 indicates that an embedded conversion features should be considered to be a derivative if the following criteria are met:
i) The economic characteristics and risks differ between the host and embedded conversion feature. This condition, relative to our Series C preferred stock, is met because the
preferred stock has a mandatory redemption feature at the discretion of the holders instead of the Company. Hence, the conversion feature is not clearly and closely related to
the economic characteristics of the host contract. The embedded derivative (that is, the conversion option) must be separated from its host contract and accounted for as a
derivative liability provided that the conversion option would, as a freestanding instrument, be a derivative instrument.
ii) The contract that includes the host and the conversion feature is not re-measured at fair value. This condition is met because the contract (Series C preferred stock) is not to
be re-measured at fair value.
iii) A separate instrument with the same terms as the embedded conversion feature would be derivative as per paragraphs 6 of FASB ASC 815. Our review of paragraph 6
revealed that the embedded conversion feature without a host would be considered a derivative because the embedded conversion feature (1) has underlying and notional
amounts (2) requires no initial net investments and (3) permits net settlement.
Based on the above considerations, the embedded conversion features related to our Series C preferred stock is a derivative that must be bifurcated from the host instrument
and accounted for at fair value with changes in fair value recorded in earnings.
The Company calculated the fair value of the embedded conversion feature at December 1, 2009 to be $16,812,682 using the Black-Scholes option pricing model using the
following assumptions:
· risk free rate of return of 1.14%
· volatility of 152.03%
· dividend yield of 6.0%
· expected term of 3 years
F-35
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 15. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK (Continued)
As of December 31, 2009, the total fair value of the embedded conversion feature was $18,798,059; therefore, the change of the total fair value of the embedded conversion
feature of $1,985,377 was recorded in earnings for the year ended December 31, 2009.
Accounting for Warrants
The Warrants have an initial exercise price which is subject to adjustments in certain circumstances for stock splits, combinations, dividends and distributions, reclassification,
exchange or substitution, reorganization, merger, consolidation or sales of assets, issuance of additional shares of common stock or equivalents. The Warrants may not be
exercised if it would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common shares.
The Company analyzed the Warrants in accordance with SFAS No. 133, which is now codified as FASB ASC 815, to determine whether the Warrants meet the definition of a
derivative and, if so, whether the Warrants meet the scope exception of FASB ASC 815, which is that contracts issued or held by the reporting entity that are both (1) indexed
to its own stock and (2) classified in stockholders’ equity shall not be considered to be derivative instruments for purposes of FASB ASC 815.
The Company also considered the provisions of EITF Issue No. 07-5, "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” which
is now codified as FASB ASC 815-40, which applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by
FASB ASC 815 and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.
As a result of its interpretation of FASB ASC 815-40, the Company concluded that the Warrants issued in the December 2009 financing should be treated as a derivative
liability because the Warrants are entitled to a price adjustment provision to allow the exercise price to be reduced in the event the Company issues or sells any additional
shares of common stock at a price per share less than the then-applicable exercise price or without consideration, which is typically referred to as a "Down-round protection” or
"anti-dilution” provision. According to FASB ASC 815-40, the "Down-round protection” provision is not considered to be an input to the fair value of a fixed-for-fixed option
on equity shares which leads the Warrants to fail to be qualified as indexed to the Company’s own stock and then to fail to meet the scope exceptions of FASB ASC 815.
Therefore, the Company accounted for the Warrants as derivative liabilities under FASB ASC 815. Pursuant to FASB ASC 815, derivatives are measured at fair value and re-
measured at fair value with changes in fair value recorded in earnings at each reporting period.
F-36
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 15. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK (Continued)
Series A warrants
The Company estimated the fair value of the Series A warrants using the Black Scholes option-pricing model and available information that management deems most relevant.
The Company calculated the fair value of the Series A warrants at December 1, 2009 (date of grant) to be $6,500,059 using the Black-Scholes option-pricing model using the
following assumptions:
· risk free rate of return of 2.03%
· volatility of 152.03%
· dividend yield of 6.0%
· expected term of 5 years
The volatility of 152.03% was determined by taking the Company’s stock price from February 13, 2009 through November 13, 2009. The Company believes that the stock price
immediately after the reverse merger to February 12, 2009 remained constant. Moreover, the stock price was extremely volatile from November 14, 2009 to December 1, 2009,
when it began trading on NASDAQ.
The re-measured fair value of the Series A warrants as of December 31, 2009 was approximately $7,248,903. The change in fair value of the Warrants of $748,844 was recorded in
earnings for the year ended December 31, 2009.
Series B warrants
The Series B warrants will not be valued at the date of the agreement because the price is not known until the Price Reset Date.
Placement Agent Warrants
In accordance with Staff Accounting Bulletin Topic 5.A: "Miscellaneous Accounting-Expenses of Offering” which is now codified as FASB ASC 340-10-S99-1”, "specific
incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering.” In
accordance with the SEC Accounting and Reporting Manual, "costs of issuing equity securities are charged directly to equity as deduction of the fair value assigned to shares
issued.” Accordingly, the Company concluded that the Placement Agent Warrants are directly attributable to the December 2009 financing. If the Company had not issued
the Placement Agent Warrants, the Company would have had to pay the same amount of cash as the fair value. Therefore, the Company deducted the total fair value of the
Placement Agent Warrants as of the commitment date, which was approximately $577,123, against the gross proceeds.
F-37
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 15. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK (Continued)
Placement Agent Warrants (Continued)
Since the Placement Agent Warrants contain the same terms as the Investor Warrants, the Placement Agent Warrants are also entitled to the benefits of the "down-round
protection” provisions, which means that the Placement Agent Warrants will also need to be accounted for as a derivative under FASB ASC 815 with changes in fair value
recorded in earnings at each reporting period. As of December 31, 2009, the total fair value of the Placement Agent Warrants was $643,610; therefore, the change of the total
fair value of the Placement Agent Warrants of $66,487 was recorded in earnings for the year ended December 31, 2009.
The registered holders of the Investor and Placement Agent Warrants are entitled to purchase from the Company at any time or times on or after the date immediately after the
six month anniversary until the sixty month anniversary after the issuance date.
Allocation of proceeds
The fair value of the embedded conversion feature and warrants of $23,312,741 was recorded as follows:-
i) the Company recorded a deemed preferred stock dividend of $13,891,477; and
ii) the excess of the fair values of the embedded conversion feature and warrants over the net proceeds received of $9,421,264 was charged to changes in fair value of warrants
and embedded derivatives in the statement of income.
Note 16. STOCK-BASED COMPENSATION
The Company adopted the 2009 Stock Incentive Plan (the "2009 Plan”) on May 26, 2009, which reserved 7,800,000 shares of common stock for issuance. The 2009 Plan allows
the Company to issue awards of incentive non-qualified stock options and stock bonuses to directors, officers, employees and consultants of the Company, which may be
subject to restrictions. The Company applied FASB ASC 718 and related interpretations in accounting for the 2009 Plan. Compensation for services that a corporation receives
under FASB ASC 718 through share-based compensation plans should be measured by the quoted market price of the stock at the grant date less the amount, if any, that the
individual is required to pay.
Stock compensation expense recognized is based on awards expected to vest. The fair value of the stock compensation is amortized over the respective vesting period based
on the terms of the employment or service agreements under which the stock was awarded. The fair value of the stock-based compensation expense amortized for the year
ended December 31, 2009 and 2008 was $7,408,162 and $5,473,907, respectively.
F-38
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 16. STOCK-BASED COMPENSATION (Continued)
A summary of the restricted stock unit activity is as follows:
Balance at January 1 2008 and December 31, 2008
Granted
Vested
Balance at December 31, 2009 (granted but not yet vested)
A summary of share-based awards available for grant is as follows:
Balance at January 1, 2008 and December 31, 2008
Shares reserved
Granted
Balance at December 31, 2009 (available for grant)
Note 17. STOCKHOLDERS’ EQUITY
(a) Common Stock
Issuance of Common Stock
$
Restricted
Stock Units
$
-
1,810,024
(868,000)
942,024
Weighted-
Average Grant
Date Price per
Share
-
3.03
3.00
3.06
Aggregated
Fair Market
Value
$
5,487,541
2,604,000
2,883,541
Restricted
Stock Units
-
7,800,000
1,810,024
5,989,976
Prior to the reverse merger, China XD Plastics had 49,632,222 shares of common stock issued and outstanding at $.0001 per share. In connection with the reverse merger
consummated on December 24, 2008, all of these outstanding shares were subject to a 124.1 for 1 reverse split for all record holders of China XD Plastics’ common stock on the
date of December 31, 2008. The number of the post reverse-split of the original common stock outstanding was rounded up to 400,000 shares.
In consideration for the Merger, China XD Plastics issued 10 shares of the common stock and 1,000,000 shares of convertible Series A preferred stock to the shareholders of
Favor Sea (BVI), and also 1,000,000 shares of Series B preferred stock to XD Engineering, the principal shareholder of Favor Sea (BVI). The 10 shares of the common stock
issued to shareholders of Favor Sea BVI were converted into approximately 50,367,778 shares of the common stock of China XD Plastics prior to and approximately 405,802
post a reverse stock split of 124.1 for 1. The equity account of Favor Sea (BVI), prior to the merger date, has been retroactively restated so that the ending outstanding share
balance as of the merger date is equal to the number of post reverse-split shares received in the merger.
F-39
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 17. STOCKHOLDERS’ EQUITY (Continued)
As a part of the Merger Agreement effected on December 24, 2008, 1,000,000 shares of Series A preferred stock were automatically converted into 38,194,072 shares of common
stock on April 20, 2009 after China XD Plastics’ effective filing to increase its authorized shares.
On June 5, 2009, China XD Plastics issued 1,790,000 common shares to some employees and consultants as stock compensation in connection with the services rendered or to
be rendered by in 2009. Among these shares, 868,000 vested during the year and 922,000 will vest in 2010.
On September 2, 2009, the Company issued 20,024 common stocks to four independent directors in connection with the service agreements between China XD Plastics and the
directors. These shares will vest in 2010.
On November 16, 2009, a consultant exercised its warrants into 57,152 shares of common stocks (See (b) below).
As of December 31, 2009, there are 40,867,050 shares of common stock issued and outstanding. There are also 1,000,000 shares of Series B Preferred Stock issued and
outstanding, and all of the issued and outstanding shares of Series B Preferred Stock have voting power equal to 40% of the total voting power of all of the issued and
outstanding shares of the common stock.
On December 1, 2009 (the "Closing Date”), the Company entered into a securities purchase agreement (the "Purchase Agreement”), with several investors, including
institutional, accredited and non-US person and entities (the "Investors”) (See Note 15).
(b) Warrants
On December 30, 2008, the Company issued warrants ("consultant warrants”) to purchase 66,667 shares of common stock to a consultant for certain services provided. The
consultant warrants were exercisable at $1.50 per share from January 1, 2009 through December 30, 2010. A total amount of $46,260 was recognized as an expense on the date
the warrants were issued using the Black-Scholes option pricing model.
On November 16, 2009, the consultant exercised all of the consultant warrants under the cashless method into 57,152 shares of common stock.
Note 18. SIGNIFICANT CONCENTRATION
Two (2) major vendors provided approximately 99% of the Company’s purchases of raw materials for the year ended December 31, 2009, with each vendor individually
accounting for approximately 50% and 49%, respectively. Two (2) vendors provided approximately 96% of the Company’s purchase of raw materials for the year ended
December 31, 2008, with each vendor individually accounting for approximately 66% and 30%, respectively.
F-40
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 18. SIGNIFICANT CONCENTRATION (Continued)
The advance to one of the vendors was $19,629,245 and $12,060,537 as of December 31, 2009 and 2008, respectively.
Sales to one major distributor accounted for approximately 83% and 81% of the Company’s sales for the years ended December 31, 2009 and 2008, respectively.
Note 19. EARNINGS PER SHARE
Earnings per share for the years ended December 31, 2009 and 2008 is determined by dividing net income for the periods by the weighted average number of both basic and
diluted shares of common stock and common stock equivalents outstanding. The following is an analysis of the differences between basic and diluted earnings per common
share in accordance with FASB ASC 260.
The following table is a reconciliation of the net income and the weighted average shares used in the computation of basic and diluted earnings per share for the years
presented:
Income available to common stockholders
Net income
Less: dividends to Series C preferred stockholder
Deemed Series C preferred stock dividends
Adjusted income (loss) attributable to common stockholders
Weighted average shares outstanding – Basic
Weighted average shares outstanding – Basic
Effect of diluted securities – Series A preferred stock
Weighted average shares outstanding – Diluted
Earnings (loss) per share
Basic EPS
Diluted EPS
F-41
December 31,
2009
US$
4,023,266
(77,396)
(13,891,477)
December 31,
2008
US$
Restated
8,213,583
-
-
(9,945,607)
8,213,583
27,789,044
414,569
27,789,044
-
27,789,044
414,569
38,194,072
38,608,641
(0.36)
(0.36)
19.81
0.21
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 20. COMMITMENTS AND CONTINGENCIES
As of December 31, 2009, the Company leased buildings and facilities in Harbin and the lease will expire on April 30, 2012. Rental expenses for the years ended December 31,
2009 and December 31, 2008 amounted to $292,954 and $119,945, respectively. The rental expenses are included in general and administrative expenses.
As of December 31, 2009, the Company rented office and quarter in the U.S. and the leases will expire on November 30, 2010 and March 2, 2010, respectively. Rental expenses
for the years ended December 31, 2009 and December 31, 2008 amounted to $72,779 and nil, respectively.
The future minimum lease payments under the above mentioned leases as of December 31, 2009 are as follows:
2010
2011
2012
Total
December 31, 2009
US$
364,044
292,954
98,139
755,137
As of December 31, 2009, HK Engineering Plastics had a commitment in respect of capital contribution to Harbin Xinda of approximately $16,000,000 (RMB109,190,000), which
has to be repaid by December 3, 2011.
Note 21. STATUTORY SURPLUS RESERVE FUND
Under PRC regulations, all subsidiaries in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC GAAP. In addition,
these subsidiaries are required to set aside at least 10% of their after-tax net profits each year, if any, to fund the statutory reserves until the balance of the reserves reaches
50% of their registered capital. The statutory reserves are not distributable in the form of cash dividends to the Company and can be used to make up cumulative prior year
losses. The PRC subsidiaries began the appropriation in 2009. Appropriation to statutory surplus reserve fund in 2009 amounted to $2,471,007.
Note 22. FAIR VALUE MEASUREMENT
FASB ASC 820 "Fair Value Measurements and Disclosures” introduces a framework for measuring fair value and expands required disclosure about fair value measurements of
assets and liabilities. FASB ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
F-42
CHINA XD PLASTICS COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 22. FAIR VALUE MEASUREMENT (Continued)
There are three levels of inputs that may be used to measure fair value:
Level 1 -
Quoted prices in active markets for identical assets or liabilities.
Level 2 -
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 -
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Description
Common stock warrant purchase liabilities
Embedded conversion feature liabilities
Total
Note 23. SUBSEQUENT EVENTS
Cash Dividend to Holders of Series C Preferred Stock
Fair Value Measurement as of December 31, 2009
Total
US$
7,892,513
18,798,059
26,690,572
Level 1
US$
-
-
-
Level 2
US$
7,892,513
18,798,059
26,690,572
Level 3
US$
-
-
-
Pursuant to the terms in the Certificate of Designation of Series C preferred stock, the Company records a cash dividend of $18 per common share payable upon conversion of
Series C preferred stock by its holder anytime after the issuance date. As of April 5, 2010, 14,436 out of total issued and outstanding 15,188 shares of Series C preferred stock
have been converted into 3,138,261 common shares and the Company has made cash dividend payment of $1,621,433 to the holders who converted their preferred shares.
F-43
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427
Exhibit 31.1
I, Jie Han, certify that:
1. I have reviewed this annual report on Form 10-K of China XD Plastics Company Limited;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: April 14, 2010
/s/ Jie Han
Jie Han, Principal Executive Officer
Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427
Exhibit 31.2
I, Taylor Zhang, certify that:
1. I have reviewed this annual report on Form 10-K of China XD Plastics Company Limited;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: April 14, 2010
/s/ Taylor Zhang
Taylor Zhang, Principal Financial and Accounting Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of China XD Company Limited (the "Company") on Form 10-K for the year ended December 31, 2009 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Jie Han, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 14, 2010
/s/ Jie Han
Jie Han, Principal Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of China XD Plastics Company Limited (the "Company") on Form 10-K for the year ended December 31, 2009 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I,
Taylor Zhang, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 14, 2010
/s/ Taylor Zhang
Taylor Zhang Principal Financial and Accounting Officer