UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _____________
Commission File No. 001-34546
CHINA XD PLASTICS COMPANY LIMITED
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
No. 9 Dalian North Road, Haping Road Centralized Industrial Park,
Harbin Development Zone,
Heilongjiang Province, P. R. China
(Address of principal executive offices)
04-3836208
(I.R.S. Employer Identification No.)
150060
(Zip Code)
Registrant's telephone number, including area code: (86) 451-8434-6600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.0001
Name of each exchange on which registered
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No X
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ 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 ☐
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 X No ☐
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. ☐
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 ☐
Non-accelerated filer ☐
(Do not check if a smaller reporting company)
Accelerated filer X
Smaller reporting company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No X
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2014 was approximately $140,630,319.
As of March 10, 2015, there were 49,151,796 shares of common stock, par value US$0.0001 per share, outstanding.
Documents incorporated by reference: None.
CHINA XD PLASTICS COMPANY LIMITED
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014
Table of Contents
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
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
Item 10
Item 11
Item 12
Item 13
Item 14
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
PART IV
Item 15
Exhibits, Financial Statement Schedules
Financial Statements
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
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F-1
F-2
F-3
F-4
F-5
F-6
F-7
ITEM 1. BUSINESS.
Our Business
PART I
China XD Plastics Company Limited ("China XD", "we", and the "Company", and "us" or "our" shall be interpreted accordingly) is one of the leading specialty chemical
companies engaged in the research, development, manufacture and sale of modified plastics primarily for automotive applications in China and to a lesser extent, in Dubai,
United Arab Emirates ("UAE"). Through our wholly-owned subsidiaries Heilongjiang Xinda Enterprise Group Company Limited ("Xinda Group") and ALComposites Materials
FZE ("Dubai Composites"), we manufacture and sell polymer composite materials (a broader category including modified plastics), primarily for automotive applications. We
develop our products using our proprietary technology through our wholly-owned research laboratory, Heilongjiang Xinda Enterprise Group Macromolecule Material
Research Center Company Limited ("Xinda Group Material Research"). Xinda Group Material Research is a professional macromolecular material research and development
institution and has 321 certifications from manufacturers in the automobile industry as of December 31, 2014. We are the only company certified as a National Enterprise
Technology Center in modified plastics industry in Heilongjiang Province. Our research and development (the "R&D") team consists of 237 professionals and 8 consultants,
including one consultant who is member of Chinese Academy of Engineering, and one consultant who is the former chief scientist of Specialty Plastics Engineering Institute of
Jilin University. As a result of the combination of our academic and technological expertise, we have a portfolio of 193 patents, five of which we have obtained the patent rights
and the remaining 188 of which we have applications pending in China as of December 31, 2014.
Modified plastics are produced by changing the physical and/or chemical characteristics of ordinary resin materials. In order for plastics to be used to produce automobile
parts and components, they must satisfy certain physical criteria in terms of mechanical functionality, stability under light and heat, durability, flame resistance, and
environmental friendliness. Our unique proprietary formulas and processing techniques enable us to produce low-cost high-quality modified plastic materials, which have been
certified by many of the major domestic and international automobile manufacturers in China. In addition, we also provide specially engineered plastics and environment-
friendly plastics for use in oilfield equipment, mining equipment, vessel propulsion systems and power station equipment.
China XD's primary end-market is the Chinese automotive industry that has been rapidly growing for the past few years where our modified plastics are used by our customers
to fabricate the following auto components: exteriors (automobile bumpers, rearview and sideview mirrors, license plate parts), 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). Our
specialized plastics are utilized in more than 27 automobile brands manufactured in China, including leading brands such as AUDI, Mercedes Benz, BMW, Toyota, Buick,
Chevrolet, Mazda, and VW Passat, Golf, and Jetta. As of December 31, 2014, 321 of Xinda Group's automotive-specific modified plastic products have been certified by one or
more of the automobile manufacturers in China and are in commercial production. As of December 31, 2014, 86 of our products were in the process of product certification by
automobile manufacturers. In addition, during the year ended December 31, 2014, the Company developed its prescence in the Republic of Korea (the "ROK") by selling to a
Korean customer primarily higher-end PA66 and plastic alloy, which embarked our entry into the international market.
We operate three manufacturing bases in Harbin, Heilongjiang in the People's Republic of China (the "PRC"). Prior to December 2012, we had approximately 255,000 metric tons
of annual production capacity across 58 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwan conveyer systems.
In December 2012, we further expanded our third production base in Harbin with additional 135,000 metric tons of annual production capacity, bringing total installed
production capacity in our three production bases to 390,000 metric tons with additional 30 new production lines. In December 2013, we broke ground on the construction of
our fourth production base in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, expecting to bring total installed production
capacity to 690,000 metric tons with additional 70 new production lines at the completion of the construction of our fourth production base. In addition, during the three
months ended June 30, 2014, we started the construction of Dubai Composites plant in Dubai, UAE with additional 4,000 metric tons targeting on high-end products for the
overseas markets. The Company expects the Dubai facility to be completed in April 2015 and majority of Sichuan production facility to be completed around the end of 2015
and early 2016.
2
Our History
China XD, formerly known as NB Payphones Ltd. and NB Telecom, Inc., was originally incorporated under the laws of the state of Pennsylvania on November 16, 1999. On
December 27, 2005, we migrated to the state of Nevada.
On December 24, 2008, we acquired Favor Sea Limited ("Favor Sea (BVI)"), a British Virgin Islands corporation, which is the holding company for Harbin Xinda Macromolecule
Material Co., Ltd. ("Harbin Xinda") and Harbin Xinda's wholly-owned subsidiary, Harbin Xinda Macromolecule Material Research Institute ("Research Institute"). Harbin
Xinda is a high-tech manufacturer and developer of modified plastics, which was established in September 2004 under the laws of the PRC. In December 2010, our management
determined that the Research Institute could not meet the Company's development needs, including meeting the criteria to be a National Enterprise Technology Center. As a
result, the Research Institute was deregistered.
On June 11, 2010, Harbin Xinda established Harbin Xinda Macromolecule Material Engineering Center Co., Ltd. ("Xinda Engineering Center") to focus on research and
development of high-end products such as engineering plastics, modified PA, alloy plastics and modified ABS. Xinda Engineering Center was deregistered in 2012 as part of
our group restructuring.
On October 14, 2010, Harbin Xinda established Heilongjiang Xinda Software Development Company Limited ("Xinda Software") to develop software applications that provide
certain standard and programmable technical services remotely.
On December 10, 2010, Harbin Xinda established Harbin Xinda Macromolecule Material Research Center Co., Ltd. ("Xinda Macromolecule Research Center") to focus on
research and development of products such as modified PP and environment-friendly modified plastics. Xinda Macromolecule Research Center was deregistered in 2012 as
part of our group restructuring.
On March 31, 2011, Harbin Xinda established a wholly-owned subsidiary, Harbin Xinda Macromolecule Material Testing Technical Co., Ltd. ("Xinda Testing"), to develop a
nationally recognized testing laboratory and provide testing services of macromolecule materials, engineering plastics and other products.
In response to our rapid business expansion and in order to be eligible for beneficial tax policies for certain regions in China, we developed a group restructuring plan.
From August 2011 to December of 2012, Harbin Xinda established (i) Harbin Meiyuan Enterprise Management Service Company Limited ("Meiyuan Training") in Harbin to
provide all year round training to both our existing and new employees, accommodate our customers and business partners as well as host industry conferences; and (ii)
Heilongjiang Xinda Enterprise Group Technology Center Company Limited ("Xinda Group Technology Center") in Harbin to focus on long-term research and development
projects.
Xinda Group, a wholly-owned subsidiary of Xinda HK Company Limited and the proposed direct parent company of all of our PRC-based operating subsidiaries after the group
restructuring was established in December 2011. Harbin Xinda Plastics Material Research Center Company Limited ("Xinda Material Research Center") was established in
December 2011 to focus on research and development of products close to commercialization phase.
Xinda Group Material Research was established in December 2012.
3
During the year ended December 31, 2013, following the overall reorganization plan, the Company completed the deregistering of Haikou New Materials, Haikou Technical
Center and Haikou Software and merged Xinda Testing and Xinda Material Research Center into Xinda Group Material Research in 2013, whose major functions included
technical support for our production bases, research and development of modified plastic products for applications in areas such as automotive, high-speed rail, aircraft and
others, customer post-sales support, and collaboration with industry leading universities and institutions.
On March 19, 2013, Xinda Group established Sichuan Xinda Enterprise Group Co., Ltd. ("Sichuan Xinda Group"), which subsequently established Sichuan Xinda Enterprise
Group Meiyuan Training Center Co., Ltd. ("Sichuan Meiyuan"), Sichuan Xinda Enterprise Group Software Development Co., Ltd. ("Sichuan Software"), and Sichuan Xinda
Enterprise Group Sales Co., Ltd ("Sichuan Sales") in April 2013, in order to expand our business in Southwest China.
On April 23, 3013, Xinda Holding (HK) Co, Ltd. ("Xinda Holding (HK)"), formerly known as Hong Kong Engineering Plastics Co., Ltd., set up Xinda (HK) International Trading
Company Ltd ("Xinda (HK) Int'l Trading") for import and export business through Hong Kong.
On January 8, 2014, Xinda Holding (HK) set up AL Composites in Dubai, UAE ("Dubai Composites") for international expansion business.
On March 5, 2014, Xinda Holding (HK) set up Xinda (HK) Trade Co., Ltd ("Xinda Trading") for import and export business through Hong Kong.
On June 17, 2014, Xinda Holding (HK) set up Xinda (Heilongjiang) Investment Co., Ltd. ("Heilongjiang Investment") for its domestic investment activities in PRC.
On August 1, 2014, Heilongjiang Investment set up Nanchong Xinda Composite Materials Co., Ltd ("Nanchong Composite Materials") in order to expand our business in
Southwest China and other regions in its proximity.
On November 12, 2014, Heilongjiang Investment set up Heilongjiang Xinda Meiyuan Tennis Club Co.,Ltd. ("Meiyuan Tennis Club") in order to replace the Meiyuan Training.
4
Corporate Structure
The corporate structure of the Company as of December 31, 2014 was as follows:
5
Our Industry
According to a research report prepared exclusively for the Company and issued by Frost & Sullivan in 2014, China is estimated to have consumed approximately 18.3 million
Metric Tons ("MT") of modified plastic products in 2014, representing an increase of 11.5% compared to 2013. With China being the world's leading manufacturing center and
with rising domestic individual consumption, we believe that demand for modified plastics from China will continue to increase in the foreseeable future. As shown in Figure 1,
the market demand for modified plastics will reach 26.5 million MT in 2018, representing compound annual growth rates ("CAGR") of 9.6% and 14.9% by sales volume and
revenues from 2014 to 2018. Currently, demand for our products is primarily driven by the Chinese automotive industry. In order for plastics to be used in automobile parts and
components, they must satisfy specific physical criteria in terms of mechanical functionality, stability under light and heat, durability, flame resistance, and environmental
friendliness. Modified plastics are usually found in interior materials, door panels, dashboards, mud flaps, chassis, bumpers, oil tanks, gas valves, grilles, unit heater shells, air
conditioner shells, heat dissipating grids, wheel covers, and other components.
Figure 1: Analysis of Chinese Modified Plastics Market: Sales Volume and Revenue (China), 2009-2018E
6
Source: Frost & Sullivan
According to Frost & Sullivan's report, the Chinese automotive modified plastics market has experienced rapid development from 2009 to 2013, with nearly a three-fold growth
in terms of revenue and sales volume during this period. The market demand is projected to reach 20.2 million MT in 2015. As illustrated in Figure 2, the Chinese automotive
modified plastics market is expected to sustain rapid increase in terms of sales volume and revenues with CAGR of 14.8% and 20.3% from 2014 to 2018, respectively.
Approximately 33.4% of the automotive modified plastic consumed in 2013 was imported from outside of the PRC or manufactured by multinational and joint venture
companies. We believe that the demand for automotive modified plastic in China will grow continuously due to the fast growing Chinese automotive market, increasing use per
unit of plastic content in automobiles and favorable government incentives and regulations. Moreover, domestic producers will likely gain larger market share from imports as
they are able to manufacture products with comparable quality at highly competitive prices and close proximity to their customers. We believe that the following are the key
drivers for the automotive modified plastic industry in China
Figure 2: Analysis of Chinese Automotive Modified Plastics Market: Sales Volume and Revenue (China), 2009-2018
Source: Frost & Sullivan
7
According to the statistics by the China Association of Automobile Manufacturers ("CAAM") in 2014, China's production volume of automobiles increased from 13.8 million
units in 2009 to 22.1 million units in 2013. The market is expected to slow down after several years' rapid growth, though a comparatively high CAGR of 8.1% from 2014 to 2018,
reaching 32.6 million units in 2018. China has exceeded the United States to become the world's largest auto market as measured by the number of automobiles sold. We believe
the growth momentum in China's auto sales will remain strong over the next four years. The automotive industry in China is still in its infancy with passenger car ownership of
93 vehicles per 1,000 inhabitants in 2013, which is significantly below Europe's average of 497 and United States' average of 797 according to National Bureau of Statistics, US
Department of Energy, Eurosta, Frost & Sullivan.
Figure 3: Overview of Chinese Macro Economy:
Vehicle Per 1,000 People Comparison (Units per 1,000 People), 2009-2018E
Source: National Bureau of Statistics, US Department of Energy, Eurosta, Frost and Sullivan
8
According to the National Bureau of Statistics, the total number of Chinese automobile parts has experienced a rapid growth because of the economic development and the
incentive policies issued by the government. The number maintained a booming trend from 62.9 million units in 2009 to 126.8 million units in 2013, and is forecasted to hit a
record of 146.8 million units in 2014 and 249.5 million units by 2018, with a CAGR of 14.2% between 2014 and 2018 as shown in Figure 4.
Figure 4: Overview of Chinese Macro Economy: Growth of Automotive Parts, 2009-2018E
Source: National Bureau of Statistics
9
Rising personal income in China is one of the key drivers for the rapid growth of the Chinese automobile industry. As shown in Figure 5, China has shown strong economic
growth with its GDP increased from approximately RMB 34,090.3 billion in 2009 to RMB 58,667.3 billion in 2013, and is expected to sustain the steady growth from 2014 to 2018.
Per Capita Consumption Expenditure of Urban Household also shows an optimistic picture with a total nominal increase of 46.8% between 2009 and 2013, and is forecasted to
reach RMB 25,699.9 billions by the end of 2018. Moreover, cars have become more affordable in China as local or joint venture automobile manufacturers continuously expand
their production to achieve economies of scale to lower production cost and source cheaper auto parts locally. Growing income and decreasing vehicle prices will continue to
make car ownership more affordable for China's rising middle class.
Figure 5: Overview of Chinese Macro Economy: Growth of Nominal GDP and Per Capita Consumption Expenditure of Urban Household (China), 2009-2018E.
Source: National Bureau of Statistics, International Monetary Fund, and Frost & Sullivan
Benefit and Increasing Use of Plastics in Automobiles
(1) Cost Reduction: The primary demand driver for modified automotive plastics arises out of the cost-reduction characteristics evidenced by the plastics material inclusion in
the automobile manufacturing process. Modified plastics can deliver the same performance as metallic materials at approximately a tenth of the cost. In addition, modified
plastics can substitute some kinds of more expensive engineering plastics. This benefit of modified plastics will become more significant with the increasing competition in
automobile manufacturing industry to improve efficiency and reduce costs.
(2) Vehicle Emissions Reduction: Plastic components impact fuel efficiency by saving approximately 2.5 liters of fuel per kilograms ("kg") used (equivalent to 6 kg of CO2
emissions) over the lifetime of the vehicle. Automobile manufacturers have been reducing vehicle weights in an attempt to reduce emissions and increase efficiencies. Modified
plastics reduce the weight of components by 40% compared with traditional metallic materials.
(3) Performance and Safety Improvement: The development of advanced plastics applications lead to the improvement in performance through reducing the number and weight
of the vehicle parts, causing the fuel consumption per vehicle to drop significantly. In addition, the lower net weight of the vehicles improves handling performance and
thereby eliminates the likelihood of losing control in case of emergency stops. The involvement of modified plastics in automotive applications results in significant
improvement of the safety features of the vehicle parts, like seat belts, air bags, and air bag containers in the recent years.
(4) New Applications: Plastics reduce the number of the required parts used in automobile manufacturing and introduce new design possibilities. Conventional materials
struggle to compete against this open innovation platform associated with the plastics industry. In addition, the performance benefits associated with plastic materials
continue to create a competitive advantage for the plastics industry.
(5) Increasing Use of Plastics per Vehicle: Weight of modified plastics per vehicle in China continually increased from 2008 to 2012, and is forecasted to reach 169.8 kg by the
end of 2017, with a growth rate of 40.2% as shown in Figure 6. Although the weight of modified plastics per vehicle in China will still be less than that in North America and
Europe, the highest growth rate indicates the huge potential for market growth. In 2012, plastic use in China is estimated to be about 128.6 kg per vehicle, whereas models
imported from Europe contain on average as much as 219 kg per vehicle. In addition, the Chinese government's goals regarding electric and hybrid vehicles may also push the
market further as weight concerns are more important for these vehicles than for traditional passenger cars.
10
Figure 6: Comparison of Weight of Modified Plastics per Vehicle in China, North America, and Europe, 2008, 2012, 2017E
Source: Frost & Sullivan, American Chemistry Council's Plastics Industry Producers' Statistics Group
Increasing Substitution of Imports
Though China's automotive plastic market has been dominated by foreign or joint venture ("JV") companies, Chinese suppliers are continually gaining market share. It is
estimated that automotive plastics imported and manufactured by multinational and JV companies accounted for 36.3% of the total China automotive plastic supply in 2013,
decreasing from 53.8% in 2009 according to a report by Frost & Sullivan. Compared to foreign competitors including JV companies, local manufacturers can largely benefit from
the lower cost and geographical convenience in China and their product sales can be customized with time-efficient after sales services and technical supports. As the local
production capacity of both domestic and foreign companies has been expanding, share of imports and multiple national companies is expected to decrease to 23.4% by the
end of 2018, while the share of domestic manufacturers is forecast to rise to 76.6% in 2018 as they expand at a greater rate than MNC and JV in China.
The financial crisis beginning in 2008 and the European debt crisis beginning in 2011 forced global automakers and suppliers to concentrate on their cost structure and pricing
mechanisms. Many automakers accelerated cost reduction initiatives. Moving manufacturing operations to and sourcing raw materials from low cost regions have emerged as
key measures to save costs. With its huge consumer market, low labor costs and high-quality manufacturing and logistics infrastructure, China is a location favored by global
auto and component makers who source parts and components not only for their local operations in China but also for their global operations. As a result, we believe that
China's local plastic suppliers will benefit from such global outsourcing trends and increasingly become a good substitute for expensive imported plastic products. JV
manufacturers based in China in automotive plastics sector have been slow to invest and expand in China.
11
Favorable National Government Policies
In the past decade, the Chinese government has adopted a number of policies and initiatives intended to encourage the development of the Chinese modified plastics industry
and stimulate the growth of the Chinese automobile industry.
Since 2000, modified plastics, including engineering plastics, have been categorized as a prioritized industrialization area by a series of government guidelines or development
plans. Some of these policies include:
●
●
●
It was stated in the "Outline of China's Twelfth Five-year Plan (2011)" that new functional materials, advanced structural materials, common base materials, fiber of
high performance and its compounded material are key development directions of new material industry.
It was stated in the "Catalogue for Guidance on Adjustment of Industrial Structure (2011)" promulgated by the National Development and Reform Commission on
March 27, 2011, that the country is currently promoting the development of production equipment of polycarbonate by the use of non-phosgene method, with
annual output of 60000t/year and above, production of engineering plastic including liquid crystalline polymer (LCP) and development and application of bleeding
modification and alloying; development and production of water – absorbed resin, conductible resin and biodegradable polymers; development and production of
new polyamide including nylon 11, nylon 1414 and nylon 46, nylon with long carbon chain and heat resistant nylon.
It was stated in the "Guidance on Key Areas of Industrialization of High Technology with Current Priority in Development (2011)" jointly promulgated by the
National Development and Reform Commission, the Ministry of Science and Technology, the Ministry of Commerce and the State Intellectual Property Office on
June 23, 2011 that modified technologies applied to general plastics, including new engineering plastics and plastic alloy, new special engineering plastics, fire
resistant modified plastics, and modified technology of general plastics, are currently prioritized areas to develop and industrialize in China's macromolecule materials
sector.
●
A series of modified plastics technologies have been listed in the "National Support for Key High-tech Fields" as stated in the Circular on the Issuance of the
Administrative Measure for the Recognition of High-tech Enterprise jointly promulgated by the Ministry of Science and Technology, Ministry of Finance, the State
Administration of Taxation in April 2008. These technologies include special engineering plastics, macromolecular compound or new synthetic modified, etc.
●
Determining the detailed standards for average fuel consumption for passenger car manufacturers: 1) In 2015 average fuel consumption for passenger car reach
0.069L per kilometer; 2) In 2020 average fuel consumption for passenger car reach 0.05L per kilometer. It will accelerate the automobile lightweight progress.
In addition, with the Chinese government strongly encouraging the production of more fuel-efficient and environmentally friendly vehicles, as one means to help resolve the
nation's worsening air pollution problem, especially in big cities, opportunities abound for suppliers of plastics materials and auto components.
We believe that the above government measures and programs will continue to accelerate the demand for automotive modified plastics in China.
Tightening Trend and Local Government Policies
Despite the favorable national government policies as set forth above, in the past couple of years, the Chinese government has implemented certain measures to control the
pace of economic growth and discontinued certain stimulus measures implemented to deal with the recent global financial crisis, including incentives for consumers to
purchase automobiles.
12
Since 2011, in order to resolve the extreme traffic congestion, Beijing government has been implementing a vehicle purchase quota policy, which limits the maximum vehicles
sold in Beijing per month to 20,000. Other cities which have begun to show signs of traffic congestion have also begun to implement similar measures to control traffic
congestion, including the limited automobile licenses policy implemented in Shanghai and Tianjin and the imposition of congestion charges in Shenzhen. The termination of
nation-wide preferential policies can negatively affect consumer demand for new vehicles, and local restrictive measures over automobile purchases in major cities may result in
the reduction in the sale of vehicles nationwide.
Our Products
Modified plastic is processed by adding chemical agents to basic plastics to generate or improve certain physical and/or chemical characteristics of plastic, such as heat
resistance, hardness, tensile strength, wear resistance, and flame resistance. Based on the type of materials, our products include eleven categories: Modified Polypropylene
(PP), Modified Acrylonitrile Butadiene Styrene (ABS), Modified Polyamide 66 (PA66), Modified Polyamide 6 (PA6), Modified Polyoxymethylenes (POM), Modified
Polyphenylene Oxide (PPO), Plastic Alloy, Modified Polyphenylene Sulfide (PPS), Modified Polyimide (PI), Modified Polylactic Acid (PLA) and Polyether Ether Ketone
(PEEK).
Our products are organized into eleven product groups, based on their physical characteristics, as set forth below:
Product Group
Modified Polyamide 66 (PA66)
Number of Products
Certified
30
Characteristics
Abrasive resistance, self-lubrication, high strength, high
temperature resistance, and flame resistance
Modified Polyamide 6 (PA6)
Plastic Alloy
28
85
High temperature resistance, weather resistance, high
strength
High impact resistance, high temperature resistance,
flame resistance, platable
Modified Polypropylene (PP)
154
Non-toxic, odorless, low density, insulated, and low
moisture uptake
Modified Acrylonitrile butadiene styrene
(ABS)
21
High rigidity, low density, rigidity toughness balance,
slow burn, and corrosion resistance
High strength, low moisture uptake, size stability, high
glass, high temperature resistance, fatigue resistance
High rigidity, flame retardant, abrasive resistance,
pollution resistance, high temperature resistance
High temperature resistance, corrosion resistance,
radiation resistance, flame resistance, size stability
1
1
1
-
-
Polyoxymethylenes (POM)
Polyphenylene Oxide (PPO)
Modified Polyphenylene Sulfide (PPS)
Modified Polylactic Acid (PLA)
Modified Polyimide (PI)
PEEK*
Total
Reproducible, good biological compatibility and totally
degraded
Glove box handle, seat cover, rearview mirror
shell, etc.
Flame resistance, high strength, high temperature
resistance, corrosion resistance
Compressor blade, piston ring, sealing washer,
bushing, gear, brake block, etc.
N/A
Excellent mechanical and chemical resistance and
temperature tolerance
Used in communications and transport
electronics and electrical appliances, machiery,
medical and analytical equipment
321
*PEEK is primarily used in applications that are unrelated to automotive applications, which does not require certifications and is in the product development stage.
13
Automotive or Other Application
Roof handles, door knobs, transmission
connection plates, fan shrouds, glovebox
assembles, engine hoods, stents baffle blocks,
trajectory, fasteners, etc.
Inner door knobs, door knobs, hand shanks,
transmission connection plates, visor bases,
etc.
instrument panels, instrument frames, shields,
automotive center stacks, speaker covers, grids,
fog light shells, battery bases, seat armrests,
luggage holders, etc.
Instrument panels, inner panels, columns,
bumpers, air conditioner shells, door knobs,
mudguards, etc.
Heat dissipating grids, steering wheel shells,
cup holders, seal banks, instrument panels,
inner door knobs, wheel covers, etc.
Heater fans, signal lamps switches, gas reseior
covers, door knobs, hand shanks, fuel pumps,
dynamic valves, accelerator pedals, rampetior
elements, etc.
Battery plants, lamp holder insulation parts, anti
freezer grids, booms, instrument panels, window
frames, tool cabinet covers, handwheel boxes,
heater holders, heater baffles, cooling system
connections, pump strainer nets, ammeler
frameworks, reaview, etc.
Air bleed control valves, pneumatic signal
conditioners, sparks plug wire insulation
covers, tachometer sensor covers, electrical
pumps, fuel pump impellers and covers, air
cylinder covers, water pump impellers, etc.
Raw Materials
The principal raw materials used for the production of our modified plastic products are plastic resins such as polypropylene, ABS and nylon. Polypropylene is a chemical
compound manufactured from petroleum. 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. Approximately 64.7% of our total raw materials purchased by volume are sourced from overseas petrochemical enterprises and 35.3% from
domestic petrochemical enterprises during the year ended December 31, 2014.
The Company has one-year renewable contracts with its major suppliers, which are distributors of petrochemical enterprises. Because the raw materials used in our products
are primarily petroleum products, the rise in oil prices directly affects the cost of the raw materials. We attempt to mitigate the increase in our raw materials prices by
appropriately raising the price for our products to pass the cost to our customers as part of our pricing policy.
Because raw materials constitute a substantial part of the cost of our products, we seek to reduce costs by dealing with major suppliers. During the year ended December 31,
2014, the Company purchased approximately 88% of the Company's raw materials from eight major suppliers. By dealing in large quantities with these major suppliers, we
obtain reduced prices for raw materials, therefore reducing the cost of our products. If we were unable to purchase from these suppliers, we believe we would still have
adequate sources of raw materials from other petrochemical distributors without material impact on the cost of our products.
Research and Development
Xinda Material Research Center and Xinda Group were organized to provide us with ongoing additions to our technology through advanced development methods, which
represent the key to our competitive strength and success. Our goal is to utilize our state-of-the-art methods, equipment and our technical expertise to produce plastics of the
highest quality that are cost-efficient for our customers. Toward this end, we have staffed Xinda Material Research Center and Xinda Group with 40 employees who have Ph.D.
and Master's degrees, 183 employees who have Bachelor's degrees, and 14 employees with Associate Bachelor's degrees. In addition, we have 8 consultants, including one
consultant who is a member of the Chinese Academy of Engineering, and one consultant who is the former chief scientist of Specialty Plastics Engineering Institute of Jilin
University. On average, our employees have been working in our industry for more than three years, and our key R&D employees have on average more than 10 years of
experience in our industry.
As aforementioned, Xinda Group Material Research assumed the functions of Xinda Material Research Center and Xinda Group Technology Center as part of our group
restructuring. To supplement the efforts of our Xinda Group Material Research, we have cooperated with a number of the leading technology institutions in China. Besides
providing specialized research and development skills, these relationships help us formulate cutting-edge research programs aimed at developing new technologies and
applications in plastics engineering.
In addition, Dubai Composites focuses on more advanced research and development in high-end applications relative to our research and development efforts in China.
All our significant research and development activities are overseen by the members of our Scientific Advisory Board, which we have assembled from the leaders in China's
chemical engineering industry. Currently, the members of the Scientific Advisory Board are:
●
●
●
●
●
●
●
●
Qingquan Lei: Member of Chinese Academy of Engineering, Post-PhD Advisor of Harbin Institute of Technology.
Xiabin Jing: Post-PhD Advisor and Researcher of Changchun Institute of Applied Chemistry of the Chinese Academy of Sciences.
Huixuan Zhang: Principal of Changchun University of Technology..
Zhenhua Jiang: Director of the Engineering Research Center of the Special Plastics Engineering Education Department of Jilin University..
Xijun Liu: Dean of Postgradate School of Qiqihaer University
Aimin Zhang: Professor of the State Key Laboratory of Polymer Materials Engineering Polymer Research Institute of Sichuan University
Pengcheng Xie: Associate Professor of Polymer Advanced Processing (En-learn) Laboratory of Beijing University of Chemical Technology
Chao Bi: Associate Professor of School of Mechanical and Electrical Engineering of Beijing University of Chemical Technology.
We host our annual seminar on the Development of the Macromolecule Materials Industry since 2008, during which we bring prominent industry-leading consultants to meet
with our R&D staff. The annual seminar gives industry experts an opportunity to review and evaluate the Company's R&D initiatives in terms of technology advancement on
the backdrop of government policies which support development of the modified plastics industry. During the seminar, industry experts assess the progress of the Company's
R&D projects for the current year, and then evaluate the Company's R&D projects for the next year. Projects are reviewed in terms of overall strategy, alignment with
government policies, market opportunities, efficient utilization of R&D and technical feasibility.
14
Xinda Group and Xinda Group Material Research are located within the same facility of our Jiangnan Zhonghuan Road production base. Xinda Group Material Research
provides technical support for our recently expanded modified plastics annual nameplate production capacity of 390,000 MT and ongoing service to our customers, and
enhanced our research and development capabilities for modified plastics in new applications in areas such as aerospace, high-speed rail and new energy vehicles. We have
been certified as a National Level Enterprise Technology Center, the only institution certified as such in the modified plastics industry in Heilongjiang. This certification makes
us eligible for participation of issuing modified plastics industry standards, certain tax and tariff relief for scientific research and development, certain funding designated for
National Enterprise Technology Center and municipal subsidies and Post-PhD and Academy Member WorkStation in Heilongjiang Province.
Our research and development expenses were US$29,434,680, US$21,258,549 and US$21,586,074 during the years ended December 31, 2014, 2013 and 2012, respectively.
Intellectual Property
Patents
As a result of our collection of academic and technological expertise, we have five approved patents and 188 pending patent applications in China, as set forth in the following
table.
No
1
2
3
4
5
6
7
8
9
10
11
12
13
A sprayed directly material used in car bumper
Patent Name
Application No.
200810051570.8
Application Date and Status
December 10, 2008
Supercritical fluid rapid diffusion synthesis of nano calcium carbonate
enhanced microcrystalline polypropylene composites
200910073402.3
December 11, 2009
Approved
Approved
A method for automotive interior low odor, low VOC, high performance
polypropylene composites
A high heat-resistant PC / ASA alloy material and its preparation
method
A rapid detection method of the tensile property of modified PP used in
auto specially by non-standard situation
A molding method suitable PEEK
A method for automotive interior matte, anti-scratch modified
polypropylene composites
A high notched impact PA / ASA alloy material and its preparation
method
A lower mold shrinkage ratio method of calcium carbonate /
polypropylene nano-composites
201010258937.0
August 20, 2010
Approved
201010508149.2
October 15, 2010
Approved
201110094454.6
April 15, 2011
Approved
201010173663.5
201010230064.2
May 17, 2010
July 19, 2010
Pending
Pending
201010230061.9
July 19, 2010
Pending
201010230088.8
July 19, 2010
Pending
Nano-ZnO filled with modified PEEK film and its preparation method
201010258955.9
August 20, 2010
A high impact and high flow PC / ASA alloy material and its preparation
method
201010258950.6
August 20, 2010
Pending
Pending
A preparation method of SiO2/CaCO3 nano-composite particles
modified polypropylene
An anti-aging, anti-yellowing, low odor polypropylene composite
material and its preparation method
201010282042.0
September 15, 2010
Pending
201010508177.4
October 15, 2010
Pending
15
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
Pending
Pending
Pending
Pending
Pending
Pending
An alloy material of high-impact, high-brightness ASA
201010543439.0
November 15, 2010
A preparation method of polymer composites with high toughness
201110035736.9
February 11, 2011
A preparation method of polylactic acid used in auto dashboard
201110035716.1
February 11, 2011
A preparation method of the thermoplastic elastomers PP with high
mobility and high resistance of deformation
201110035725.0
February 11, 2011
A preparation process of high weathering colour ASA resin
A special material of cooling grille with high heat resistance and high
weather resistance
A preparation process of centralized control method used in plastic
production line
A preparation process of ABS alloy with high impact performance and
high heat resistance
A rapid detection method of the impact property of modified plastics
used in automobile specially
A preparation process of the premixed screening system
A preparation method of high heat-resistant and high rigid PLA
composite material reinforced by fully biodegradable natural fiber
A preparation method of easily dispersed and easily processing
polyprolene composite material
A high-powered aircraft tail composite material and its preparation
process
201110347336.1
201110094466.9
February 11, 2011
April 15, 2011
201110122566.8
May 12, 2011
Pending
201110122586.5
May 12, 2011
Pending
201110158528.8
June 14, 2011
Pending
201110158488.7
201110158512.7
June 14, 2011
June 14, 2011
Pending
Pending
201110158511.2
June 14, 2011
Pending
201110196209.6
July 13, 2011
Pending
A high impact PA6 composite material with core-shell toughening and
its preparation method
201110196226.X
July 13, 2011
Pending
A preparation method of polypropylene resin foam particles with
supercritical CO2 act
A preparation method of the plastic production line with high
performance and high homogeneity
A high toughness, low warpage and high-mobility PET/PBT/PC alloy
reinforced by glass fiber and its preparation method
A high impact and high heat-resistant flame retardant ABS composite
material reinforced by glass fiber and its preparation process
A preparation method of polylactic acid used composite material
modified by hydroxyapatite with supercritical water act
A high heat-resistant and high wear-resistant PEEX composite material
and its preparation process
16
201110230302.4
August 12, 2011
Pending
201110233488.9
August 16, 2011
Pending
201110235189.9
August 17, 2011
Pending
201110268625.2
September 13, 2011
Pending
201110268687.3
September 13, 2011
Pending
201110347338.0
November 7, 2011
Pending
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
A high toughness, low warpage and low mold temperature PET/PA6
alloy reinforced by glass fiber and preparation method
A polypropylene composite material used in battery tank of new source
of energy automobile and its preparation method
A preparation method of glass fiber reinforced polyether ether ketone
with high strength and high heat resistance
A high toughness of polycarbonate blends material and its preparation
method
A high-strength carbon fiber reinforced polyetherether ketone
composite material and its preparation method
A high-impact, green flame retardant PC / ABS alloy material and its
preparation process
201110347339.5
November 7, 2011
Pending
201110347320.0
November 7, 2011
Pending
201110399890.4
December 6, 2011
Pending
201110319832.6
December 20, 2011
Pending
201210114931.5
April 20, 2012
Pending
201210122281.9
April 25, 2012
Pending
A preparation method for heat-resistant and easy processing of natural
fiber reinforced polylactic acid composites
201210147444.9
May 14, 2012
Pending
High performance halogen-free flame-retardant PC / ABS composite
material and its preparation method
A high temperature conductive PPO/PA6 alloy material and its
preparation method
High-performance, green flame retardant reinforced PA66 composites
technology
An antistatic LSOH flame retardant PC / ABS alloy material and its
preparation method
A preparation method of high encapsulation efficiency and stable
release polylactic lysozyme drug microsphere
A supercritical carbon dioxide reactor pressure method for preparing
polypropylene foamed material
An antimicrobial, dust suppression, halogen-free flame retardant ABS
and its preparation process
201210201826.5
June 19, 2012
Pending
201210241856.9
July 13, 2012
Pending
201210260160.0
July 26, 2012
Pending
201210296750.9
August 20, 2012
Pending
201210295154.9
August 20, 2012
Pending
201210298694.2
August 22, 2012
Pending
201210305824.0
August 27, 2012
Pending
A free primer and sprayed directly on the bumper composites
201210306240.5
August 27, 2012
An extrusion grade sisal fiber reinforced polypropylene composite
material and its preparation process
201210357867.3
September 25, 2012
A preparation methods of ultra-hydrophobic microporous polymer film
201210358122.9
September 25, 2012
A long glass fiber reinforced polypropylene material and its preparation
method
201210362626.8
September 26, 2012
Pending
Pending
Pending
Pending
A flame-retardant glass fiber reinforced PA66 and its preparation
method
201210370558.X
September 29, 2012
Pending
17
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
A modified Kevlar fiber reinforced PA66 material and its preparation
method
201210369747.5
September 29, 2012
Pending
The chest protected belts
A high toughness wear-resistant fiberglass /PA6 composites for rail
transit fasteners
A non-asbestos and non-metal materials brake pads composite material
and its preparation method
A high impact, high heat-resistant PC / PBT alloy material and its
preparation process
A wear-resistant, anti-static, flame retardant ultra-high molecular weight
polyethylene composite material
A glass fiber reinforced poly (ethylene terephthalate) / polycarbonate
alloy
A production method of antimicrobial, hydrophilic polypropylene
particle
201220526299.0
201210396122.8
October 15, 2012
October 18, 2012
Pending
Pending
201210395921.3
October 18, 2012
Pending
201210403095.2
October 22, 2012
Pending
201210402814.9
October 22, 2012
Pending
201210403197.4
October 22, 2012
Pending
201210411680.7
October 25, 2012
Pending
Graphene / polymer conductive composites
201210411231.2
October 25, 2012
A continuous aramid fiber reinforced POM materials and preparation
methods
201210411967.X
October 25, 2012
Pending
Pending
A glass fiber, SiO2 enhanced toughening polyphenylene sulfide
material and its preparation method
An alcohol solution PA66 material special for intake manifold and its
preparation method
An environmentally friendly self- aromatic polypropylene material and
its preparation process
A multilayer hot pressing method for preparing hydroxyapatite /
polylactide composite
A mechanical strength polypropylene power lithium battery separator
and its preparation method
An ramie fiber reinforced polypropylene composite material and its
preparation process
An environmentally friendly foam polypropylene material and
preparation method
201210439116.6
November 7, 2012
Pending
201210442251.6
November 8, 2012
Pending
201210457403.X
November 15, 2012
Pending
201210474211.X
November 21, 2012
Pending
201210472283.0
November 21, 2012
Pending
201310185514.4
May 20, 2013
Pending
201310185228.8
May 20, 2013
Pending
Preparation of a glass fiber reinforced nylon 66 / nylon 6 Composites
201310185041.8
A high mobility of polyvinyl alcohol / lignin WPC
201310203047.3
A polypropylene self-luminous material and preparation method
201310250047.9
A low-cost method for preparing hydrophobic material of
polypropylene
201310250185.7
May 20, 2013
May 28, 2013
June 24, 2013
June 24, 2013
Pending
Pending
Pending
Pending
Preparing a polyamide material reinforced with continuous glass fibers
201310250967.0
June 24, 2013
Pending
18
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
One kind of resistance to warpage reinforced polyamide 6 material and
preparation method
201310250426.8
June 24, 2013
Pending
One kind of aramid pulp-reinforced PA66 composite material and
preparation method
A PPO/PA6 alloy material applied to electrostatic spraying and its
preparation method
201310367404.X
August 22, 2013
Pending
201310367459.0
August 22, 2013
Pending
A preparation method of reinforced, flame-retardant ABS material
201310367420.9
August 22, 2013
201310372282.3
August 24, 2013
Pending
Pending
One kind of anti-alcohol solution, low warpage reinforced nylon66
composite material and preparation method
Preparation of a high-performance fiber-reinforced polyphenylene
sulfide composites
A high-gloss, free paint, scratch-resistant alloy material and preparation
method
An anti-oxidation, high flow, flame retardant ABS and preparation
process
A preparation process of heat-stable flame retardant reinforced nylon
composite material
An antistatic, low smoke, flame retardant PC / ABS alloy materials and
preparing process
A no-spray, high durability, scratch-resistant, flame retardant ABS
Preparation and Process
A Preparation of applying to charging pile casing PC / ABS alloy
compound
An flax noil fiber reinforced polypropylene composite material and its
preparation process
An environmentally friendly fire-retardant, high-performance EVA
composite material and preparation method
A free spray paint bumper with modified material and preparation
method
A method for preparing low temperature resistance, scratch-resistant
zipper jacket compound for cars
Preparation method of impact-resistant strain of modified polylactic acid
material
A MARINE with wear-resistant ultra high molecular weight
polyethylene composites
A method for preparing an enhanced flame retardant rigid polyurethane
composites
A direct line of long glass fiber reinforced thermoplastic composite
material and its preparation method
19
201310372289.5
August 24, 2013
Pending
201310372789.9
August 26, 2013
Pending
201310413270.0
September 22, 2013
Pending
201310413691.3
September 22, 2013
Pending
201310414847.X
September 22, 2013
Pending
201310414024.7
September 24, 2013
Pending
201310414007.3
September 24, 2013
Pending
201310413287.6
September 24, 2013
Pending
201310467812.2
October 10, 2013
Pending
201310468057.X
October 10, 2013
Pending
201310468076.2
October 10, 2013
Pending
201310468059.9
October 10, 2013
Pending
201310468060.1
October 10, 2013
Pending
201310467797.1
October 10, 2013
Pending
201010471859.6
October 12, 2013
Pending
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
A highly weather-resistant polypropylene self-luminous material and
preparation method
Preparation of a high strength of continuous glass fiber reinforced
nylon 6 material
Preparation of an aircraft engine surrounding high temperature
polyimide composites
A high resistance temperature reinforced polyamide 6 material and
preparation method
201310555483.7
November 12, 2013
Pending
201310555451.7
November 12, 2013
Pending
201310555389.1
November 12, 2013
Pending
201310556569.1
November 12, 2013
Pending
A toughening wear-resistant alloy material and preparation method
201310556261.7
November 12, 2013
A silicone toughening polyphenylene sulfide material and its
preparation method
201310560625.9
November 13, 2013
Pending
Pending
Method for preparing porous polymer composite superhydrophobic
films
An alloy NiMoB modified talc enhanced Bumper material and its
preparation method
One kind of aramid fiber / polyimide composite material and preparation
method
201310559589.4
November 13, 2013
Pending
201310559588.X
November 13, 2013
Pending
201310559294.7
November 13, 2013
Pending
A polypropylene foam material and preparation method
201310559024.6
November 13, 2013
A high-gloss, avoid spraying PTT / PMMA rearview mirror Compound
and its production process
201310652729.2
December 6, 2013
Pending
Pending
A high toughness, wear-resistant rail fasteners with glass / nylon 6
Composites
A keyboard and mouse with anti-bacterial perspiration modified plastics
and its preparation method
A high-strength lightweight hollow glass microspheres toughening PP
material and preparation method
201310646768.1
December 6, 2013
Pending
201310676101.6
December 13, 2013
Pending
201310721731.0
December 25, 2013
Pending
a method for producing a heatproof polyimide composite used for
aircraft engine periphery
Preparation method of a special fiber reinforced skis
The preparation method of a kind of special fiber cable oil and gas
exploration
Preparation method of a glass fiber reinforced polylactic acid base
composite material
A 2D carbon fiber heating cloth
A kind of thermoplastic carbon fiber prepreg and its preparation
method.
A method for preparing super toughened polylactic acid base
composite material
201410144739.X
April 12, 2014
Pending
201410144740.2
201410146070.8
April 12, 2014
April 29, 2014
Pending
Pending
201410145388.4
May 6, 2014
Pending
201410144738.5
201410145300.9
May 7, 2014
May 7, 2014
Pending
Pending
201410145345.6
May 9, 2014
Pending
116
A thermosetting carbon fiber prepreg and its preparation method
201410205668.X
May 16, 2014
Pending
20
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
A high toughness flame retardant PLA/PC alloy
Oil and gas exploration prepared by weaving method of special fiber
cable
A method for producing a heatproof polyimide composite
Preparation method of PBO fiber reinforced skis
The preparation method of a high-strength PEEK composites
A high dimensional stability, excellent abrasion resistance PEEK valve
composite
An advantage of specially coupling treated carbon fibers reinforced
PEEK
High thermal conductivity high heat resistance carbon fiber heating
cloth
201410206092.9
201410205870.2
201410205669.4
201410205670.7
201410262746.X
201410262638.2
May 16, 2014
May 16, 2014
May 16, 2014
May 16, 2014
June 13, 2014
June 13, 2014
Pending
Pending
Pending
Pending
Pending
Pending
201410262651.8
June 13, 2014
Pending
201410262691.2
June 13, 2014
Pending
Preparation of low temperature resistance special fiber reinforced skis
201410262850.9
A method for preparing high performance PEEK/long glass fiber
composites
201410263606.4
June 14, 2014
June 16, 2014
Pending
Pending
The preparation method of a kind of long glass fiber reinforced
polypropylene
201410264159.4
June 16, 2014
Pending
A preparation method of jute fiber reinforced polypropylene
201410326831.8
Preparation of one kind of ultra light and thin fiber reinforced skids
201410326799.3
A kind of high thermal conductive composite fiber cloth
Preparation of a high tensile strength of PEEK composites
Preparation of Carbon Fiber Reinforced PI Composite Material
A method for producing a polyimide composite
A toughening polylactic and acid and its preparation method
The preparation method of large tow carbon fiber cable
201410326610.0
201410326616.8
201410326641.6
201410326840.7
201410362495.2
201410363355.7
The preparation method of glass fiber reinforced polypropylene
201410365812.6
July 10, 2014
July 10, 2014
July 10, 2014
July 10, 2014
July 10, 2014
July 10, 2014
July 29, 2014
July 29, 2014
July 29, 2014
A preparation method of PEAK modified epoxyresin system/carbon
fiber cable
201410413361.9
August 21, 2014
21
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
A preparation method of high transparent heat-proof polylactic acid
based composite material
A high-heat-resistant, excellent in abrasion resistance sheet composite
PEEK valve
The preparation of a high-strength ,high-temperature polyimide
composites
201410413616.1
August 21, 2014
Pending
201410413379.9
August 21, 2014
Pending
201410413832.6
August 21, 2014
Pending
Toughened prepreg of carbon fiber and its preparation method
201410418312.4
August 25, 2014
A preparation method of polylactic acid/starch composite foams
201410489544.9
September 22, 2014
Preparation of PI composite material by coupling agent treated glass
fiber
201410481809.0
September 22, 2014
New type of composite carbon fiber heating cloth
201410481306.3
September 24, 2014
A preparation of antibacterial polylactic acid fiber
201410691901.X
November 27, 2014
A preparation method of high toughness biodegradable polylactic acid
foam plastics
201410691587.5
November 27, 2014
A preparation method of polyimide composite material
201410691532.4
November 27, 2014
A kind of biodegradable polymer-docetaxel bonding medicine and its
preparation method
201410690529.0
November 27, 2014
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
A kind of 3D printing poly lactic acid/leather powder composite
materials and its preparation method
201410690528.6
November 27, 2014
Pending
A method of preparing high toughness PLA composites
201410697801.8
November 28, 2014
A kind of twin screw reactive extrusion method ring opening
polymerization preparation of PLA
201410697838.0
November 28, 2014
A method of preparing high strength PLA composites
201410697790.3
November 28, 2014
A modification of PLA material and its preparation method
201410697822.X
November 28, 2014
A kind of polylactic acid preparation method of lactide ring-opening
polymerization
201410697015.8
November 28, 2014
A carbon fiber-reinforced thermoplastic polyimide composites
201410703816.0
November 30, 2014
A surface treatment of carbon fiber reinforced thermoplastic polyimide
composites
201410703815.6
November 30, 2014
Pending
Pending
Pending
Pending
Pending
Pending
Pending
A kind of organic molecule catalytic method for preparation of poly
lactic acid
201410703493.5
November 30, 2014
Pending
158
A preparation method of the high toughness ABS/PLA-based alloys
201410704588.9
December 4, 2014
Pending
22
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
A preparation method of the natural fiber/polylactic acid-based
composite materials
A preparation method of the high toughness, high mobility PLA/PP
Alloy
Method for increasing the compatibility of PPS/PEEK composite
materials
Foamed PP and graphite fiber composites preparation methods of
enhancement of skis
An PEEK/BaSO4 composite material and its preparation method
High mobility TLCP/PES/PEEK composite material and its preparation
method
Boron fiber reinforced polyimide
Method for preparing thermoplastic polyimide composites
Nanoparticles/CF hybrid reinforced PEEK composite material and its
preparation method
Method for preparing high toughness of polycarbonate/polylactic acid-
based alloys
An automobile air conditioner drive gear with the modified materials
and the method
201410704612.9
December 4, 2014
Pending
201410704664.6
December 4, 2014
Pending
201410730258.7
December 5, 2014
Pending
201410729634.0
December 5, 2014
Pending
201410730260.4
201410729614.3
December 5, 2014
December 5, 2014
201410730235.6
201410730324.0
201410729719.9
December 5, 2014
December 5, 2014
December 5, 2014
Pending
Pending
Pending
Pending
Pending
Pending
201410733882.2
December 8, 2014
Pending
201410733905.X
December 8, 2014
Pending
A method of preparation of carbon fiber prepreg reinforced skis
201410729635.5
December 5, 2014
A compressor valve plate with a modified material and the method
201410733902.6
December 8, 2014
A preparation method of polylactic acid film
201410746939.2
December 10, 2014
A method of processing aids (ACR) improved PVC materials
201410746804.6
December 10, 2014
A high-retardant polyvinyl alcohol/Wood Flour Composites biomass
201410746938.8
December 10, 2014
A kind of microfluids device prepared by the technology of 3D-printing
201410747264.3
December 10, 2014
A modified high-performance carbon fiber composite materials
201410747395.1
December 10, 2014
A high strength, high modulus of PEEK composite material and
preparation method
201410747376.9
December 10, 2014
The use of core-shell particles toughening PC and PBT resin
201410747406.6
December 10, 2014
A process for producing acrylic polyurethane high-solids coatings
201410747079.4
December 10, 2014
A preparation method of chemical vapor deposition method graphene
films
201410747180.X
December 10, 2014
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
23
181
182
183
184
185
186
187
188
189
190
191
192
193
A preparation method of impact-resistant strain of modified polylactic
acid materials
A preparation method of low warpage ABS special 3D printing
materials
A process for producing fiber reinforced PA6 dedicated 3D printing
materials processing using a special method
201410747377.3
December 10, 2014
Pending
201410746979.7
December 10, 2014
Pending
201410747082.6
December 10, 2014
Pending
Preparation of an enhanced flame retardant polyurethane composites
201410747055.9
December 10, 2014
A highly heat-resistant polylactic acid/Wood Flour Composites
201410747097.2
December 10, 2014
One kind of thermal evaporation method graphene Gec
201410746877.5
December 10, 2014
A high-mobility PVA/wood flour composite biomass
201410747054.4
December 10, 2014
An advantage of specially prepared by coupling treatment SiO2
reinforced PEEK
201410747062.9
December 10, 2014
Glass fiber modified wearable Polyimide
201410747053.X
December 10, 2014
Sensor with high-performance fiber-reinforced PPS composites
201410747061.4
December 10, 2014
A ternary no return toughening copolymer of polylactic acid composite
material and its preparation method
201410747386.2
December 10, 2014
A preparation method of PEEK composite material
201410746978.2
December 10, 2014
A preparation method of high performance PEEK/carbon fiber
composite material
201410747379.2
December 10, 2014
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
24
Trademark
We own the trademarks for our graphic logo and Chinese characters of "Xinda", which we use in packaging our products and marketing.
Certification Process
To meet the requirements of an automobile manufacturer, products used as component parts must pass a rigorous certification process by the manufacturer's technological
quality assurance department before they can be approved for and used in production. The certification process consists of three stages.
First, the automobile manufacturer reviews the manufacturer of modified plastics. The examination involves assessment of the operation history of the modified plastics
manufacturer, their experience in providing component services, the specialization of their factory equipment, their research and development capacity and quality assurance
systems. The manufacturer's operations need to meet the requirements of the automobile manufacturer. Once the initial review is passed, the modified plastics manufacturer will
obtain a qualification as an automobile component manufacturer. This initial stage takes approximately sixteen to twenty two months to complete.
Second, the automobile manufacturer and the manufacturer of modified plastics reach an understanding about a product specification. The modified plastics manufacturer
provides product research and development materials to the automobile manufacturer for inspection. The automobile manufacturer tests the product specification according to
its standards and, if results are satisfactory, the modified plastics manufacturer obtains a product specification certification and enters the product certification stage. The
second stage takes approximately eight months to complete.
Third, the parties complete technology R&D tests and perform automobile component finished parts tests. The product undergoes additional testing by the automobile
manufacturer and is used in road tests. This stage takes approximately five to fifteen months depending on whether the car model is an existing model or a new model. At the
conclusion of the third stage, the modified plastics manufacturer receives a product certification from the automobile manufacturer.
We believe that the necessity, rigorousness, complexity and duration of the certification process make it difficult for outside competitors to enter the field in a short period of
time. We have 321 certifications from automobile manufacturers as of December 31, 2014, which we believe is currently one of the largest portfolios of product certifications in
the Chinese automobile modified plastics industry.
25
Sales and Marketing
Currently, our sales network focuses on the northeastern, northern, eastern and southwestern regions of China. We primarily sell to end customers through our approved
distributors. To a less extent, we also sell directly to end customers. A typical customer development cycle starts when our R&D staff develops customized products for new
end customers and obtains product certifications. These end customers are usually major automobile parts manufacturers who can only source from suppliers like China XD
with product certifications granted by major automobile manufacturers. After we established relationships with these end customers and began to have large volume of
transactions with them, we assign end customers to our approved distributors according to our internal policies. We also acquired end customers with our existing
certifications from time to time. In 2014, approximately 86.6% of our sales were generated from approved distributors.
We enter into distribution agreements with local distributors in areas where large automobile manufacturers are located. The distribution agreements usually have a term of one
year, during which period we can enter into distribution agreements with other distributors for our products. The distributors are responsible for marketing and distributing our
products. Through the established sales channels, we can quickly respond to local market demand, address customer needs, enhance our ability to provide technical support
and after-sales services, and lower our marketing expenses. Our general credit term with our distributors is three months and our collection of payment from distributors is not
contingent upon their cash collection from end customers. We manufacture products according to orders received from our distributors and maintain a certain quantity of raw
materials based on our experience and the distributors order patterns. By doing this we hope to ensure the smooth implementation of the production plan of major automobile
manufacturers and avoid risks of inventory shortage. We do not provide the distributors nor end customers with the right of return, price protection or any other
concessions. We allow for an exchange of products or return only if the products are defective.
We have been actively extending our distribution network to 9 distributors in 2014 and we believe we have good relationships with our distributors. We believe that we have
been able to secure and maintain strong relationships with end customers due to our existing certifications, advanced technologies and high product quality, which establish a
higher barrier to entry for others. Most of the end customer relationships will be developed through our own R&D and sales force and maintained by our R&D and sales
professionals and our distributors. According to our distribution contracts, our distributors are prohibited from selling our competitors' products and required to use the
product certificate, brand name and package standards set by us during the distribution period. After the expiration of the distribution contracts in absence of renewal, we
retain the customer relationships with end customers.
While the pricing volatility of our raw materials is a primary cause of cost variations in our products, we are generally able to pass the cost of price changes in our raw materials
to our customers, although there are timing delays of varying lengths depending upon volatility of raw material prices, the type of products, competitive conditions and
individual customer arrangements.
We sell our products substantially through approved distributors in the PRC. Our sales to our distributors are highly concentrated but have been gradually diversified in
recent years. Sales to major distributors and direct customer, which individually exceeded 10% of our revenues, accounted for approximately 78.0%, 75.9% and 72.0% of our
revenues for the years ended December 31, 2014, 2013 and 2012, respectively. We expect to reduce our distributor concentration over time, although revenues from these
distributors are expected to continue to represent a substantial portion of our revenue in the future.
We have initiated our marketing efforts to develop new customers outside of China, in particular those in the Korean market. We have started offering certain high-end
products, such as PA66 and long-chain PA12 manufactured from our Heilongjiang plants, directly to the Korean market since the second quarter of 2014. In addition, we
started the construction of Dubai Composites plant in the second quarter of 2014 in Dubai, UAE, targeting on high-end products for the overseas markets, which will be
completed in April 2015. We plan to serve customers in oversea markets from our Dubai Composites plant, including the existing one in the ROK.
26
Competition
The PRC automotive modified plastics industry is growing rapidly and highly fragmented with the top three domestic producers occupying less than approximately 24.9% of
the market shares in 2013 according to Frost & Sullivan's report. According to Frost & Sullivan's report, in terms of sales volume and production capacity, we are one of the
leading domestic specialized manufacturers of modified plastic for automobile parts in China, with a market share of approximately 11.6% in 2013 and 7.2% in 2012. In 2014, our
sales volume of automotive plastics was approximately 341,520 MT. As of December 31, 2014, our annual production capacity of automotive plastics was 390,000 MT.
In 2014, the Company developed a customer from the Republic of Korea (the "ROK") by the sales of mainly higher-end polymer composite materials. Our competitors in ROK
are mostly global brand name companies. Due to our high quality standard and competitive pricing, we are able to compete in and penetrate markets outside of China.
We installed 30 new product lines in December 2012, which are utilized primarily for the manufacture of higher value-added modified plastics products. The lines increased the
Company's total production capacity by 135,000 MT to 390,000 MT per annum.
Currently, Xinda Group's primary Chinese competitor in the automobile industry is Guangzhou Kingfa Science & Technology Co., Ltd. ("Guangzhou Kingfa"). Guangzhou
Kingfa entered the automotive modified plastics market in 2006 and its facilities had an annual manufacturing capacity of 375,000 MT for its modified plastics products used in
the automobile industry at the end of 2012, according to the research report by Frost and Sullivan. Guangzhou Kingfa has the largest capacity expansion plans and was
expected to expand to 1.06 million MT by 2015 according to Frost and Sullivan's report, but its utilization rate of production capacity is expected to be lower than that of China
XD based on Frost & Sullivan's report. Guangzhou Kingfa has much larger financial resources than Xinda Group. However, we believe that it is less focused in automotive
sector and currently holds fewer number of product certifications for automotive modified plastic to the automobile industry compared to Xinda Group. Another top domestic
manufacturer of modified plastic is Shanghai Pret Composites Co., Ltd. ("Shanghai Pret"), which focuses on the production of automotive plastics. It had an annual capacity
and sales volume of 113,524 MT and 47,100 MT in 2013 and 2012, respectively, according to a report by Frost and Sullivan.
Historically, the Chinese auto market predominantly used modified plastics manufactured overseas or in factories controlled by foreign companies, such as manufacturers from
Germany, the US, the Netherlands and Japan. Although China's automotive plastic market has been dominated by foreign or JV players, Chinese suppliers are continuing to
gain market share. It is estimated that automotive plastics imported or manufactured by multinational and JV companies accounted for approximately 33.4% of the total China
automotive plastic supply in 2013, decreased from 36.3% in 2009. JV manufacturers based in China in automotive plastics sector have been slow to invest and expand in China.
Compared to non-domestic competitors including JV manufacturers, domestic manufacturers can benefit from the lower costs and geographical proximity in China. As local
players continue to invest in research and development, enhance product quality and improve management skills, we believe that domestic production of automotive plastics
will compete very favorably with the foreign competitors in terms of price, quality, services and delivery times and continue to replace imported plastics.
27
Our Competitive Strengths
We believe that the following competitive strengths continue to enable us to compete effectively in the automotive modified plastics market in the PRC:
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Leading Market Position with High Barrier to Entry. We believe that we are one of the China's leading specialized manufacturers of modified plastic for automobile
parts in terms of sales volume and production capacity, with a market share of approximately 11.6% in 2013. The PRC automotive modified plastics industry is growing
rapidly and is highly fragmented with the top three domestic producers occupying less than approximately 24.9% of the market shares in 2013. In 2014, our sales
volume of automotive plastics was approximately 341,520 MT, representing a growth of 0.6% compared to that in 2013 due to our capacity constraint. As of December
31, 2014, our annual production capacity of automotive plastics was 390,000 MT. We believe our leading market position allows us to successfully compete with other
foreign and domestic modified plastic manufacturers in the market. Being one of the leading specialized manufacturers of automotive modified plastics in China, we
believe we are well-positioned to not only grow with the increasing market demand but increase market share by replacing smaller and less efficient modified plastic
manufacturer.
In addition, as a result of our consistent research and development efforts, we have 321 product certifications from major automotive manufacturers in the PRC as of
December 31, 2014, which we believe is among the largest numbers of product certifications by any domestic player in China's automotive plastics industry. Strict
certification requirements and long certification periods result in high barriers to entry. Our current or potential competitors are required to obtain relevant product
certifications from automotive manufacturers in order to compete with us. Each certification normally takes over two years to complete, and as a result, automotive
manufacturers are reluctant to replace suppliers like us who have already received necessary certifications and proven consistent product quality. We believe that
having one of the largest portfolios of product certifications in China allows us to strengthen our competitive position.
Long-Term Relationships with Reputable End Users. Our senior management has been involved in the business of modified plastics since 1985. We benefit from the
industry connections and experience of our senior management, which have enabled us to establish long-term customer relationships and strong industry recognition.
We are a qualified provider of high-quality automotive plastics, and have sold our products through plastic auto part manufacturers to many leading automotive
manufacturers in China. Currently, our modified plastics are utilized in more than 27 automobile brands and over 80 automobile models manufactured in China,
including Audi, Volkswagen, BMW, GM, Mazda, Toyota, Cherry, and Geely. We believe that our brand and our products are well recognized and respected in China's
automotive modified plastics market.
High Quality Products with Lower Costs. We purchase our raw materials from a small number of large suppliers who procure resins locally or internationally. By
concentrating our purchases from a small group of suppliers, we are able to keep the costs of purchasing raw materials relatively low. Also, since our manufacturing
facilities are located in China where labor, raw materials and operation costs are relatively lower, we are able to charge lower prices than our international competitors
while maintaining comparable quality. Compared to our domestic competitors, we believe our long-standing manufacturing experience, in-depth market knowledge,
significant scale of economy and strong R&D capabilities enable us to provide higher quality products at competitive prices.
Manufacturing facilities are critical to the quality of products. We have in the past invested substantial time and resources in building state-of-the-art production lines
to enhance our product quality. Our facilities have maintained ISO/TS16949, a certification of quality management systems specific to the automotive industry.
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Strong Customer-Oriented R&D Capabilities. The modified plastics industry is characterized by rapid development and increasing demand for high quality products.
We have strong R&D capabilities that allow us to have successfully passed OEM automakers' certification processes in the past and continually introduce new and
high quality products to the market. Compared to international plastic supply models, which target larger scale applications of common plastics and involve less
customization and specialization, we provide customer-oriented product development through our certification process. By working closely with our customers, we
are able to adjust our product features to better satisfy the specific needs of each customer. To achieve this, we have staffed our R&D team with 237 professionals, of
whom 40 have Ph.D. and Master's degrees. On average, our R&D employees have worked with us for more than three years, and some key experts have more than 10
years of experience in our industry. We have also cooperated with a number of the leading technology centers in China. Besides providing specialized research and
development skills, these relationships help us formulate cutting edge research programs aimed at developing new technologies and applications in plastics
engineering. We currently have 5 approved patents and 188 patent applications pending with the State Intellectual Property Office of the PRC, or SIPO.
Established Distribution Model. Through 9 distributors across China, we have established distribution networks that cover northeast, north, southwest and east
China, with a current focus on northeast China. We enter into distribution agreements with local distributors in areas where large automobile manufacturers are
located. By leveraging the proximity of our distributors to the automobile manufacturers, we can enhance our relationships with our customers. Through the
established sales channels, we can quickly respond to local market demand, address customer needs, enhance our ability to provide superior technological support
and after-sales services, and lower our marketing expenses. At the same time, our distributors are responsible for the payments to us which is not contingent upon
their cash collection from end customers. By actively managing our distribution network, we are also able to accelerate local market penetration and increase sales
opportunities. For example, we entered the north China market in 2009 through a local distributor, one year earlier than we planned, and in 2013, we entered into the
southwest China market. For the year ended December 31, 2014, northeast, north, east and southwest China account for approximately 36.3%, 16.8%, 31.5%, and 2.8%
of our revenues, respectively.
Entry to Overseas Market. In 2014, the Company developed its prescence in the Korean market by selling primarily higher-end PA66 and (Long Chain) plastic alloy,
US$140.1 million products to the Korean market, accounting for 12.6% of the total revenues for the year ended December 31, 2014.
Seasoned Management Team. Our senior management team and key personnel have extensive operating and industry experience. Mr. Han, our chief executive officer
and president, founded our former affiliate Harbin Xinda Nylon Factory in 1985. With 30 years of industry experience, Mr. Han has in-depth knowledge and expertise
in China's modified plastics industry. He currently serves as executive director of the China Plastics Processing Industry Association and as a member of the Standing
Committee of the Heilongjiang Association of Industry and Commerce. Our chief executive officer, chief technology officer and chief operating officer have over 50
years combined experience in the modified plastics industry and we believe their extensive expertise and knowledge can well serve our customers.
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Our Strategies
Our goal is to capitalize on China's modified plastics growth trend, with a specific focus on applications in the auto sector, and to eventually be the leading modified plastics
manufacturer in China. We are committed to enhancing our sales and profitability and achieving our goals through the following strategies:
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Continue to Increase Production Capacity. Over the past five years, we have consistently increased production capacity to meet the rising demands of the
automotive industry in the PRC. As of December 31, 2014, we have an installed annual production capacity of 390,000 MT, and we have been operating at near full
capacity since 2007. With the expected strong growth in the automotive modified plastics market of China, we expect that we will continue to experience strong
demand from our customers. Therefore, we intend to continue to strategically increase our production capacity to meet customer demands from both expanded
geographical locations and future downstream sector growth. In 2013, we commenced to construct our fourth production base with 300,000 MT new material
production capacity and the affiliated research and development center and training center in Nanchong City of Sichuan Province (the "Project"). We plan to complete
the Project in about two years and our annual capacity is expected to reach approximately 690,000 MT by 2015 upon completion of the Project. The Company expects
the Dubai facility to be completed by the second quarter of 2015 and the majority of Sichuan facility to be completed around the end of 2015 and early 2016.
Focus on R&D and Develop New Product Offerings. We are currently utilizing our research and development capabilities to obtain further product certifications,
develop new products, applications and technologies. Approximately 90% of our automotive plastics product certification applications are currently undergoing trial
manufacturing periods to obtain the necessary certifications. In addition, we are developing new products for automotive applications to expand our product portfolio,
including initiating R&D on modified plastic for use in electric vehicles. We are also developing specialty engineering plastics and bio-plastics for use in other
applications, such as high-speed trains, vessel-propulsion systems, mining and oil-field equipment and aerospace equipment. We are the first non-State-Owned-
Enterprise awarded National Level Enterprise Technology Center, in Heilongjiang Province. In addition, we have Post-PhD and Academy Member WorkStation in
Heilongjiang Province enhancing our research and development capabilities.
Expand Customer Base Domestically and Internationally. The automotive plastics market in the PRC is highly fragmented with significant barriers to entry.
Although we had approximately 11.6% of the market share in 2013, our customer coverage was concentrated in the northeast regions of the PRC. We seek to steadily
enhance our market share in northeast China, and also expand our reach to northern and eastern China. In addition, we have conducted sales in overseas markets and
exported our products including non-auto sectors in 2014. We plan to implement such strategies through further expanding our distribution network by working with
local distributors who have contacts and networks overseas and directly establishing strategic alliances with certain of our non-PRC customers. Although the entry
barrier of some non-auto sectors might not generally be as high as that of the auto sector, our focus is to target high-value-added products by leveraging our
technology, expertise and know-how accumulated in the auto sector over the course of our operational history.
Pursue Selective Strategic Acquisitions. While we have experienced substantial organic growth, we plan to pursue a disciplined and targeted acquisition strategy to
accelerate our growth. Our strategy will focus on strengthening presence in certain geographies, improving our penetration in attractive markets, enhancing research
and development capabilities and acquiring new markets or customers.
Increase Efficiency by Corporate Restructuring. We completed our corporate restructuring plan at the end of 2014, with the aim of establishing a more efficient
company group structure, as a result of which our subsidiaries are more easily accessible to our end customers and our operations are able to respond to the market
changes in a more efficient manner.
30
Environmental Laws
The cost of compliance with Chinese environmental regulations currently is minimal. Most of the waste produced from our production process is water, which we circulate in
our enclosed water treatment system.
Employees
China XD's operations are organized into several operational departments including manufacturing, R&D, management, finance, sales, purchasing and marketing and others.
As of December 31, 2014, there were 1,293 employees, including 541 in manufacturing, 237 in R&D, 217 in management, 56 in finance, 69 in sales, purchasing and marketing and
173 in other departments.
Available Information
We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and registration statements, and any amendments
thereto, with the Securities and Exchange Commission (SEC). All such filings are available online through the SEC's website at http://www.sec.gov or on our corporate website
at http://www.chinaxd.net. We make available free of charge, on or through our corporate website, our annual, quarterly and current reports, and any amendments to those
reports, as soon as reasonably practicable after electronically filing such reports with the SEC. In addition, copies of the written charters for the committees of our board of
directors and our Code of Business Conduct are also available on our website, and can be found under the Investor Relations-Corporate Governance links. You may read and
copy any materials we file with the SEC at the Securities and Exchange Commission Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Our website address
is intended to be an inactive textual reference only, and none of the information contained on our website is part of this report or is incorporated in this report by reference.
31
ITEM 1A. RISK FACTORS
In addition to the other information in this Form 10-K, readers should carefully consider the following important factors. These factors, among others, in some cases have
affected, and in the future could affect, our financial condition and results of operations and could cause our future results to differ materially from those expressed or implied
in any forward-looking statements that appear in this on Form 10-K or that we have made or will make elsewhere.
The global economic uncertainty could further impair the automotive industry thereby limiting demand for our products.
The continuation or intensification of the recent global economic uncertainty arising from the European debt crisis and economic slowdown in Asia may adversely impact our
business and the businesses of our customers. Our specialized plastics are sold to automobile parts manufacturers and distributors. The recent global economic uncertainty
harmed most industries and has been detrimental to the automotive industry. Since virtually all of our sales are made to auto industry participants, our sales and business
operations are dependent on the financial health of the automotive industry and could suffer if our customers experience, or continue to experience, a downturn in their
business. Presently, it is unclear whether and to what extent the economic stimulus measures facilitated by the European Union and other governments throughout the world
will mitigate the effects of the crisis on the automotive industry and other industries that affect our business.
We concentrate our operations primarily in the automotive industry; therefore, a contraction in automotive sales and production could have a material adverse effect on
our results of operations and liquidity.
We develop, manufacture, and distribute modified plastic, primarily for use in automobiles. Automotive sales and production are highly cyclical and depend, among other
things, on general economic conditions and consumer spending and preferences (which can be affected by a number of issues including fuel costs and the availability of
consumer financing). As the volume of automotive production fluctuates, the demand for our products also fluctuates. While the China automotive sales and production
maintained growth momentum in 2013 and continued to grow in 2014, however, the growth rate was significantly down from previous years. A contraction in automotive sales
and production could harm our results of operations and financial condition. Consequently, we are exposed to the risks of adverse developments affecting the auto industry to
a greater extent than if our operations were dispersed over a variety of industries.
The withdrawal of preferential government policies and the tightening control over the Chinese automotive industry and automobile purchase restrictions imposed in
certain major cities may limit market demand for our products.
In 2011, Chinese government terminated two preferential policies for its automotive industry: (1) vehicles with 1.6L or lower air displacement were given a 50% discount in
purchase tax and (2) vehicles sold in rural area were given a government subsidy. Since 2011, in order to resolve the extreme traffic congestion, the Beijing government has
been implementing the vehicle purchase quota policy, which limits the maximum vehicles sold in Beijing per month to 20,000. Other cities which have begun to show signs of
traffic congestion have also begun to implement similar measures to control traffic congestion, including the limited automobile licenses policy implemented in Shanghai and
Tianjin and the imposition of congestion charges in Shenzhen. The termination of two nation-wide preferential policies negatively affected consumer demand for new vehicles,
and local restrictive measures over automobile purchases in major cities may result in slower growth or the reduction in the sale of vehicles nationwide although China's total
new automobile sales to end-users in 2013 were up 13.9% percent compared to the slowest rate in 2012 according to China Passenger Vehicle Association. The national and
local policies over the Chinese automotive industry may continue to impact market demand for automobiles in 2015 and eventually result in a reduction in our product sales.
32
The Chinese automotive industry's growth is slowing after the rapid growth since 2000 and such slowdown may adversely affect the market demand for our products.
There is a direct correlation between our business and automobile production volume and sales, which are dependent on economic policies and market sentiment. The Chinese
automotive industry had been rapidly growing for a decade prior to 2011. However, inflation, higher interest rates, tighter bank lending, lifting of consumer subsidies and
buying restrictions in congested cities all contributed to a more modest environment since 2011, resulting in the sharp slow-down in automobile sales volume growth rate to
4.3% in 2012, compared to 34% in 2010, representing the lowest growth rate in the past 13 years, according to the latest data issued by China Association of Automobile
Manufacturers. Any significant reduction in automobile production and sales would have a material and adverse effect on our business. There can be no assurance that the
market conditions, government policies and other factors leading to the existing slowdown in demand for automobiles will not continue. The decline in demand for automobiles
would directly and adversely affect demand for our products and hence our business, financial condition and results of operations.
A large percentage of our sales revenue is derived from sales to a limited number of distributors and a limited number of customers, and our business will suffer if sales to
these customers decline.
A significant portion of our sales revenue historically has been derived from a limited number of distributors in China. Sales to major distributors and direct customer, which
individually exceeded 10% of the Company's revenues is approximately 78.0% and 75.9% in 2014 and in 2013, respectively. Any significant reduction in demand for modified
plastics by any of these major distributors, any decrease in demand of products by its customers or by our Korean customer could harm our sales and business operations,
financial condition and results of operations.
We are dependent on a limited number of suppliers. While we have identified alternative sources for the materials and equipment we use, a temporary disruption in our
ability to procure necessary materials and equipment could adversely impact our sales in future periods.
Materials constitute a substantial part of the cost of our products. We seek to reduce the cost of raw materials by dealing with major suppliers. During the year ended
December 31, 2014, we purchased approximately 88% of our raw materials from eight major suppliers. The Company purchased equipment from two suppliers, which accounted
for 99.6% of the Company's equipment purchases for the year ended December 31, 2014. We believe the relationship with our suppliers is satisfactory and that alternative
suppliers are available if relationships falter or existing suppliers should become unable to keep up with our requirements. However, there can be no assurance that our current
or future suppliers will be able to meet our requirements on commercially reasonable terms or within scheduled delivery times. An interruption of our arrangements with
suppliers could cause a delay in the production of our products for timely delivery to distributors and customers, which could result in a loss of sales in future periods.
33
If we are subject to product quality or liability claims relating to our products, we may incur significant litigation expenses and management may have to devote
significant time defending such claims, which if determined adversely to us, could require us to pay significant damage awards.
Although we have adopted certain internal measures to supervise and examine the quality of our products, we may be subject to legal proceedings and claims from time to time
relating to our product quality. The defense of these proceedings and claims could be both costly and time-consuming and significantly divert the efforts and resources of our
management. An adverse determination in any such proceedings could subject us to significant liability. In addition, any such proceeding, even if ultimately determined in our
favor, could damage our market reputation and prevent us from maintaining or increasing sales and market share. Protracted litigation could also result in our customers or
potential customers deferring or limiting their purchase of our products.
We have limited insurance coverage on our assets in China and any uninsured loss or damage to our property, business disruption or litigation may result in our
incurring substantial costs.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited insurance products. Other than automobile insurance on
certain vehicles and property and casualty insurance for some of our assets such as factories and equipment we do not have insurance coverage on our other assets or
inventories, nor do we have any business interruption, product liability or litigation insurance for our operations in China. We have determined that the costs of insuring for
these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured
loss or damage to property, business disruption or litigation may result in our incurring substantial costs and the diversion of our resources, which may have a material adverse
effect on our results of operations, financial condition and/or liquidity.
SAFE regulations relating to offshore investment activities by PRC individuals may increase our administrative burden and restrict our overseas and cross-border
investment activity. If our shareholders and beneficial owners who are PRC individuals fail to make any required applications, registrations and filings under such
regulations, we may be unable to distribute profits and may become subject to liability under PRC laws.
The State Administration of Foreign Exchange, or "SAFE", has promulgated several regulations, including the Circular on Relevant Issues Relating to Domestic Resident's
Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular No. 37, in July 2014 that requires PRC residents or entities to register
with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In
addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of
basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of
shares, or mergers or divisions. SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging
in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular No. 75.
34
We have requested our shareholders and beneficial owners who are PRC residents to make the necessary applications and filings as required under these regulations and
under any implementation rules or approval practices that may be established under these regulations. As of the date of this Annual Report on Form 10-K, Mr. Han, our Chief
Executive Officer, has registered his beneficial ownerships in China XD and XD Engineering Plastics Company Limited ("XD Engineering Plastics") respectively with local
SAFE in accordance with Circular No. 37. However, we cannot assure you that the rest of our shareholders and beneficial owners who are PRC individuals have timely updated
their registrations with SAFE in accordance with SAFE regulations. The failure or inability of our PRC shareholders and beneficial owners make any required registrations may
subject us to fines and legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries' ability to make distributions or pay dividends or
affect our ownership structure, as a result of which our acquisition strategy and business operations and our ability to distribute profits to you could be materially and
adversely affected.
On December 25, 2006, the People's Bank of China issued the Administration Measures of Foreign Exchange Matters for Individuals, which set forth the respective
requirements for foreign exchange transactions by individuals (both PRC and non-PRC citizens) under the current account or the capital account, and the corresponding
Implementing Rules were issued by SAFE on January 5, 2007, both of these regulations became effective on February 1, 2007. According to these regulations, all foreign
exchange matters relating to employee stock holding plans, share option plans or similar plans of an overseas publicly-listed company in which PRC citizens will participate
require approval from SAFE or its authorized branch.
In February 2012, SAFE promulgated the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of
Overseas Publicly-Listed Company, or the New Stock Option Rules, which replaced and substituted the Application Procedure of Foreign Exchange Administration for
Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule. According to the New Stock
Option Rules, if a PRC resident participates in any stock incentive plan of an overseas publicly-listed company, a qualified PRC domestic agent, which could be a PRC
subsidiary of such overseas publicly-listed company or another qualified institution selected by such PRC subsidiary, among other things, must file on behalf of such
participant an application with SAFE to conduct the SAFE registration with respect to such stock incentive plan and obtain approval for an annual allowance with respect to
the purchase of foreign exchange in connection with the exercise or sale of stock options or stock such participant holds. Such participants must also retain an overseas
entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In
addition, the qualified PRC domestic agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock
incentive plan, the qualified PRC domestic agent or the overseas entrusted institution or other material changes. Such participant's foreign exchange income received from the
sale of stock and dividends distributed by the overseas publicly-listed company must be fully remitted into a specific domestic foreign currency account opened and managed
by such qualified PRC domestic agent first, before distribution to such participants.
We are an offshore listed company and, as a result, any Chinese employee or foreign employee of our PRC subsidiaries, who resides in PRC more than one year consecutively,
including without limitation, directors, supervisors and other senior management staffs of our PRC subsidiaries, who have been granted share options or shares under our
existing share incentive plan, are subject to the New Stock Option Rules. We completed the application with local SAFE in Heilongjiang on December 16, 2013, obtaining a
registration in respect of our incentive share plan in accordance with the New Stock Option Rules. If our PRC subsidiaries or their qualified employees fail to comply with these
regulations, including the New Stock Option Rules, they may be subject to fines or other legal sanctions imposed by SAFE or other Chinese government authorities. In that
case, our ability to compensate our employees, directors, supervisors and other senior management staffs through equity compensations may be hindered and our business
operations may be adversely affected.
35
Under the PRC EIT Law, we and/or Favor Sea BVI may be classified as a "resident enterprise" of the PRC. Such classification could result in tax consequences to us, our
non-PRC resident shareholders and Favor Sea BVI.
On March 16, 2007, the National People's Congress approved and promulgated the PRC Enterprise Income Tax Law, or "EIT Law," which took effect on January 1, 2008. Under
the EIT Law, enterprises are classified as resident enterprises and non-resident enterprises. An enterprise established outside of China with "de facto management bodies"
within China is considered a "resident enterprise," and subject to the uniform 25% enterprise income tax rate on global income. The implementing rules of the EIT Law define
"de facto management bodies" as a managing body that in practice exercises "substantial and overall management and control over the production and operations, personnel,
accounting, and properties" of the enterprise; however, due to the short history of the EIT Law and lack of applicable legal precedents, it remains unclear whether the PRC tax
authorities would deem our managing body as being located within China, or whether we or our non-PRC subsidiaries would be deemed as resident enterprises of the PRC.
If the PRC tax authorities determine that we, Favor Sea Limited, a British Virgin Islands corporation ("Favor Sea BVI") and/or Xinda Holding (HK) Company Limited, a Hong
Kong corporation ("Xinda HK"), are "resident enterprises" for PRC enterprise income tax purposes, a number of PRC tax consequences could follow. We, Favor Sea BVI
and/or Xinda HK may be subject to enterprise income tax at a rate of 25% on our, Favor Sea BVI's and/or Xinda HK's worldwide taxable income, as well as PRC enterprise
income tax reporting obligations. However, under the EIT Law and its implementing rules, dividends paid between "qualified resident enterprises" are exempt from enterprise
income tax. As a result, if we, Favor Sea BVI and Xinda HK are treated as PRC "qualified resident enterprises," all dividends paid from Xinda Group to Xinda HK, from Xinda
HK to Favor Sea BVI and from Favor Sea BVI to us may be exempt from PRC tax. Otherwise, all dividends paid from Xinda Group to Xinda HK, from Xinda HK to Favor Sea BVI
and from Favor Sea BVI to us may be subject to withholding tax under the EIT Law and its implementing rules.
On April 22, 2009, State Administration of Taxation ("SAT") enacted "Circular of the State Administration of Taxation on Issues Concerning the Identification of Chinese-
Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance With the Actual Standards of Organizational Management". On July 27, 2011, SAT enacted
"Announcement of the State Administration of Taxation on Printing and Distributing the Administrative Measures for Income Tax on Chinese-controlled Resident Enterprises
Incorporated Overseas (Trial Implementation)". Under those two rules, either the enterprises may request the PRC tax authorities to determine their "resident enterprises"
identity or the tax authority may investigate and determine an enterprise's identity. The target enterprises under those two rules are foreign registered companies controlled by
the PRC companies, however, the PRC tax authority may determine if a foreign registered company controlled by the PRC individual(s) is a "resident enterprise" or not by
reference to those two rules.
36
Under the EIT Law and its implementation rules, dividends payable by a foreign-invested enterprise in China to its shareholders that are "non-resident enterprises" are subject
to a 10% withholding tax, unless such shareholders' jurisdiction of incorporation has a tax treaty with China that provides for a preferential arrangement. Pursuant to the Notice
of the SAT on Issuing the Table of Tax Rates on Dividends in Treatises, or Notice 112, which was issued on January 29, 2008, the Arrangement between the PRC and the Hong
Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double Taxation Arrangement (Hong Kong), which became
effective on December 8, 2006, such withholding tax may be lowered to 5% if the PRC enterprise is at least 25% directly held by a Hong Kong enterprise. In October 2009, the
SAT further issued the Notice on How to Understand and Determine the "Beneficial Owners" in Tax Treaties, or Circular 601. According to Circular 601, non-resident
enterprises that cannot provide valid supporting documents as "beneficial owners" may not be approved to enjoy tax treaty benefits, and "beneficial owners" refer to
individuals, companies or other organizations which are normally engaged in substantive operations. These rules also set forth certain adverse factors on the recognition of a
"beneficial owner." Specifically, they expressly exclude a "conduit company" that is usually established for the purposes of avoiding or reducing tax obligations or transferring
or accumulating profits and not engaged in substantive operations such as manufacturing, sales or management, from being a "beneficial owner." As a result, if we are treated
as PRC "non-resident enterprises" under the EIT Law, then dividends from Xinda Group (assuming such dividends were considered sourced within the PRC) paid to us
through Xinda HK may be subject to a reduced withholding tax at a rate of 5% if Xinda HK is determined to be Hong Kong tax residents and are considered to be "beneficial
owners" that are generally engaged in substantive business activities and entitled to treaty benefits under the Double Taxation Arrangement (Hong Kong). Otherwise, we may
not be able to enjoy the preferential withholding tax rate of 5% under the tax arrangement and therefore be subject to withholding tax at a rate of 10% with respect to dividends
to be paid by Xinda Group (assuming such dividends were considered sourced within the PRC) to us through Xinda HK. Any such taxes on dividends could materially reduce
the amount of dividends, if any, we could pay to our shareholders.
However, if we are deemed as a "resident enterprise," the new "resident enterprise" classification could result in a situation in which an up to 10% PRC tax is imposed on
dividends we pay to our non-PRC shareholders that are not PRC tax "resident enterprises". In such event, we may be required to withhold an up to 10% PRC tax on any
dividends paid to non-PRC resident enterprise shareholders. Our non-PRC resident enterprise shareholders also may be responsible for paying PRC tax at a rate of 10% on any
gain realized from the sale or transfer of our ordinary shares in certain circumstances if such income is considered PRC-sourced income by relevant tax authorities. We would
not, however, have an obligation to withhold PRC tax with respect to such gain.
On December 15, 2009, the State Administration of Taxation ("SAT") released the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by
Non-PRC Resident Enterprises ("Circular 698") that reinforces the taxation of non-listed equity transfers by non-resident enterprises through overseas holding vehicles.
Circular 698 is retroactively effective from January 1, 2008. Circular 698 addresses indirect share transfer as well as other issues. According to Circular 698, where a foreign
(non-PRC resident) investor who indirectly holds shares in a PRC resident enterprise through a non-PRC offshore holding company indirectly transfers equity interests in a
PRC resident enterprise by selling the shares of the offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than
12.5% or where the offshore income of its residents is not taxable, the foreign investor is required to provide the PRC tax authority in charge of that PRC resident enterprise
with certain relevant information within 30 days of the transfer. The tax authorities in charge will evaluate the offshore transaction for tax purposes. In the event that the tax
authorities determine that such transfer is abusing forms of business organization lack of reasonable commercial purpose or for purpose of avoidance of PRC income tax
liability, the PRC tax authorities will have the power to re-assess the nature of the equity transfer under the doctrine of substance over form. If the relevant tax authority's
challenge of a transfer is successful, it may disregard the existence of the offshore holding company that is used for tax planning purposes and require seller to pay PRC tax on
the capital gain from such transfer. Circular 698 also points out that when a non-resident enterprise transfers its equity interests in a PRC resident enterprise to its related
parties at a price lower than the fair market value, the relevant tax authorities have the power to make a reasonable adjustment on the taxable income of the transaction. Since
Circular 698 has a short history, there is uncertainty as to its application. We (or a foreign investor) may become at risk of being taxed under Circular 698 and may be required to
expend valuable resources to comply with Circular 698 or to establish that we (or such foreign investor) should not be taxed under Circular 698, which could have a material
adverse effect on our financial condition and results of operations (or such foreign investor's investment in us).
If any such PRC taxes apply, a non-PRC resident shareholder may be entitled to a reduced rate of PRC taxes under an applicable income tax treaty and/or a foreign tax credit
against such shareholder's domestic income tax liability (subject to applicable conditions and limitations). Prospective investors should consult with their own tax advisors
regarding the applicability of any such taxes, the effects of any applicable income tax treaties, and any available foreign tax credits.
37
PRC regulations relating to mergers and acquisitions of domestic enterprises by foreign investors may increase the administrative burden we face and create regulatory
uncertainties.
On August 8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce, or MOFCOM, the State Assets Supervision and Administration Commission, or
SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or CSRC, and SAFE, jointly
adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, which became effective on September 8, 2006. The
M&A Rule purports, among other things, (i) to require any PRC company, enterprise or individual that intends to merge or acquire its domestic affiliated company in the name
of an overseas company which it lawfully established or controls, to apply for MOFCOM's examination on and approval for the proposed merger or acquisition; and (ii) to
require SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled directly or indirectly by PRC companies or individuals, to
obtain the approval of CSRC prior to publicly listing their securities on an overseas stock exchange. However, there are substantial uncertainties regarding the interpretation,
application and enforcement of these rules, and CSRC has yet to promulgate any written provisions or formally to declare or state whether the overseas listing of a PRC-related
company structured similar to ours is subject to the approval of CSRC. As a result, we are not sure whether the M&A Rule would require us or our entities in China to obtain
the approval from either MOFCOM or CSRC or any other regulatory agencies in connection with the transaction contemplated by the share transfer contracts which were
entered into between Mr. Jie Han, Mr. Qingwei Ma and Xinda Holding (HK) Company Limited on June 26, 2008, the transaction contemplated in the Agreement and Plan of
Merger entered into by and among NB Telecom, Favor Sea (BVI) and the shareholders of Favor Sea (BVI) on December 24, 2008 (detailed description of both of the two
aforesaid transactions and relevant contracts can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed on April 14, 2010) the adoption
and performance of the option agreement dated May 16, 2008 between Ms. Piao and Mr. Han.
Further, in the event MOFCOM or CSRC deems it necessary for us to obtain its approval prior to our entry into the aforesaid agreements, we could be subject to severe
penalties. The M&A Rule does not stipulate the specific penalty terms, therefore, we are unable to determine what penalties we may face, and how such penalties may affect
our business operations or future strategy.
Our business will suffer if we cannot obtain or maintain necessary permits or approvals.
Under PRC laws, we are required to obtain from various PRC governmental authorities certain permits and licenses in relation to the operation of our business. These permits
and licenses are subject to periodic renewal and/or reassessment by the relevant PRC government authorities and the standards of compliance required in relation thereto may
from time to time be subject to change. We cannot assure you that we can always obtain, maintain or renew all the permits and licenses in a timely manner. Additionally, any
changes in compliance standards, or any new laws or regulations that may prohibit or render it more restrictive for us to conduct our business or increase our compliance costs
may adversely affect our operations or profitability. Any failure by us to obtain, maintain or renew necessary licenses, permits and approvals, could subject us to fines and
other penalties and limit the business we could conduct, which could have a material adverse effect on the operation of our business. In addition, we may not be able to carry
on business without such permits and licenses being renewed and/or reassessed.
Pursuant to PRC laws and regulations, construction or expansion of a building or a production facility is subject to various permits and approvals from different government
authorities. In connection with the construction of Xinda Group's factory and production facilities, which has already been completed and put into operation, we obtained a
project approval from Administration Committee of Harbin Economic and Technological & High-tech Development Zone and an approval for the environmental impact
assessment report on the construction project of Xinda Group in 2003. However, certain other necessary permits relating to the construction and operation of Xinda Group's
factory and production facilities are outstanding. Failure to obtain all necessary approvals/permits may subject us to various penalties, such as fines or being required to
vacate from the facilities where we currently operate our business.
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 we plans to export plastics to the U.S. and Europe in coming years, we have developed certain safeguards in our
manufacturing processes to assure compliance with the environmental protection standard ISO/TS16949 Quality Assurance Standard, the European Union's RoHS Standards
and Germany's PAHs Standards. Furthermore, we are in the process of applying for the U.S.'s UL Safety Certification, ISO14001 Environmental Management System
Certification and OHSAS18001 Occupational Health Management System Certification. 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.
38
Our independent registered public accounting firm's audit documentation related to its audit reports included in our annual report may include audit documentation
located in the Peoples' Republic of China. The Public Company Accounting Oversight Board currently cannot inspect audit documentation located in China and, as
such, you may be deprived of the benefits of such inspection.
Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the U.S. Securities and Exchange Commission, as an
auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board ("PCAOB"), is required by the
laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. However,
workpapers located in China are not currently inspected by the PCAOB because the PCAOB is currently unable to conduct inspections without the approval of the Chinese
authorities.
Inspections of certain other firms that are conducted by the PCAOB outside of China have identified deficiencies in those firms' audit procedures and quality control
procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from
regularly evaluating audit documentation located in China and its related quality control procedures. As a result, investors may be deprived of the benefits of PCAOB
inspections.
The inability of the PCAOB to conduct inspections in China makes it more difficult to evaluate the effectiveness of our auditor's audit procedures or quality control procedures
as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the
quality of our financial statements.
The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory body in China.
Accordingly, our public disclosures should be reviewed in light of the fact that no governmental agency located in China where substantially all of our operations and
business are located has conducted any due diligence on our operations or reviewed or cleared any of our disclosures.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC
under the Securities Act and the Exchange Act. Our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC
regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of the CSRC, a PRC regulator that is tasked with oversight of
the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has
done any due diligence on the Company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been reviewed
or otherwise been scrutinized by any local regulator.
The Chinese member firm of the KPMG network, of which our independent registered public accounting firm is also a member, may be temporarily suspended from
practicing before the SEC if unable to continue to satisfy SEC investigation requests in the future. If a delay in completion of our audit process occurs as a result, we
could be unable to timely file certain reports with the SEC, which may lead to the delisting of our stock.
We manufacture and sell our products primarily in the PRC. Certain of our independent registered public accounting firm's audit documentation related to their audit reports
included in this Report may be located in China, and certain audit procedures take place within China's borders. The PCAOB is currently unable to conduct inspections in
China or review audit documentation located within China without the approval of Chinese authorities. Like many U.S. companies with significant operations in China, our
independent registered public accounting firm may rely on a Chinese member firm for assistance in completing the audit work associated with our operations in China.
On January 22, 2014, Judge Cameron Elliot, an SEC administrative law judge, issued an initial decision suspending the Chinese member firms of the "Big Four" accounting firms,
among others, from practicing before the SEC for six months as a result of their failure to provide certain documents to the SEC because to do so would violate Chinese PRC
laws. On February 12, 2014, the accounting firms filed an appeal with the SEC regarding the administrative law judge's decision. On February 6, 2015, the accounting firms
agreed to pay $500,000 each to settle this yearlong dispute with the SEC, which allows them to avoid a temporary suspension of their right to audit U.S.-traded firms. As part of
the settlement, the SEC censures the accounting firms, which eventually began providing the documents, and requires them to perform specific steps to satisfy SEC requests
for similar materials over the next four years.
We cannot assure you, however, that the accounting firms, including the Chinese member firm of KPMG, will be able to continue to satisfy SEC investigation requests to its
satisfaction in the future due to compliance with the PRC laws and regulations. A delay in completion of the audit process could delay the timely filing of our quarterly or
Annual Reports with the SEC. A delinquency in our filings with the SEC may result in NASDAQ initiating delisting procedures, which could have a material and adverse effect
on our results of operations and financial condition.
39
We may fail to develop and maintain an effective system of internal controls over financial reporting. As a result, we may not be able to accurately report our financial
results or prevent fraud and current and potential shareholders could lose confidence in the integrity of our financial reports, which could harm our business and the
trading price of our common stock.
Prior to our listing on the US stock exchange, we were a private company with all business operations within China. Our accounting and reporting system was designed to
satisfy local statutory requirements and internal management needs. Since we became a public company, our business has grown significantly over the years.
Management concluded that our internal controls over financial reporting were ineffective as of December 31, 2014, due to one material weakness which relates to the lack of
sufficient accounting and financial reporting personnel to formalize certain key controls over the financial reporting process and report financial information based on US
GAAP and SEC reporting requirements.
Our management is committed to strengthening our internal controls and complying with Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"). Since 2011, we have
commenced a plan, pursuant to which (1) our accounting staff obtained external training of U.S. GAAP and SEC reporting by qualified entities, (2) we have hired two third-party
SOX 404 compliance consultants to help us improve our internal control system, (3) we continue to seek senior qualified people with requisite expertise and knowledge to help
improve our internal control procedures, (4) we have adopted internal policies and approval and supervision procedures governing financial reporting, (5) we have adopted
procedures to evaluate and assess performance of directors, officers and employees of the Company, and (6) we continue to hold internal meetings, discussions and seminars
periodically to review and improve our internal control procedures.
However, we cannot be certain that these measures we have undertaken will ensure that we will maintain adequate controls over our financial processes and reporting in the
future. Furthermore, if we are able to rapidly grow our business, the internal controls that we will need may become more complex, and significantly more resources may be
required to ensure our internal controls remain effective. Failure to implement required controls, or difficulties encountered in their implementation, could harm our operating
results or cause us to fail to meet our reporting obligations. If we fail to maintain an effective internal control system, our stockholders and other potential investors may lose
confidence in our business operations and the integrity of our financial statements, and may be discouraged from future investments in our company, which may delay or
hinder any future business development or expansion plans if we are unable to raise funds in future financings, and our current stockholders may choose to dispose of the
shares of common stock they own in our company, which could have a negative impact on our stock price. In addition, non-compliance with SOX 404 could subject us to a
variety of administrative sanctions, including the suspension of trading of our stock on the NASDAQ Global Market, ineligibility for listing on other national securities
exchanges, and the inability of registered broker-dealers to make a market in our common stock, which could further reduce our stock price.
We may be subject to or be liable for US taxes, interest and penalties.
As of December 31, 2014, for U.S. federal income tax purposes, the Company has tax loss carryforwards of 374,721 and owes U.S. federal income taxes of US$1,213,183. There
can be no assurance that the IRS will agree with this position, and therefore we ultimately could be held liable for U.S. federal income taxes, interest and penalties.
Our inability or failure to protect our intellectual property rights may significantly and materially impact our business, financial condition and results of operations.
Protection of our proprietary processes, methods and other technology is important to our business. We generally rely on a combination of the patent, trademark and
copyright laws of the PRC and laws protecting trade secret in the PRC, as well as licenses and non-disclosure and confidentiality agreements, to protect our intellectual
property rights. The patent, trademark and copyright laws of the PRC, as well as laws protecting trade secret in the PRC, may not protect our intellectual property rights to the
same extent as the laws of the U.S.
Failure to protect our intellectual property rights may result in the loss of valuable proprietary technologies. Additionally, some of our technologies are not covered by any
patent or patent application and, even if a patent application has been filed, it may not result in an issued patent. If patents are issued to us, those patents may not provide
meaningful protection against competitors or against competitive technologies. In addition, upon the expiration of patents issued to us, we will be unable to prevent our
competitors from using or introducing products using the formerly-patented technology. As a result, we may be faced with increased competition and our results of operations
may be adversely affected. We cannot assure you that our intellectual property rights will not be challenged, invalidated, circumvented or rendered unenforceable.
We also rely upon unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive
position. While we generally enter into confidentiality/non-disclosure agreements with our employees and third parties to protect our intellectual property, we cannot assure
you that our confidentiality/non-disclosure agreements will not be breached, that they will provide meaningful protection for our trade secrets and proprietary manufacturing
expertise or that adequate remedies will be available in the event of an unauthorized use or disclosure of our trade secrets or manufacturing expertise.
40
Our intellectual property rights may be challenged or infringed upon by third parties or we may be unable to maintain, renew or enter into new license agreements that are
important to our business with third-party owners of intellectual property on reasonable terms. We could also face patent infringement claims from our competitors or others
alleging that our processes or products infringe on their proprietary technologies. If we are found to be infringing on the proprietary technology of others, we may be liable for
damages, and we may be required to change our processes, to redesign our products partially or completely, to pay to use the technology of others or to stop using certain
technologies or producing the infringing product(s) entirely. Even if we ultimately prevail in an infringement suit, the existence of the suit could prompt customers to switch to
products that are not the subject of infringement suits. We may not prevail in any intellectual property litigation and such litigation may result in significant legal costs or
otherwise impede our ability to produce and distribute key products.
We may be unable to renew the leases for our factories on acceptable terms or these leases may be terminated.
As of December 31, 2014, Xinda Group operated three separate factories located at 9 Qinling Road (the "Qinling Road Factory"), 9 North Dalian Road (the "Dalian Road
Factory") and 9 Jiangnan First Road (the "Jiangnan Road Factory"), respectively. The Xinda Group owns the titles to the land and premises of the Qinling Road Factory.
Xinda Group leases land and premises of the Dalian Road Factory from Xinda High-Tech. Xinda Group is in the process of acquiring the titles to the land and premises at
Jiangnan Road Factory. The Company expects the title transfer to be completed by the end of third quarter of 2015. Xinda Group's leases will expire on December 31, 2018. If we
are unable to renew our lease on acceptable terms in due course or acquire the titles to the land and premises at Jiannan Road Factory or if our lease is terminated by the lessor
unilaterally for the Dalian Road Factory:
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we may be unable to find a new property with the amenities and in the location we require for our factories, which may result in a factory closure;
we may have to relocate to a less desirable location;
we may have to relocate to a location with facilities that do not meet our requirements;
our factories may experience significant disruption in operations and, as a result, we may be unable to produce products during the period of disruption.
Any of these events may materially and adversely affect our business, prospects, results of operations and financial condition.
Our ability to sell our products at current profit margin is subject to a number of risks and uncertainties, which are beyond our control; in particular, we may not be able
to reflect raw material cost increases in the price of our products.
Our ability to sell our products at current profit margin is subject to a number of risks and uncertainties, which are beyond our control. For example, general slow-down in the
Chinese or world economy may lessen the demand for our products, and we may be forced to sell our products at a lower price. See "Risks Relating to the PRC — Changes in
political or economic policies of the PRC government and a slow-down in China's economy may have an adverse impact on our operations."
Particularly, we may not be able to pass through raw material cost increases to our customers on a timely basis and reflect such increases in the price of our products. We
purchase various plastic resins, which are derived from petroleum or natural gas, to produce our modified plastics products. Cost of raw materials made up a vast majority of
our cost of revenues in 2013 and 2014. The market prices of plastic resins may fluctuate due to changes in supply and demand conditions in that industry. Any shortage in
supply of or significant increase in demand for plastic resins and additives may result in higher market prices and thereby increase our cost of revenues, and we may not be
able to pass on increases in the prices of raw materials to our customers. Under the terms of our distributor agreements, we will only be able to increase the sales prices for our
products if the cost of our raw materials increases by more than 5% on a cumulative basis. As a result, we may not be able to adjust our selling prices in a timely manner, and
our inability to increase the selling prices of our products sold during the period in which the cumulative increases of the cost of our raw materials is less than 5% may reduce
our profitability. Furthermore, other adverse developments such as increased competition may not allow us to pass through cost increases to our distributors at all. Any of the
foregoing could have a material adverse effect on our margins, results of operations and financial condition. When expanding into new regions, we have taken and may
continue to take marketing initiatives from time to time to offer sales incentives, including discounts, to increase market share. Such initiatives and measures have put and may
continue to put pressure on our margins.
Our assets are primarily located in China. So any dividends or proceeds from liquidation are subject to the approval of the relevant Chinese government agencies.
Our assets are primarily located inside China. Under the laws governing FIEs in China, dividend distribution and liquidation are allowed but subject to respective administrative
procedures under the relevant laws and rules. Any dividend payment will be subject to the decision of the Board of Directors and be subject to foreign exchange rules
governing such repatriation. Any liquidation is subject to the decision of the highest authority of the company, the relevant government agency's approval and supervision
(including but not limited to the local branch of MOFCOM), as well as the whole process of liquidation under PRC laws and regulations, including without limitation personnel
resettlement, assets disposition, settlement of debts and creditor's rights as well as deregistration, which process could be very time-consuming and complex. Since the
dividend distribution procedure is subject to foreign exchange rules governing such repatriation, risks may arise for our investors when Xinda Group pays dividend to us
through Xinda HK. Furthermore, the liquidation procedure is a complex and time consuming procedures subject to government approvals, additional risks and costs may arise
for our investors in the process.
41
Governmental control of currency conversions may affect the value of your investment.
All of our revenue are 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 our subsidiaries in China would be reduced.
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 2005 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 25% from July 21, 2005 to December 31, 2014. 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 our revenues in Renminbi and US dollars. 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 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.
MSPEA Modified Plastics Holding Limited ("MSPEA") has significant influence over our affairs.
MSPEA currently owns 100% of our outstanding Series D Preferred Stock, representing approximately 23.8% of our issued and outstanding shares of common stock on an as
converted basis. Pursuant to the Amended and Restated Certificate of Designation of Series D Preferred Stock, holders of Series D Preferred Stock have the right to elect,
voting as a separate class, two directors to serve on the Board so long as at least 12,800,000 (adjusted for any dilutive corporate actions) shares of Series D Preferred Stock are
outstanding, and one director to serve on the Board if the number of shares of Series D Preferred Stock outstanding at such time is less than 12,800,000 but more than 1,600,000
(in each case adjusted for any dilutive corporate actions). For so long as at least 1,600,000 (adjusted for any dilutive corporate actions) shares of Series D Preferred Stock
remain outstanding, holders of Series D Preferred Stock have veto rights over certain material corporate actions of the Company and its subsidiaries as described in the
Amended and Restated Certificate of Designation of Series D Preferred Stock. As such, MSPEA currently has significant influence over our affairs.
42
The terms of our senior notes financing include provisions on events of default that may require us to repay such notes, which may not be practicable at such time
depending upon the circumstances.
On February 5, 2014, the Company's wholly owned subsidiary, Favor Sea Limited (the "Note Issuer"), completed the sale of US$150 million in aggregate principal amount of
11.75% guaranteed senior notes due on February 4, 2019 (the "Notes"). The Notes are guaranteed on a senior basis by the Company (the "Parent Guarantor") and Xinda
Holding (HK) Company Limited, a subsidiary wholly owned by the Note Issuer (the "Subsidiary Guarantor") and secured by a pledge of the shares of the Note Issuer and the
Subsidiary Guarantor. Events of default under the Notes include a breach by the Parent Guarantor or the Subsidiary Guarantor of certain provisions of the Notes and the
indenture in connection with the issuance of the Notes, the commencement by the Company or any of its subsidiaries of any bankruptcy, insolvency, reorganization or the like,
or the appointment of a custodian, receiver, liquidator, assignee, trustee or other similar officials of the Company or any of its subsidiaries for the winding up or liquidation of
its affairs. Should any such event occur, the holders of the Notes may be entitled to repayment in full of such indebtedness, which we may be unable to repay and would need
to seek a waiver from such holders, which they may be unwilling to provide. As a result, if we have insufficient cash available or do not have access to additional third-party
financings on commercially reasonable terms or at all to repay the Notes, we may be required to liquidate assets to fund such repayment, which could have a material adverse
effect on our business, financial condition and results of operations.
Upon the occurrence of certain events, we may be required to redeem all or a portion of the Series D Preferred Stock.
On January 27, 2014, the Company adopted and filed the Amended and Restated Certificate of Designation of Series D Preferred Stock (the "Restated Certificate of
Designation") with the Secretary of State of the State of Nevada, pursuant to which, the maturity date of the Series D Preferred Stock is extended to February 4, 2019, and, the
performance target for the year ended December 31, 2013 the failure to meet which target could trigger the mandatory redemption of the Series D Preferred Stock, has been
removed.
As of December 31, 2013, the Company concluded that it has met the actual profit targets under the Restated Certificate of Designation that could otherwise trigger mandatory
redemption. The remaining trigger events pursuant to the terms of the Restated Certificate of Designation for such mandatory redemption include:
(i) a breach by the Company, XD Engineering Plastics Company Limited ("XD Engineering Plastics"), or Mr. Han of certain provisions of the financing documents in
connection with the issuance and sale of the Series D Preferred Stock, if such breach would constitute a material adverse effect on the Company and its subsidiaries taken as a
whole or which materially diminishes the value of the Series D Preferred Stock,
(ii) the commencement by the Company or any of its subsidiaries of any bankruptcy, insolvency, reorganization or the like, or
(iii) the appointment of a custodian, receiver, liquidator, assignee, trustee or other similar officials of the Company or any of its subsidiaries for the winding up or liquidation of
its affairs.
If any of the events mentioned above occurs prior to February 4, 2019, or, in the event the Series D Preferred Stock remains outstanding as of February 4, 2019, we may be
required to redeem such shares at a price per share equal to an amount that would yield a total (annualized) internal rate of return of 15% to the holder of such Series D
Preferred Stock on the original issue price of US$6.25 per share, and, in the event we have insufficient cash available or do not have access to additional third-party financings
on commercially reasonable terms or at all to complete such redemption, we may experience liquidity problems, which could have a material adverse effect on our ability to
service our debt, including the Notes, and we may be required to liquidate assets to fund such redemption.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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 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 Xinda Group by the City of Harbin and
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"). 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
and one guard room.
43
On May 9, 2011, Harbin Xinda, a subsidiary of China XD, entered into a purchase agreement with Harbin Shengtong Engineering Plastics Co. Ltd. ("Harbin Shengtong") as
amended on June 1, 2011. The legal representative of Harbin Shengtong is a former employee of Harbin Xinda. Pursuant to the purchase agreement, Harbin Xinda will purchase
from Harbin Shengtong land use rights and a plant consisting of five workshops, a building and certain ancillary facilities (the "Project"), in exchange for a total consideration
of RMB435.8 million (approximately US$70.2 million) in cash. Harbin Shengtong is responsible to complete the construction of the plant and workshops according to Harbin
Xinda's specifications. Once the Project is fully completed and accepted by Harbin Xinda, Harbin Shengtong shall transfer titles of the Project to Harbin Xinda. During the year
ended December 31, 2011, the Company paid Harbin Shengtong a cash deposit of RMB118.9 million (equivalent to US$19.2 million). In December 2011, two workshops were
completed and subsequently placed into service by the Company. Accordingly, the cost of these two workshops of approximately RMB59.5 million (equivalent to US$9.6
million) was recorded in workshops and buildings as of December 31, 2011. The allocable cost of the land use right related to the two workshops of approximately RMB24.1
million (equivalent to US$3.9 million) was recorded in land use rights in the Company's balance sheet as of December 31, 2011. In December 2012, the remaining three
workshops were completed and placed into service by the Company. Accordingly, the cost of these three workshops of approximately RMB138.7 million (equivalent to US$22.4
million) was recorded in workshops and buildings as of December 31, 2012. The allocable cost of the land use right related to the two workshops of approximately RMB40.5
million (equivalent to US$6.5 million) was recorded in land use rights in the Company's balance sheet as of December 31, 2012. During the year ended December 31, 2013, the
main building was completed. The allocable cost of the land use right of approximately RMB11.2 million (equivalent to US$1.8 million) and approximately RMB111.8 million
(equivalent to US$18.0 million) related to the main building were recorded respectively in the Company's balance sheet as of December 31, 2013. During the year ended
December 31, 2014, the Project was completed. The total cost for the Project was RMB501.5 million (equivalent to US$80.8 million) . The Company paid Harbin Shengtong in
cash of RMB349.7 million (equivalent to US$56.4 million) in 2014. The unpaid RMB32.9 million (equivalent to US$5.3 million) represents the guarantee deposit of the project.
The titles of the five workshops are expected to transfer to the Company in 2015.
As of December 31, 2014, we had approximately 390,000 metric tons of production capacity across 83 automatic production lines utilizing German twin-screw extruding systems,
automatic weighing systems and Taiwan conveyer systems, including the three additional workshops with 30 production lines completed the trial-run in December of 2012 and
further expanded our annual capacity potential by approximately 135,000 metric tons and support our future growth in 2013. In December 2013, we broke ground on the
construction of our fourth production base in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, expecting to bring total
installed production capacity to 690,000 metric tons with additional 70 new production lines at the completion of the construction of our fourth production base. In addition,
during the three months ended June 30, 2014, we started the construction of Dubai Composites plant in Dubai, UAE, with additional 4,000 metric tons targeting on high-end
products for the overseas markets, which will be completed in April 2015.
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 Xinda Group. 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, Xinda Group has developed its own techniques and equipment for many of the steps in the production process. Among the
aspects of production for which Xinda Group 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 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 Xinda Group as a National Torch Project and a National Spark Plan
Project, and has given Xinda Group the "Most Valuable High Tech in China" award. Xinda Group is an executive member of the Council of the Chinese Automobile Parts
Association, a member of the Chinese Modified Plastics Professional Committee, a member of the Chinese Plastics Engineering Committee and Heilongjiang Province Post
Doctoral Working Station.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its officers and directors have been named as defendants in two putative securities class action lawsuits filed in the United States District Court
for the Southern District of New York. These actions, which allege violations of Section 10(b) and Section 20(a) of the United States securities laws, were filed on July 15, 2014
and July 16, 2014 and are captioned Yang v. Han, et al., No. 14-cv-5308 (GBD) and Tompkins v. China XD Plastics Company Ltd., et al., No. 14-cv-5359 (GBD), respectively. On
November 21, 2014, the Court consolidated the actions and appointed lead plaintiffs. On February 17, 2015, the lead plaintiffs filed a Consolidated Class Action Complaint on
behalf of a class of all persons other than the defendants who purchased the common stock of China XD Plastics Company Limited between March 25, 2014 and July 10, 2014,
inclusive. Specifically, the lead plaintiffs allege that the Company and two of its officers made false or misleading statements and/or omitted material facts in the Company's
Form 10-K for the year ended December 31, 2013 and the Company's Form 10-Q for the first quarter ended March 31, 2014. They also assert that the individual defendants are
liable because they allegedly controlled the Company during the time the allegedly false and misleading statements and omissions were made. The lead plaintiffs seek damages
in unspecified amounts.
Based on our initial review of the complaints, the management believes the lawsuits are without merit and intend to vigorously defend against them.
44
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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 OTC 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.
PART II
Fiscal Year Ending December 31, 2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ending December 31, 2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Common Stock
High
Low
5.74
12.70
8.31
6.46
4.33
4.26
4.41
5.60
4.58
5.37
5.05
5.15
3.95
3.80
4.05
4.51
Number of Holders
As of March 10 2015, there were 443 record holders of our common stock.
Interwest Transfer Company Inc. is the registrar and transfer agent for our common stock. 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.
Under current PRC regulations, wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if
any, determined in accordance with PRC accounting standards and regulations. Additionally, these foreign-invested enterprises are required to set aside certain amounts of
their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends. Payment of future dividends, if any, will be at
the discretion of our Board of Directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash
needs.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On April 7, 2011, the Board of Directors approved a stock repurchase program that allows the Company to repurchase up to US$10 million of its stock until May 31, 2012. On
September 28, 2011, the Company purchased 21,000 shares of its common stock in the public stock market for a total consideration of US$92,694. The stock repurchase program
expired on May 31, 2012.
45
Stockholder Return Performance Graph
The following Performance Graph and related information shall not be deemed "soliciting material" or deemed to be "filed" with the Securities and Exchange Commission,
nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that
we specifically incorporate such information by reference into such filing.
The following graph compares the change in cumulative total stockholders' return on our common stock with (a) NASDAQ Composite Index and (b) Russell Small Cap
Completeness Index, for each year from December 31, 2009 through December 31, 2014. The graph assumes an initial investment of $100 at the closing price on December 31,
2009 and assumes all dividends (if any) were reinvested. The figures for the chart and graph set forth below have been calculated based on the closing prices on the last
trading day on the NASDAQ Global Market for each period indicated.
China XD Plastics Co. Ltd.
Nasdaq Composite Index
Russell Small Cap Completeness Index
$
$
$
68 $
209 $
214 $
66 $
184 $
199 $
48 $
133 $
144 $
67 $
115 $
122 $
68 $
117 $
127 $
12/31/2014
12/31/2013
12/31/2012
12/31/2011
12/31/2010
12/31/2009
100
100
100
Adjusted Closing Stock Price Cumulative Change
*$100 invested on 12/31/2009 in stock or index, including reinvestment of dividends. Data points are the last day of each fiscal year for the Company's common stock and
December 31 of each year for indexes.
46
Sale of Unregistered Securities
The Company issued the Series A investor warrants to purchase a total of 1,320,696 shares of common stock at an exercise price of US$4.58 per share with a five-year term, in
connection with the issuance of Series C preferred stock on December 1, 2009. The Company also issued Series A placement agent warrants to purchase a total of 117,261
shares of common stock at an exercise price of US$5.50 per share, with a five-year term to Rodman & Shaw, LLC ("Rodman"), the exclusive placement agent of the placement,
as part of the placement fee. On October 21, 2012, Rodman transferred the warrants specified in the foregoing sentence to OTA LLC. The exercise prices of the Series A
investor warrants and the Series A placement agent warrants were adjusted to US$4.90 per share in connection with the common stock direct offering on October 4, 2010.
On April 3, 2014,130,435 Series A investor warrants were exercised for 130,435 shares of the common stocks of the Company for an aggregate exercise price of US$596,740 in
cash. As set forth in the following table, such corresponding number of shares of Series A investor warrants were exercised by the following stockholders on those certain
dates using cashless method for that number of shares of our common stock set forth opposite their respective names for the fiscal year ended December 31, 2014.
Following is a table for cashless exercise of 894,383 Series A investor warrants during the year ended December 31, 2014:
Date of Exercise
April 30, 2014
June 11, 2014
September 15, 2014
December 2, 2014
December 5, 2014
Total
Name of Stockholder
OTA LLC
OTA LLC
Daybreak Special Situations Master Fund
Capital Ventures International
Empery Asset Master Ltd.
OTA LLC
OTA LLC
Hudson Bay Master Fund LTD
Number of Series A
Investor Warrants
Exercised
100,870
451,353
17,391
130,435
52,174
36,078
19,126
86,956
894,383
Number of Shares
of Common Stock
Received Following
Cashless Exercise
38,201
276,799
10,859
81,443
32,831
11,512
3,217
17,161
472,023
For the fiscal year ended December 31, 2014, 1,024,828 shares of Series A investor warrants were exercised and the remaining Series A warrant shares were unexercised and
expired on December 1, 2014. There were no warrants outstanding as of December 31, 2014.
47
ITEM 6. SELECTED FINANCIAL DATA
The tables below set forth selected historical financial information of the Company that has been derived from the audited financial statements as of December 31, 2010, 2011,
2012, 2013 and 2014, and for the last five years in the period ended December 31, 2014. The selected historical financial data should be read in conjunction with the consolidated
financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations", included elsewhere in this Form 10-K.
(in millions, except number of shares and per share amounts).
Revenues
Net income
Earnings per share
- basic
-diluted
Shares used in computing earnings per share
$
$
$
$
-basic
-diluted
Total cash, cash equivalents, restricted cash and
time deposits
Total Assets
Long term bank loans
Notes payable
Total liabilities
Redeemable Series D Convertible Preferred Stock
Total Stockholder's equities
2014
2013
2012
2011
2010
1,110.6 $
120.7 $
1.85 $
1.85 $
1,050.8 $
133.8 $
2.08 $
2.08 $
599.8 $
85.9 $
1.35 $
1.35 $
381.6 $
60.5 $
1.17 $
1.16 $
249.8
28.8
0.58
0.49
48,833,434
48,833,434
47,794,028
47,794,028
47,549,275
47,549,275
47,280,468
47,286,375
43,822,914
44,331,524
296.5
1,299.7
174.3
148.6
676.8
97.6
525.3
390.5
1,075.9
-
-
566.0
97.6
412.3
148.7
611.6
-
-
249.6
97.6
264.4
146.6
360.6
-
-
89.1
97.6
173.9
22.7
159.4
-
-
55.1
-
104.3
48
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: global and domestic economic conditions generally and the automotive modified plastics market specifically, legislative or regulatory changes that affect
our business, including changes in environmental regulations and control policies over the domestic automotive industry, 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
China XD Plastics Company Limited ("China XD", "we", and the "Company", and "us" or "our" shall be interpreted accordingly) is one of the leading specialty chemical
companies engaged in the research, development, manufacture and sale of modified plastics primarily for automotive applications in China, and to a lesser extent, in Dubai,
UAE. Through our wholly-owned operating subsidiaries in China, we develop modified plastics using our proprietary technology, manufacture and sell our products primarily
for use in the fabrication of automobile parts and components. We have 321 certifications from manufacturers in the automobile industry as of December 31, 2014. We are the
only company certified as a National Enterprise Technology Center in modified plastics industry in Heilongjiang province. Our Research and Development (the "R&D") team
consists of 237 professionals and 8 consultants, including one consultant who are members of Chinese Academy of Engineering, and one consultant who is the former chief
scientist of Specialty Plastics Engineering Institute of Jilin University. As a result of the integration of our academic and technological expertise, we have a portfolio of 193
patents, five of which we have obtained the patent rights and the remaining 188 of which we have applications pending in China as of December 31, 2014.
Our products include eleven categories: Modified Polypropylene (PP), Modified Acrylonitrile Butadiene Styrene (ABS), Modified Polyamide 66 (PA66), Modified Polyamide 6
(PA6), Modified Polyoxymethylenes (POM), Modified Polyphenylene Oxide (PPO), Plastic Alloy, Modified Polyphenylene Sulfide (PPS), Modified Polyimide (PI), Modified
Polylactic acid (PLA) and Poly Ether Ether Ketone (PEEK). As we have successfully developed more new products to grow our business, we have re-categorized our product
types as presented above in order to present more updated breakdown of polymer composite materials we produce since the beginning of 2014. We believe the current
categorization better reflects the nature and characteristics of our products and the way that our management currently views and analyzes our products. In conformity with
this new categorization, we have adjusted comparable product information in applicable prior periods. Since not all the categories have achieved sales during the years 2014,
2013 and 2012, we only presented the categories which have generated sales.
The Company's products are primarily used in the production of exterior and interior trim and functional components of more than 27 automobile brands and 80 automobile
models manufactured in China, including Audi, Mercedes Benz, Buick, Chevrolet, VW Passat, Golf and Jetta, BMW, Mazda, and Toyota. In addition, during the three months
ended June 30, 2014, we started the construction of AL Composites plant in Dubai, UAE with additional 4,000 metric tons targeting high-end products for the overseas markets,
which will be completed in April 2015. We plan to serve customers in oversea market from our AL Composites plant, including the existing one in the Republic of Korea. Our
research center is dedicated to the research and development of modified plastics, and benefits from its cooperation with well-known scientists from prestigious universities in
China. We operate three manufacturing bases in Harbin, Heilongjiang in the PRC, with the construction of Sichuan plant underway. As of December 31, 2014, we had
approximately 390,000 metric tons of production capacity across 83 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and
Taiwanese conveyer systems. In December 2013, we broke ground on the construction of our fourth production base in Nanchong City, Sichuan Province, with additional
300,000 metric tons of annual production capacity, expecting to bring total installed production capacity to 690,000 metric tons with additional 70 new production lines at the
completion of the construction of our fourth production base. In addition, during the three months ended June 30, 2014, we started the construction of Dubai Composites plant
in Dubai, UAE, with additional 4,000 metric tons targeting on high-end products for the overseas markets. The Company expects the Dubai facility to be completed in April
2015 and Sichuan facility to be completed around the end of 2015 and early 2016.
49
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (1) the reported
amounts of our assets and liabilities; (2) the disclosure of our contingent assets and liabilities at the end of each reporting period; and (3) the reported amounts of revenues
and expenses during each reporting period. We continually evaluate these judgments, estimates and assumptions based on our own historical experience, knowledge and
assessment of current business and other conditions and our expectations regarding the future based on available information which together form our basis for making
judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual
results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
When reading our consolidated financial statements, you should consider our selection of critical accounting policies, the judgment and other uncertainties affecting the
application of such policies, and the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most
significant judgments and estimates used in the preparation of our consolidated financial statements.
Long-Lived Assets
Our long-lived assets include property, plant and equipment and land use rights.
We depreciate and amortize our property, plant and equipment and land use rights, using the straight-line method of accounting over the estimated useful lives of the assets.
We make estimates of the useful lives of property, plant and equipment, including the salvage values, and land use rights in order to determine the amount of depreciation and
amortization expense to be recorded during each reporting period. The estimated useful life is the period over which the long-lived assets are expected to contribute directly or
indirectly to the future cash flows of the Company.
We evaluate long-lived assets, including property, plant and equipment, and land use rights for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. We assess recoverability by comparing carrying amount of a long-lived asset or asset group to estimated
undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated undiscounted
future cash flows, we recognize an impairment charge based on the amount by which the carrying amount exceeds the estimated fair value of the asset or asset group. We
estimate the fair value of the asset or asset group through various valuation techniques, including discounted cash flow models, quoted market values and third-party
independent appraisals, as considered necessary. Assets to be disposed are reported at the lower of carrying amount or fair value less costs to sell, and are no longer
depreciated.
No impairment on our long-lived assets was recognized in 2014, 2013 or 2012.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In establishing the required
allowance, we consider historical losses adjusted to take into account current market conditions, the amount of receivables in dispute, and the current receivables aging and
current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is
considered remote. We do not have any off-balance-sheet credit exposure related to our customers.
We extend unsecured credit to customers with good credit history. We review our accounts receivable on a regular basis to determine if the bad debt allowance is adequate at
each year-end. We have not experienced any material write-offs in history.
Valuation of Inventories
Our inventories are stated at the lower of cost or market. We routinely evaluate quantities and value of our inventories in light of current market conditions and market trends,
and record a write-down against the cost of inventories for a decline in market. Expected demand and anticipated sales price are the key factors affecting our inventory
valuation analysis. For purposes of our inventory valuation analysis, we develop expected demand and anticipated sales prices primarily based on sales orders as well as
industry trends and individual customer analysis. We also consider sales and sales orders after each reporting period-end but before the issuance of our financial statements
to assess the accuracy of our inventory valuation estimates. Historically, actual demand and sales price have generally been consistent with or greater than expected demand
and anticipated sales price used for purposes of the our inventory valuation analysis. The evaluation also takes into consideration new product development schedules, the
effect that new products might have on the sale of existing products, product obsolescence, customer concentrations, product merchantability and other factors. Market
conditions are subject to change and actual consumption of inventories could differ from forecasted demand. Furthermore, the price of plastic resins, our primary raw material,
is subject to fluctuations based on global supply and demand. Our management continually monitors the changes in the purchase price paid for plastic resins, including
advances to suppliers, and the impact of such change on our ability to recover the cost of inventory and our prepayments to suppliers. Our products have a long life cycle and
obsolescence has not historically been a significant factor in the valuation of inventories. We have not experienced any material inventory write-downs before.
50
Income Tax Uncertainties and Realization of Deferred Income Tax Assets
Our income tax provision, deferred income tax assets and deferred income tax liabilities are recognized and measured primarily based on actual and expected future income, PRC
statutory income tax rates, PRC tax regulations and tax planning strategies. Significant judgment is required in interpreting tax regulations in the PRC, evaluating uncertain tax
positions, and assessing the realizability of deferred income tax assets. Actual results could differ materially from those judgments, and changes in judgments could materially
affect our consolidated financial statements. As of December 31, 2014 and 2013, we had total gross deferred income tax assets of US$727,711 and US$73,182 respectively. We
record a valuation allowance to reduce our deferred income tax assets if, based on the weight of available evidence, we believe expected future taxable income is not likely to
support the use of a deduction or credit in that jurisdiction. We evaluate the level of our valuation allowances quarterly, and more frequently if actual operating results differ
significantly from forecasted results. As of December 31, 2014 and 2013, our valuation allowance against deferred income tax assets was US$727,711 and US$73,182
respectively.
We recognize the impact of a tax position if we determine the position is more likely than not to be sustained upon examination, including resolution of any related appeals or
litigation processes, based solely on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, it is
presumed that the position will be examined by the appropriate tax authority that has full knowledge of all relevant information. In addition, a tax position that meets the more-
likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount
of benefit that is greater than fifty percent (50%) likely of being realized upon settlement. The tax positions are regularly re-evaluated based on the results of the examination of
income tax filings, statute of limitations expirations and changes in tax law that would either increase or decrease the technical merits of a position relative to the more-likely-
than-not recognition threshold. In the normal course of business, we are regularly audited by the PRC tax authorities. The settlement of any particular issue with the applicable
tax authority could have a material impact on our consolidated financial statements.
Stock Based Compensation
We measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award and recognize the cost over
the period the employee is required to provide service in exchange for the award, which generally is the vesting period. We have elected to recognize the compensation cost for
an award with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. However, the cumulative
amount of compensation cost recognized at any date equals at least the portion of the grant date value of such award that is vested at that date.
We estimated the fair value of our share options using the Black-Scholes Option Pricing model. The model incorporates subjective assumptions. The expected volatility was
based on implied volatilities from traded options and historical volatility of the Company's common stock. The risk free interest rate assumption is determined using the Federal
Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. There is no expected dividend yield,
as the Company has not paid dividend and does not anticipate paying dividend over the term of the grants.
Changes in our estimates and assumptions regarding the expected volatility could significantly impact the estimated fair values of our share options determined under the
Black-Scholes valuation model and, as a result, our net income.
51
The following table sets forth statements of income data for the years ended December 31, 2014, 2013 and 2012 in million of US$:
(millions of US$, except the
percentage)
Revenues
Cost of revenues
Gross profit
Total operating expenses
Operating income
Income before income taxes
Income tax expense
Net income
Revenues
Fiscal 2014 Highlights
2014
For the Years Ended December 31,
2013
Change
Change
2012
Amount
%
%
Amount
%
%
Amount
%
1,110.6
(888.2)
222.4
(50.7)
171.7
139.0
(18.3)
120.7
100.0%
(80.0)%
20.0%
(4.6)%
15.4%
12.4%
(1.6)%
10.8%
5.7%
7.3%
(0.4)%
34.1%
(7.5)%
(23.0)%
(60.8)%
(9.8)%
1,050.8
(827.4)
223.4
(37.8)
185.6
180.5
(46.7)
133.8
100.0%
(78.7)%
21.3%
(3.6)%
17.7%
17.2%
(4.4)%
12.8%
75.2%
81.4%
55.4%
18.5%
65.9%
56.4%
58.3%
55.8%
599.8
(456.0)
143.8
(31.9)
111.9
115.4
(29.5)
85.9
100.0%
(76.0)%
24.0%
(5.3)%
18.7%
19.3%
(5.0)%
14.3%
Revenues increased by 5.7% or US$59.8 million in 2014 as compared to 2013. This was due to approximately 0.6% increase in sales volume and 5.3 % increase in the average
RMB selling price of our products.
In 2014, the Company developed its presence in the Republic of Korea by selling to a Korean customer primarily higher-end PA66 and plastic alloy products for an aggregate
amount of US$140.1 million, which accounted for 12.6% of the total revenues for the year ended December 31, 2014.
The year-over-year increase of sales volume was primarily driven by the new business from the oversea market in the ROK.
Vehicle sales in China grew by 6.9% in 2014, the slowest rate in approximately 24 years, missing the State-backed auto association's revised forecast amid the economy
slowdown in the world's largest car market. The Chinese government's anti-monopoly probe against luxury automobile manufacturers by the state and dealers backlashed
against automakers. Both contributed to the lower-than-expected growth rate. Further, both automakers and parts manufacturers in China experienced pricing pressure in 2014.
As a result, plastic fabricators have been seeking newer products utilizing lower cost raw materials and more cost-efficient formulations. The pricing of the majority of our
existing products remained stable while our newly launched products have relatively lower average selling price in response to customer demand in China. As previously
disclosed, the Company has started marketing its higher-end products to customers overseas since early 2014 to better allocate its limited production capacity, diversify its
business and reduce its concentration in the Chinese market. Although revenues from China declined in 2014 as compared to 2013, the increase of revenues from oversea
market in the ROK more than offset such decline.
52
Fiscal 2013 Highlights
Revenue increased by 75.2% or US$451.0 million in 2013 as compared to 2012. This was due to approximately 51.6% increase in sales volume and 12.6% increase in the average
RMB selling price of our products.
The increase of sales volume was driven by the strong demand of modified plastics in the PRC market and higher penetration of our business in our existing markets supported
by our additional 30 production lines, which commenced production in December 2012, as well as the marketing efforts to develop new customers, in particular those in East
and Southwest China. Such increase in demand was driven by increasing demand for middle and high-end automobiles by Chinese consumers, continuing substitution of
imported modified plastics by domestic suppliers, as well as the increase of plastic content on the per-vehicle-basis in China with even higher adoption rate in higher-end
automobile models than low-end ones. The increase of average RMB selling price was mainly due to the shift of product mix towards higher-end products.
The following table summarizes the breakdown of revenues by categories in millions of US$:
(millions of US$, except the
percentage)
Modified Polyamide 66 (PA66)
Modified Polyamide 6 (PA6)
Plastic Alloy
Modified Polypropylene (PP)
Modified Acrylonitrile butadiene
styrene (ABS)
Polyoxymethylenes (POM)
Polyphenylene Oxide (PPO)
Modified Polylactic Acid (PLA)
Others
Sub-total
After-sales Service
Total Revenues
Revenues
For the Years Ended December 31,
2014
Amount
%
Change
%
2013
Amount
%
Change
%
2012
Amount
%
192.4
223.1
400.3
232.4
36.8
3.6
14.8
0.0
7.2
1,110.6
-
1,110.6
17.4%
20.1%
36.0%
21.0%
3.3%
0.3%
1.3%
0.0%
0.6%
100.0%
-%
100.0%
(1.6)%
3.2%
35.0%
(18.8)%
13.6%
28.6%
8.8%
n/a
33.3%
5.9%
(100.0)%
5.7%
53
195.5
216.2
296.6
286.3
32.4
2.8
13.6
-
5.4
1,048.8
2.0
1,050.8
18.6%
20.6%
28.2%
27.2%
3.1%
0.3%
1.3%
-%
0.5%
99.8%
0.2%
100.0%
172.7%
168.6%
139.8%
(1.4) %
28.1%
366.7%
n/a
n/a
n/a
77.1%
(73.3)%
75.2%
71.7
80.5
123.7
290.5
25.3
0.6
-
-
-
592.3
7.5
599.8
12.0%
13.4%
20.6%
48.4%
4.2%
0.1%
-%
-%
-%
98.7%
1.3%
100.0%
The following table summarizes the breakdown of metric tons (MT) by product mix:
Sales Volume
For the Years Ended December 31,
Modified Polyamide 66 (PA66)
Modified Polyamide 6 (PA6)
Plastic Alloy
Modified Polypropylene (PP)
Modified Acrylonitrile butadiene
styrene (ABS)
Polyoxymethylenes (POM)
Polyphenylene Oxide (PPO)
Modified Polylactic Acid (PLA)
Others
Total Sales Volume
2014
MT
36,984
49,447
114,216
120,385
13,884
1,040
2,010
1
3,553
341,520
%
10.8%
14.5%
33.4%
35.3%
4.1%
0.3%
0.6%
0.0%
1.0%
100.0%
Change
%
3.4%
17.8%
8.9%
(14.3)%
23.5%
11.8%
7.5%
n/a
47.2%
0.6%
2013
MT
35,757
41,989
104,894
140,505
11,244
930
1,870
-
2,413
339,602
%
10.5%
12.4%
30.9%
41.3%
3.3%
0.3%
0.6%
-%
0.7%
100.0%
Change
%
151.8%
155.7%
122.0%
2.8%
21.8%
416.7%
n/a
n/a
n/a
51.6%
2012
MT
14,202
16,419
47,248
136,698
9,235
180
-
-
-
223,982
%
6.3%
7.3%
21.1%
61.1%
4.1%
0.1%
-
-
-
100.0%
The Company continued to shift production mix from traditional Modified Polypropylene (PP) to higher-end products such as Modified Polyamide (PA66 and PA6) and plastic
alloy, primarily due to (i) the increasing demand of advanced modified plastics in luxury automobile models in China, (ii) the stronger demand as a result of promotion by
the Chinese government for clean energy vehicles and (iii) increased sales of higher-end cars made by automotive manufacturers from Chinese and Germany joint ventures,
and U.S. and Japanese joint ventures, which manufacturers tend to use more and higher-end modified plastics in quantity per vehicle in China. In addition, the Company sold
primarily higher-end PA66 and plastic alloy to the newly developed customer from the Republic of Korea.
Gross Profit and Gross Margin
(in millions, except percentage)
Gross Profit
Gross Margin
2014
Change
For the Years Ended December 31,
2013
Change
$
222.4
20.0%
(0.4)% $
(1.3)%
223.4
21.3%
2012
55.4% $
(2.7)%
143.8
24.0%
54
Fiscal 2014 Highlights
The year-over-year decrease in the gross margin percentage in 2014 compared to 2013 was driven by multiple factors including the following:
(i)
(ii)
new and lower-margin modified PA6 and PA66 products that we developed in 2014 in response to customer demand;
higher cost structures due to utilization of higher-end raw materials on certain products and flat production capacity to focus on product quality, partially offset by
the favorable shift in sales mix to higher-end products with higher margins and sales to the Korean market;
(iii)
lower sales discount off the original prices to lower-end products such as Modified Polypropylene (PP) and Modified Acrylonitrile Butadiene Styrene (ABS);
(iv)
(v)
higher-end product sales (mainly PA6, PA66, POM, PPO and Plastic Alloy) accounting for 75.1% of our total revenues in 2014 as compared to 69.1% of that of the
prior year;
the average 1.0% of sales discount off the original prices to lower-end products Modified Polypropylene (PP) and Modified Acrylonitrile Butadiene Styrene (ABS) in
2014 as compared to an average 5.8% discount off the original prices in 2013.
The Company anticipates gross margin during 2015 to be maintained at the similar level of 2014. With The foregoing statement regarding the Company's expected gross margin
percentage in 2015 is forward-looking and could differ from actual results. The Company's future gross margins can be impacted by multiple factors including, but not limited to
those set forth above in Part I, Item 1A of this Form 10-K under the heading "Risk Factors" and those described in this paragraph. In general, the Company believes gross
margins will remain the same level due to a variety of factors, including continued industry wide global product pricing pressures, increased competition, product transitions,
potential increases in the cost of components and potential strengthening of the U.S. dollar, as well as potential increases in the costs of manufacturing costs in payroll and a
potential flat production capacity in the Company's sales mix towards products with higher gross margins. In response to competitive pressures, the Company expects it will
continue to manage product quality to prioritize higher-end products, which would favorably affect gross margins. Gross margins could also be affected by the Company's
ability to manage product quality and to stimulate demand for certain of its products. The Company expects continuing growth opportunities in oversea markets, including the
Republic of Korea. With the Company's increasing international sales, financial results can be also affected by fluctuations in exchange rates.
Fiscal 2013 Highlights
The year-over-year decrease in the gross margin percentage in 2013 compared to 2012 was primarily due to:
(i)
(ii)
an average 5.8% discount on the listed prices in 2013 provided to our distributors as part of our marketing initiatives to increase our market share in East China and
Southwest China. The discount is primarily aimed at further expanding into the East China and Southwest China market. As a result, revenues contribution from East
China and Southwest China grew to 31.2% and 3.7% of our total sales in 2013 compared to 22% and nil in the same period of 2012, respectively.
an increase in shipping expenses to US$16.0 million in 2013 from US$2.1 million in 2012. We started bearing the shipping expenses, which is a part of our marketing
tactic to grow our market share since the first quarter of 2013. Such arrangement is expected to continue in the future.
55
General and Administrative Expenses
(in millions, except percentage)
General and Administrative Expenses
as a percentage of revenues
Fiscal 2014 Highlights
2014
$
Change
For the Years Ended December 31,
2013
Change
20.6
1.9%
26.4% $
0.3%
16.3
1.6%
2012
63.0% $
(0.1)%
10.0
1.7%
General and administrative (G&A) expenses were US$20.6 million in 2014 compared to US$16.3 million in 2013, representing an increase of 26.4%, or US$4.3 million. This
increase is primarily due to the increase of (i) US$3.1 million in payroll resulting of headcount and salary increase; (ii) US$0.4 million in rental fee due to the business expansion;
(iii) US$0.4 million of professional fees; and (iv) US$0.2 million in fixed assets depreciation.
On a percentage basis, G&A expenses in 2014 was 1.9% of revenues, compared to 1.6% of the same period of 2013.
Fiscal 2013 Highlights
General and administrative ("G&A") expenses were US$16.3 million in 2013 compared to US$10.0 million in 2012, representing an increase of 63.0%, or US$6.3 million. This
increase was primarily due to the increase of (i) US$ 2.4 million of share based compensation; (ii) US$ 0.9 million of travel and office expenses associated with the business
expansion; (iii) US$ 0.7 million of fixed assets deprecation; (iv) US$ 0.6 million of professional fees and (v) US$ 0.6 million of non-income taxation.
On a percentage basis, G&A expenses in 2013 was 1.6% of revenues, compared to 1.7% of the same period of 2012.
Research and Development Expenses
(in millions, except percentage)
Research and Development Expenses
as a percentage of revenues
Fiscal 2014 Highlights
2014
$
Change
For the Years Ended December 31,
2013
Change
29.4
2.6%
38.0% $
0.6%
21.3
2.0%
2012
(1.4)% $
(1.6)%
21.6
3.6%
Research and development ("R&D") expenses were US$29.4 million in 2014 compared with US$21.3 million in 2013, an increase of US$8.1 million, or 38.0% in 2014,
reflecting increased research and development activities on new products primarily in consumption of raw materials for various experiments for automotive applications from
automobile manufacturers as well as other non-automotive applications.
As of December 31, 2014, the number of ongoing research and development projects is 96. We expect to complete and commence to realize economic benefits on approximately
25% of the projects in the near term. The remaining projects are expected to be carried out for a longer period. The majority of the projects are in the field of modified plastics in
automotive applications and the rest are in advanced fields such as ships, airplanes, high-speed rail, medical devices, etc. In 2014, the Company successfully launched 38 new
automobile manufacturers certified products ("AMCP"), which increased its total number of AMCP to 321.
Fiscal 2013 Highlights
Research and development ("R&D") expenses were US$21.3 million in 2013 compared with US$21.6 million in 2012, a decrease of US$0.3 million, or 1.4%. The decrease of our
R&D expenses in 2013 was due to decreased expenses associated with the early completion of some research and development experiments after our R&D strategic review
where we recalibrated our R&D efforts to target more longer-term but higher-end applications in fields such as aerospace, high-speed train, biological and medical. In 2013, the
Company successfully launched 37 new AMCP, which increased its total number of AMCP to 283.
As of December 31, 2013, the Company had 96 products in the process of being certified by automotive and non-automotive manufacturers. The majority of the projects were in
the field of modified plastics in automotive applications and the rest were in advanced fields such as ships, airplanes, high-speed rail, medical devices, etc.
56
Operating Income
Total operating income was US$171.7 million in 2014 compared to US$185.6 million in 2013 and US$111.9 million in 2012, representing a decrease of 7.5% or US$13.9million in
2014 and an increase of 65.9% or US$73.7 million in 2013. This decrease in 2014 was due to the lower gross profit and higher general and administration expenses and research
and development expenses, while the increase in 2013 was primarily due to higher gross profit, partially offset by higher general and administrative expenses.
Interest Income (Expenses)
(in millions, except percentage)
Interest Income
Interest Expenses
Net Interest Expenses
as a percentage of revenues
Fiscal 2014 Highlights
2014
Change
For the Years Ended December 31,
2013
Change
2012
$
$
11.0
(41.5)
(30.5)
2.7%
61.8% $
171.2%
258.8% $
1.9%
6.8
(15.3)
(8.5)
0.8%
47.8% $
232.6%
-% $
0.8%
4.6
(4.6)
0.0
-%
Net interest expense was US$30.5 million in 2014, compared to net interest expense of US$8.5 million in 2013, primarily due to (i) an increase of US$16.9 million interest expenses
resulting from the Notes issued on February 4, 2014; (ii) an increase of US$9.3 million interest expenses resulting from the increase of bank loans to meet the need of our future
capacity expansion in Southwest China and Dubai. The average balance of short-term and long-term bank loans in 2014 was US$373.7 million as compared to US$238.4 million
during that of the prior year, leading to US$9.3 million more interest expense, partially offset by (iii) an increase of US$ 4.2 million interest income. The average deposit balance
in, 2014 was US$399.2 million as compared to US$226.4 million during that of the prior year, leading to the increase of interest income.
We expect interest expenses to increase in 2015.
Fiscal 2013 Highlights
Net interest expenses was US$8.5 million in 2013 compared to that of net interest expenses of US$25,678 in 2012, primarily due to increase of short-term loans to meet the need
of our future capacity expansion in Southwest China. The weighted average loan balance for the twelve-month ended December 31, 2013 was US$238.4 million as compared to
US$65.7 million as of that of the prior year, leading to US$8.5 million more net interest expenses.
57
Foreign Currency Exchange Gains (Losses)
(in millions, except percentage)
Foreign currency exchange gains (losses)
as a percentage of revenues
2014
$
Change
For the Years Ended December 31,
2013
Change
2012
(1.9)
0.2%
(176.0)% $
0.0%
2.5
0.2%
316.7% $
0.1%
0.6
0.1%
Foreign currency exchange losses were US$1.9 million in 2014, compared to gains of US$2.5 million in 2013 and US$0.6 million in 2012 mostly due to
the appreciation of US Dollar against RMB during 2014 as China loosened the range RMB was allowed to fluctuate.
Losses on foreign currency forward contracts
In 2014, the Company settled a foreign currency forward contract which was entered into to manage its exposure to foreign currency risks with a notional amount of US$80
million by paying RMB6.6 million (equivalent to US$1.1 million) due to the appreciation of US dollars against Chinese Yuan in June, and had a change of fair value of loss of
RMB15,000 (equivalent to US$2,450) for another foreign currency forward contract with a notional amount of US$50 million.
Income Taxes
(in millions, except percentage)
Income before Income Taxes
Income Tax Expense
Effective income tax rate
2014
$
Change
For the Years Ended December 31,
2013
Change
139.0
(18.3)
13.1%
(23.0)% $
(60.8)%
(12.8)%
180.5
(46.7)
25.9%
56.4% $
58.3%
0.3%
2012
115.4
(29.5)
25.6%
The effective income tax rate in 2014, 2013 and 2012 was 13.1%, 25.9% and 25.6%, respectively.
The effective income tax rate in 2014 differs from the PRC statutory income tax rate of 25% primarily due to (i) Sichuan Xinda Group's preferential income tax rate and exemption
of income tax for the income earned by Dubai Composites, partially offsetting by (i) increase of valuation allowances against deferred income tax assets of certain subsidiaries,
which were at cumulative loss position and (ii) effect of non-deductible expenses.
The effective income tax rate of 25.9% in 2013 differs from the PRC statutory income tax rate of 25% primarily due to (i) non-deductible stock-based compensation expenses and
(ii) subpart F income for controlled foreign operations, partially offset by the preferential income tax rate of 15% enjoyed by Sichuan Xinda Group.
The effective income tax rate of 25.6% in 2012 differs from the PRC statutory income tax rate of 25% primarily due to (i) the net operating loss of one of the Company's PRC
subsidiaries, which is to be merged into another subsidiary in 2013, and pursuant to the PRC tax laws and regulations, its losses cannot be carried forward to the surviving
entity, after the merger, (ii) subpart F income for controlled foreign operations and (iii) non-deductible entertainment expenses.
Our PRC and Dubai subsidiaries have US$296.5 million of cash and cash equivalents, restricted cash and time deposits as of December 31, 2014, which are planned to be
indefinitely reinvested in the PRC and Dubai. The distributions from our PRC and Dubai subsidiaries are subject to the U.S. federal income tax at 34%, less any applicable
foreign tax credits. Due to our policy of indefinitely reinvesting our earnings in our PRC business, we have not provided for deferred income tax liabilities related to PRC
withholding income tax on undistributed earnings of our PRC subsidiaries. In addition, due to our policy of indefinitely reinvesting our earnings in Dubai, UAE, we have not
provided for deferred income tax liabilities related to Dubai Composites in Dubai, UAE, on undistributed earnings.
58
Net Income
As a result of the above factors, we had a net income of US$120.7 million in 2014, compared to US$133.8 million in 2013 and US$85.9 million in 2012.
Selected Balance Sheet Data as of December 31, 2014 and 2013:
(in millions, except percentage)
Cash and cash equivalents
Restricted cash
Time deposits
Accounts receivable, net of allowance for doubtful accounts
Inventories
Property, plant and equipment, net
Land use rights, net
Prepayment to equipment suppliers
Other non-current assets
Total assets
Short-term bank loans, including current portion of long-term bank loans
Bills payable
Accounts payable
Income taxes payable, including noncurrent portion
Accrued expenses and other current liabilities
Long-term bank loans, excluding current portion
Notes payable
Redeemable Series D convertible preferred stock
Stockholders' equity
2014
2013
Change
Amount
%
45.5
12.5
238.5
204.0
249.8
318.3
11.9
182.2
25.5
1,299.7
99.7
43.4
152.1
17.3
24.5
174.3
148.6
97.6
525.3
95.5
13.7
281.3
282.3
144.9
233.8
12.5
1.3
1.8
1,075.9
314.7
25.6
122.5
26.8
55.9
-
-
97.6
412.3
(50)
(1.2)
(42.8)
(78.3)
104.9
84.5
(0.6)
180.9
23.7
223.8
(215)
17.8
29.6
(9.6)
(31.4)
174.3
148.6
-
113.0
(52.4)%
(8.8)%
(15.2)%
(27.7)%
72.4%
36.1%
(4.8)%
13915.4%
1,316.7%
20.8%
(68.3)%
69.5%
24.2%
(35.8)%
(56.2)%
N/A
N/A
-
27.4%
Our financial condition continued to improve as measured by an increase of 27.4% in stockholders' equity as of December 31, 2014 compared to the prior year. Cash and cash
equivalents, restricted cash and time deposits decreased by 24.1% due to the decrease of aggregate short-term and long-term bank loans of US$40.7 million, and investing in
the capital expenditures. Inventories increased by 72.4% due to the anticipation of the increase of customer demand in the following quarters. Prepayment to equipment
suppliers increased by 13,915.4% due to the advance for equipment to be used in Dubai, UAE and Southwest China facilities. Other non-current assets increased by 1,316.7%
due to long-term restricted time deposit to secure a three-year loan. The aggregate short-term and long-term bank loans decreased by 12.9% due to the overall consideration of
existing lines of credit and maintaining a healthy asset to liability ratio. Accounts payable increased by 24.2% as a result of the inventory buildup in order to timely meet the
demand from customers especially those geographically located in more distant cities in subsequent quarters. Bills payable increased by 69.5% due to the increase of
purchases from our domestic raw material suppliers. As of December 31, 2014, notes payable was US$148.6 million due to the issuance of 11.75% guaranteed senior notes due
in 2019, net of discount.
59
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary uses of cash have been to finance working capital needs and capital expenditures for new production lines. We have financed these requirements
primarily from cash generated from operations, bank borrowings and the issuance of our convertible preferred stocks and debt financings. As of December 31, 2014 and 2013,
we had US$45.5 million and US$95.5 million, respectively, in cash and cash equivalents, which were primarily deposited with banks in China (including Hong Kong and Macau).
As of December 31, 2014, we had US$99.7 million outstanding short-term bank loans (including the current portion of lines long-term bank loans), including US$47.2 million
unsecured loan and US$40.3 million loans secured by accounts receivable, and US$12.2 long-term bank loans that due in one year. We also had US$174.3 million outstanding
long-term bank loans (excluding the current portion), including US$70.0 million loans secured by long-term deposits and US$104.3 million unsecured loan. Short-term and long-
term bank loans in total bear a weighted average interest rate of 4.1% per annum and do not contain any renewal terms. We have historically been able to make repayments
when due. In addition, the Company has US$148.6 million of 11.75% guaranteed senior notes due in 2019.
A summary of lines of credit for the year ended December 31, 2014 and the remaining line of credit as of December 31, 2014 is as below:
(in millions)
December 31, 2014
Name of Financial Institution
Bank of Communications
Bank of Longjiang, Heilongjiang
Bank of China
HSBC
Agriculture Bank of China
China Construction Bank
Societe Generale
Total
Date of Approval
December 09, 2014
March 10, 2014
April 30, 2014
September 2, 2014
September 25, 2014
December 25, 2013
August 1, 2014
Lines of Credit, Obtained
RMB
USD
300.0
300.0
1,110.0
279.2
300.0
300.0
150.0
2,739.2
Remaining
Available
USD
16.2
0
16.4
45.0
32.2
48.3
9.4
167.5
48.3
48.3
178.9
45.0
48.3
48.3
24.4
441.5
We have historically been able to make repayments when due. As of December 31, 2014, we have contractual obligations to pay (i) lease commitments in the amount of US$4.2
million, including US$1.5 million due in one year; (ii) equipment acquisition in the amount of US$98.6 million; (iii) long-term bank loan in the amount of US$197.7 million
(including principals and interests); and (iv) notes payable in the amount of US$229.3 million (including principals and interests).
We expect that we will be able to meet our needs to fund operations, capital expenditures and other commitments in the next 12 months primarily with our cash and cash
equivalents, operating cash flows and bank borrowings.
60
We may, however, require additional cash resources due to changes in business conditions or other future developments. If these sources are insufficient to satisfy our cash
requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could result in additional
dilution to stockholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financial covenants that would
restrict operations. Financing may not be available in amounts or on terms acceptable to us, or at all.
Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2012, 2013, and 2014:
(in millions, except percentage)
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash provided by financing activities
Effect of foreign currency exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
FY 2014 Highlights
Operating Activities
2014
Years Ended December 31,
2013
2012
148.7
(299.3)
99.4
1.1
(50.1)
115.6
(249.9)
143.2
2.8
11.7
(31.4)
(144.9)
123.9
0.7
(51.7)
Net cash provided by the operating activities increased by US$33.1 million for the year ended December 31, 2014 from US$115.6 million last year. This increase was primarily
due to (i) the increase of approximately US$234.6 million in cash collected from our customers for the year ended December 31, 2014 resulting from increasing sales during the
year, partially offset by (ii) the increase of approximately US$184.9 million in raw material purchases, and (iii) the increase of approximately US$18.1 million interest payment in
2014 resulting from increase in short term and long-term loans.
Investing Activities
Net cash used in the investing activities increased by US$49.4 million for the year ended December 31, 2014 as compared to US$249.9 million last year, mainly due to the
increase of US$166.7 million purchase of time deposits, increase of US$1.5 million payment for land use right and increase of US$312.6 million purchase of property, plant and
equipment, partially offset by the increase of US$431.4 million proceeds from maturity of time deposits.
Financing Activities
Net cash provided by the financing activities decreased by US$43.8 million for the year ended December 31, 2014, as compared to US$143.2 million last year, primarily as a result
of the increase of (i) US$473.7 million repayments of bank borrowings, (ii) US$12.4 million of placement of restricted cash as collateral for bank borrowings, (iii) US$4.7 million
payment of issuance costs related to the notes payable, and offset by (iv) the increase of US$293.8 million proceeds from bank borrowings, (v) the increase of US$4.3 million
release of restricted cash, and (vi) the proceeds of US$148.4 million from issuance of long-term notes payable and (vii) the proceeds from US$0.6 million warrants exercises.
On January 24, 2014, the Company's wholly owned subsidiary, Favor Sea Limited, priced its international offering of guaranteed senior notes. The offering consists of US$150
million aggregate principal amount of 11.75% guaranteed senior notes due 2019. The Notes have been listed and quoted on the Singapore Stock Exchange on February 5,
2014. The Company intends to use the net proceeds from the offering for repayment of indebtedness incurred by its PRC subsidiaries, for capital expenditure on a production
base in Sichuan and for general corporate purposes. The Notes are guaranteed on a senior basis by China XD and Xinda Holding (HK) Company Limited, a subsidiary wholly
owned by the Note Issuer. The Notes are secured by a pledge of the shares of the Note Issuer and the Subsidiary Guarantor.
61
FY 2013 Highlights
Operating Activities
Net cash provided by the operating activities increased by US$147.1 million for the year ended December 31, 2013 from net cash used in the operating activities of US$31.5
million used last year. This increase was primarily due to (i) the increase of approximately US$438.7 million in cash collected from our customers for the year ended December
31, 2013 resulting from increasing sales during the period, partially offset by (ii) increase of approximately US$289.3 million in cash operating expenditures, including
approximately US$282.5 million in raw material purchases and (iii) the increase of approximately US$2.3 million income tax payment in 2013 resulting from increase in income
before taxes and decrease of effective income tax rate.
Investing Activities
Net cash used in the investing activities increased by US$105.0 million for the year ended December 31, 2013 as compared to US$144.9 million last year, mainly due to the
increase of US$85.8 million purchase of time deposits, and the decrease of US$95.2 million proceeds from maturity of time deposits, partially offset by the decrease of US$76.0
million purchase of property, plant and equipment.
Financing Activities
Net cash provided by the financing activities was US$143.2 million for the year ended December 31, 2013, as compared to US$123.9 million last year, primarily as a result of the
increase of US$260.8 million borrowings of short-term bank loans, the release of restricted cash as collateral for bank borrowings of US$5.7 million, which was partially offset by
the increase of US$3.4 million placement of restricted cash as collateral for bank borrowings, and the increase of US$243.8 million repayments of bank borrowings for the year
ended December 31, 2013.
As of December 31, 2014, our cash and cash equivalents balance was US$45.5 million, compared to US$95.5 million at December 31, 2013.
Days Sales Outstanding ("DSO") has increased from 72 days for the year ended December 31, 2013 to 77 days for the year ended December 31, 2014 as a result of overall
slowdown in the Chinese economy, automobile industry, and its impact to our industry. It takes longer to collect from our customers. We believe that our DSO is still well
below industry average Industry Standard Customer and Supplier Payment Terms (days) as below:
Customer Payment Term
Supplier Payment Term
Year ended December 31, 2014,2013 and 2012
Payment in advance/up to 90 days
Payment in advance/up to 60 days
Inventory turnover days has increased from 49 days for the year ended December 31, 2013 to 80 days for the year ended December 31, 2014 due to inventory of raw materials
buildup in anticipation of increasing demand from our customers, especially those located in longer distance in the following quarters.
Based on past performance and current expectations, we believe our cash and cash equivalents provided by operating activities and financing activities 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 revenues 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. Inflation has not had a material impact on the Company's business.
62
COMMITMENTS AND CONTINGENCIES
Contractual Obligations
Our contractual obligations as of December 31, 2014 are as follows:
Contractual obligations
Lease commitments
Purchase of land use rights, plant equipment, and
construction in progress
Long-term bank Loans (1)
Notes payable (2)
Total
Total
Payment due
less than 1 year
1 – 3 years
3-5 years
More than 5
years
4,193,836
1,475,625
1,942,598
775,613
98,557,879
197,686,936
229,312,500
529,751,151
98,557,879
18,324,766
17,625,000
135,983,270
-
179,362,170
35,250,000
216,554,768
-
-
176,437,500
177,213,113
-
-
-
-
-
(1) Includes interest of US$11.2 million accrued at the interest rate under the loan agreements. For borrowings with a floating rate, the most recent rate as of December 31, 2014
was applied.
(2) On February 4, 2014, Favor Sea Limited, a wholly owned subsidiary of the Company, issued US$150,000,000 aggregate principal amount of 11.75% Guaranteed Senior Notes
due 2019 with issuance price of 99.080% (the "Notes"). The Notes bear interest at a rate of 11.75% per annum, payable on February 4 and August 4 of each year, commencing
August 4, 2014. The Notes will mature on February 4, 2019.
(3) On March 8, 2013, Xinda Holding (HK) Company Limited ("Xinda Holding (HK)"), a wholly owned subsidiary of the Company, entered into an investment agreement with
Shunqing Government, pursuant to which Xinda Holding (HK) will invest RMB1.8 billion (equivalent to US$290 million) in property, plant and equipment and approximately
RMB0.6 billion (equivalent to US$97 million) in working capital, for the construction of Sichuan plant. As of December 31, 2014, the Company has a commitment of RMB584.0
million (equivalent to US$94.1 million) mainly for acquisition of equipment.
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.
63
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to interest rate risk primarily with respect to our short-term and long-term bank loans. Although the interest rates of our short-term and long-term bank loans,
which are based on the prime rates set by People's Bank of China, are fixed during the terms of the loans, increase in interest rates will increase the cost of new borrowings and
our interest expense.
A hypothetical 1.0% increase in the annual interest rate for all of our credit facilities under which we had outstanding borrowings as of December 31, 2014 would decrease
income before income taxes by approximately US$4.2 million for the year ended December 31, 2014. Management monitors the banks' prime rates in conjunction with our cash
requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce
our exposure to interest rate risk.
Foreign Currency Exchange Rates
Majority of our revenues are collected in and our expenses are paid in RMB. We face foreign currency rate translation risks when our results are translated to U.S. dollars.
The RMB was relatively stable against the U.S. dollar at approximately 8.28 RMB to the US$1.00 until July 21, 2005 when the Chinese currency regime was altered resulting in a
2.1% revaluation versus the U.S. dollar. From July 21, 2005 to June 30, 2010, the RMB exchange rate was no longer linked to the U.S. dollar but rather to a basket of currencies
with a 0.3% margin of fluctuation resulting in further appreciation of the RMB against the U.S. dollar. Since June 30, 2009, the exchange rate had remained stable at 6.8307 RMB
to 1.00 U.S. dollar until June 30, 2010 when the People's Bank of China allowed a further appreciation of the RMB by 0.43% to 6.798 RMB to 1.00 U.S. dollar. On December 31,
2014, the RMB traded at 6.2046 RMB to 1.00 U.S. dollar.
There remains international pressure on the Chinese government to adopt an even more flexible currency policy and the exchange rate of RMB is subject to changes in China's
government policies which are, to a large extent, dependent on the economic and political development both internationally and locally and the demand and supply of RMB in
the domestic market. There can be no assurance that such exchange rate will continue to remain stable in the future amongst the volatility of currencies, globalization and the
unstable economies in recent years. Since (i) our revenues and net income of our PRC operating entities are denominated in RMB, and (ii) the payment of dividends, if any, will
be in U.S. dollars, any decrease in the value of RMB against U.S. dollars would adversely affect the value of the shares and dividends payable to shareholders, in U.S. dollars.
64
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary financial information of the Company and its subsidiaries, including the notes thereto, together with the report of our
independent registered public accounting firm, are presented beginning on page F-1 of this report and are incorporated into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act)). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's
rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our
reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure. Based on our assessment, the CEO and the CFO determined that, as of December 31, 2014, and as of the
date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, because of the material weakness in our internal control over financial
reporting described below, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended.
Notwithstanding management's assessment that our internal control over financial reporting was ineffective as of December 31, 2014 due to the material weakness described
below under Management's Report on Internal Control Over Financial Reporting, we believe that the consolidated financial statements included in this Annual Report on Form
10-K correctly present our financial condition, results of operations and cash flows for the fiscal years covered thereby in all material respects.
(a) Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over the Company's financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act. The Company's internal control over financial reporting is a process that is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United
States and includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles
generally accepted in the United States and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on a framework established in Internal Control- Integrated Framework (1992) issued by the committee of
Sponsoring Organizations of the Treadway Commission (COSO) as of December 31, 2014. Based on such evaluation, our management, including the CEO and CFO, has
concluded that the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended) as of
December 31, 2014 is ineffective. This assessment identified one material weakness related to lack of sufficient accounting and financial reporting personnel to formalize certain
key controls over the financial reporting process and report financial reporting information based on generally accepted accounting principles and SEC reporting requirements.
The Company's independent registered public accounting firm has issued an attestation report on the Company's internal control over financial reporting as of December 31,
2014, as stated in their report appearing herein under Item 9A(b) of this Annual Report on Form 10-K. Our independent registered public accounting firm has issued an adverse
opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2014.
65
Changes in Internal Control Over Financial Reporting
During the twelve months ended December 31, 2014, our efforts to improve our internal controls over financial reporting include (1) hiring SOX 404 compliance consultant to
help us comply with SOX404 requirements, (2) external training of U.S. GAAP and SEC reporting by qualified entities to our accounting staff, (3) recruiting qualified accounting
staff in AL Composites with requisite expertise and knowledge to help improve our internal control procedures, (4) adopting internal policies and approval and supervision
procedures governing financial reporting, (5) adopting procedures to evaluate and assess performance of directors, officers and employees of the Company, (6) internal
meetings, discussions and seminars periodically to review and improve our internal control procedures. Other than the foregoing, there has been no other changes in our
internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our fourth fiscal quarter ended December 31,
2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
(b) Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
China XD Plastics Company Limited:
We have audited China XD Plastics Company Limited's internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control –
Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). China XD Plastics Company Limited's
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our audit.
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 effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company's 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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) 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 (3) 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, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
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. A material weakness related to the Company's lack of
sufficient accounting and financial reporting personnel has been identified and included in management's assessment. We also have audited, in accordance with the standards
of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of China XD Plastics Company Limited and subsidiaries as of December
31, 2014 and 2013, and the related consolidated statements of comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended
December 31, 2014. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial
statements, and this report does not affect our report dated March 16, 2015, which expressed an unqualified opinion on those consolidated financial statements.
In our opinion, because of the effect of the aforementioned material weakness on the achievement of the objectives of the control criteria, China XD Plastics Company Limited
has not maintained effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (1992)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ KPMG
Hong Kong, China
March 16, 2015
ITEM 9B. OTHER INFORMATION
None.
66
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
PART III
The following table sets forth the names and ages of our current directors and executive officers, their age, their principal offices and positions and the date each such person
became a director or executive officer. Executive officers are appointed at the discretion of the Board of Directors. Directors are elected annually by our stockholders at our
annual meeting of stockholders. Each director holds his office until his successor is elected and qualified or his earlier resignation or removal.
Our current directors and executive officers are as follows:
Name
Jie Han
Taylor Zhang
Qingwei Ma
Lawrence W. Leighton (1)(2)(3)
Feng Li (1)(2)(3)
Linyuan Zhai (1)(2)(3)
Homer Sun (2)(4)
Jun Xu(4)
Junjie Ma
Age
Title
Date of Initial Appointment
49
36
40
80
52
65
43
39
39
Chief Executive Officer and Chairman of the Board
of Directors
Chief Financial Officer and Director
Chief Operating Officer and Director
Independent Director
Independent Director
Independent Director
Independent Director
Independent Director
Chief Technology Officer
December 31, 2008
May 14, 2009
December 31, 2008
May 14, 2009
November 14, 2012
May 14, 2009
January 1, 2012
September 28, 2011
May 26, 2009
(1) Serves as a member of the Audit Committee.
(2) Serves as a member of the Compensation Committee.
(3) Serves as a member of the Nominating Committee.
(4) Series D Director nominee.
Jie Han. Mr. Han co-founded Harbin Xinda Macromolecule Material Co., Ltd. ("Harbin Xinda"), the Company's wholly owned subsidiary, 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 Co., Ltd
("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 29 years of experiences
in the industry, Mr. Han is an expert in the management and financial aspects of the manufacture and distribution of modified plastic products. Mr. Han contributes to our
Board of Directors strong leadership and vision for the development of our Company.
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. Mr. Han received a business management degree from the Heilongjiang
Provincial Party School.
67
Taylor Zhang. Mr. Zhang has over 12 years of experience in finance and operation in a broad range of industries. From May 2008 to March 2009, Mr. Zhang served as Chief
Financial Officer of Advanced Battery Technologies, Inc. From 2007 to 2008, he served as Executive Vice President of Finance of China Natural Gas, Inc.. 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. Mr. Zhang
contributes to our Board of Directors with extensive experience in finance and operations. 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
to the Board of Directors. 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 16 years of experiences in the modified plastics industry and contributes to our Board of
Directors with such extensive experience. 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" and 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 in 2009. From December 2008 to May 2009, Mr. Ma served as a member of our Board of Directors. 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 engineer 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.
Lawrence W. Leighton. Mr. Leighton has had an extensive 46-year international investment banking career. Beginning at what became Lehman Brothers, he advised on
financing for the Mexican Government and leading Mexican corporations. As Director of Strategic Planning for the consumer products company, Norton Simon Inc., he
initiated and executed the acquisition of Avis Rent-a-car. Subsequently, he was a Limited Partner of Bear Stearns & Co., a Managing Director of the investment bank of Chase
Manhattan Bank and then President and Chief Executive Officer of the U.S. investment bank of Credit Agricole, a major French Bank. Among his transactions, Mr. Leighton
has advised Pernod Ricard, a major European beverage company, on its acquisitions in the United States; and Verizon, a U. S. telecom company, on its dispositions of certain
European operations. Since 2005, Mr. Leighton has served as a managing director of Bentley Associates Investment Banking. Since 2008, Mr. Leighton has served as a
member of the board of directors of China Natural Gas, Inc. Mr. Leighton contributes to our Board of Directors with extensive international banking experience and corporate
executive advisory experience, advising both large and small corporations in both foreign countries and the United States. Mr. Leighton received his Bachelor's Degree in
engineering from Princeton University and a Master's Degree from Harvard Business School. He holds a commercial pilot's license with instrument rating.
Linyuan Zhai. Mr. Zhai, 65, worked for China FAW Group Corporation for 37 years and has and contributes to our Board of Directors with extensive experience in terms of
technology, production, and business management. He is one of the pioneers and outstanding contributors of FAW Group's success. Since 2000, Mr. Zhai has served as
general manager of FAW Sihuan Products Co., Ltd., an automobile manufacturing company. From August 1998 to December 2000, Mr. Zhai was the manufacturing section
chief at FAW Sihuan Head Office. From August 1992 to August 1998, Mr. Zhai was the factory manager at FAW Sihuan Auto Warm Air Blower Factory. In 2000, as deputy
general manager, Mr. Zhai successfully led the initial public offering of Four Ring Company, a subsidiary of FAW Group, a leader in the vehicle manufacturing industry based
in China. Mr. Zhai received his business management degree from Changchun University.
Homer Sun. Mr. Sun, 43, is a Managing Director of Morgan Stanley and leads Morgan Stanley Private Equity Asia's China Investments. Mr. Sun has been at Morgan Stanley
since 1999 and serves on Morgan Stanley's China Management Committee, which is comprised of the Morgan Stanley's senior business leaders within China. Mr. Sun
currently serves as a director on the boards of several Chinese companies, including Sihuan Pharmaceutical Group, China Shanshui Cement Group, China Flooring and Yongye
International. From 2000 to 2006, Mr. Sun worked in Morgan Stanley's Investment Banking Division in the Mergers and Acquisitions Group in Hong Kong where he worked on
a wide range of mergers and acquisitions in Greater China. Prior to joining Morgan Stanley, Mr. Sun practiced as a mergers and acquisitions lawyer with the law firm Simpson
Thacher & Bartlett in New York and Hong Kong from 1996 to 2000. Mr. Sun received a B.S.E. in Chemical Engineering magna cum laude from the University of Michigan and a
J.D. cum laude from the University of Michigan Law School. Mr. Sun contributes to our Board of Directors with a broad range of transactional experience, both as a lawyer and
as a managing director at Morgan Stanley.
Jun Xu. Mr. Xu, 39, is an Executive Director of Morgan Stanley. Mr. Xu joined Morgan Stanley Private Equity Asia in 2008 after spending six years in investment banking
advising Chinese clients on financing transactions and cross-border mergers and acquisitions. Prior to joining Morgan Stanley in 2005, he was with Goldman Sachs in Hong
Kong SAR from 2002 to 2005. Mr. Xu focuses on the group's private equity transactions in China. Mr. Xu is a native Chinese and is based in Hong Kong SAR. Mr. Xu
contributes to our Board of Directors with a broad range of transactional experience. Mr. Xu received dual Bachelor Degrees in both international trade and computer science
magna cum laude from Shanghai Jiaotong University and an M.B.A. with honors from the University of Michigan.
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Feng Li. Mr. Li, age 52, is a deputy director at Plastics Processing R&D Center of Beijing Research Institute of the Chemical Industry, as well as a member of the Science and
Technology Committee of Beijing Research Institute of the Chemical Industry. He has and contributes to our Board of Directors substantial experience in technology,
production, and business management in the chemical industry. Under his leadership in various senior roles including Vice General Manager, Director, and Chief Engineer,
responsible for project design, investment, management and finance, Mr. Li successfully launched and operated several joint ventures between Beijing Chemical Industry
Research Institute (Group), a subsidiary of China Petroleum & Chemical Corp (Sinopec), the largest refiner in Asia, and Jiangnan Mould & Plastic Co. Ltd., Shenzhen
Petrochemical and Plastics Co. Ltd., Suzhou Anli Chemical Co., Ltd., and others. Mr. Li is also on the committee of Venture Capital for Innovative Small-Medium size Enterprises
under the Ministry of Science and Technology of the People's Republic of China. Mr. Li received a B.S. in polymer material from Nanjing Institute of Chemical Technology and
a Master's Degree from Beijing University of Chemical Technology. Mr. Li also attended MBA program at China Sinopec Management Institute of Business Administration
and studied as an exchange scholar at the University of Technology in Sydney, Australia.
Family Relationships
There are no family relationships between or among any of the executive officers or directors of the Company.
Board Leadership Structure
The Board of Directors believes that Jie Han's service as both Chairman of the Board of Directors 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 is thus best positioned to develop
agendas that ensure that the time and attention of our Board of Directors 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 stockholders, employees and
customers.
Each of the directors other than Jie Han, Taylor Zhang and Qingwei Ma is independent (see "Director Independence" below), and the Board of Directors believes that the
independent directors provide effective oversight of management. The Board of Directors has not designated a lead director. Our independent directors call and plan their
executive sessions collaboratively and, between Board of Directors meetings, communicate with management and one another directly. In the circumstances, the directors
believe that formalizing in a lead director functions in which they all participate might detract from rather than enhance performance of their responsibilities as directors.
Director Qualifications
We seek directors with established strong professional reputations and experience in areas relevant to the strategy and operations of our businesses. We also seek directors
who possess the qualities of integrity and candor, who have strong analytical skills and who are willing to engage management and each other in a constructive and
collaborative fashion, in addition to the ability and commitment to devote significant time and energy to service on the Board of Directors and its committees. We believe that
all of our directors meet the foregoing qualifications.
The Nominating Committee and the Board of Directors believe that the leadership skills and other experiences of the members of its Board of Directors, as described "Item 10 –
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE – Directors and Executive Officers", provide the Company with a range of perspectives and
judgment necessary to guide our strategies and monitor their execution.
Board of Directors Practices
Our business and affairs are managed under the direction of our Board of Directors. The primary responsibilities of our Board of Directors are to provide oversight, strategic
guidance, counseling and direction to our management. It is our expectation that the Board of Directors will meet regularly on a quarterly basis and additionally as required.
Board of Directors' Role in Risk Oversight
The Board of Directors as a whole has responsibility for risk oversight, with reviews of certain areas being conducted by the relevant Board of Directors committees. These
committees then provide reports to the full Board of Directors. The oversight responsibility of the Board of Directors and its committees is enabled by management reporting
processes that are designed to provide visibility to the Board of Directors about the identification, assessment, and management of critical risks. These areas of focus include
strategic, operational, financial and reporting, succession and compensation, compliance, and other risks. The Board of Directors and its committees oversee risks associated
with their respective areas of responsibility, as summarized below.
Meetings of the Board of Directors
The Board of Directors held 8 meetings during 2014. No director attended fewer than 75% of the meetings of the Board of Directors. No director attended less than 75% of any
meeting of a committee of which the director was a member in fiscal year 2013.
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Involvement in Certain Legal Proceedings
None of our directors and officers has been involved in any of the legal proceedings specified in Item 401(f) of Regulation S-K in the past 10 years.
Committees of the Board of Directors
Our Board of Directors has an Audit Committee, a Nominating Committee, and a Compensation Committee. Our Board of Directors has determined that Lawrence W. Leighton,
Feng Li, Linyuan Zhai and Homer Sun, the members of these committees, are "independent" under the current independence standards of NASDAQ Marketplace Rule 4200(a)
(15) and meet the criteria for independence set forth in Rule 10A-3(b)(1) under the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act"). Our Board of
Directors has also determined that these persons have no material relationships with us — either directly or as a partner, stockholder or officer of any entity — which could be
inconsistent with a finding of their independence as members of our Board of Directors.
Audit Committee
The Audit Committee was established on May 26, 2009. The Audit Committee operates under a written charter. The Audit Committee Charter can be found on our website at
www.cxdc.net and can be made available in print free of charge to any shareholder who requests it.
The Audit Committee's charter states that the responsibilities of the Audit Committee shall include, among other things:
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reviewing the Audit Committee's charter, annual report to stockholders and reports submitted to the SEC;
appointing the Company's independent auditors, confirming and reviewing their independence, and approving their fees;
reviewing the independent auditors' performance;
discussing with the independent auditor and management the independent auditor's judgment about the quality, not just the acceptability, of the Company's accounting
principles;
following an audit, reviewing significant difficulties encountered during the audit; and
reviewing significant disagreements among management and the independent auditors in the preparation of the Company's financial statements.
In addition, the Audit Committee reviews and approves all transactions with affiliates, related parties, directors and executive officers.
The Audit Committee held 5 meetings during 2014. The members of the Audit Committee during 2014 were Lawrence Leighton, Feng Li and Linyuan Zhai. Mr. Leighton served
as the Chairman of the Audit Committee. Each of the above-listed Audit Committee members were or are considered "independent" under the current independence standards
of NASDAQ Marketplace Rule 4200(a)(15) and meet the criteria for independence set forth in Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, as amended, as
determined by the Board of Directors.
Our Board of Directors has determined that we have at least one audit committee financial expert, as defined in the Exchange Act, serving on our Audit Committee. Lawrence
Leighton is the "audit committee financial expert" and is an independent member of our Board of Directors.
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AUDIT COMMITTEE REPORT
The Audit Committee has reviewed and discussed our consolidated financial statements for the fiscal year ended December 31, 2014, including significant accounting policies
applied by the Company in its consolidated financial statements, as well as alternative treatments with management and the Company's independent registered public
accounting firm. The Committee has discussed with the independent registered public accounting firm all matters required by the standards of the Public Company
Accounting Oversight Board (the "PCAOB"), including those described in Auditing Standard No. 16, Communications with Audit Committees.
In addition, the Committee has received the letter from the independent registered public accounting firm required by the applicable PCAOB requirements concerning auditor
independence, and the Committee has discussed with the independent registered public accounting firm their independence from the Company and its management. The
Committee has also considered whether the independent registered public accounting firm's provision of non-audit services to the Company could affect the accountant's
independence. The Committee has concluded that the independent registered public accounting firm is independent from the Company and its management. The Committee
has discussed with the Company's independent registered public accounting firm the overall scope and plans for its audit.
Based on the Audit Committee's review of the matters noted above and its discussions with our independent registered public accounting firm 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, 2014.
Respectfully submitted by:
Lawrence Leighton (Chair)
Feng Li
Linyuan Zhai
Nominating Committee
The Nominating Committee was established on May 26, 2009. The purpose of the Nominating Committee is to assist the Board of Directors in identifying qualified individuals
to become members of the Board of Directors, in making recommendations to the Board of Directors as to the independence of each director, in monitoring significant
developments in the law and practice of corporate governance and of the duties and responsibilities of directors of public companies, and in leading the Board of Directors in
any annual performance self-evaluation, including establishing criteria to be used in connection with such evaluation. The Nominating Committee held 1 meeting during 2014.
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The members of the Nominating Committee during 2014 were Lawrence Leighton, Feng Li and Linyuan Zhai. Mr. Zhai served as the Chairman of the Nominating Committee.
Each of the above-listed Nominating Committee members is considered "independent" under the current independence standards of NASDAQ Marketplace Rule 4200(a)(15)
and meet the criteria for independence set forth in Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, as amended, as determined by the Board of Directors.
The Nominating Committee operates under a written charter. The Nominating Committee Charter can be found on our website at www.chinaxd.net and can be made available in
print free of charge to any shareholder who requests it.
On September 28, 2011 the Company filed a Certificate of Designation with the Secretary of State of the State of Nevada (amended on January 24, 2014 and filed with the
Secretary of State of the State of Nevada on January 27, 2014), which provides the holders of the Series D Preferred Stock with the right to elect up to two (2) directors to the
Company's Board of Directors on the terms and conditions set forth therein. There have been no other changes to the procedures by which the stockholders of the Company
may recommend nominees to the Board of Directors since the filing of the Company's Definitive Proxy Statement on November 19, 2009 for its Annual Meeting of Stockholders,
which was held on December 1, 2009. The Nominating Committee will consider director candidates recommended by any reasonable source, including current Board of
Directors members, stockholders, professional search firms or other persons. The directors will not evaluate candidates differently based on who has made the
recommendation. The Board of Directors does not have a formal policy on Board of Directors candidate qualifications. The Board of Directors may consider those factors it
deems appropriate in evaluating director nominees made either by the Board of Directors or stockholders, including judgment, skill, strength of character, experience with
businesses and organizations comparable in size or scope to the Company, experience and skill relative to other Board of Directors members, and specialized knowledge or
experience in business or financial matters as would make such nominee an asset to the Board of Directors and may, under certain circumstances, be required to be
"independent," as such term is defined in the NASDAQ Marketplace Rules and applicable SEC regulations. Depending upon the current needs of the Board of Directors,
certain factors may be weighed more or less heavily. In considering candidates for the Board of Directors, the directors evaluate the entirety of each candidate's credentials
and do not have any specific minimum qualifications that must be met.
Security holders wishing to submit the name of a person as a potential nominee to the Board of Directors must send the name, address, and a brief (no more than 500 words)
biographical description of such potential nominee to the Nominating Committee at the following address: Nominating Committee of the Board of Directors, c/o China XD
Plastics Company Limited, 500 Fifth Ave Suite 960, New York, NY 10110. Potential director nominees will be evaluated by personal interview, such interview to be conducted
by one or more members of the Nominating Committee, and/or any other method the Nominating Committee deems appropriate, which may, but need not, include a
questionnaire. The Nominating Committee may solicit or receive information concerning potential nominees from any source it deems appropriate. The Nominating Committee
need not engage in an evaluation process unless (i) there is a vacancy on the Board of Directors, (ii) a director is not standing for re-election, or (iii) the Nominating Committee
does not intend to recommend the nomination of a sitting director for re-election. A potential director nominee recommended by a security holder will not be evaluated any
differently than any other potential nominee. Although it has not done so in the past, the Nominating Committee may retain search firms to assist in identifying suitable
director candidates.
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Compensation Committee
The Compensation Committee was established on May 26, 2009. The members of the Compensation Committee during 2013 were Lawrence Leighton, Feng Li, Homer Sun and
Linyuan Zhai. Mr. Li served as the Chairman of the Compensation Committee.
Each of these members were or are considered "independent" under the current independence standards of NASDAQ Marketplace Rule 4200(a)(15) and meet the criteria for
independence set forth in Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, as amended, as determined by the Board of Directors. The Compensation Committee
operates under a written charter. The Compensation Committee Charter can be found on our website at www.chinaxd.net and can be made available in print free of charge to
any shareholder who requests it.
The Compensation Committee discharges the Board of Directors' responsibilities relating to compensation of the Company's executive officers and administers our 2009 Stock
Incentive Plan. The Committee has overall responsibility for approving and evaluating the executive officer compensation plans, policies and programs of the Company. The
Compensation Committee held one meeting during 2014.
Code of Business Conduct
We have adopted a code of business conduct that applies to our directors, officers and employees. A written copy of the code can be found on our website at
www.chinaxd.net and can be made available in print to any shareholder upon request at no charge by writing to our Secretary, c/o China XD Plastics Company Limited, 500
Fifth Ave Suite 960, New York, NY 10110. Our code of business conduct is intended to be a codification of the business and ethical principles which guide us, and to deter
wrongdoing, to promote honest and ethical conduct, to avoid conflicts of interest, and to foster full, fair, accurate, timely and understandable disclosures, compliance with
applicable governmental laws, rules and regulations, the prompt internal reporting of violations and accountability for adherence to the code.
Executive Sessions
Under NASDAQ Marketplace Rule 5605(b)(2), our independent directors are required to hold regular executive sessions. The chairperson of the executive session will rotate at
each session so that each non-management director shall have an opportunity to serve as chairperson. Interested parties may communicate directly with the presiding director
of the executive session or with the non-management directors as a group, by directing such written communication to Mr. Lawrence Leighton at c/o China XD Plastics
Company Limited, 500 Fifth Ave Suite 960, New York, NY 10110.
Process for Sending Communications to the Board of Directors
The Board of Directors maintains a process for stockholders to communicate with the Board of Directors. Stockholders wishing to communicate with the Board of Directors or
any individual director may send an email through our website at www.chinaxd.net or mail a communication addressed to the Secretary of the Company, c/o China XD Plastics
Company Limited, 500 Fifth Ave Suite 960, New York, NY 10110. Any such communication must state the number of shares of common stock beneficially owned by the
stockholder making the communication. All of such communications will be forwarded to the full Board of Directors or to any individual director or directors to whom
communication is directed unless the communication is clearly of a marketing nature or is inappropriate, in which case we have the authority to discard the communication or
take appropriate legal action regarding the communication.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the executive officers and directors of the Company and every person who is
directly or indirectly the beneficial owner of more than 10% of any class of security of the Company to file reports of ownership and changes in ownership with the Securities
and Exchange Commission. Such persons also are required to furnish our company with copies of all Section 16(a) forms they file. Based solely on our review of copies of
such forms received by us, we believe that during the fiscal year 2014, all of the executive officers and directors of the Company and every person who is directly or indirectly
the beneficial owner of more than 10% of any class of security of the Company complied with the filing requirements of Section 16(a) of the Exchange Act.
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ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The following is a discussion and analysis of our named executive officer compensation program for the year ended December 31, 2014 detailing what we pay to our named
executive officers and how our compensation objectives and policies help achieve our business objectives.
Overview of Compensation Program
Our Compensation Committee has responsibility for establishing, implementing and monitoring adherence to our compensation philosophy and objectives. Our Compensation
Committee is responsible for ensuring that the total compensation paid to our executive officers is fair, reasonable and competitive. Our compensation decisions with respect to
executive officer salaries, annual incentives and long-term incentive opportunities are influenced by (a) the officer's level of responsibility and function; (b) our overall financial
performance and, in some cases, the officer's business unit; and (c) our assessment of the competitive marketplace, including other peer companies.
Compensation Philosophy and Objectives
All of our compensation programs, including our executive compensation programs, are designed to attract and retain key employees in the highly competitive modified plastic
marketplace in China. Our executive compensation programs are also designed to motivate our executives to achieve and reward them for superior performance in attaining
corporate and individual objectives that create stockholder value. Different programs, including both cash and stock-based compensation, are geared towards short-term and
long-term performance, respectively, with the goal of aligning employee interests with stockholder interests and increasing stockholder value over the long term. Executive
compensation programs impact all employees by setting general levels of compensation and creating an environment of goals, reward and expectations. Finally, we endeavor to
ensure that our compensation programs are viewed as fundamentally fair to our stockholders.
Compensation Programs and Process
Elements of Compensation
Elements of compensation for our named executive officers include base salary, non-equity incentive compensation, equity incentive awards, pension plan, health, disability
and life insurance and certain other perquisites. We use salary as the base amount necessary to match our competitors for executive talent. We utilize cash incentive payments
to reward performance achievements over the course of a one-year horizon and we use equity incentive awards to reward long-term performance, with excellent corporate
performance and extended tenure producing potentially significant value for our named executive officers. We believe that this combination of programs provides an
appropriate mix of fixed and variable pay, balances short-term operational performance with long-term stockholder value, and encourages executive recruitment and retention.
Compensation Process
Our Compensation Committee is responsible for establishing, implementing and monitoring the compensation of our named executive officers. When making compensation
decisions, our Compensation Committee analyzes the dollar amount of each component of the executive officer's compensation, including current cash compensation (base
salary and non-equity plan incentive compensation), long-term equity incentive program compensation, and any other compensation.
Except as set forth below, our Compensation Committee has not adopted any formal or informal policies or guidelines for allocating compensation between long-term and
currently paid out compensation, or between cash and non-cash compensation. However, our philosophy is to pay our executive officers competitive levels of compensation
that best reflect their individual responsibilities and contributions to us.
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We choose to pay each element of compensation in order to attract and retain necessary talent, reward annual performance (on an individual, business unit and enterprise-wide
basis) and provide incentives for achieving long-term strategic goals as well as short-term objectives. The amount of each element of compensation is determined by our
Compensation Committee in consultation with our CEO with respect to the other named executive officers, and, with respect to the CEO, by our Compensation Committee.
Compensation decisions for all named executive officers take into account the following factors:
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Performance against corporate and individual objectives for the previous year;
Value of skills and capabilities to support our long-term performance;
Performance of general management responsibilities; and
Contribution as a member of our executive management team.
Base Salary
Base salary levels for our named executive officers are intended to compensate executives competitively within the modified plastic marketplace in China. Base salary rewards
core competence in an executive role relative to an officer's skills, experience and contributions to our business. Base salaries are determined on an individual basis by
evaluating each executive officer's scope of responsibility, past performance, and data on prevailing compensation levels in an appropriate market comparison group.
2009 Stock Option / Stock Issuance Plan
On May 26, 2009, we adopted our 2009 Stock Option / Stock Issuance Plan, supplemented by "Stock Award Grant Supplemental Provisions" in July 2013 (the "Plan"), under
which 7,800,000 shares of common stock are reserved for issuance. The Plan provides for the grant of the following types of incentive awards: (i) stock options and (ii) stock
issuances. Each of these is referred to individually as an "Award." Those who are eligible for Awards under the Plan include employees, directors and independent contractors
who provide services to the Company and/or its affiliates.
Number of Shares of Common Stock Available Under the Plan
The Board of Directors has reserved 7,800,000 shares of the common stock for issuance under the Plan. As of December 31, 2014, 3,543,139 stock awards and 148,500 stock
options have been granted under the Plan. Currently, approximately 105 employees and directors are eligible to participate in the Plan.
If the Company declares a dividend or other distribution or engages in a recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, or exchange of shares or other securities of the Company, or other change in the corporate structure of the Company affecting the Company's
common stock, the Board of Directors will adjust the number and class of shares that may be delivered under the Plan, the number, class, and price of shares covered by each
outstanding Award, and the numerical per-person limits on Awards.
Shares of common stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent (1) the options expire or terminate for any
reason prior to exercise in full or (2) the options are cancelled in accordance with the Plan. Unvested shares issued under the Plan and subsequently repurchased by the
Company, at a price per share not greater than the option exercise or direct issue price paid per share, pursuant to the Company's repurchase rights under the Plan shall be
added back to the number of shares of common stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent
option grants or direct stock issuances under the Plan.
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Administration of the Plan
The Board of Directors administers the Plan. However, any or all administrative functions otherwise exercisable by the Board of Directors may be delegated to a committee of
the Board of Directors (the "Committee"). Members of the Committee serve for such period of time as the Board of Directors may determine and shall be subject to removal by
the Board of Directors at any time. The Board of Directors may also at any time terminate the functions of the Committee and reassume all powers and authority previously
delegated to the Committee. Subject to the terms of the Plan, the Board of Directors has the sole discretion to select the employees, independent contractors, and directors
who will receive Awards, determine the terms and conditions of Awards, and to interpret the provisions of the Plan and outstanding Awards.
Options
The Board of Directors is able to grant nonqualified stock options and incentive stock options under the Plan. The Board of Directors determines the number of shares subject
to each option. Incentive options may only be granted to employees. The aggregate fair market value of the shares of common stock for which one or more options granted to
any employee under the Plan may for the first time become exercisable as incentive options during one calendar year may not exceed $100,000.
The Board of Directors determines the exercise price of options granted under the Plan, provided the exercise price (i) of incentive stock options must be at least equal to the
fair market value of the common stock on the date of grant and (ii) of non-statutory stock options must be at least equal to 85% of the fair market value of the common stock on
the date of grant. In addition, the exercise price of an incentive stock option granted to any participant who owns more than 10% of the total voting power of all classes of the
Company's outstanding stock must be at least 110% of the fair market value of the common stock on the grant date.
The term of an option may not exceed ten years, except incentive stock options granted to an employee who is a 10% stockholder may not exceed five years.
Unless otherwise determined by the Board of Directors, after a termination of service with the Company, a participant will be able to exercise the vested portion of his or her
option for (i) 90 days following his or her termination (or within such other period of time as may be specified by the Company, but in any event no later than the date of
expiration of the option term) for reasons other than death, disability or misconduct, (ii) one year following his or her termination (or within such other period of time as may be
specified by the Company, but in any event no later than the date of expiration of the option term) due to death or disability. Unless otherwise determined by the Board of
Directors, if a participant ceases to be employed by the Company on the account of (i) termination by the Company for defined misconduct, any option held by the participant
shall (A) terminate on the date on which the participant ceases to be employed by, or provide service to, the Company, or the date on which such option would otherwise
expire, if earlier.
The administrator of the Plan shall have the discretion to grant options that are exercisable for unvested shares. Should the optionee's service cease while the shares issued
upon the early exercise of the optionee's option are still unvested, the Company shall have the right to repurchase any or all of the unvested shares in accordance with the
Plan.
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Stock Issuance
The Board of Directors may transfer shares of Company stock to a Plan participant pursuant to a stock issuance, either through the immediate purchase of such shares or as a
bonus for services rendered the Company. Stock issuances will vest in accordance with the terms and conditions established by the Board of Directors in its sole discretion.
The Board of Directors will determine the number of shares granted pursuant to an Award of stock. Vesting conditions on stock issuances granted to non-officer employees
may not be more restrictive than 20% per year vesting, with the initial vesting to occur no later than one year after the shares are issued.
The Board of Directors shall fix the purchase price per share of stock issuance. Shares issued to 10% stockholders must not have a purchase price per share less than 100% of
the fair market value per share of common stock on the date of issuance. Shares issued to other Plan participants shall not be less than 85% of the fair market value per share of
common stock on the date of issuance.
The participant shall have full stockholder rights with respect to any shares of common stock issued to the participant under the Plan, whether or not the participant's interest
in those shares is vested. Accordingly, the participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares.
Should the participant cease to remain in service while holding one or more unvested shares issued under the Plan or should the performance objectives not be attained with
respect to one or more such unvested shares, then the Company has the right to repurchase the unvested shares at the lower of (a) the purchase price paid per share or by the
participants (b) the fair market value per share on the date participant's service ceased or the performance objective was not attained. The terms upon which such repurchase
right shall be exercisable shall be established by the Board of Directors and set forth in the document evidencing such repurchase right.
The Board of Directors may in its discretion waive the surrender and cancellation of one or more unvested shares (or other assets attributable thereto) which would otherwise
occur upon the non-completion of the vesting schedule applicable to those shares. Such waiver shall result in the immediate vesting of the participant's interest in the shares of
common stock as to which the waiver applies. Such waiver may be effectuated at any time, whether before or after the Participant's service ceases or he or she attains the
applicable performance objectives.
Transferability of Awards
Except as described below, Stock Option Awards granted under the Plan are generally not transferable, and all rights with respect to a Stock Option Award granted to a
participant generally will be available during a participant's lifetime only to the participant. A participant may not transfer those rights except by will or by the laws of descent
and distribution. Participant may transfer non-statutory stock options to family members, or one or more trusts or other entities for the benefit of or owned by family members
or to a transferee's former spouse, consistent with applicable securities laws, provided that the participant receives no consideration for the transfer of an option and the
transferred option shall continue to be subject to the same terms and conditions as were applicable to the option immediately before the transfer.
The Company has the right of first refusal with respect to any proposed disposition by an optionee or a participant of any shares of common stock issued under the
Plan. Such right of first refusal shall be exercisable and lapse in accordance with the terms established by the Board of Directors and set forth in the document evidencing such
right.
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Change of Control
In the event of a change of control, each outstanding option which is at the time outstanding will automatically become fully vested and exercisable and be released from any
restrictions on transfer and repurchase or forfeiture rights, and the restrictions and conditions on all outstanding stock issuances will lapse immediately prior to the specified
effective date of such change of control, for all of the shares at the time represented by such option or stock issuance. An outstanding option shall not fully vest and be
exercisable and released from such limitations and a stock issuance will not be released from such restrictions and restrictions on stock issuances if and to the extent: (i) such
option or stock issuance is, in connection with the change in control, either to be assumed by the successor corporation or parent thereof or to be replaced with a comparable
option, stock appreciation right or stock issuance with respect to shares of the capital stock of the successor corporation or parent thereof, or (ii) such option or stock issuance
is to be replaced with a cash incentive program of the successor corporation or parent thereof which preserves the compensation element of such option or stock issuance
existing at the time of the change in control and provides for subsequent payout in accordance with the same vesting schedule applicable to such option or stock issuance.
The determination of option or stock issuance comparability under clause (i) above shall be made by the Board of Directors.
Effective upon the consummation of the change of control, all outstanding options or stock issuances under the Plan will terminate and cease to remain outstanding, except to
the extent assumed by the successor company or its parent.
Amendment and Termination of the Plan
The Board of Directors has the authority to amend, alter, suspend or terminate the Plan, except that shareholder approval will be required for any amendment to the Plan to the
extent required by any applicable laws. No amendment, alteration, suspension or termination of the Plan will impair the rights of any participant, unless mutually agreed
otherwise between the participant and the Board of Directors and which agreement must be in writing and signed by the participant and the Company. The Plan will terminate
on May 26, 2019, unless the Board of Directors terminates it earlier or it is extended by the Company with the approval of the shareholders.
Although there may be adverse accounting consequences to doing so, options may be granted and shares may be issued under the Plan which are in each instance in excess
of the number of shares of common stock then available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow
until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of common stock available for issuance under the Plan. If such
stockholder approval is not obtained within twelve months after the date the first such excess grants or issuances are made, then (1) any unexercised options granted on the
basis of such excess shares shall terminate and (2) the Company shall promptly refund to the optionees and the participants the exercise or purchase price paid for any excess
shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such
shares shall thereupon be automatically cancelled.
78
In 2014, pursuant to the Company's 2010 Executive Compensation Program which sets forth cash and stock compensation of the Company's executives and directors, including
the Company's named executive officers, the executive officers are entitled to receive compensation as follows:
Compensation for Mr. Jie Han, the Company's Chief Executive Officer: For fiscal year 2014, Mr. Han is entitled to a base salary of $27,592 (RMB 170,000) per month from
January to March and $41,550 (RMB 256,000) per month from April to December. In addition, Mr. Han may receive a discretionary bonus as determined by the Compensation
Committee of the Board of Directors at the end of the fiscal year.
Compensation for Mr. Taylor Zhang, the Company's Chief Financial Officer : For fiscal year 2014, Mr. Zhang is entitled to a monthly base salary of $15,620. On August 7,
2010, Mr. Zhang received options to purchase up to 100,000 shares of the Company's common stock at the exercise price of $8.01 per shares and 14,000 non-vested shares
under our 2009 Stock Option / Stock Issuance Plan. One-third of the stock options shall vest on each anniversary of the grant date over a three-year period. The non-vested
shares will vest on the third anniversary of the grant date. Mr. Zhang didn't exercise the options, which expired in 2013. On August 7, 2013 and on August 7, 2014, Mr. Zhang
received 14,000 and 17,220 non-vested shares, respectively, under our 2009 Stock Option/Stock Issuance Plan. The restricted shares shall vest on the third anniversary of the
grant date. In addition, Mr. Zhang may receive a discretionary bonus as determined by the Compensation Committee of the Board of Directors at the end of the fiscal year.
Compensation for Mr. Qingwei Ma, the Company's Chief Operating Officer: For fiscal year 2014, Mr. Ma is entitled to a base salary of $24,184 (RMB 149,000) per month from
January to March and $16,068 (RMB 99,000) per month from April to December. On August 7, 2010, Mr. Ma was granted options to purchase up to 75,000 shares of the
Company's common stock at the exercise price of $8.01 per share and 12,000 nonvested shares under our 2009 Stock Option / Stock Issuance Plan. One-third of the stock
options shall vest on each anniversary of the grant date over a three-year period. The non-vested shares will vest on the third anniversary of the grant date. Mr. Ma didn't
exercise the options, which expired in 2013. On August 7, 2013 and on August 7, 2014, Mr. Ma received 14,000 and 17,220 non-vested shares, respectively, under our 2009
Stock Option/Stock Issuance Plan. The restricted shares shall vest on the third anniversary of the grant date. In addition, Mr. Ma may receive a discretionary bonus as
determined by the Compensation Committee of the Board of Directors at the end of the fiscal year.
Compensation for Mr. Junjie Ma, the Company's Chief Technology Officer : For fiscal year 2014, Mr. Ma is entitled to a base salary of $6,914 (RMB 42,600) per month from
January to March and $4,609 (RMB 28,400) per month from April to December. On August 7, 2010, Mr. Ma was granted options to purchase up to 25,000 shares of the
Company's common stock at the exercise price of $8.01 per share and 8,000 nonvested shares under our 2009 Stock Option / Stock Issuance Plan. One-third of the stock options
shall vest on each anniversary of the grant date over a three-year period. The non-vested shares will vest on the third anniversary of the grant date. Mr. Ma didn't exercise the
options, which expired in 2013. On August 7, 2013 and on August 7, 2014, Mr. Ma received 13,530 and 16,060 non-vested shares, respectively, under our 2009 Stock
Option/Stock Issuance Plan. The restricted shares shall vest on the third anniversary of the grant date. In addition, Mr. Ma may receive a discretionary bonus as determined by
the Compensation Committee of the Board of Directors at the end of the fiscal year.
79
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this filing on Form 10-K with management. Based on
the Compensation Committee's review of and the discussions with management with respect to the Compensation Discussion and Analysis, the Compensation Committee has
recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2014 for filing with the SEC.
Respectfully submitted,
COMPENSATION COMMITTEE
Lawrence W. Leighton
Feng Li
Linyuan Zhai
Homer Sun
80
The following table is a summary of the compensation paid to our executive officers for the two years ended December 31, 2014, 2013 and 2012.
SUMMARY COMPENSATION TABLE
Name and Principal
Position
Year
Salary ($)
Bonus ($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compen-
sation
($)
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compens-
ation
($)
Total
($)
Jie Han,
CEO
Qingwei Ma,
COO
Taylor Zhang,
CFO
Junjie Ma,
CTO
2014
2013
2012
2014
2013
2012
2014
2013
2012
2014
2013
2012
456,729
282,762
485,551
259,284
198,990
204,887
211,414
143,316
138,544
117,334
138,711
124,651
Kenan Gong
Secretary to the Board
of Directors
2014
79,645
2013
2012
70,630
70,116
498,604
-
-
166,867
-
-
290,203
44,088
-
41,137
-
31,162
34,184
-
15,581
-
-
-
73,076
67,536
42,792
73,076
64,920
47,180
62,787
50,664
30,488
29,997
16,368
4,704
-
-
-
-
11,149
56,045 (1)
-
14,865
74,726 (1)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
955,333
282,762
485,551
514,317
277,675
303,724
589,783
267,189
260,450
240,698
197,161
252,833
164,210
105,190
120,977
(1) Stock and option awards represent the amount of stock compensation expense recognized in 2014, 2013 and 2012 in accordance with FASB ASC 718.
The following is a summary of all options, unvested stock and equity incentive plans for our executive officers for the year ended December 31, 2014.
81
GRANTS OF PLAN-BASED AWARDS
Grant Date
(Grant
Approval
Date) (1)
August 7,
2014
August 7,
2014
August 7,
2014
August 7,
2014
Name
Jie Han, CEO
Taylor Zhang, CFO
Qingwei Ma, COO
Junjie Ma, CTO
Kenan Gong Sereatry to
the Board of Directors
Estimated Future Payouts
Under Non-
Equity Incentive Plan Awards
Target
($)
Threshold
($)
Maximum
($)
Estimated Future Payouts
Under Equity Incentive Plan (2)
Target
(#)
Threshold
(#)
Maximum
(#)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
All Other
Stocks
Awards:
Number of
Shares of
Stock or
Units (#)
-
All Other
Option
Awards:
Number of
Securities
Underlying
Options (#)
-
17,220(3)
17,220(3)
16,060(3)
9,840(3)
-
-
-
-
Grant
Date Fair
Value of
Stock and
Option
Awards
Option
Awards
Exercise or
Base Price of
Option
Awards
($/Sh)
-
-
-
-
-
88,166
88,166
82,227
50,381
(1)
(2)
(3)
The "Grant Approval Date" is the date on which our Board of Directors approved the grant.
The Company's equity incentive plan does not provide for thresholds or maximums; the amounts listed represent the actual awards to the named executive officers for
fiscal 2014.
These awards represent restricted stock units granted to the individual pursuant to the Company's 2009 Stock Option / Stock Issuance Plan, as amended, for services
rendered to the Company. The Shares shall vest on the date that is three years after August 7, 2014, the date on which our Board of Directors approved such grant. No
purchase price was paid for these awards.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Number of
securities
underlying
unexercised
options (#)
exercisable
Number of
securities
underlying
unexercised
options (#)
unexercisable
Option Awards
Number of
securities
underlying
unexercised
options (#)
unexercisable
-
-
-
-
-
-
-
-
-
-
Option exercise
price ($)
-
-
-
-
-
-
-
-
-
-
Option
expiration date
-
-
-
-
-
Stock Awards
Number of
shares or
units of stock
that have not
vested (#)
Market value
of stock or
units of stock
that have not
vested ($)
-
59,220
59,220
51,590
25,840
-
272,126
272,126
237,697
120,221
Name
Jie Han, CEO
Taylor Zhang, CFO
Qingwei Ma, COO
Junjie Ma, CTO
Kenan Gong, Secretary to the
Board of Directors
82
Employment Agreements
All of our officers have entered into employment agreements with the Company.
On December 31, 2011, Jie Han and China XD's subsidiary, Xinda Group, entered into an employment agreement and an employment memorandum, pursuant to which Mr. Han
received a monthly salary of RMB170,000(approximately US$27,592) from January to March, 2014. Since April 2014, Jie Han received a monthly salary of RMB 256,000
(approximately US$41,550) and awards of shares of China XD's common stock and options to purchase shares of China XD's common stock, as determined by the
Compensation Committee of the Board of Directors. Also, Mr. Han will receive an annual bonus of RMB 3,072,000 (approximately US$498,604), which amount is subject to the
Company's achievement of the corresponding year's performance goals. The calculation of the annual performance-based salary is based on a method set forth in Xinda
Group's compensation management policy. The term of employment is five years beginning on January 1, 2012. The employer and employee may reach consent and terminate
Mr. Han's employment with Xinda Group, and Xinda Group may have the right to unilaterally terminate Mr. Han's employment prior to the expiration of the employment term
under certain circumstances, with a one-month prior notice.
On December 31, 2011, Taylor Zhang and Xinda Group entered into an employment agreement and an employment memorandum, pursuant to which Mr. Zhang received a
monthly salary of US$15,620 and awards of shares of China XD's common stock and options to purchase shares of China XD's common stock, as determined by the
Compensation Committee of the Board of Directors. In addition, Mr. Zhang received an annual performance-based salary of USD 23,978 in August 2014 and will receive an
annual bonus of US$290,203, which amount is subject to the Company's achievement of the corresponding year's performance goals. The calculation of the annual
performance-based salary is based on a method set forth in Xinda Group's compensation management policy. The term of employment is five years beginning on January 1,
2012. The employer and employee may reach consent to terminate Mr. Zhang's employment with Xinda Group at any time and Xinda Group has the right to unilaterally
terminate Mr. Zhang's employment prior to the expiration of the employment term under certain circumstances, with a one-month prior notice. The employment agreement
entered into between Mr. Zhang and Favor Sea (US) Inc., a China XD's subsidiary, on May 1, 2009 was terminated by a termination agreement executed by and among Mr.
Zhang, Favor Sea (US) Inc. and Xinda Group on December 31, 2011.
On December 31, 2011, Qingwei Ma and Xinda Group entered into an employment agreement and an employment memorandum, pursuant to which Mr. Ma received a monthly
salary of RMB149,000 (approximately US$24,184 from January to March, 2014. Since April, 2014, Qingwei Ma received a monthly RMB99,000 (approximately US$16,068), and
awards of shares of China XD's common stock and options to purchase shares of China XD's common stock, as determined by the Compensation Committee of the Board of
Directors. Also, Mr. Ma will receive an annual performance-based salary of RMB259,500 (approximately US$42,118) and an annual bonus of RMB1,028,100 (approximately
US$166,867), which amounts are subject to the Company's achievement of the corresponding year's performance goals. The calculation of the annual performance-based
salary is based on a method set forth in the Xinda Group's compensation management policy. The term of employment is five years beginning on January 1, 2012. The
employer and employee may reach consent to terminate Mr. Ma's employment with Xinda Group at any time and Xinda Group has the right to unilaterally terminate Mr. Ma's
employment prior to the expiration of the employment term under certain circumstances, with a one-month prior notice. That employment agreement entered into between Mr.
Ma and Harbin Xinda on January 1, 2010 was terminated by a termination agreement executed by and among Mr. Ma, Harbin Xinda and Xinda Group on December 31, 2011.
On December 31, 2011, Junjie Ma and Xinda Group entered into an employment agreement and an employment memorandum, pursuant to which Mr. Ma received a monthly
salary of RMB64,000 (approximately US$10,388) from January to March, 2014. Since April, 2014, Junjie Ma received a monthly RMB42,000 (approximately US$6,817), and awards
of shares of China XD's common stock and options to purchase shares of China XD's common stock, as determined by the Compensation Committee of the Board of
Directors. In addition, Mr. Ma will receive an annual performance-based salary of RMB152,917 (approximately US$24,819) and annual bonus of RMB253,455 (approximately
US$41,137), which amounts are subject to the Company's achievement of the corresponding year's performance goals. The calculation of the annual performance-based salary
is based on a method set forth in the Xinda Group's compensation management policy. The term of employment is five years beginning on January 1, 2012. The employer and
employee may reach consent to terminate Mr. Ma's employment with Xinda Group at any time and Xinda Group has the right to unilaterally terminate Mr. Ma's employment
prior to the expiration of the employment term under certain circumstances, with a one-month prior notice.
On December 31, 2011, Kenan Gong and Xinda Group entered into an employment agreement and an employment memorandum, pursuant to which Mr. Gong received a
monthly salary of RMB42,600 (approximately US$6,194) from January to March, 2014. Since April, 2014, Kenan Gong received a monthly RMB28,400 (approximately US$4,609),
and awards of shares of China XD's common stock and options to purchase shares of China XD's common stock, as determined by the Compensation Committee of the Board
of Directors. In addition, Mr. Gong will receive an annual performance-based salary of RMB107,307 (approximately US$17,417) and annual bonus of RMB210,614
(approximately US$34,183) which amounts are subject to the Company's achievement of the corresponding year's performance goals. The calculation of the annual
performance-based salary is based on a method set forth in the Xinda Group's compensation management policy. The term of employment is five years beginning on January
1, 2012. The employer and employee may reach consent to terminate Mr. Gong's employment with Xinda Group at any time and Xinda Group has the right to unilaterally
terminate Mr. Gong's employment prior to the expiration of the employment term under certain circumstances, with a one-month prior notice.
83
Potential Payments Upon Termination or Change in Control
We may be required to make severance payments upon termination of employment pursuant to the laws of the PRC and other applicable jurisdictions. Under the PRC Labor
Contract Law, if an employment is terminated prior to the expiration of the employment term, unless the termination resulted from such employee's certain fault, the employer
shall pay a severance compensation for termination at an amount that is usually the average monthly salary of the 12-month period prior to termination multiplied by the
number of years for which the terminated employee worked at the Company, subject to certain adjustment and restrictions if such employee's base salary is sufficiently higher
than that of the average in the municipal region. In addition, in the event that the employer terminates the employment in violation of the PRC Labor Contract Law, the
applicable severance compensation for termination should be two times the aforementioned amount. Furthermore, certain non-compete payment obligation may also apply
upon termination of an employment, which payment amount pursuant to the Company's standard non-compete agreement, if so entered into with the said employee, is one
third the monthly base salary prior to the termination of such employee per month for 24 months following the termination.
Director Compensation
On December 30, 2009, our Board of Directors approved 2010 Executive Compensation Program, which sets forth cash and stock compensation of the Company's executives
and directors. Under the 2010 Executive Compensation Program, the Company's employee directors receive no additional compensation for their services to the Company as
directors, including the Chairman of the Board of Directors. In addition, for fiscal year 2014, all non-employee directors who reside in China received an annual cash
compensation of RMB 60,000 (approximately $9,738) after the first 18 months of continuous directorship and RMB36,000 (approximately $5,843) during the initial 18 months
directorship and Lawrence Leighton, the non-employee director who resides outside of China, received annual cash compensation of $60,000. In addition, each non-employee
director other than the two directors appointed by the Series D Preferred Stockholder is entitled to an annual stock award equal to a number of shares of the Company's
common stock valued at $50,000 for those who reside outside of China, RMB50,000 (approximately $8,115) for Mr. Zhai , who resides in China, based on the market value of the
common stock at the time of the stock award and such stock award shall vest six months after the grant date. Mr. Li will be eligible for an annual stock award equal to a number
of shares of the Company's common stock valued at RMB50,000 (approximately $8,115) after 18 months of continuous directorship. During the year ended December 31, 2014,
the Company issued this stock award of 9,488 for the service rendered during the year ended December 31, 2013. The Company also accrued and recorded the stock award for
the service rendered during the year ended December 31, 2014 as share base compensation expense. The Company has repurchase rights on the unvested shares of the stock
award.
The following is a summary of the compensation paid to our non-employee directors for the year ended December 31, 2014. Our employee directors do not receive
compensation for their services to the Company as directors.
DIRECTOR COMPENSATION
Name (1) (2)
Lawrence Leighton
Feng Li
Linyuan Zhai
Fees earned
or paid in
cash ($)
Stock awards
($)
Option awards
($)
60,000
8,198
9,738
50,000
-
8,115
-
-
-
Non-equity
incentive plan
compensation ($)
Nonqualified
deferred
compensation
earnings ($)
All other
compensation ($)
Total ($)
-
-
-
-
-
-
-
-
-
110,000
8,198
17,853
(1)
(2)
Jie Han, Taylor Zhang and Qingwei Ma are not included in this table as they are our executive officers and thus received no compensation for their services as a
director. For disclosure related to the compensation of Jie Han, Taylor Zhang and Qingwei Ma as an executive officer, see the "Summary Compensation Table" above.
Homer Sun and Jun Xu are not included in this table as they receive no compensation for serving on our Board.
84
Service Agreements
On November 14, 2010, the Company entered into a Service Agreement with Lawrence W. Leighton. Pursuant to the terms of the Service Agreement, the Company shall (i) pay
Mr. Leighton a fee of $5,000 per month ($60,000 annually); and (ii) award to Mr. Leighton under the Company's 2009 Equity Incentive Plan and pursuant to the terms of a
restricted stock award agreement $50,000 in restricted shares of common stock of the Company on an annual basis (the "Stock"), which shall vest in accordance with the terms
of the restricted stock award agreement. The Stock shall be valued at the average closing price for the ten trading days prior to November 4, 2010, the date of the execution of
the Service Agreement, and prior to each anniversary thereof. The Stock shall vest after six months of each year subject to Mr. Leighton's continued directorship with the
Company, pursuant to such vesting schedule set forth in the restricted stock award agreement.
On November 14, 2010, the Company entered into a Service Agreement with Linyuan Zhai. Pursuant to the terms of the Service Agreement, the Company shall (i) pay Mr. Zhai
a fee of RMB5,000 per month (RMB60,000 annually); and (ii) award to Mr. Zhai under the Company's 2009 Equity Incentive Plan and pursuant to the terms of a restricted stock
award agreement RMB50,000 in restricted shares of common stock of the Company on an annual basis (the "Stock"), which shall vest in accordance with the terms of the
restricted stock award agreement. The Stock shall be valued at the average closing price for the ten trading days prior to November 14, 2010, the date of the execution of the
Service Agreement, and prior to each anniversary thereof. The Stock shall vest after twelve months of each year subject to Mr. Zhai's continued directorship with the
Company, pursuant to such vesting schedule set forth in the restricted stock award agreement.
On November 14, 2012, the Company entered into a Service Agreement with Feng Li. Pursuant to the terms of the Service Agreement, the Company shall (i) pay Mr. Li a fee of
RMB3,000 per month (RMB36,000 annually) for 18 months, and then RMB5, 000 per month (RMB60,000 annually starting from May 14, 2014; and (ii) award to Mr. Li under the
Company's 2009 Equity Incentive Plan and pursuant to the terms of a restricted stock award agreement RMB50,000 in restricted shares of common stock of the Company on an
annual basis (the "Stock"), which shall vest in accordance with the terms of the restricted stock award agreement. The Stock shall be valued at the average closing price for the
ten trading days prior to May 14, 2014, the date of the execution of the Service Agreement, and prior to each anniversary thereof. The Stock shall vest after twelve months of
each year subject to Mr. Li's continued directorship with the Company, pursuant to such vesting schedule set forth in the restricted stock award agreement.
During fiscal year 2014, none of the members of our Compensation Committee was our current or former officer or employee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our Compensation Committee has had any relationship with us requiring disclosure under Item 404 of Regulation S-K under the Exchange Act. No member of our
Compensation Committee during 2014 was an officer of China XD or any of our subsidiaries.
None of our executive officers has served as a director or member of the compensation committee (or other committee serving an equivalent function) of any other organization
whose executive officer served as a member of our Board or Compensation Committee.
85
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance under Equity Compensation Plans
The Company adopted the 2009 Stock Option / Stock Issuance Plan (the "Plan") on May 26, 2009, which reserved 7,800,000 shares of common stock for issuance under the
Plan. The Plan allows the Company to issue awards of stock options and stock issuances to directors, officers, employees and consultants of the Company, which may be
subject to restrictions.
The following table provides certain information with respect to the Company's Plan in effect as of December 31, 2014.
Plan category
Number of
securities to be
issued upon
exercise of
outstanding options
and unvested shares
(a)
Weighted-average
exercise price of
outstanding options and
unvested options
(b)
Number of
securities
remaining available
for future issuance
under equity
compensation plan
(excluding
securities reflected
in column (a))
(c)
Equity compensation plan approved by security holders – 2009 Stock Option / Stock Issuance Plan
Total
647,288
647,288
-
-
3,857,861
3,857,861
(a) All securities are unvested shares.
(b) Shares issued to employees are subject to a three-year vesting schedule.
As of December 31, 2014, the number of securities remaining available for future issuance under equity compensation plans was 3,857,861 shares.
86
Security Ownership Of Certain Beneficial Owners and Management
The following table sets forth certain information, as of December 31, 2014, with respect to the beneficial ownership of the outstanding share capital of our Company by (i) any
holder of more than five percent (5%) of any class of our voting securities; (ii) each of our executive officers and directors; and (iii) our directors and executive officers as a
group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.
Name and Address
Jie Han
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 960, New York, New York 10110)
Jie Han
Qingwei Ma
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 960, New York, New York 10110)
Junjie Ma
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 960, New York, New York 10110)
Taylor Zhang
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 960, New York, New York 10110)
Lawrence W. Leighton
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 960, New York, New York 10110)
Linyuan Zhai
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 960, New York, New York 10110)
Feng Li
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 960, New York, New York 10110)
XD. Engineering Plastics Company Limited
(address: Palm Grove House, P.O. Box 438, Road Town,
Tortola, British Virgin Islands)
XD. Engineering Plastics Company Limited
MSPEA Modified Plastics Holding Limited
(address: c/o Walkers Corporate Services Limited, Walker House,
87 Mary Street, George Town, Grand Cayman KY1-9005, Cayman Islands)
Total Ownership of Common Stock by All Directors and Executive Officers as a
Group
* Less than 1%
Title of Class
Series B Preferred Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Series B Preferred Stock
Common Stock
Series D Preferred Stock
Amount and
Nature of
Beneficial
Ownership
(1)
Percent of Class
(2)
1,000,000(3)
32,510,131(3)
100.0%
66.1%
71,220
59,590
73,220
63,121
9,472
9,549
*
*
*
*
*
*
1,000,000(3)
24,382,598(3)
16,000,000(4)
32,756,956
100.0%
51.3%
100.0%
76.7%
(1) The amount of beneficial ownership includes the number of shares of common stock and/or Series B Preferred Stock and/or Series D Preferred Stock, plus, in the case of
each of the executive officer and directors and all officers and directors as a group, all shares issuable upon the exercise of the options held by them, which were
exercisable as of March 13, 2014 or within 60 days thereafter. Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended, and the rules promulgated by
the SEC, every person who has or shares the power to vote or to dispose of shares of common stock are deemed to be the "beneficial owner" of all the shares of common
stock over which any such sole or shared power exists.
(2) Based upon 49,151,796 shares of Common Stock outstanding, 1,000,000 shares of Series B Preferred Stock outstanding and 16,000,000 shares of Series D Preferred Stock
outstanding as of December 31, 2014
(3) Mr. Jie Han beneficially owns (i) 32,510,131 shares of Common Stock, representing 66.1% of our total outstanding Common Stock, which includes 8,127,533 shares of
Common Stock directly held by Mr. Jie Han and 24,382,598 shares of Common Stock beneficially owned by Mr. Jie Han through his sole ownership of XD Engineering
Plastics, and (ii) 1,000,000 shares of Series B Preferred Stock through his sole ownership of XD Engineering Plastics, representing 100% of our total outstanding Series B
Preferred Stock.
(4) MSPEA Modified Plastics Holding Limited owns 16,000,000 shares of Series D Preferred Stock, representing 100% of our total outstanding Series D Preferred Stock.
87
Changes in Control
There were no arrangements, known to the Company, including any pledge by any person of securities of the Company the operation of which may at a subsequent date result
in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
Other than as described below, there have been no other transactions since January 1, 2013, or any currently proposed transaction, or series of similar transactions, to which
the Company was or is to be a party, in which the amount involved exceeds $120,000 and in which any current or former director of officer of the Company, any 5% or greater
shareholder of the Company or any member of the immediate family of any such persons had, or will have, a direct or indirect material interest other than as disclosed below.
During the years presented, the Company entered into related party transactions with (i) Xinda High-Tech, an entity controlled by the wife of Mr. Han, the chief executive
officer and controlling stockholder of the Company, and (ii) Mr. Han's son.
The Company rents the following plant and office buildings in Harbin, Heilongjiang province from Xinda High-Tech and Mr. Han's son:
Premise Leased
Plant and office building
Office building
Office building
Office building
Office building
Area (M2)
Annual Rental Fee
(US$)
Period of Lease
20,250
250
3,394
3,394
23,894
665,440 Between May 1, 2012 and December 31, 2013
8,115 Between January 1, 2012 and December 31, 2013
110,173 Between May 1, 2012 and April 30, 2013
110,173 Between May 1, 2013 and December 31, 2013
775,613 Between January 1, 2014 and December 31, 2018
The Company rents the following facilities in Harbin, Heilongjiang province from Mr. Han's son:
Premise Leased
Facility
Facility
Area (M2)
Annual Rental Fee
(US$)
Period of Lease
3,134
200
16,231 Between January 1, 2014 and December 31, 2014
6,492 Between August 17, 2014 and August 16, 2015
Total rental expenses paid or payable to Xinda High-Tech amounted to US$775,189, US$785,449 and US$618,605 during the years ended December 31, 2014, 2013 and
2012, respectively. Total rental expenses paid or payable to Mr. Han's son amounted to US$16,271, US$16,266 and US$15,852 during the years ended
December 31, 2014, 2013 and 2012, respectively.
It is our policy that we will not enter into any related party transactions unless the Audit Committee or another independent body of the Board of Directors first reviews and
approves such transaction over US$120,000.
88
Director Independence
A majority of the directors serving on our Board of Directors must be independent directors under Rule 5605(b)(1) of the Marketplace Rules of The NASDAQ Stock Market
("NASDAQ"). The Board of Directors has a responsibility to make an affirmative determination whether a directors has a material relationships with the listed company through
the application of Rule 5605(a)(2) of the Marketplace Rules of NASDAQ, which provides the definition of an independent director.
The Board of Directors has determined that each of the directors, except Jie Han, Taylor Zhang and Qingwei Ma, has no relationship that, in the opinion of the Board of
Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and is an "independent director" as defined in the
Marketplace Rules of NASDAQ. In determining the independence of our directors, the Board of Directors has adopted independence standards that follow the criteria
specified by applicable laws and regulations of the SEC and the Marketplace Rules of NASDAQ. In determining the independence of our directors, the Board of Directors
considered all transactions in which the Company and any director had any interest, including those discussed under "Certain Relationships and Related Transactions" above.
Based on the application of the independence standards and the examination of all of the relevant facts and circumstances, the Board of Directors determined that none of the
following directors had any material relationship with the Company and, thus, are independent under Rule 5605(a)(2) of the Marketplace Rules of NASDAQ: Lawrence W.
Leighton, Feng Li, Linyuan Zhai, Homer Sun and Jun Xu. In accordance with the Marketplace Rules of NASDAQ, a majority of our Board of Directors is independent.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our independent accountants for the audits of our annual financial statements for the years ended December 31, 2014 and 2013 was KPMG. The following table shows the fees
paid and to be paid by us to KPMG.
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total paid to independent public audit firms
2014
2013
$
$
1,298,175 $
-
20,769
44,674
1,363,618 $
1,005,660
130,412
24,622
-
1,160,694
Audit Fees
Audit fees were paid for professional services rendered for the audit of our annual financial statements and the review of our quarterly financial statements and statutory
audits. We paid or accrued expenses of US$1,298,175 and US$1,005,660 related to KPMG's audits of our annual financial statements, reviews of our quarterly financial
statements and statutory audits for the years ended December 31, 2014 and 2013.
Audit-Related Fees
During the year ended December 31, 2013, we paid US$130,412 for audit-related services in connection with the bond issuance.
Tax Fees
During the years ended December 31, 2014 and 2013, we paid or accrued expense of US$20,769 and US$24,622, respectively for professional services rendered for tax
compliance work and transfer pricing services.
All Other Fees
Fees for all other services and related expenses were US$44,674 and nil, respectively, for the years ended December 31, 2014 and 2013, billed by KPMG for SOX compliance
services.
Pre-Approval Policies and Procedures
The Audit Committee appoints the independent auditor each year and approves the audit, audit related and permissible non-audit services and fees proposed by the
independent auditor. All services described under the caption services and fees of independent auditors were approved.
89
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following are filed with this Annual Report:
(1) The financial statements listed on the Financial Statements Table of Contents.
(2) Not applicable.
(3) The exhibits referred to below, which include the following management contracts or compensatory plans or arrangements:
●
●
●
●
●
●
●
●
●
●
●
●
Service Agreement effective as of November 14, 2010 between China XD Plastics Company Limited and Linyuan Zhai
Service Agreement effective as of November 14, 2010 between China XD Plastics Company Limited and Lawrence W. Leighton
Employment Agreement dated December 31, 2011 between Heilongjiang Xinda Enterprise Group Co., Ltd and Jie Han
Employment Memorandum dated December 31, 2011 between Heilongjiang Xinda Enterprise Group Co., Ltd and Jie Han
Employment Agreement dated December 31, 2011 between Heilongjiang Xinda Enterprise Group Co., Ltd and Qingwei Ma
Employment Memorandum dated December 31, 2011 between Heilongjiang Xinda Enterprise Group Co., Ltd and Qingwei Ma
Employment Agreement dated December 31, 2011 between Heilongjiang Xinda Enterprise Group Co., Ltd and Taylor Zhang
Employment Memorandum dated December 31, 2011 between Heilongjiang Xinda Enterprise Group Co., Ltd and Taylor Zhang
Employment Agreement dated December 31, 2011 between Heilongjiang Xinda Enterprise Group Co., Ltd and Junjie Ma
Employment Memorandum dated December 31, 2011 between Heilongjiang Xinda Enterprise Group Co., Ltd and Junjie Ma
Employment Memorandum dated December 31, 2011 between Heilongjiang Xinda Enterprise Group Co., Ltd and Kenan Gong
Service Agreement dated November 14, 2012 between China XD Plastics Company Limited and Feng Li
(b) The exhibits listed on the Exhibit Index are filed as part of this Annual Report.
(c) Not applicable.
90
Exhibit No.
3.1
Description of Exhibit
Articles of Incorporation
Incorporated by Reference Herein from the Following Filing
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.
EXHIBIT INDEX
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
Amendment to Articles of Incorporation
Filed as Appendix I of Company's definitive information statement on Schedule 14C, as filed
Bylaws
Form of Second Amendment to Articles of Incorporation of
the Company
Second Amended and Restated Bylaws
with the Securities and Exchange Commission on March 12, 2009.
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.
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the Securities
and Exchange Commission on August 15, 2011.
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the Securities
and Exchange Commission on November 8, 2011.
Forms of Certificates of Correction
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the Securities
Specimen Stock Certificate
Filed as an exhibit to the Company's registration statement on Form SB-2, as filed with the
Certificate of Designation of Series A Convertible Preferred
Stock
Certificate of Designation of Series B Preferred Stock
Filed as an exhibit to the Company's definitive information statement on Schedule 14C, as
filed with the Securities and Exchange Commission on March 12, 2009.
Filed as an exhibit to the Company's definitive information statement on Schedule 14C, as
Securities and Exchange Commission on May 12, 2006.
and Exchange Commission on August 15, 2011.
Form of Certificate of Designations, Preferences and Rights of
Series C Convertible Preferred Stock
Form of Series A Warrant to Purchase Common Stock
filed with the Securities and Exchange Commission on March 12, 2009.
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.
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.
Form of Series B Warrant to Purchase Common Stock
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the Securities
Form of indenture with respect to senior debt securities, to be
entered into between registrant and a trustee acceptable to the
registrant, if any
Form of indenture with respect to subordinated debt
securities, to be entered into between registrant and a trustee
acceptable to the registrant, if any
Form of Common Stock Purchase Warrant
and Exchange Commission on November 30, 2009.
Filed as an exhibit to the Company's registration statement on Form S-3, as amended, as filed
with the Securities and Exchange Commission on June 10, 2010.
Filed as an exhibit to the Company's registration statement on Form S-3, as amended, as filed
with the Securities and Exchange Commission on June 10, 2010.
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the Securities
and Exchange Commission on October 6, 2010.
Registration Rights Agreement entered into by and between
the Company and MSPEA Modified Plastics Holding Limited
on August 15, 2011
Form of Certificate of Designation, Preferences and Rights of
Series D Junior Convertible Preferred Stock
Form of Amended and Restated Certificate of Designation,
Preferences and Rights of Series D Junior Convertible
Preferred Stock
Purchase Agreement entered into by and among the Company,
Favor Sea (BVI), Xinda Holding (HK), Morgan Stanley & Co.
International PLC, UBS AG, Hong Kong Branch, the
HongKong and Shanghai Banking Corporation Limited and
China Minsheng Banking Corp., Ltd. Hong Kong Branch on
January 24, 2014
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the Securities
and Exchange Commission on August 15, 2011.
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the Securities
and Exchange Commission on August 15, 2011.
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the Securities
and Exchange Commission on January 28, 2014.
Filed as an exhibit to the Company's annual report on Form 10-K, as filed with the Securities
and Exchange Commission on March 26, 2014.
91
4.14
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
Indenture, dated February 4, 2014, constituting US$150 million
11.75% Guaranteed Senior Notes Due 2019
2009 Stock Option/Stock Issuance Plan
Filed as an exhibit to the Company's annual report on Form 10-K, as filed with the Securities
and Exchange Commission on March 26, 2014.
Filed as an appendix to the Company's definitive proxy statement on Schedule 14A, as filed
with the Securities and Exchange Commission on November 11, 2009.
Filed as an exhibit to the Company's quarterly report on Form 10-Q, as filed with the Securities
and Exchange Commission on August 9, 2010.
District Entry Agreement and Memorandum dated April 14, 2010
by and between Harbin Xinda Macromolecule Material Co., Ltd.
and Harbin Economic and Technological Development Zone
Administration
Letter Agreement, dated October 4, 2010, between China XD
Plastics Company Limited and Rodman & Renshaw, LLC
Securities Purchase Agreement dated October 4, 2010, among
China XD Plastics Company Limited and certain institutional
investors
Amendment Agreement, dated as of September 30, 2010, to the
Securities Purchase Agreement dated November 27, 2009 among
China XD Plastics Company Limited and the purchasers named
therein
Service Agreement effective as of October 4, 2010 between
China XD Plastics Company Limited and Robert Brisotti
Service Agreement dated November 14, 2010 between China XD
Plastics Company Limited and Linyuan Zhai *
Service Agreement dated November 14, 2010 between China XD
Plastics Company Limited and Lawrence Leighton
Stock Award Grant Supplemental Provisions
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the Securities
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the Securities
and Exchange Commission on October 6, 2010.
and Exchange Commission on October 6, 2010.
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the Securities
and Exchange Commission on October 6, 2010.
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the Securities
and Exchange Commission on October 7, 2010.
Filed as an exhibit to the Company's current report on Form 10-K, as filed with the Securities
Filed as an exhibit to the Company's current report on Form 10-K, as filed with the Securities
and Exchange Commission on March 26, 2012.
and Exchange Commission on March 26, 2012.
Filed as an exhibit to the Company's current report on Form 10-K, as filed with the Securities
Securities Purchase Agreement entered into by and between the
Company, MSPEA Modified Plastics Holding Limited, XD.
Engineering Plastics Company Limited, and Mr. Jie Han on
August 15, 2011
Stockholders' Agreement entered into by and between MSPEA
Modified Plastics Holding Limited, XD. Engineering Plastics
Company Limited, and Mr. Jie Han on August 15, 2011
Form of Pledge Agreement by and between MSPEA Modified
Plastics Holding Limited and XD. Engineering Plastics Company
Limited
and Exchange Commission on March 26, 2012.
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the Securities
and Exchange Commission on August 15, 2011.
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the Securities
and Exchange Commission on August 15, 2011.
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the Securities
and Exchange Commission on August 15, 2011.
92
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
14.1
16.1
16.2
16.3
21.1
23.1
31.1
31.2
32.1
101.
Form of Indemnification Agreement
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the Securities
Employment Agreement dated December 31, 2011 between
Heilongjiang Xinda Enterprise Group Co. Ltd and Jie Han *
Employment Memorandum dated December 31, 2011 between
Heilongjiang Xinda Enterprise Group Co. Ltd and Jie Han
Employment Agreement dated December 31, 2011 between
Heilongjiang Xinda Enterprise Group Co. Ltd and Qingwei Ma *
Employment Memorandum dated December 31, 2011 between
Heilongjiang Xinda Enterprise Group Co. Ltd and Qingwei Ma
Employment Agreement dated December 31, 2011 between
Heilongjiang Xinda Enterprise Group Co. Ltd and Taylor Zhang
*
Employment Memorandum dated December 31, 2011 between
Heilongjiang Xinda Enterprise Group Co. Ltd and Taylor Zhang
Employment Agreement dated December 31, 2011 between
Heilongjiang Xinda Enterprise Group Co. Ltd and Junjie Ma *
Employment Memorandum dated December 31, 2011 between
Heilongjiang Xinda Enterprise Group Co. Ltd and Junjie Ma
Employment Memorandum dated December 31, 2011 between
Heilongjiang Xinda Enterprise Group Co. Ltd and Kenan Gong *
Service Agreement dated November 14, 2012 between China XD
Plastics Company Limited and Feng Li *
Code of Business Conduct
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
Letter, dated August 15, 2011, from Moore Stephens Hong
Kong, to the Securities and Exchange Commission
Subsidiaries of Registrant
Consent of KPMG
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
Interactive Data Files
and Exchange Commission on August 15, 2011.
Filed as an exhibit to the Company's current report on Form 10-K, as filed with the Securities
and Exchange Commission on March 26, 2012.
Filed as an exhibit to the Company's current report on Form 10-K, as filed with the Securities
and Exchange Commission on March 26, 2012.
Filed as an exhibit to the Company's current report on Form 10-K, as filed with the Securities
and Exchange Commission on March 26, 2012.
Filed as an exhibit to the Company's current report on Form 10-K, as filed with the Securities
and Exchange Commission on March 26, 2012.
Filed as an exhibit to the Company's current report on Form 10-K, as filed with the Securities
and Exchange Commission on March 26, 2012.
Filed as an exhibit to the Company's current report on Form 10-K, as filed with the Securities
and Exchange Commission on March 26, 2012.
Filed as an exhibit to the Company's current report on Form 10-K, as filed with the Securities
and Exchange Commission on March 26, 2012.
Filed as an exhibit to the Company's current report on Form 10-K, as filed with the Securities
and Exchange Commission on March 26, 2012.
Filed herewith
Filed as an exhibit to the Company's current report on Form 10-K, as filed with the Securities
and Exchange Commission on March 25, 2013.
Filed as an exhibit to the Company's current report on Form 10-K, as filed with the Securities
and Exchange Commission on March 26, 2012.
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 November 6, 2009.
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the Securities
and Exchange Commission on August 15, 2011.
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
93
* English translation
SIGNATURES
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: March 16, 2015
CHINA XD PLASTICS COMPANY LIMITED
By:
By:
/s/ Jie Han
Jie Han
Chief Executive Officer
(Principal Executive Officer)
/s/ Taylor Zhang
Taylor Zhang
Chief Financial Officer
(Principal Financial Officer)
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:
Name
/s/ Jie Han
Jie Han
/s/ Taylor Zhang
Taylor Zhang
/s/ Qingwei Ma
Qingwei Ma
/s/ Lawrence Leighton
Lawrence Leighton
/s/ Feng Li
Feng Li
/s/ Linyuan Zhai
Linyuan Zhai
/s/ Homer Sun
Homer Sun
/s/ Jun Xu
Jun Xu
Title
Chairman and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
94
Date
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012
Notes to the Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-1
The Board of Directors and Stockholders
China XD Plastics Company Limited:
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of China XD Plastics Company Limited and subsidiaries as of December 31, 2014 and 2013, and the related
consolidated statements of comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2014. 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 audits.
We conducted our audits 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 misstatement. 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 Limited
and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), China XD Plastics Company Limited's internal
control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2015 expressed an adverse opinion on the effectiveness of the Company's
internal control over financial reporting.
/s/ KPMG
Hong Kong, China
March 16, 2015
F-2
CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Time deposits
Accounts receivable, net of allowance for doubtful accounts
Amounts due from a related party
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Land use rights, net
Prepayments to equipment suppliers
Other non-current assets
Total assets
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCKS AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank loans, including current portion of long-term bank loans
Bills payable
Accounts payable
Income taxes payable
Warrants liability
Accrued expenses and other current liabilities
Total current liabilities
Long-term bank loans, excluding current portion
Notes payable
Income taxes payable
Deferred income tax liabilities
Total liabilities
December 31,
2014
US$
2013
US$
45,456,612
12,545,772
238,532,702
203,998,138
220,262
249,797,244
11,253,828
761,804,558
318,324,600
11,896,542
182,259,578
25,499,744
1,299,785,022
99,735,422
43,389,928
152,073,014
3,269,115
-
24,484,583
322,952,062
174,274,446
148,617,057
14,025,825
16,951,551
676,820,941
95,545,904
13,708,971
281,343,641
282,320,819
225,752
144,885,688
8,418,143
826,448,918
233,841,735
12,457,001
1,332,742
1,826,232
1,075,906,628
314,682,620
25,604,176
122,457,396
18,631,698
1,063,401
55,893,004
538,332,295
-
-
8,224,057
19,428,706
565,985,058
Redeemable Series D convertible preferred stock
Stockholders' equity:
Series B preferred stock
Common stock, US$0.0001 par value, 500,000,000 shares authorized, 49,172,796 shares and 47,896,133 shares
issued, 49,151,796, shares and 47,875,133 shares outstanding as of December 31, 2014 and 2013, respectively
Treasury stock, 21,000 shares at cost
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Commitments and contingencies
Total liabilities, redeemable convertible preferred stocks and stockholders' equity
97,576,465
97,576,465
100
100
4,916
(92,694)
80,875,787
431,823,706
12,775,801
525,387,616
-
1,299,785,022
4,789
(92,694)
76,341,659
311,047,337
25,043,914
412,345,105
-
1,075,906,628
See accompanying notes to consolidated financial statements.
F-3
CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Revenues
Cost of revenues
Gross profit
Selling expenses
General and administrative expenses
Research and development expenses
Total operating expenses
Operating income
Interest income
Interest expense
Foreign currency exchange gains (losses)
Losses on foreign currency forward contracts
Change in fair value of embedded derivative liability
Change in fair value of warrants liability
Government grant
Total non-operating income (expenses), net
Income before income taxes
Income tax expense
Net income
Earnings per common stock:
Basic and diluted
Net Income
Other comprehensive income (loss)
Foreign currency translation adjustment, net of nil income taxes
Comprehensive income
2014
US$
Years Ended December 31,
2013
US$
2012
US$
1,110,685,692
(888,227,868)
222,457,824
1,050,816,364
(827,419,861)
223,396,503
(728,232)
(20,564,820)
(29,434,680)
(50,727,732)
(243,975)
(16,284,528)
(21,258,549)
(37,787,052)
599,818,968
(456,011,715)
143,807,253
(273,289)
(10,069,273)
(21,586,074)
(31,928,636)
171,730,092
185,609,451
111,878,617
10,984,980
(41,518,878)
(1,938,807))
(1,067,162)
-
(1,871,074)
2,723,495
(32,687,446)
6,788,243
(15,250,780)
2,519,486
-
-
(54,651)
924,216
(5,073,486)
4,601,336
(4,627,014)
561,829
-
610
2,854,177
114,385
3,505,323
139,042,646
180,535,965
115,383,940
(18,266,277)
(46,697,120)
(29,516,193)
120,776,369
133,838,845
85,867,747
1.85
2.08
1.35
120,776,369
133,838,845
85,867,747
(12,268,113)
10,385,656
3,180,381
108,508,256
144,224,501
89,048,128
See accompanying notes to consolidated financial statements.
F-4
CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Series B Preferred Stock
Number of
Shares
Amount
US$
Common Stock
Number of
Shares
Amount
US$
Treasury
Stock
US$
Additional
Paid-in
Capital
US$
Retained
Earnings
US$
Accumulated
Other
Comprehensive
Income
US$
Total
Stockholders'
Equity
US$
1,000,000
-
100
-
47,527,367
-
4,754
-
(92,694)
-
71,190,659
-
91,340,855
85,867,747
11,477,877
-
173,921,551
85,867,747
-
-
-
-
-
-
-
-
-
-
-
36,405
-
-
-
4
-
-
-
1,393,255
-
-
3,180,381
3,180,381
-
1,393,255
-
-
-
(4)
(110)
-
-
-
(110)
-
1,000,000
-
100
-
47,563,772
-
4,758
-
(92,694)
-
72,583,910 177,208,492
- 133,838,845
14,658,258
-
264,362,824
133,838,845
-
-
-
-
-
-
-
-
-
-
-
-
-
3,757,780
311,361
31
-
(31)
-
-
-
10,385,656
10,385,656
-
-
3,757,780
-
1,000,000
-
100
-
47,875,133
-
4,789
-
(92,694)
-
76,341,659 311,047,337
120,776,369
25,043,914
-
412,345,105
120,776,369
-
-
-
-
-
-
-
-
-
-
602,458
674,205
-
-
60
67
-
-
-
1,003,040
-
3,531,155
-
(67)
-
-
-
-
(12,268,113)
(12,268,113)
1,003,040
3,531,215
-
-
-
1,000,000
100
49,151,796
4,916
(92,694)
80,875,787 431,823,706
12,775,801
525,387,616
Balance at
January 1, 2012
Net income
Other comprehensive
income - Foreign
currency translation
adjustment, net of nil
income taxes
Stock based
compensation
Dividends to
redeemable Series C
Convertible preferred
stockholders
Vesting of unvested
shares
Balance as of
December 31, 2012
Net income
Other comprehensive
income - Foreign
currency translation
adjustment, net of nil
income taxes
Stock based
compensation
Vesting of unvested
shares
Balance as of
December 31, 2013
New income
Other comprehensive
loss-Foreign currency
translation
adjustment, net of nil
income taxes
Stock based
compensation
Exercise of Series A
investor warrants
Vesting of unvested
shares
Balance as of
December 31, 2014
See accompanying notes to consolidated financial statements.
F-5
CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net provision (reversal) for doubtful accounts
Depreciation and amortization
Stock-based compensation
Change in fair value of embedded derivative liability
Change in fair value of warrants liability
Amortization of discount and issuance cost of the Notes
Change in fair value of forward contract
Foreign currency exchange losses (gains)
Losses on disposals of property, plant and equipment
Deferred income tax benefit
Change in operating assets and liabilities:
Restricted cash
Accounts receivable
Amounts due from a related party
Inventories
Prepaid expenses and other current assets
Other non-current assets
Bills payable
Accounts payable
Income taxes payable
Accrued expenses and other current liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchase of time deposits
Proceeds from maturity of time deposits
Purchases of and deposits for property, plant and equipment
Purchase of land use rights
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from bank borrowings
Repayment of bank borrowings
Redemption of redeemable Series C convertible preferred stock
Proceeds from Senior Notes Payable
Payment of issuance costs of the Notes
Proceeds from exercise of Series A investor warrants
Dividends paid to Series C convertible preferred stockholders
Release of restricted cash as collateral for bank borrowings
Placement of restricted cash as collateral for bank borrowings
Net cash provided by financing activities
Effect of foreign currency exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest
Income taxes paid
Non-cash investing and financing activities:
Accrual for purchase of equipment
Accrual for issuance cost of the Notes
2014
US$
Years Ended December 31,
2013
US$
2012
US$
120,776,369
133,838,845
85,867,747
(35,849)
22,916,893
1,003,040
-
1,871,074
898,634
2,435
2,051,596
10,292
(2,018,757)
(6,427,562)
72,318,976
-
(109,198,972)
(3,719,794)
-
18,538,133
32,823,457
(8,996,712)
5,935,116
148,748,369
(626,994,741)
663,216,581
(334,092,742)
(1,460,754)
(299,331,656)
797,615,642
(831,932,534)
-
148,396,175
(4,718,452)
596,740
-
10,022,398
(20,612,868)
99,367,101
1,126,894
(50,089,292)
95,545,904
45,456,612
33,537,952
29,288,894
-
202,712
(2,293)
21,420,723
3,757,780
-
54,651
-
-
(2,519,486)
4,817
(1,880,228)
6,082,662
(132,230,006)
6,534
(63,358,285)
(2,134,119)
1,435
15,676,880
113,429,086
17,835,057
5,662,472
115,646,525
(460,292,902)
231,849,776
(21,461,391)
-
(249,904,517)
503,843,151
(358,190,868)
-
-
-
-
-
5,733,852
(8,173,789)
143,212,346
2,768,948
11,723,302
83,822,602
95,545,904
15,413,648
30,742,291
21,398,595
-
34,491
10,705,037
1,393,255
(610)
(2,854,177)
-
-
(561,829)
-
(1,574,995)
(827,585)
(97,157,176)
(137,904)
(32,494,523)
6,830,122
96,741
(12,998,869)
6,576,382
2,604,368
3,044,530
(31,454,995)
(374,481,497)
327,121,555
(97,492,169)
-
(144,852,111)
243,045,097
(114,369,501)
(1,829)
-
-
-
(110)
-
(4,775,204)
123,898,453
748,869
(51,659,784)
135,482,386
83,822,602
3,618,679
28,486,820
36,450,344
-
See accompanying notes to consolidated financial statements.
F-6
Note 1 – Description of business and significant concentrations and risks
China XD Plastics Company Limited ("China XD") is a holding company that is incorporated in the U.S. State of Nevada. China XD and its subsidiaries (collectively referred to
hereinafter as the "Company"), is primarily engaged in the research and development, production and sales of modified and engineering plastics products. The plastics
products, which are manufactured by the Company, are primarily for use in the fabrication of automobile parts and components and secondarily for applications in high-speed
railway, airplanes and ships and consist of the following major products categories: Acrylonitrile Butadiene Styrene ("ABS"), Polyamid6 ("PA6"), Polyamid66 ("PA66"),
Polyformaldehyde ("POM"), Polypropylene ("PP"), Polyphenylene Oxide ("PPO"), Plastic Alloy, Polyphenylene Sulfide ("PPS"), Poly Imide ("PI"), Poly Ether Ether Ketone
("PEEK"), and Polylactide Acid ("PLA").
The Company's operations are primarily conducted through its subsidiaries in the People's Republic of China ("PRC") and Dubai, United Arab Emirates ("UAE"). The
Company's other subsidiaries in the US, the British Virgin Islands ("BVI") and Hong Kong Special Administrative Region ("SAR"), do not have significant operations.
Sales concentration
The Company sells its products primarily through approved distributors in the PRC. To a lesser extent, the Company also sells its products to an overseas customer. The
Company's sales are highly concentrated. Sales to distributors and end customer, which individually exceeded 10% of the Company's revenues for the years ended December
31, 2014, 2013 and 2012, are as follows:
(in millions,
except percentage)
Distributor A, located in
PRC
Distributor B, located in
PRC
Distributor C, located in
PRC
Distributor D, located in
PRC
Distributor E, located in
PRC
Direct customer F, located
in ROK
Total
2014
US$
%
Years Ended December 31,
2013
US$
%
2012
US$
%
176.6
139.8
138.5
136.4
134.0
140.1
865.4
15.9%
12.6%
12.5%
12.3%
12.1%
12.6%
78.0%
209.4
138.1
63.8
250.7
136.0
-
798.0
19.9%
13.1%
6.1%
23.9%
12.9%
-
75.9%
196.1
88.5
-
61.6
85.4
-
431.6
32.7%
14.8%
-
10.3%
14.2%
-
72.0%
The Company expects revenues from these distributors and the customer to continue to represent a substantial portion of its revenue in the future. Any factors adversely
affecting the automobile industry in the PRC and ROK or the business operations of these customers will have a material effect on the Company's business, financial position
and results of operations.
Purchase concentration of raw materials and equipment
The principal raw materials used for the Company's production of modified plastics products are plastic resins, such as polypropylene, ABS and nylon. The Company
purchases substantially all of its raw materials through eight distributors. Raw material purchases from these eight suppliers, which individually exceeded 10% of the
Company's total raw material purchases, accounted for approximately 88%, 61%, 52% of the Company's total raw material purchases for the years ended December 31, 2014,
2013 and 2012, respectively. Management believes that other suppliers could provide similar raw materials on comparable terms. A change in suppliers, however, could cause a
delay in manufacturing and a possible loss of sales, which would adversely affect the Company's business, financial position and results of operations.
The Company purchased equipment from two equipment distributors, which accounted for 99.6%, 34.6% and 99.9% of the Company's total equipment purchases for the years
ended December 31, 2014, 2013 and 2012, respectively. Management believes that other suppliers could provide similar equipment on comparable terms. A change in suppliers,
however, could cause a delay in manufacturing and a possible loss of sales, which could adversely affect the Company's business, financial position and results of
operations. The majority owner of one of the major equipment distributors that supplied approximately 1.9%, 34.6% and 99.9% of the Company's total equipment purchases, is
also the majority owner of a major raw material supplier that supplied approximately 0.4%, 13% and 22% of the Company's total raw material purchases for the years ended
December 31, 2014, 2013 and 2012, respectively. In addition, the majority owner of the equipment distributor is also the majority owner of sales Distributor E presented above.
F-7
Cash concentration
Cash and cash equivalents, restricted cash and time deposits maintained at banks consist of the following:
RMB denominated bank deposits with:
Financial Institutions in the PRC
U.S. dollar denominated bank deposits with:
Financial Institution in the U.S.
Financial Institutions in the PRC
Financial Institution in Hong Kong Special Administrative Region ("Hong Kong SAR")
Financial Institution in Macau Special Administrative Region ("Macau SAR")
Financial Institution in Dubai, United Arab Emirates ("UAE")
Euro denominated bank deposits with:
Financial institution in Hong Kong SAR
HK dollar denominated bank deposits with:
Financial institution in Hong Kong
Dirham denominated bank deposits with:
Financial institution in Dubai, UAE
December 31,
2014
US$
2013
US$
311,377,750
389,522,815
770,704
17,139
1,366,224
47,868
481,179
83,017
6,723
112,815
84,011
-
847,559
-
-
143,890
-
-
The bank deposits with financial institutions in the PRC are not insured by any government authority. The bank deposits with financial institutions in the HK SAR are insured
by the government authority up to HK$500,000. The bank deposits with financial institutions in the Macau SAR are insured by the government authority up to
MOP$500,000.To limit exposure to credit risk, the Company primarily places bank deposits with large financial institutions in the PRC, HK SAR and Macau SAR with acceptable
credit rating.
Note 2 – Summary of significant accounting policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.
GAAP").
(b) Consolidation
The accompanying consolidated financial statements include the financial statements of China XD and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated upon consolidation.
(c) Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the recoverability
of the carrying amounts of property, plant and equipment, the realizability of inventories, the useful lives of property, plant and equipment, the collectability of accounts
receivable, the fair values of stock-based compensation awards, derivative liabilities and the accruals for tax uncertainties and other contingencies. The current economic
environment has increased the degree of uncertainty inherent in those estimates and assumptions.
(d) Foreign Currency
The Company's reporting currency is the U.S. dollar (US$). The functional currency of China XD Plastics and its subsidiaries in the United States, BVI, Hong Kong and Dubai,
UAE is the US$. The functional currency of China XD's subsidiaries in the PRC is Renminbi (RMB).
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the date of the
transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using the applicable exchange rates at the balance
sheet date. The resulting exchange differences are recorded in foreign currency exchange gains (losses) in the consolidated statements of comprehensive income.
F-8
Assets and liabilities of subsidiaries with functional currencies other than US$ are translated into US$ using the exchange rate on the balance sheet date. Revenues and
expenses are translated into US$ at average rates prevailing during the reporting period. The differences resulting from such translation are recorded as a separate component
of accumulated other comprehensive income within shareholders' equity.
Since the RMB is not a fully convertible currency, all foreign exchange transactions involving RMB must take place either through the People's Bank of China or other
institutions authorized to buy and sell foreign exchange.
(e) Cash and cash equivalents, time deposits and restricted cash
Cash and cash equivalents consist of cash on hand, cash in bank and interest-bearing certificates of deposit with an initial term of three months or less when purchased.
Time deposits represent certificates of deposit with initial terms of six or twelve months when purchased. As of December 31, 2014 and 2013, the Company's time deposits bear
a weighted average interest rate of 3.0% and 3.1% per annum, respectively.
Cash that is restricted as to withdrawal or usage is reported as restricted cash in the consolidated balance sheets and is not included as cash and cash equivalents in the
consolidated statements of cash flows.
Short-term bank deposits that are pledged as collateral for bills payable relating to purchases of raw materials are reported as restricted cash and amounted to US$11,868,855
and US$3,964,518 as of December 31, 2014 and 2013, respectively. Upon maturity and repayment of the bills payable, which is generally within 6 months, the cash becomes
available for use by the Company. Short-term bank deposits that are pledged as collateral for letter of credit relating to purchases of raw materials are reported as restricted cash
and amounted to US$676,917 and US$237,871 as of December 31, 2014 and 2013, respectively. The cash will be available for use by the Company 90 days from the issuance of
the letter of credit. The cash flows from the pledged bank deposits, which relate to purchases of raw materials, are reported within cash flows from operating activities in the
consolidated statements of cash flows.
Short-term bank deposits that are pledged as collateral for short-term bank borrowings are reported as restricted cash and amounted to nil and US$9,506,582 as of December 31,
2014 and 2013, respectively. Long-term bank deposits that are pledged as collateral for issuance of letter of guarantee are reported as other non-current assets and amounted to
US$17,728,782 and nil as of December 31, 2014 and 2013, respectively. The cash flows from such bank deposits are reported within cash flows from financing activities in the
consolidated statements of cash flows.
(f) Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. In establishing the required allowance, management considers historical losses, the amount of accounts
receivables in dispute, the accounts receivables aging and the customers' payment patterns. Account balances are written off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its
customers.
F-9
(g) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method. Work-in-progress and finish goods comprise direct materials
(including purchasing, receiving and inspection costs), direct labor and an allocation of related manufacturing overhead based on normal operating capacity.
(h) Long-lived Assets
Property, plant and equipment
Property, plant and equipment are initially recorded at cost. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. The estimated
useful lives of property, plant and equipment are as follows:
Workshops and buildings
Machinery, equipment and furniture
Motor vehicles
Estimated
Useful Life
39 years
5-10 years
5 years
An appropriate allocation of depreciation expense of property, plant and equipment attributable to manufacturing activities base on normal capacity is capitalized as part of the
cost of inventory, and expensed in cost of revenues when the inventory is sold. Costs incurred in the construction of property, plant and equipment, including an allocation of
interest expense incurred, are capitalized and transferred into their respective asset category when the assets are ready for their intended use, at which time depreciation
commences. Ordinary maintenance and repairs are charged to expenses as incurred, while replacements and betterments are capitalized. When items are retired or otherwise
disposed of, income is charged or credited for the difference between net book value of the item disposed and proceeds realized thereon.
Interest cost incurred in the construction of new facilities is capitalized and transferred out of construction in progress and into their respective assets categories when the
assets are ready for their intended use, at which time depreciation commences.
Land Use Rights
A land use right in the PRC represents an exclusive right to occupy, use and develop a piece of land during the contractual term of the land use right. The cost of land use right
is usually paid in one lump sum at the date the right is granted. The prepayment usually covers the entire duration period of the land use right. The lump sum advance payment
is capitalized and recorded as land use right and then charged to expense on a straight-line basis over the period of the right, which is normally 50 years.
Amortization expense of land use rights was US$259,310, US$224,587 and US$79,404 for the years ended December 31, 2014, 2013 and 2012, respectively, and is included in
general and administrative expenses.
(i) Impairment of Long-lived Assets
Long-lived assets, such as property, plant and equipment, and land use rights, are reviewed for impairment when events or changes in circumstances indicate that the carrying
value of such assets may not be recoverable. Recoverability of a long-lived asset or asset group to be held and used is measured by a comparison of the carrying amount of an
asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying value of an asset or asset group
exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount that the carrying value exceeds the estimated fair value of the asset or
asset group. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third party independent
appraisals, as considered necessary. Assets to be disposed are reported at the lower of carrying amount or fair value less costs to sell, and are no longer depreciated.
No impairment of long-lived assets was recognized for any of the years presented.
F-10
(j) Derivative Financial Instruments
The Company recognizes all derivative instruments as either assets or liabilities at their respective fair values. Changes in the fair value of derivative instruments not
designated for hedge accounting are recognized in earnings.
(k) Revenue Recognition
The Company sells its products primarily to approved distributors. Revenue is recognized when all of the following conditions are met: persuasive evidence of an arrangement
exists, delivery of the products has occurred or services have been rendered, the price is fixed or determinable and collectibility is reasonably assured. These criteria as they
relate to each of the following major revenue generating activities are described below.
Products sales
For sales in PRC, acceptance of delivery of the products by the distributors is evidenced by goods receipt notes signed by the distributors' customers (or end users). The
distributors accept the products at the time they are delivered to the distributors' customers (or end customers). Delivery acceptance is evidenced by signed goods receipt
notes. The Company has no remaining obligations after the distributors' acceptance of the products. Under the terms of the contracts or purchase orders between the
Company and the distributors, the risks and rewards of ownership of the products is transferred to the distributor upon the signing of the goods receipt notes and the
distributor has no rights to return the products (other than for defective products). For sales to ROC, delivery of the products occurs at the point in time the product is
delivered to the named port of shipment, which is when the risks and rewards of ownership are transferred to the customer. For the years ended December 31, 2014, 2013 and
2012, there were no sales returns from the customers.
The selling price, which is specified in the sales contracts or purchase orders, is fixed. Under the terms of the sales contract, upon the sale of the products to the distributors
and the signing of the good receipts notes, the Company has the legal enforceable right to receive full payment of the sales price. The distributors' obligation to pay the
Company is not dependent on the distributors selling the products or collecting cash from their customers (or end customers).
The Company's sales are net of value added tax ("VAT") and business tax collected on behalf of tax authorities in respect of product sales. VAT and business tax collected
from customers, net of VAT paid for purchases, is recorded as a liability in the balance sheet until it is paid to the tax authorities.
Service revenue
The Company used to provide technical assistance and consultation services to manufacturing companies prior to 2014.
Revenue from technical support was recognized as the services were performed, which was evidenced by signed customer acceptance forms on a monthly basis. Service
revenue was recorded, net of business tax and surcharges, which was levied on the Company's service revenues generated in the PRC at the rate of 5.6%.
(l) Cost of revenues
Cost of revenues represents costs of raw materials (including purchasing, receiving and inspection costs), packaging materials, labor, utilities, depreciation and amortization of
manufacturing facilities and warehouses, handling costs, outbound freight and inventory write-down. Depreciation and amortization of manufacturing facilities and
warehouses attributable to manufacturing activities is capitalized as part of the cost of inventory, and expensed in costs of revenues when the inventory is sold.
F-11
(m) Selling, general and administrative expenses
Selling expenses represents primarily costs of payroll, benefits, commissions for sales representatives and advertising expenses. General and administrative expenses
represents primarily payroll and benefits costs for administrative employees, rent and operating costs of office premises, depreciation and amortization of office facilities, and
other administrative expenses.
(n) Research and Development Expense
Research and development costs are expensed as incurred.
(o) Government Grants
Government grants are recognized when there is reasonable assurance that the Company will comply with the conditions attaching to them and the grants will be received.
Government grants for the purpose of giving immediate financial support to the Company with no future related costs are recognized as other income in the Company's
consolidated statements of comprehensive income. Government grants that compensate the acquisition cost of an asset are deducted from the carrying amount of the asset
and effectively recognized in profit or loss over the useful life of the asset by way of reduced depreciation expense.
(p) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax operating loss and tax credit carryforwards.
Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are
expected to be recovered or settled. The effect of a change in tax rates or tax laws on deferred income tax assets and liabilities is recognized in the consolidated statements of
comprehensive income in the period the change in tax rates or tax laws is enacted. A valuation allowance is provided to reduce the carrying amount of deferred income tax
assets if it is considered more likely than not that some portion or all of the deferred income tax assets will not be realized.
The Company recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination,
based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in
recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to
unrecognized tax benefits, if and when required, as part of interest expense, and general and administration expenses, respectively in the consolidated statements of
comprehensive income.
(q) Bills Payable
Bills payable represent bills issued by financial institutions to the Company's raw material suppliers. The Company's suppliers receive payments from the financial institutions
upon maturity of the bills and the Company is obliged to repay the face value of the bills to the financial institutions.
F-12
(r) Employee Benefit Plans
Pursuant to relevant PRC regulations, the Company is required to make contributions to various defined contribution plans organized by municipal and provincial PRC
governments. The contributions are made for each PRC employee at rate of approximately 40% on a standard salary base as determined by local social security bureau.
Contributions to the defined contribution plans are charged to the consolidated statements of comprehensive income when the related service is provided. For the years ended
December 31, 2014, 2013 and 2012, the costs of the Company's contributions to the defined contribution plans amounted to US$1,555,471, US$1,024,728 and US$623,251,
respectively.
For the years ended December 31, 2014 2013 and 2012, 78%, 80% and 60% of costs of employee benefits were recorded in general and administration expenses, respectively,
with the remaining portion of costs of employee benefits in selling expenses, research and development expenses and cost of revenues each year.
The Company has no other obligation for the payment of employee benefits associated with these plans beyond the contributions described above.
(s) Stock Based Compensation
The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes
the cost over the period during which the employee is required to provide service in exchange for the award, which generally is the vesting period. The amount of cost
recognized is adjusted to reflect any expected forfeitures prior to vesting. The Company recognizes compensation cost for an award with only service conditions that has a
graded vesting schedule on a straight-line basis over the requisite service period for the entire award, provided that the cumulative amount of compensation cost recognized at
any date at least equals the portion of the grant-date value of such award that is vested at that date.
(t) Commitments and Contingencies
In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of
matters, including, among others, government investigations, shareholder lawsuits, product and environmental liability, and non-income tax matters. An accrual for a loss
contingency is recognized when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.
(u) Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income attributable to common stockholders by the weighted average number of common stock outstanding
during the year using the two-class method. Under the two-class method, net income attributable to common stockholders is allocated between common stock and other
participating securities based on participating rights in undistributed earnings. Nonvested shares, redeemable Series C and Series D convertible preferred stock are
participating securities since the holders of these securities participate in dividends on the same basis as common stockholders. Diluted EPS is calculated by dividing net
income attributable to common stockholders as adjusted for the effect of dilutive common stock equivalent, if any, by the weighted average number of common stock and
dilutive common stock equivalent outstanding during the year. Potential dilutive securities are not included in the calculation of diluted earnings per share if the impact is anti-
dilutive.
(v) Segment reporting
The Company uses the management approach in determining reportable operating segments. The management approach consider the internal reporting used by the
Company's chief operating decision maker for making operating decisions about the allocation of resources of the segment and the assessment of its performance in
determining the Company's reportable operating segments. Management has determined that the Company has one operating segment, which is the modified plastics segment.
F-13
(w) Fair Value Measurements
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company
determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering
market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are
categorized in one of the following levels:
-
-
-
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of
the asset or liability.
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for
situations in which there is little, if any, market activity for the asset or liability at measurement date.
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement
in its entirety.
-
-
-
The fair value of restricted cash and time deposits as of December 31, 2014 and 2013 are categorized as Level 2 measurement.
The fair value of the warrants liability as of December 31, 2013 is categorized as Level 3 measurement.
The fair value of foreign currency forward contracts as of December 31, 2014 is categorized as Level 3 measurement.
Except for the foreign currency forward contracts and warrants liability, which was measured at fair value on a recurring basis as of December 31, 2014 and 2013, the Company
did not have any financial assets and liabilities or nonfinancial assets and liabilities that are measured and recognized at fair value on a recurring or nonrecurring basis as of
December 31, 2014 and 2013. Management used the following methods and assumptions to estimate the fair values of financial instruments at the balance sheet dates:
-
-
-
-
-
Short-term financial instruments, including cash and cash equivalents, restricted cash, time deposits, accounts receivable, amounts due from a related party, short-term
bank loans, bills payable, accounts payable and accrued expenses and other current liabilities- carrying amounts approximate fair values because of the short maturity of
these instruments.
Long-term bank loans-fair value is based on the amount of future cash flows associated with each loan discounted at the Company's current borrowing rate for similar debt
instruments of comparable terms. The carrying value of the long-term bank loans approximate their fair values as the long-term bank loans carry interest rates which
approximate rates currently offered by the Company's banks for similar debt instruments of comparable maturities.
Notes payable-fair values of the Company's notes payable are estimated based on quoted market prices which are categorized as Level 1 measurement in the fair value
hierarchy. As of December 31, 2014, the carrying amount and estimated fair value of the notes payable were US$148,617,057 and US$152,344,500, respectively.
Derivative liabilities on warrants liabilities- fair values are determined using an option-pricing model which considers the following significant inputs: the Company's stock
price, risk-free interest rate and expected volatility of the Company's stock price over the term of the derivative liabilities.
Derivative liabilities on foreign currency forward contracts- fair values are determined using a discount cash flow model, which discounts the difference between the
forward contract exchange rate from the quoted curve and the contract rate multiplied by the notional amounts. It considers the following significant inputs: risk-free rate
and foreign exchange rate.
(x) Recently Issued Accounting Standards
The Financial Accounting Standards Borad issued Accounting Standards Update ( "ASU" ) No. 2014-09, Revenue from Contracts with Customers, in May 2014.
ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and
qualitative information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising
from contracts with customers. The new standard is effective for annual reporting periods beginning after December 15, 2017. The Company will
implement the provisions of ASU 2014-09 as of January 1, 2018. The Company has not yet determined the impact of the new standard on its current
policies for revenue recognition.
F-14
Note 3 – Accounts receivable
Accounts receivable consists of the following:
Accounts receivable
Allowance for doubtful accounts
Accounts receivable, net
December 31,
2014
US$
2013
US$
204,108,050
(109,912)
203,998,138
282,466,580
(145,761)
282,320,819
As of December 31, 2014 and 2013, the accounts receivable balances also include notes receivable in the amount of US$921,907 and US$7,481,629, respectively. As of
December 31, 2014 and 2013, US$50,473,063 and US$133,778,940 respectively of accounts receivable are pledged for the short-term bank loans.
The movements of the allowance for doubtful accounts are as follows:
Balance at the beginning of the year
Reversal of bad debt allowance
Balance at the end of the year
Note 4 – Inventories
Inventories consist of the following:
Raw materials
Work in progress
Finished goods
Total inventories
There were no write down of inventories during the years ended December 31, 2014, 2013 and 2012.
F-15
Year ended December 31,
2013
2014
US$
US$
(145,761)
35,849
(109,912)
(148,054)
2,293
(145,761)
December 31,
2014
US$
241,853,814
207,181
7,736,249
249,797,244
2013
US$
135,120,514
2,551,621
7,213,553
144,885,688
Note 5 – Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
Advances to suppliers
Value added taxes receivables
Interest receivable
Others
Total prepaid expenses and other current assets
December 31,
2014
US$
2013
US$
168,614
6,407,547
3,351,672
1,325,995
11,253,828
920,277
3,924,767
2,405,666
1,167,433
8,418,143
Interest receivable mainly represents interest income accrued from time deposits and restricted cash. Others mainly include other prepaid expenses and staff advances.
Note 6 – Property, plant and equipment, net
Property, plant and equipment consist of the following:
Machinery, equipment and furniture
Motor vehicles
Workshops and buildings
Construction in progress
Total property, plant and equipment
Less: accumulated depreciation
Property, plant and equipment, net
F-16
December 31,
2014
US$
209,509,700
1,854,985
79,009,346
93,970,716
384,344,747
(66,020,147)
318,324,600
2013
US$
209,921,805
1,580,877
62,217,256
4,807,666
278,527,604
(44,685,869)
233,841,735
Depreciation expense on property, plant and equipment was allocated to the following expense items:
Cost of revenues
General and administrative expenses
Research and development expenses
Total depreciation expense
2014
US$
Years Ended December 31,
2013
US$
2012
US$
19,407,668
1,155,419
2,094,496
22,657,583
18,578,088
958,976
1,659,072
21,196,136
9,363,351
232,576
1,029,706
10,625,633
The Company capitalized US$113,317, nil and nil of interest costs as a component of the cost of construction in progress for the years ended December 31, 2014, 2013 and 2012
respectively.
Note 7 - Prepayments to equipment suppliers
On March 8, 2013, Xinda Holding (HK) entered into an investment agreement with Nanchong Government, pursuant to which Xinda Holding (HK) will
invest RMB1.8 billion (equivalent to US$290.1 million) in property, plant and equipment and approximately RMB0.6 billion (equivalent to US$96.7
million) in working capital, for the construction of the Sichuan plant. In December 2013, the Company entered into an equipment purchase contract with
Harbin Jiamu Import & Export Trading Co., Ltd ("Jiamu") for a total consideration of RMB1,629.3 million (equivalent to US$262.6 million) to purchase 70
production lines. Pursuant to the contract, during the year ended December 31, 2014, the Company paid 65% of the total consideration i.e. RMB1,059.1
million (equivalent to US$170.7 million) as prepayments. In addition, the Company entered into a testing equipment purchase contract with Jiamu for a total
consideration of RMB89.7 million (equivalent to US$14.5 million). During the year ended December 31, 2014, the Company paid 80% of the total
consideration, i.e. RMB71.8 million (equivalent to US$11.6 million) as prepayments.
Note 8 - Foreign currency forward contracts
On March 14, 2014, the Company entered into a foreign currency forward contract with HSBC Bank (China) Company Ltd. (the "HSBC"), pursuant to which the Company
would pay US$80 million to HSBC in exchange for RMB492 million on June 18, 2014. On June 18, 2014, the Company paid HSBC US$1.1 million to settle the contract because
the foreign exchange rate of USD had appreciated against RMB during the period of the forward contract. The Company entered into another foreign currency forward
contract with HSBC on June 18, 2014, pursuant to which the Company would pay US$50 million in exchange for RMB315 million on June 23, 2015. Changes in fair value of the
foreign currency forward contract dated June 18, 2014 amounted to US$2.4 thousand from the date of its inception to December 31, 2014 and was recognized in earnings
because it did not qualify or was designated for hedge accounting.
During the years ended December 31, 2014, the Company recognized loss on foreign currency forward contracts in the amount of US$1.1 million.
F-17
Note 9 – Borrowings
(a) Current
Unsecured loans
Loans secured by accounts receivable
Loans secured by bank deposits
Current portion of long-term bank loans (note b)
Total short-term bank loans, including current portion of long-term bank loans
Interest-free loan secured by land use rights
Total short-term loans, including current portion of long-term bank loans
(i)
(ii)
December 31,
2014
US$
47,223,028
40,292,686
-
12,219,708
2013
US$
169,027,897
100,434,445
36,960,867
-
99,735,422
306,423,209
-
8,259,411
99,735,422
314,682,620
(i)
As of December 31, 2014 and 2013, the Company's short-term bank loans (including the current portion of long-term bank loans) bear a weighted average interest rate of
5.7% and 5.9% per annum, respectively. All short-term bank loans mature at various times within one year and contain no renewal terms.
(ii) The Company obtained an interest-free loan in the amount of RMB50.0 million from a company affiliated with the People's Government of Shunqing District, Nanchong
City, Sichuan Province ("Shunqing Government"). The loan was issued to support the Company's construction of a production plant in Sichuan. The Company repaid
the loan in July 2014.
(b) Non-current
Secured loans
Unsecured loans
Less: current portion
Total long-term bank loans, excluding current portion
2013
US$
December 31,
2014
US$
70,000,000
116,494,154
12,219,708
174,274,446
-
-
-
-
On January 17, 2014, the Company obtained four two-year unsecured loans with an aggregated principal amount of RMB150 million (equivalent to US$24.2 million) at 110% of
Renminbi benchmark interest rates per annum from China Construction Bank. The Company has paid off these four loans in advance on December 29, 2014.
During March and April 2014, the Company obtained two 15-month unsecured loans of RMB50 million (equivalent to US$8.1 million) at an interest rate of 6.15% per annum
from the Bank of Hei Longjiang Longjiang.
During the second quarter of 2014, the Company obtained seven two-year unsecured loans of RMB328 million (equivalent to US$52.9 million) at an interest rate of 6.15% per
annum from Bank of China. The Company has paid off all of these loans in advance in December 2014.
On May 15, 2014, the Company obtained a two-year unsecured loan of RMB50 million (equivalent to US$8.1 million) at an interest rate of 6.77% per annum from Bank of
Communication. On June 23, 2014, the Company obtained a two-year unsecured loan of RMB45 million (equivalent to US$7.3 million) at an interest rate of 6.77% per annum
from Bank of Communication. The company paid off these two loans in advance on September 28, 2014.
On June 12, 2014, the Company obtained a three-year secured loan of US$70 million from Bank of China, at an interest rate of London Inter-Bank Offered Rate ("LIBOR",
2.5510% as of December 31, 2014) plus 2.6%. The interest rate is reset every three months. The loan is secured by bank deposits amounted of US$17.7 million.
On July 1, 2014, the Company obtained three two-year unsecured loans of RMB122 million (equivalent to US$19.7 million) at an interest rate of 6.15% per annum from Bank of
China. The Company has paid off these three loans in advance in December 2014.
F-18
On December 11, 2014, the Company obtained a two-year unsecured loan of RMB197 million (equivalent to US$31.8 million), a one and half year unsecured loan of RMB1
million (equivalent to US$0.2 million) and a 385-day unsecured loan of RMB1 million (equivalent to US$0.2 million) at an interest rate of 6.60% per annum from Bank of
Communication.
On December 16, 2014, the Company obtained an eighteen month unsecured loans of US$76.4 million from Bank of China, at LIBOR (2.5510% as of December 31, 2014) plus
1.7%. The interest rate is reset every three months.
As of December 31, 2014, the Company had total lines of credit of RMB2,739.2 million (US$441.5 million) from PRC banks in Harbin, Heilongjiang province. As of December 31,
2014, the Company has unused lines of credit of RMB936.2 million (US$150.9 million) with remaining terms less than 12 months and RMB 102.9 million (US$16.6 million) with
remaining terms beyond 12 months.
Certain lines of credit contain financial covenants such as total stockholders' equity, debt asset ratio, current ratio, contingent liability ratio and net profit. As of December 31,
2014, the Company has met these financial covenants.
Note 10 – Notes Payable
On February 4, 2014, Favor Sea Limited, a wholly owned subsidiary of the Company, issued US$150,000,000 aggregate principal amount of 11.75% Guaranteed Senior Notes due
2019 (the 'Notes') with issuance price of 99.080%. The Notes bear interest at a rate of 11.75% per annum, payable on February 4 and August 4 of each year, commencing
August 4, 2014. The Notes will mature on February 4, 2019. Net proceeds after debt issuance costs and debt discount were approximately US$143.5 million. Debt issuance
costs in the amount of US$4.9 million are recorded as deferred charges and included in the other noncurrent assets on the consolidated balance sheet. The debt discount and
debt issuance costs are amortized into interest expense using the effective interest method over the terms of the Notes.
The Notes can be redeemed prior to their maturity, the details of which are as follows:
The Company may at its option redeem the Notes, in whole but not in part, at any time prior to February 4, 2017, at a redemption price equal to 100% of the principal amount of
the Notes redeemed plus the Applicable Premium, as defined in the Indenture of the Notes, and accrued and unpaid interest, if any, to (but not including) the redemption date.
In addition, at any time and from time to time prior to February 4, 2017, the Company may at its option redeem up to 35% of the aggregate principal amount of the Notes with the
net cash proceeds of one or more sales of common stock of China XD in an equity offering, at a redemption price of 111.75% of the principal amount of the Notes redeemed,
plus accrued and unpaid interest, if any, to (but not including) the redemption date, provided that at least 65% of the aggregate principal amount of the Notes issued remains
outstanding after each such redemption and any such redemption takes place within 60 days after the closing of the related equity offering.
On or after February 4, 2017, the Company may on any or more occasions redeem all or any part of the Notes, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest, if any, on the Notes redeemed, to (but not including) the applicable date of redemption, if redeemed during the
twelve-month period beginning on February 4 of the years indicated below:
Year
2017
2018
Redemption Price
105.875%
102.938%
Upon occurrence of a Change of Control Triggering Event, as defined in the Indenture of the Notes, the Company must make an offer to purchase all the Notes outstanding at
a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to (but not including) the purchase date.
The Notes are guaranteed on a senior basis by China XD and Xinda Holding (HK) Company Limited ("Xinda Holding (HK)"), one of its direct subsidiaries. The Notes are
secured by a lien on the share capital of Favor Sea Limited and Xinda Holding (HK).
For the year ended December 31, 2014, the Company recognized interest expenses of the Notes in the amount of US$16,870,122.
F-19
Note 11 – Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consist of the following:
Payables for purchase of property, plant and equipment
Accrued freight expenses
Accrued interest expenses
Others
Total accrued expenses and other current liabilities
December 31,
2014
US$
7,234,607
1,688,431
9,031,741
6,529,804
24,484,583
2013
US$
44,510,678
5,010,341
1,171,203
5,200,782
55,893,004
Others mainly represent accrued payroll and employee benefits, non income tax payables, accrued issuance cost for the note offering, deferred revenue, and other accrued
miscellaneous operating expenses.
Note 12 – Related party transactions
The Company entered into related party transactions with Harbin Xinda High-Tech Co., Ltd. ("Xinda High-Tech"), an entity controlled by the wife of Mr. Han, the chief
executive officer and controlling stockholder of the Company and Mr. Han's son. The significant related party transactions are summarized as follows:
The significant related party transactions are summarized as follows:
Costs and expenses resulting from transactions with related parties:
Rental expenses for plant and office space
The balance due from a related party is summarized as follows:
Amounts due from a related party:
Prepaid rental expenses to Xinda High-Tech
F-20
2014
US$
Years Ended December 31,
2013
US$
2012
US$
791,460
801,715
634,457
December 31,
2014
US$
2013
US$
220,262
225,752
The Company rents the following plant and office buildings in Harbin, Heilongjiang province from Xinda High-Tech:
Premise Leased
Plant and office building
Office building
Office building
Office building
Office building
Area (M2)
Annual Rental Fee
(US$)
Period of Lease
20,250
250
3,394
3,394
23,894
665,440 Between May 1, 2012 and December 31, 2013
8,115 Between January 1, 2012 and December 31, 2013
110,173 Between May 1, 2012 and April 30, 2013
110,173 Between May 1, 2013 and December 31, 2013
775,613 Between January 1, 2014 and December 31, 2018
The Company rents the following facilities in Harbin, Heilongjiang province from Mr. Han's son:
Premise Leased
Facility
Facility
Note 13 – Income Taxes
Area (M2)
Annual Rental Fee
(US$)
Period of Lease
3,134
200
16,231 Between January 1, 2014 and December 31, 2014
6,492 Between August 17, 2014 and August 16, 2015
China XD and Xinda Holding (HK) US Sub Inc. ("Xinda US)") (collectively referred to as the "U.S. Entities") are each subject to a tax rate of 34% and file separate U.S. federal
income tax returns. Favor Sea (US) Inc. ("Favor Sea (US)") was subject to a tax rate of 34% and file separate U.S. federal income tax returns before all of its assets and liabilities,
business and employees were transferred to Xinda US in 2013, as a result of an internal organization. Favor Sea (US) was liquidated after the reorganization.
Under the current laws of the British Virgin Island ("BVI"), Favor Sea Limited ("Favor Sea BVI"), a subsidiary of China XD, is not subject to tax on its income or capital gains.
No provision for Hong Kong Profits Tax was made for Xinda Holding (HK) Co., Ltd. ("Xinda HK"), (formerly known as Hong Kong Engineering Plastics Co., Ltd.), Xinda (HK)
International Trading Co., Ltd. ("Xinda Trading"), and Xinda Hong Kong Trading Co., Ltd. ("HK Trading") as they did not have any assessable profits arising in or derived
from Hong Kong for any of the periods presented.
Under the current laws of Dubai, AL Composites Materials FZE ("Dubai Composites"), a subsidiary of China XD, is exempted from income taxes.
The Company's PRC subsidiaries file separate income tax returns in the PRC. Effective from January 1, 2008, the PRC statutory income tax rate is 25% according to the
Corporate Income Tax ("CIT") Law which was passed by the National People's Congress on March 16, 2007.
Pursuant to an approval from the local tax authority in July 2013, Sichuan Xinda Enterprise Group Co., Ltd. ("Sichuan Xinda Group"), a subsidiary of China XD, became a
qualified enterprise located in the western region of the PRC, which entitled it to a preferential income tax rate of 15% from January 1, 2013 to December 31, 2020.
The CIT Law and its implementation rules impose a withholding income tax at 10%, unless reduced by a tax treaty or arrangement, on the amount of dividends distributed by a
PRC-resident enterprise to its immediate holding company outside the PRC that are related to earnings accumulated beginning on January 1, 2008. Dividends relating to
undistributed earnings generated prior to January 1, 2008 are exempt from such withholding income tax.
F-21
China XD earnings from its subsidiaries in PRC and Dubai are subject to the U.S. federal income tax at 34%, less any applicable foreign tax credits. Due to its plan to indefinitely
reinvest its earnings in the PRC, the Company has not provided for deferred income tax liabilities related to PRC withholding income tax on undistributed earnings of
US$434,416,319 and US$383,294,864 as of December 31, 2014 and 2013, respectively. In addition, due to its plan to indefinitely reinvest its earnings in Dubai, the Company has
not provided for deferred income tax liabilities related to Dubai on undistributed earnings of US$83,272,307 and nil as of December 31, 2014 and 2013, respectively. It is not
practicable to estimate the amounts of unrecognized deferred income tax liabilities thereof.
The components of income before income taxes are as follows:
US
BVI
Hong Kong
Dubai
PRC, excluding Hong Kong
Total income before taxes
2014
US$
Years Ended December 31,
2013
US$
2012
US$
(4,957,190)
(16,070,146)
(973,523)
83,267,935
77,775,570
139,042,646
(4,768,725)
(7,685)
(815,408)
-
186,127,783
180,535,965
625,840
(4,208)
(568,268)
-
115,530,576
115,383,940
The Company's income tax expense (benefit) recognized in the consolidated statements of comprehensive income consists of the following:
Current income tax expense-PRC
Current income tax expense-US
Deferred income tax benefit-PRC
Total income tax expense
2014
US$
Years Ended December 31,
2013
US$
2012
US$
20,089,436
195,598
(2,018,757)
18,266,277
47,559,763
1,017,585
(1,880,228)
46,697,120
31,091,188
-
(1,574,995)
29,516,193
The effective income tax rate based on income tax expense and income before income taxes reported in the consolidated statements of comprehensive income differs from the
PRC statutory income tax rate of 25% due to the following:
PRC statutory income tax rate
Increase (decrease) in effective income tax rate resulting from:
Tax rate differential on entities not subject to PRC income tax
Non-deductible expenses (non-taxable income)
Preferential tax rate
Change in valuation allowance
Others
Effective income tax rate
2014
US$
Years Ended December 31,
2013
US$
2012
US$
25%
(12.1)%
0.6%
(3.3)%
0.5%
2.4%
13.1%
25%
(0.1)%
0.8%
(0.7)%
(0.0)%
0.9%
25.9%
25%
0.2%
(0.4)%
(0.0)%
(0.4)%
1.2%
25.6%
Pursuant to an approval from the local tax authority in July 2013, Sichuan Xinda Enterprise Group Co., Ltd. ("Sichuan Xinda Group"), a subsidiary of China XD, became a
qualified enterprise located in the western region of the PRC, which entitled it to a preferential income tax rate of 15% from January 1, 2013 to December 31, 2020. Under the
current laws of Dubai, Al Composites Materials FZE ("Al Composites"), a subsidiary of China XD, is exempted from income taxes.
F-22
The principal components of the Company's deferred income tax assets and deferred income tax liabilities are as follows:
Deferred income tax assets:
Tax loss carryforwards
Less: valuation allowance
Deferred income tax assets, net
Deferred income tax liabilities:
Net assets of Research Institute granted to Research Center
Forward contract
Property, plant and equipment
Total deferred income tax liabilities
December 31,
2014
US$
2013
US$
727,711
(727,711)
-
1,185,638
(604)
15,766,517
16,951,551
73,182
(73,182)
-
3,134,131
-
16,294,575
19,428,706
The Research Institute was established with a registered capital of approximately US$0.4 million in 2007. The Research Institute provided research and development services to
the Company's ultimate end customers. In December 2010, for tax purposes and because the Research Institute could not meet the Company's development needs, the
Company dissolved the Research Institute and formed a new legal entity, Heilongjiang Xinda Enterprise Group Macromolecule Materials R&D Center Company Limited
("Xinda Group Material Research"). Based on applicable regulations promulgated by the local Civil Affairs Bureau, only the local government has the authority for the
distribution of the assets of the Research Institute upon liquidation. Therefore, the Company dissolved the Research Institute by distributing the net assets of the Research
Institute in the amount of US$84.0 million to the local government. The difference between the net assets in the amount of US$84.0 million and the amount of the initial
registered capital of US$0.4 million represents undistributed accumulated profit generated by the Research Institute from its inception date to its liquidation
date. Simultaneously, the local government granted the net assets back to the Research Center, the newly established subsidiary of Harbin Xinda in December 2010. The
Research Center was established with a registered capital of approximately US$0.5 million funded by cash. A loss equal to the net assets of the Research Institute distributed
to the local government was recognized in other expenses and a government grant for the receipts of the same assets back from the local government was recognized as other
income in the consolidated statements of comprehensive income. Pursuant to the local tax regulations, the net assets granted to the Research Center are not subject to income
tax to the extent the Research Center spends a total of US$84.0 million in five years from the date of grant. The expenditures of US$84.0 million will not be deductible for income
tax purposes. As a result, the Company recognized a deferred income tax liability in the amount of US$21.5 million in connection with the net assets granted to the Research
Center as of December 31, 2010. To the extent that the Company has spent on research and development equipment during the five years from the date of grant, deferred
income tax liabilities relating to the net assets of Research Institute granted to Research Center will be reclassified to deferred income tax liabilities relating to property, plant
and equipment, and recognized in profit or loss over the useful life of the asset.
F-23
The movements of the valuation allowance are as follows:
Balance at the beginning of the year
Expiration due to liquidation
Additions of valuation allowance
Reduction of valuation allowance
Balance at the end of the year
2014
US$
Years Ended December 31,
2013
US$
2012
US$
73,182
-
662,151
(7,622)
727,711
556,677
(437,762)
72,305
(118,038)
73,182
1,005,361
-
41,110
(489,794)
556,677
The valuation allowance as of December 31, 2014, 2013 and 2012 was primarily provided for the deferred income tax assets of certain Entities, which were at cumulative loss
positions. As of December 31, 2014, for U.S. federal income tax purposes, the Company had tax loss carryforwards of (i) US$374,721 from Xinda US, of which US$2,581,
US$212,659 and US$159,481 would expire by 2032, 2033 and 2034, respectively, if unused, (ii) US$1,247,021 from subsidiaries in PRC, of which US$19,371, US$67,201, and
US$1,160,448 would expire by 2017, 2018 and 2019, respectively, if unused, and (iii) US$1,762,003 from subsidiaries in HK, which could be carried forward indefinitely to be
offset against future profits. In view of the cumulative losses for the entities concerned, 100% valuation allowances were provided against their deferred income tax assets as of
December 31, 2014, 2013 and 2012, which in the judgment of the management, are not more likely than not to be realized.
A reconciliation of the beginning and ending amount of total unrecognized tax benefits for the year ended December 31, 2014 is as follows:
Balance at beginning of year
Increase related to current year tax positions
Balance at end of year
2014
US$
Year ended December 31,
2013
US$
2012
US$
8,807,490
5,801,768
14,609,258
-
8,807,490
8,807,490
-
-
-
At December 31, 2014, 2013 and 2012, there are US$12,544,088, US$6,690,841 and nil of unrecognized tax benefits that if recognized, would affect the annual effective tax rate.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and does not recognize penalties. During the years ended December 31, 2014,
2013 and 2012, the Company recognized approximately US$1,322,135, nil and nil of interest expense. The Company had approximately US$1,322,135 and nil for the payment of
interest accrued related to unrecognized tax benefits at December 31, 2014 and 2013, respectively. US$14,025,825 of unrecognized tax benefits were included in non-current
income taxes payable. US$583,433 of unrecognized tax benefit were presented as a reduction of the deferred income tax assets for tax loss carryforwards since the uncertain tax
position would reduce the tax loss carryforwards under the tax law. The unrecognized tax benefits represent the estimated income tax expenses the Company would be required
to pay, should the income tax rate used, taxable income and deductible expenses for tax purpose recognized in accordance with tax laws and regulations. The Company is
currently unable to provide an estimate of a range of the total amount of unrecognized tax benefits that is reasonably possible to change significantly within the next twelve
months.
The tax returns of the U.S. Entities are subject to U.S. federal income tax examination by tax authorities for the years from 2012 to 2014. According to the PRC Tax
Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding
agent. The statute of limitations is extended to five years under special circumstances where the underpayment of taxes is more than US$15,000. In the case of transfer pricing
issues, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. The tax returns of the Company's PRC subsidiaries for the years from
2012 to 2014 are open to examination by the PRC tax authorities.
F-24
Note 14 – Common Stock
Pursuant to the amended Article of Incorporation dated March 12, 2009, the Company's authorized share capital is 550,000,000 shares, consisting of 500,000,000 shares of
common stock (US$0.0001 par value), and 50,000,000 shares of all classes of preferred stock (US$0.0001 par value).
Note 15 – Preferred Stock
Series B preferred stock
The Company issued 1,000,000 shares of Series B preferred stock to XD Engineering Plastics in December 2008. The Series B preferred stock is not convertible or
redeemable. The holder of Series B preferred stock has 40% of the total voting power of the Company on a fully diluted basis. Holders of Series B preferred stock are not
entitled to receive dividends. In the event of any liquidation, dissolution or winding up, whether voluntary or involuntary, the holders of issued and outstanding shares of
Series B preferred stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the common stockholders and any other
series of preferred stock ranking junior to the Series B preferred stock with respect to liquidation, US$1.00 per share in cash. The holders of Series B preferred stock will not be
entitled to any further participation in any distribution of assets by the Company.
Redeemable Series D convertible preferred stock
On August 15, 2011, China XD entered into a securities purchase agreement (the "Securities Purchase Agreement") with MSPEA Modified Plastics Holding Limited, a Cayman
Islands company and an affiliate of Morgan Stanley Private Equity Asia III Holdings (Cayman) Ltd, a Cayman Islands limited liability company ("MSPEA"), XD Engineering
Plastics and Mr. Han, pursuant to which MSPEA purchased 16,000,000 shares of the Company's Series D convertible preferred stock with par value of US$0.0001 per share (the
"Series D Preferred Stock"), for a total consideration of US$100 million or US$6.25 per share. On September 28, 2011, China XD issued 16,000,000 shares of Series D Preferred
Stock and received total gross proceeds of US$100 million in cash. Net proceeds after issuance cost were approximately US$99.1 million.
The significant terms of Series D Preferred Stock are as follows:
(i) Conversion
The holders of the Series D Preferred Stock have the right to convert all or any portion of their holdings into common stock at a price of US$6.25 per share from January 1, 2012
through February 4, 2019, subject to adjustments for stock splits, combinations, dividends or distributions of common stock, merger and reorganization. In addition, if the
Company achieves net income as adjusted to exclude (i) all extraordinary or non-recurring gains or losses for the relevant period, (ii) all gains or losses derived from any
business operation other than the principal business of the Company or otherwise derived outside the ordinary course of business of the Company for the relevant period, and
(iii) all gains or losses attributable to the Series D Preferred Stock ("Actual Profit"), at least RMB360 million, RMB520 million and RMB800 million in 2011, 2012 and 2013,
respectively, each outstanding Series D Preferred Stock will be converted into common stock from September 28, 2014 upon the delivery of a written notice from the Company
to the holders of Series D Preferred Stock. The Company determined that there was no embedded beneficial conversion feature attributable to the Series D Preferred Stock at
the commitment date since the initial conversion price of the Series D Preferred Stock was greater than the price of China XD's common stock.
(ii) Voting
The holders of Series D Preferred Stock have the same voting rights as the common stockholders on an "if-converted" basis. In addition, if 1,600,000 shares or more (adjusted
for any dilutive corporate actions) of Series D Preferred Stock remain outstanding, holders of Series D Preferred Stock have veto rights over certain material corporate actions
of the Company.
(iii) Dividends
Each share of Series D Preferred Stock shall be entitled to dividend or other distribution simultaneously with any dividend or distribution on any shares of the Company's
common stock as if each share of Series D Preferred Stock has been converted to common stock.
(iv) Liquidation preference
In the event of the liquidation, dissolution or winding-up of the affairs of the Company, whether voluntary or involuntary (a "Liquidation"), the holders of Series D Preferred
Stock then outstanding shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders before any payment shall be made to the
holders of shares of common stock by reason of their ownership thereof, but after any payment shall be made to the holders of any Series B preferred stock by reason of their
ownership thereof, with respect to each share of Series D Preferred Stock, an amount equal to the greater of (i) an amount per share that would yield a total internal rate of
return of 15% on the Series D Original Issuance Price, taking into account all cash dividends and/or distributions paid by the Company and received by the holder in respect of
his or her share of Series D Preferred Stock (the IRR Price); and (ii) an amount per share as would have been payable had all shares of Series D Preferred Stock been converted
into the Company's common stock pursuant to a voluntary conversion or a mandatory conversion immediately prior to such Liquidation (without taking into account any
limitations or restrictions on the convertibility of the shares of Series D Preferred Stock).
F-25
(v) Redemption
Upon the occurrence of a triggering event as defined below, the holders of the Series D Preferred Stocks have the option to redeem the Series D Preferred Stock at a price equal
to the IRR Price (the "Redemption Price"), by delivery of written notice to the Company (the "Redemption Request") at least 6 months prior to the proposed date of redemption
(the "Redemption Date").
A triggering event means any of the following events: (I) the occurrence of any of the following: (i) the Actual Profit for the Financial Year ended December 31, 2011 is less than
RMB360 million, or (ii) the Actual Profit for the Financial Year ended December 31, 2012 is less than RMB468 million, or (iii) the Actual Profit for the Financial Year ending
December 31, 2013 is less than RMB608 million, which Actual Profit target has been removed pursuant to the Restated Certificate of Designation filed as of January 27, 2014
(such targets under (I) collectively, the "Actual Profit Targets"); (II) any breach by any of the Company, XD Engineering Plastics and Mr. Han (the "Principal Stockholders") of
any representation, warranty, covenant or other agreement in the Securities Purchase Agreement, the Certificate of Designation, the Registration Rights Agreement, the
Stockholders' Agreement, the Pledge Agreement and the Indemnification Agreements (collectively, the "Transaction Document") that (i) in the case of a breach of a covenant
or agreement that is curable, has remained uncured for 30 days after the holder of Series D Preferred Stock has given written notice of such breach to the Company' Principal
Stockholders and (ii) has had or could reasonably be expected to have a material adverse impact on (a) the business, operations, properties, financial position (including any
material increase in provisions), earnings or condition of the Company, or (b) the value, marketability or liquidity of the Series D Preferred Stock taking into account any
remedies already sought and received in connection with such breach; or (III) the commencement by the Company or any other member of the Company of any bankruptcy,
insolvency, reorganization or of any other case or proceeding to be adjudicated a bankruptcy or insolvency, or the consent by it to the entry of a decree or order for relief in
respect of the Company or any other member of the Company in an involuntary case; or the appointment of a custodian, receiver, liquidator, assignee, trustee, sequestrator
other similar officials of the Company or any other member of the Company for the winding up or liquidation of its affairs.
If any shares of Series D Preferred Stock remain outstanding on February 4, 2019, the holders of such shares shall require the Company to redeem each share of Series D
Preferred Stock at a price equal to the IRR Price (the "Mandatory Redemption Price") no later than six months after the Original Maturity Date.
As of December 31, 2013, the Company concluded that it has met the Actual Profit Targets and that it is not probable any of the triggering events has occurred or is expected
to occur. In addition, the Company concluded that it has met the performance target of RMB360 million, RMB520 million and RMB800 million in 2011, 2012 and 2013,
respectively and accordingly it has the right to request the conversion of Series D Preferred Stock into common stock. As a result, it was not probable that the Series D
Preferred Stock is redeemable as of December 31, 2014. Therefore no changes in the redemption value were recognized during 2014. The Company will assess the probability of
whether the Series D Preferred Stock is redeemable at each reporting period end.
F-26
Pursuant to the Stockholders' Agreement between MSPEA and the Principal Stockholders, if the Company shall at any time issue or sell any shares of common stock or equity
securities, other than an issuance or sale in an exempted issuance, at a price per share, or in the case other equity securities exchangeable or convertible into shares of common
stock, at a conversion or exercise price for a share of common stock (in each case, the "New Issue Price") that is less than the then effective conversion price of Series D
Preferred Stock, the holders of Series D Preferred Stock shall have the right to purchase from the Principal Stockholders, and Principal Stockholders shall sell and transfer to the
holders of Series D Preferred Stock, at par value per share, a number of shares of common stock that is equal to (i) the number of shares of common stock that the Series D
Preferred Stock held by the holders of Series D Preferred Stock would have been convertible into as if the then effective conversion price is equal to the New Issue Price, minus
(ii) the number of shares of common stock that the outstanding Series D Preferred Stock held by the holders of Series D Preferred Stock are convertible into under the then
effective conversion price. The exempted issuance refers to (a) any issuance of common stock upon the conversion of the Series D Preferred Stock; (b) the conversion, exercise
or exchange of options, warrants or convertible securities of the Company that are outstanding and have been fully disclosed to MSPEA as of September 28, 2011; (c) any
issuance of shares of common stock or options to employees, officers, directors or other service providers of the Company pursuant to any stock or option plan duly approved
for such purpose including the board of directors; (d) any issuance of common stock, options, warrants or convertible securities of the Company pursuant to acquisitions or
other strategic transactions, in each case approved by the board of directors and (e) any issuance of adjustment shares that the Principal Stockholders shall sell and transfer to
the holders of Series D Preferred Stock if the Company is unable to achieve the Actual Profit as defined below.
In addition, the Principal Stockholders entered into a pledge agreement with the holders of Series D Preferred Stock to secure the payment and performance of the following
obligations (collectively, the "Secured Obligations"), which are secured by the collateral under the Pledge Agreement between the holders of Series D Preferred Stock and the
Principal Stockholders: (a) the full and prompt payment when due (whether at stated maturity, by redemption or acceleration or otherwise) of all debts, obligations and liabilities
of Principal Stockholders owing to the holders of Series D Preferred Stock; (b) all reasonable costs and expenses incurred by the holders of Series D Preferred Stock to enforce
this Agreement and maintain, preserve, collect and realize upon the collateral. The collateral refers to 16,000,000 shares of common stock, par value $0.0001, of China XD
registered in the name of XD Engineering Plastic.
The holders of Series D Preferred Stock have an option to purchase common stock at par value from the Principal Stockholders if the Company is unable to achieve the Actual
Profit of RMB360 million, RMB520 million and RMB800 million in 2011, 2012 and 2013, respectively. The number of common stock to be purchased is based on a pre-set formula
as specified in the Stockholders' Agreement.
The Stockholders' Agreement was an inducement made to facilitate the investment in the Series D Preferred Stock on behalf of the Company. Therefore, the fair value of the
options issued by the Principal Stockholders to the holders of the Series D Preferred Stock was recognized as additional paid-in capital and reflected as a reduction of the
proceeds allocated to the Series D Preferred Stock. As of September 28, 2011, the fair value of the options was determined to be US$1,501,000 based on the Company's common
stock price on September 28, 2011, and the probability of the Company's future financial projection and the expected volatility of the Company's common stock.
F-27
Note 16 – Warrants
In connection with the issuance of Series C preferred stock on December 1, 2009, the Company also issued Series A investor warrants to purchase a total of 1,320,696 shares of
common stock at an exercise price of US$5.50 per share with a five-year term. On April 3, 2014, 130,435 Series A investor warrants were exercised for 130,435 shares of the
common stocks of the Company. The Company received proceeds of US$596,740 in cash on April 3, 2014. In addition, 894,383 shares of Series A investor warrants were
exercised using cashless method for 472,023 shares of the common stocks of the Company during the year ended December 31, 2014. 295,878 investor warrants expired on
December 1, 2014.
The Company also issued Series A placement agent warrants to purchase a total of 117,261 shares of common stock at an exercise price of US$5.50 per share, with a five-year
term to a third party as part of the placement fee. The exercise price of the Series A investor warrants was adjusted to US$4.90 per share in connection with the common stock
direct offering on October 4, 2010. The warrants expired on December 1, 2014.
In connection with the common stock direct offering on October 4, 2010, the Company issued Series C investor warrants to purchase a total of 1,666,667 shares of common
stock at an exercise price of US$6.00 per share. The warrants are exercisable for a period between April 8, 2011 and October 14, 2011. The Company also issued Series C
placement agent warrants to purchase 166,667 shares of common stock at an exercise price of US$7.50 per share to a third party as part of the placement fee. The warrants
expired on July 6, 2013.
Pursuant to the agreements of the Series A investor warrants, if the Company issues its common stock for a consideration per share less than the exercise price of the Series A
investor warrants, the exercise price of the Series A investor warrants shall be reduced to the lower issuance price. Also, if the Company grants any options or other securities
convertible to its common stock for which the exercise or conversion price is less than the exercise price of the Series A investor warrants, the exercise price of the Series A
investor warrants shall be reduced to the lowest exercise or conversion price. The holders of the Series A placement agent warrants have the same down-round protection as
the holders of the Series A investor warrants. The Company's Series A investor warrants and Series A placement agent warrants with down-round protection are not
considered indexed to a company's own stock under ASC Subtopic 815-40, Contracts in Entity's Own Equity, and accordingly are accounted as derivatives.
The Company also determined that the Series C placement agent warrants are derivatives because the warrants require a net cash settlement if the Company fails to cause the
transfer agent to timely transmit to the warrant holders a certificate or certificates representing the shares of common stock upon exercise.
Accordingly, the Company accounted for these warrants at fair value with changes in fair value recorded in earnings at each reporting period.
There were no outstanding warrants as of December 31, 2014. The outstanding and exercisable warrant balance as of December 31, 2013:
Warrants
Series A investor warrants
Series A placement agent warrants
Total
Exercise Price
US$
Number of Warrants
Outstanding
Remaining
Contractual Life
Years
4.9
5.5
1,320,696
117,261
1,437,957
0.92
0.92
The fair values of these warrants as of December 31, 2013 were calculated using the Black-Scholes option-pricing model with the following assumptions:
Volatility
Expected dividends yield
Fair value of underlying common stock (per share)
Risk-free interest rate (per annum)
F-28
Series A Investor
Warrants
Series A Placement
Agent Warrants
28.9%
0%
5.26
0.16%
28.9%
0%
5.26
0.16%
The changes in the fair value of warrants during the years presented is as follow:
Series A investor
warrants
US$
Series A placement
agent warrants
US$
Series C placement
agent warrants
US$
Total
US$
915,189
89,721
1,004,910
1,929,565
(2,934,475)
-
66,077
(7,586)
58,491
(58,491)
-
-
27,484
(27,484)
-
-
-
-
1,008,750
54,651
1,063,401
1,871,074
(2,934,475)
-
As of December 31, 2012
Change in fair value
As of December 31, 2013
Change in fair value
Exercise of warrants
As of December 31, 2014
Note 17 – Stock based compensation
Stock options issued to employees, directors and consultants
On May 26, 2009, the Board of Directors approved the adoption of the 2009 Stock Incentive Plan (the "2009 Plan"), which provides for the granting of stock options and other
stock-based awards to key employees, directors and consultants of the Company. The aggregate number of common stock which may be issued under the 2009 Plan may not
exceed 7,800,000 shares.
Nonvested shares
On August 7, 2010, the Company's Board of Directors approved the grant of 99,856 nonvested shares to four independent directors, two directors and certain executive officers
and employees. 19,856 shares vested on February 7, 2011 and 80,000 shares vested on August 6, 2013.
On October 24, 2011, the Company's Board of Directors approved the grant of 26,405 nonvested shares to four independent directors, all vested on April 24, 2012.
On August 7, 2012, the Company's Board of Directors approved the grant of (i) 230,000 nonvested shares to certain executive officers and employees which will vest on
August 6, 2015, (ii) 225,000 nonvested shares to 15 consultants which vested on February 7, 2013, and (iii) 10,000 nonvested shares to a former employee which vested on the
date of grant.
On May 8, 2013, the Company's Board of Directors approved the grant of 26,361 nonvested shares to three independent directors, all of which vested on November 8, 2013.
On August 7, 2013, the Company's Board of Directors approved the grant of (i) 192,370 nonvested shares to certain executive officers and employees which will vest on
August 7, 2016; (ii) 674,205 nonvested shares to 17 consultants and two independent directors which vested on February 7, 2014.
On August 7, 2014, the Company's Board of Directors approved the grant of (i) 282,460 nonvested shares to certain executive officers and employees which will vest on
August 7, 2017; (ii) 9,488 nonvested shares to two independent directors which will vest on February 7, 2015.
A summary of the nonvested shares activity for the years ended December 31, 2014, 2013 and 2012 is as follows:
Outstanding as of December 31, 2011
Granted
Vested
Forfeited
Outstanding as of December 31, 2012
Granted
Vested
Forfeited
Outstanding as of December 31, 2013
Granted
Vested
Forfeited
Outstanding as of December 31, 2014
Expected to vest as of December 31, 2014
Number of
Nonvested
Shares
Weighted Average
Grant date Fair
Value
US$
106,405
465,000
(36,405)
(22,000)
513,000
892,936
(311,361)
(4,000)
1,090,575
291,948
(674,205)
(61,030)
647,288
647,288
6.03
4.41
4.39
6.37
4.66
4.52
4.74
4.37
4.89
5.13
4.58
4.47
5.00
5.00
The total fair value of shares vested during the years ended December 31, 2014, 2013 and 2012 was US$3,090,766, US$1,499,941 and US$159,754, respectively.
The Company recognized US$1,003,040, US$3,630,565 and US$1,098,795 of compensation expense in general and administrative expenses relating to nonvested shares for the
years ended December 31, 2014, 2013 and 2012, respectively.
As of December 31, 2014, total unrecognized compensation cost relating to nonvested shares was US$1,806,377, which is to be recognized over a weighted average period of
1.72 years.
F-29
Stock options
On August 7, 2010, the Company's Board of Directors approved the grant of stock options to purchase 445,500 shares of the Company's common stock to two directors and
certain executive officers and employees at an exercise price of US$8.01. The options vest over a three-year period beginning on each anniversary of the date of grant. One-
third of the options expired on August 7, 2011, 2012 and 2013, respectively.
A summary of stock options activity for the years ended December 31, 2013 and 2012 is as follows. There were no stock options activities for the year ended December 31,
2014.
Outstanding as of December 31, 2011
Expired
Outstanding as of December 31, 2012
Expired
Outstanding as of December 31, 2013
Number of
Options
Outstanding
Weighted Average
Exercise Price
US$
297,000
(148,500)
148,500
(148,500)
-
8.01
8.01
8.01
8.01
-
The Company recognized US$127,215 and US$294,460 of share-based compensation expense in general and administration expenses relating to stock options for the years
ended December 31, 2013 and 2012, respectively.
F-30
Note 18– Earnings per share
Basic and diluted earnings per share are calculated as follows:
Numerator:
Net income
Less: Dividends to Series C convertible preferred stockholders
Net income available to the Company's stockholders
Less:
Earnings allocated to participating Series C convertible preferred stock
Earnings allocated to participating Series D convertible preferred stock
Earnings allocated to participating nonvested shares
Net income for basic and diluted earnings per share
Denominator:
Denominator for basic and diluted earnings per share
Earnings per common share:
Basic and diluted earnings per common share
2014
US$
Years Ended December 31,
2013
US$
2012
US$
120,776,369
-
120,776,369
-
(29,552,623)
(1,026,493)
90,197,253
133,838,845
-
133,838,845
-
(33,229,887)
(1,347,073)
99,261,885
85,867,747
(110)
85,867,637
(478)
(21,527,155)
(364,965)
63,975,039)
48,833,434
47,794,028
47,549,275
1.85
2.08
1.35
The following table summarizes potentially dilutive securities excluded from the calculation of diluted earnings per share for the years ended December 31, 2014, 2013 and 2012,
because their effects are anti-dilutive:
Numerator:
Shares issuable upon conversion of Series D convertible preferred stocks
Shares issuable upon exercise of Series A investor warrant
Shares issuable upon exercise of Series A placement agent warrant
Shares issuable upon exercise of Series C placement agent warrant
Shares issuable upon exercise of stock options
F-31
2014
US$
Years Ended December 31,
2013
US$
2012
US$
16,000,000
-
-
-
-
16,000,000
1,320,696
117,261
-
-
16,000,000
1,320,696
117,261
166,667
148,500
Note 19 – Statutory reserves
Under PRC rules and regulations, all subsidiaries of China XD in the PRC are required to appropriate 10% of their net income, as determined in accordance with PRC accounting
rules and regulations, to a statutory surplus reserve until the reserve balance reaches 50% of their registered capital. The appropriation to this statutory surplus reserve must
be made before distribution of dividends to China XD can be made. The statutory reserve is non-distributable, other than during liquidation, and can be used to fund previous
years losses, if any, and may be converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value
of the shares currently outstanding, provided that the remaining balance of the statutory reserve after such issue is not less than 25% of the registered capital.
For the years ended December 31, 2014, 2013 and 2012, China XD' subsidiaries in the PRC made appropriations to the reserve fund of RMB37,156,541 (equivalent to
US$6,030,731), RMB30,075,331 (equivalent to US$4,892,127) and RMB3,737,172 (equivalent to US$599,858) respectively. As of December 31, 2014, 2013 and 2012, the
accumulated balance of the statutory surplus reserve was RMB91,830,755 (equivalent to US$14,924,173), RMB54,674,214 (equivalent to US$8,893,442) and RMB24,598,883
(equivalent to US$3,948,393) respectively.
Note 20– Commitments and contingencies
(1)
Lease commitments
Future minimum lease payments under non-cancellable operating leases agreements as of December 31, 2014 were as follows. The Company's leases do not contain any
contingent rent payments terms.
Years ending December 31,
2015
2016
2017
2018
2019 and thereafter
US$
1,475,625
1,100,034
842,564
775,613
-
Rental expenses incurred for operating leases of plant and equipment and office spaces were US$1,476,640, US$1,042,894 and US$711,310 in 2014, 2013 and 2012, respectively.
There are no step rent provisions, escalation clauses, capital improvement funding requirements, other lease concessions or contingent rent in the lease agreements. The
Company has no legal or contractual asset retirement obligations at the end of leases. The Company's leases do not contain any contingent rent payments terms.
(2) Sichuan plant construction and equipment
On March 8, 2013, Xinda Holding (HK) entered into an investment agreement with Shunqing Government, pursuant to which Xinda Holding (HK) will invest RMB1.8 billion
(equivalent to US$290 million) in property, plant and equipment and approximately RMB0.6 billion (equivalent to US$97 million) in working capital, for the construction of
Sichuan plant. As of December 31, 2014, the Company has a commitment of RMB584.0 million (equivalent to US$94.1 million) mainly for acquisition of equipment.
(3) Contingencies
The Company and certain of its officers were named as defendants in two putative securities class action lawsuits filed on July 15, 2014 and July 16, 2014
in the United States District Court for the Southern District of New York. The Company, after consultation with its legal counsel, believes that the lawsuits
are without merit and intends to vigorously defend against them. Nevertheless, there is a possibility that a loss may have been incurred. In accordance with
ASC Topic 450, no loss contingency was accrued as of December 31, 2014 since the possible loss or range of loss cannot be reasonably estimated.
F-32
Note 21 – Revenues
Revenues consist of the following:
Modified Polyamide 66 (PA66)
Modified Polyamide 6 (PA6)
Plastic Alloy
Modified Polypropylene (PP)
Modified Acrylonitrile butadiene styrene (ABS)
Polyoxymethylenes (POM)
Polyphenylene Oxide (PPO)
Polylactide (PLA)
Others
Subtotal
Service revenue
Total Revenue
2014
US$
Years Ended December 31,
2013
US$
2012
US$
192,374,156
223,122,191
400,306,257
232,421,229
36,804,599
3,606,000
14,830,647
13,952
7,206,661
1,110,685,692
-
1,110,685,692
195,471,978
216,210,438
296,635,139
286,263,653
32,440,913
2,835,335
13,570,734
-
5,373,656
1,048,801,846
2,014,518
1,050,816,364
71,651,635
80,491,488
123,684,058
290,535,039
25,348,218
569,633
-
-
-
592,280,071
7,538,897
599,818,968
The Company has re-categorized its product types as presented above in order to present more updated breakdown of polymer composite materials since the beginning of
2014, and retrospectively adjusted the sales amount of each types for the years ended December 31, 2013 and 2012 in conformity with the new categories.
Note 22 – Selected Quarterly Financial Information (Unaudited)
The following tables show a summary of the Company's quarterly financial information for each of the four quarters of 2014 and 2013 (in millions, except gross margin and per
share amounts):
2014:
Revenues
Gross profit
Net income
Earnings per share
Basic
Diluted
2013:
Revenues
Gross profit
Net income
Earnings per share
Basic and diluted EPS
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$
$
$
$
$
$
$
$
$
307.1 $
58.1 $
35.7 $
0.54 $
0.54 $
315.7 $
65.4 $
43.2 $
0.66 $
0.62 $
264.2 $
52.3 $
19.8 $
0.30 $
0.30 $
223.6
46.6
22.0
0.34
0.34
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
384.5 $
91.3 $
57.4 $
293.1 $
65.7 $
41.1 $
202.2 $
37.2 $
20.8 $
0.89 $
0.64 $
0.32 $
171.0
29.2
14.5
0.23
F-33
Note 23 – Geographic Revenue Information
The following summarizes the Company's revenues from the following geographic areas (based on the location of the customer):
Revenues (in US$ millions)
PRC (excluding HK SAR, Macau SAR and Taiwan)
ROK
Total
Note 24 – Subsequent Events
2014
US$
Years Ended December 31,
2013
US$
2012
US$
970.5
140.1
1,110.6
1,050.8
-
1,050.8
599.8
-
599.8
To facilitate the construction of our production base in Sichuan Province, and the purchase of requisite equipment, on January 23, 2015, local authorities in
Sichuan Province extended the Company a RMB110 million interest-free loan.
For the same purposes stated above, on February 11, 2015, the Nanchong City Government of Sichuan Province, through its investment vehicle, provided
guarantee on the Company’s (1) RMB140 million bank loan accruing at an interest rate of 5.32%, extended by the Bank of Communications and (2)
RMB100 million bank loan accruing at an interest rate of 5.32%, extended by the Bank of Construction. The foregoing loans were extended by the
corresponding bank in 2015, and are due and payable in five installments. The last installment will become due and payable on November 30, 2015.
F-34
Exhibit 10.22
EMPLOYMENT AGREEMENT
BETWEEN
Party A (Employer)
Heilongjiang Xinda Enterprise Group Company Limited
AND
Party B (Employee)
Address:
Legal representative:
Responsible person:
Name: Kenan Gong
Residence:
ID Card No.:
Party A and Party B hereby agree to enter into the present contract (this "Contract") in good faith and based on the principle of equality, voluntariness, mutual agreement
through negotiation in accordance with the Employment Law of the People's Republic of China, Employment Contract Law of the People's Republic of China and other
related laws and regulations and will comply with the terms and conditions set forth hereunder.
1. Type and duration of the contract (all numerals in the capital form)
Article 1 Party A and Party B agree to determine the duration of this Contract by selecting the first form of contract as follows:
(1) Fixed-term contract: This Contract has a duration of FIVE year (SIXTY months) commencing from January 1, 2012 to December 31, 2016, without probation period.
2. Content and place of work
Article 2 Pursuant to the needs of Party A, Party B agrees to perform the work of________________(job description). The job position (or type of the job) may be changed by
mutual agreement of the parties hereto.
Article 3 Party B shall meet the requirements of Party A for this position in respect of time, quality and quantity of the work.
Article 4 Party B agrees to work at the place of No. 9 Dalian North Road, Haping Road Centralized Industrial Park, Harbin Development Zone, Heilongjiang Province arranged
by Party A. The place of work may be changed by mutual consent pursuant to the needs of Party A.
3. Working hours and holidays
Article 5 The working hours of Party B are based on the system of cumulative working hours (standard working hours, irregular working hours and cumulative working hours).
1
Article 6 Where Party A extends the working hours of Party B, then Party B shall be given compensatory leave of an equivalent number of hours or overtime wages for the
extended hours.
Article 7 Party B shall enjoy nationally designated legal holidays and paid leaves and Party A shall ensure that Party B takes at least one day off work per week.
Article 8 Party A shall, in strict compliance with all applicable national and local laws, rules and regulations relating to labor protection, provide all necessary working
conditions and tools for Party B, establish and improve manufacturing processes, formulate standard operating procedures, work requirements as well as a work safety and
sanitation system and related standards.
Article 9 Where Party B engages in any occupational-disease-inductive businesses, Party A shall arrange occupational health inspections before Party B takes up the post and
at the time when Party B leaves the post according to applicable national regulations and during the term of the contract, provide health inspections for Party B at regular times.
Article 10 Party A is obligated to provide Party B with education and training in respect of professional ethics, vocational skills, work safety and sanitation as well as relevant
rules and regulations.
Article 11 Party B shall have the right to refuse to follow Party A's instructions in violation of safety regulations. With respect to any act of Party A and its management staff in
disregard of the safety and health of Party B, then Party B shall have the right to criticize, expose and accuse such acts to the competent authority.
2
5. Remunerations
Article 12 The wages of the employee during the probation period may not be less than the lowest wage level for the same job or less than 80% of the wage agreed upon in
Article 13 hereunder. In no event shall the wage be less than the minimum wage in the place where the employer is located.
Article 13 Upon expiry of the probation period for Party B, Party A shall adopt the first form of wages for Party B according to its wage-related regulations as follows:
(1) Remuneration based on working time. The remuneration of Party B consists of: monthly salary and year-end bonus at the rate of RMB 42,600/month from January to March
2014 and RMB 28,400/month from April to December 2014 and RMB 511,200/year . New rates of remuneration shall apply in the event of any amendments to Party A's wage
system or any change of the job position of Party B.
Article 14 Party A shall pay to Party B a monthly salary in a legal form of currency on the eighteenth day of each month, without deductions or delays for no reasons
whatsoever.
Article 15 If Party A arranges Party B to work longer hours, it shall pay the wage which is not less than 150% of the wage of Party B; if Party B is arranged to work on rest days
and compensatory leave cannot be arranged, then Party B shall be paid with the wage which is not less than 200% of the wage of Party B; if Party B is arranged to work on
legal holidays, Party B shall be paid with the wage which is not less than 300% of the wage of Party B.
Article 16 If Party A undergoes any shutdown, halt of production or close down for not more than one (1) month for reasons that are unrelated to Party B, then Party A shall
pay wages to Party B as per the wage standard agreed upon hereunder; if such scenarios persist more than one (1) month and Party A does not arrange any work for Party B,
then Party A shall pay Party B living expenses no less than the standard of local unemployment insurance benefits.
Article 17 Where Party A extends the working hours of Party B, then Party B shall be given compensatory leave of an equivalent number of hours or overtime wages for the
extended hours.
3
Article 18 Party B shall enjoy annual leave, home leave, funeral leave, etc. according to the law and Party A shall pay all wages as per applicable national and local regulations
or the standards agreed upon hereunder.
6. Social insurance and welfare
Article 19 Party A shall pay for Party B the insurance premium covering retirement, medical, unemployment, work-related injuries, maternity and other social insurance in
accordance with applicable national and local laws, regulations and polices relating to social insurance. For the portion of insurance premium payable by an individual, Party A
may withhold the amount from Party's salary before such payment. In the event of cancellation or termination of this Contract by the parties thereto, Party A shall handle the
transfer of personal files and social insurance for Party B.
Article 20 The medical treatment benefits available to Party B who suffers diseases or non-work-related injuries shall be dealt with according to applicable national and local
policies.
Article 21 The treatment of work-related injuries available to Party B shall be dealt with according to applicable national and local policies.
Article 22 [omitted]
Article 23 Party A shall provide Party B with the following welfare benefits: as per the company's rules and regulations.
7. Labor disciplines, rules and regulations
Article 24 Party A shall make public and notify Party B of all rules and regulations formulated by it according to the law.
Article 25 Party B shall strictly abide by the rules and regulations formulated by Party A, complete work tasks, improve professional skills, enforce labor safety and sanitation
regulations and comply with labor disciplines and professional ethics.
Article 26 If Party B violates any labor disciplines, Party A may impose relevant administrative resolution, administrative sanction, economic punishment up until termination of
the contract.
8. Amendment, termination and renewal of the contract
Article 27 In the event the objective circumstances relied on at the time of the conclusion of the employment contract have materially changed, making performance thereof
impossible, both Parties shall negotiate to amend the relevant provisions hereof.
Article 28 The Contract can be rescinded upon mutual agreement between both Parties.
Article 29 Party A may terminate the Contract if Party B (i) failed to satisfy the recruitment requirement of Party A during the probationary period, (ii) seriously violated the
Party A's rules and policies, (iii) simultaneously had an employment relationship with another Employer, seriously affecting the completion of his/her work tasks with the
Employer, or, after having the same mentioned to him/her by the Employer, he/she refused to rectify the matter; (v)used means such as deceit, or took advantage of the Party
A's plight, to cause it to conclude an employment contract or amend the same in a manner contrary to its true intent; (vi) has criminal liability pursued against him/her in
accordance with the law.
4
Article 30 In the following circumstance, Party A may nullify the Contract by sending a 30 days prior written notice or paying one month salary to Party B:
(i) Party B has fallen ill or has sustained off-duty injury and cannot engage in the original work or cannot or is not willing to engage in any other work assigned by Party
A to him upon the conclusion of his medical treatment;
(ii) Party B has been incapable of doing his job and remains incapable of doing so after receiving training or being transferred to another post, and refused to accept the
arrangement;
(iii) Both parties fail to reach agreement as to the amendment to the Contract according to article 27.
Article 31 If Party A is in a period of statutory reorganization due to its imminent bankruptcy or encounters major difficulties in its operations, it shall inform the trade union or
all workers of the situation thirty (30) days in advance, hear the opinions of the trade union or all workers, and report to the labor and social security authority before
rescinding the Agreement。
Article 32 Party A shall not nullify this Contract in accordance with article 30 and article 31 in any of the following situations:
(1) Party B is engaged in operations that would expose him to occupational disease hazards and has not undergone an occupational health check-up before leaving work,
or is suspected of having contracted an occupational disease and is being diagnosed or under medical observation;
(2) Party B suffers from an occupational disease or has sustained work-related injury and has been determined to be disabled;
(3) Party B suffers from an illness or non-work-related injury and the proscribed time period of medical treatment has not expired;
(4) Party B, in case of a female employee, is in her pregnancy, confinement or nursing period;
(5) Party B has been working for the employer for 15 or more consecutive years and is less than 5 years away from the statutory age for his retirement;
(6) Party B acts as and is performing his duty of collective bargaining representative;
(7) other circumstances as set forth by laws.
5
Article 33 In any of the following situations, Party B may terminate this Contract at any time and Party A shall pay the remuneration and social insurance contribution as
required by law:
(i) Party A fails to provide work protection or working conditions in accordance with the employment contract;
(ii) Party A fails to pay labour compensation on time and in full;
(iii) Party A fails to pay social insurance premiums for Party B in accordance with the law;
(iv) the rules of Party A violate laws or regulations, harming the rights and interests of Party B;
(v) Party A is in any of the circumstances as described in article 26 of the Labor Contract Law of the PRC, which makes the Contract invalid;
(vi) other circumstances under which Party B can terminate the Contract according to the applicable laws.
Article 34 Party B shall terminate the Contract by sending a 30 days prior written notice to Party A.
Article 35 The Contract shall terminate automatically upon its expiration. The Contract can also be renewed by mutual agreement between both Parties.
Article 36 In the event that both Parties still maintain the employment relationship upon expiration of this Contract, both Parties shall renew the Contract in a timely manner. In
the event that both Parties fail to reach agreement upon the term of the renewed Contract, such new or renewed contract shall be valid at least for a period of 60 months as of
the date of execution. If Party B satisfies the conditions for an open-ended contract, Party A shall execute such open-ended contract with Party B.
6
Article 37 The Contract, in case of open-ended contract, shall terminate upon occurrence of any statutory termination conditions or any termination conditions as agreed upon
between both Parties.
9. Severance pay and economic compensation
Article 38 In the event that Party A fails to pay remuneration in full in a timely manner or does not pay for overtime work according to any provisions hereunder or national
rules and regulations, apart from full payment of remuneration within designated timeframe, Party A shall also pay a compensation more than 50% but less than 100% of the
amounts payable. Where the rate of remuneration paid by Party A is less than the local minimum salary, then it shall top up the portion of the amount less than the local
minimum salary and further pay a compensation more than 10% but less than 100% of the amounts payable.
Article 39 If Party A terminates this Contract, except to the extent set forth in Article 29 hereunder, Party shall pay Party B severance pay in accordance with Article 47 of the
Employment Contract Law of the People's Republic of China.
Article 40 In cases where Party B's termination of this Contract in violation of said regulations or provisions agreed upon hereunder has caused losses to Party A, then Party B
shall compensate the losses sustained by Party A as follows:
(a) the training fee and recruitment costs paid for it by Party A;
(b) direct economic losses in respect of the production, management and business of Party A;
(c) other costs and expenses subject to compensation as agreed upon hereunder.
10. Liability for breach of contract
Article 41 The liability for any breach of contract by whichever party hereto shall be dealt with according to the Contract Law and relevant rules of the company.
11. Other matters agreed upon by parties hereto
Article 42 _____[none]_________________________________
7
12. Labor dispute settlement
Once a labor dispute occurs, the parties hereto may apply to the labor dispute mediation committee of the employer for mediation; if it cannot be settled through mediation and
a party hereto requests arbitration, then the dispute shall be submitted within sixty (60) days of the date of such dispute to a labor dispute arbitration committee for arbitration.
Any party hereto may also directly apply to a labor dispute arbitration committee for arbitration. The party who objects to the ruling of the committee may lodge the case before
a people's court.
13. Miscellaneous
Article 43 The following agreement for special purposes and the rules and regulations are provided as the attachments hereto and shall have equal legal effect.
Article 44 The parties hereto may settle through negotiation all matters that are not covered hereunder; matters in disagreement with any future national laws or administrative
regulations shall be dealt with in accordance therewith.
Article 45 This Contract is made in two copies, one for each.
Article 46 Party B hereby confirms the following address as the address for service of all document and instruments relating to employment relations. Party B shall notify in
writing Party A of any change of the address in a timely manner.
8
Exhibit 21.1
Company Name:
Favor Sea Limited
Xinda Holding (HK) Company Limited
Xinda Holding (HK) US Sub Inc
Xinda (HK) Trade Company Limited
Xinda (HK) International Trading Company Limited
Al Composites Materials FZE
Heilongjiang Xinda Enterprise Group Company Limited
Heilongjiang Xinda Investment Company Limited
Heilongjiang Xinda Composite Materials Company Limited
Heilongjiang Xinda Enterprise Group Macromolecule Material Research Center Company Limited
Harbin Xinda Plastics New Material Company Limited
Heilongjiang Xinda Software Development Company Limited
Heilongjiang Xinda Meiyuan Tennis Club Company Limited
Heilongjiang Xinda Enterprise Meiyuan Training Center Company Limited
Heilongjiang Xinda Enterprise Group Technology Center Company Limited
Sichuan Xinda Enterprise Group Company Limited
Sichuan Xinda Enterprise Group Meiyuan Training Company Limited
Sichuan Xinda Enterprise Group Software Development Company Limited
Sichuan Xinda Enterprise Group Sales Company Limited
Nanchong Xinda Composite Materials Company Limited
Jurisdiction
British Virgin Islands
Hong Kong
New York, United States of America
Hong Kong
Hong Kong
United Arab Emirates
People's Republic of China
People's Republic of China
People's Republic of China
People's Republic of China
People's Republic of China
People's Republic of China
People's Republic of China
People's Republic of China
People's Republic of China
People's Republic of China
People's Republic of China
People's Republic of China
People's Republic of China
People's Republic of China
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
China XD Plastics Company Limited:
We consent to the incorporation by reference in the registration statements on Form S-3/A (No. 333-167423 and No. 333-164027) of China XD Plastics Company Limited of our
reports dated March 16, 2015, with respect to the consolidated balance sheets of China XD Plastics Company Limited as of December 31, 2014 and 2013, and the related
consolidated statements of comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2014, and the
effectiveness of internal control over financial reporting as of December 31, 2014, which reports appear in the December 31, 2014 annual report on Form 10-K of China XD
Plastics Company Limited.
Our report dated March 16, 2015, on the effectiveness of internal control over financial reporting as of December 31, 2014, expresses our opinion that China XD Plastics
Company Limited did not maintain effective internal control over financial reporting as of December 31, 2014 because of the effect of one material weakness on the achievement
of the objectives of the control criteria and contains an explanatory paragraph that states that the material weakness related to the Company's lack of sufficient accounting and
financial reporting personnel has been identified and included in management's assessment.
/s/ KPMG
Hong Kong, China
March 16, 2015
Exhibit 31.1
I, Jie Han, the Chief Executive Officer of the registrant, certify that:
CERTIFICATION
(1)
(2)
(3)
(4)
I have reviewed this Annual Report on Form 10-K of China XD Plastics Company Limited, for the year ended December 31, 2014.
Based on my knowledge, this 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 report;
Based on my knowledge, the financial statements, and other financial information included in this 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 report;
The registrant’s other certifying officers 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.
b.
c.
d.
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;
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;
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
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s fourth fiscal quarter 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 officer(s) 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 the registrant’s Board of Directors (or persons performing the equivalent functions):
a.
All significant 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: March 16, 2015
/s/ Jie Han
Name:
Title:
Jie Han
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION
Exhibit 31.2
I, Taylor Zhang, the Chief Financial Officer of the registrant, certify that:
(1)
(2)
(3)
(4)
I have reviewed this Annual Report on Form 10-K of China XD Plastics Company Limited, for the year ended December 31, 2014.
Based on my knowledge, this 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 report;
Based on my knowledge, the financial statements, and other financial information included in this 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 report;
The registrant’s other certifying officers 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.
b.
c.
d.
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;
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;
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
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s fourth fiscal quarter 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 officer(s) 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 the registrant’s Board of Directors (or persons performing the equivalent functions):
a.
All significant 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: March 16, 2015
/s/ Taylor Zhang
Name: Taylor Zhang
Title:
Chief Financial Officer
(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 Plastics Company Limited (the "Company”), on Form 10-K for the year ended December 31, 2014 as filed with the
Securities and Exchange Commission ("SEC”) on the date hereof (the "Report”), each of the undersigned, Jie Han, Chief Executive Officer of the Company and Taylor Zhang,
Chief Financial Officer of the Company, certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
the Report fully complies, in all material respects, with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ Jie Han
Name:
Title:
Jie Han
Chief Executive Officer
(Principal Executive Officer)
March 16, 2015
/s/ Taylor Zhang
Name: Taylor Zhang
Title:
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 16, 2015