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
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
or
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
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
Securities registered pursuant to Section 12(g) of the Act: None
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, 2015 was approximately $102,796,027
As of March 10, 2016, there were 49,406,191 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, 2015
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 ("HLJ Xinda Group") and AL Composites 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 ("HLJ Xinda Group Material Research"). HLJ Xinda Group Material Research is
a professional macromolecular material research and development institution and has 361 certifications from manufacturers in the automobile industry as of December 31, 2015. 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 362 professionals
and 11 consultants, including one consultant who is a member of the Chinese Academy of Engineering. As a result of the combination of our academic and technological expertise, we have a
portfolio of 278 patents, 10 of which we have obtained the patent registration in China and the applications for the remaining 268 of which are pending in China as of December 31, 2015.
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 oil-field 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 28 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, 2015, 361 of HLJ 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, 2015,
144 of our products were in the process of product certification by automobile manufacturers. In addition, since the second quarter of 2014, the Company has developed and maintained its presence
in the Republic of Korea (the "ROK") by selling to a ROK 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"). In addition, we completed and started the trial production in the plant in Dubai, UAE
with additional 2,500 metric tons ("Phase 1") targeting high-end products for the overseas markets. As of December 31, 2015, in domestic market, we had approximately 390,000 metric tons of
production capacity across 84 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwanese conveyer systems. 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 domestic 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. Sichuan Xinda Enterprise Group Co., Ltd. ("Sichuan Xinda") has supplied to its customers
since 2013, backed by production capacity in our Harbin production base. To streamline the management in Sichuan, the Company completed a restructuring in July 2015 by merging its subsidiary in
Nanchong City, the entire registered capital (US$99.99 million) of which was owned by Xinda (Heilongjiang) Investment Co., Ltd, into Sichuan Xinda. The Company expects Sichuan facility to be
completed around the middle of 2016. In order to meet the increasing demand from our customer in the ROK and to develop potential overseas markets, on January 25, 2015, AL Composites
Materials FZE obtained a leased property of approximately 10,000 square meters from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE with constructed building comprising a warehouse,
office and service block with lease term granted 15 years. The Company is planning to complete installing 75 production lines with additional 14,000 metric tons ("Phase 2") of annual production
capacity in that property at the beginning of 2017, bringing total production capacity in Dubai to 16,500 metric tons.
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.
HLJ 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 deregistration of Haikou New Materials, Haikou Technical Center and Haikou
Software and merged Xinda Testing and Xinda Material Research Center into HLJ 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, 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, 2013, 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 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.
In July 2015, Nanchong Composite Materials merged into Sichuan Xinda as part of the efforts to streamline the Company’s management in Sichuan.
On October 16, 2015, Xinda Holding (HK) set up Xinda CI (Beijing) Investment Holding Co., Ltd. ("Beijing Investment") in order to manage domestic companies in mainland China.
4
Corporate Structure
The corporate structure of the Company as of December 31, 2015 was as follows:
5
Our Industry
According to a research report prepared exclusively for the Company and issued by Frost & Sullivan in 2015, China is estimated to have consumed approximately 20.9 million Metric Tons ("MT") of
modified plastic products in 2015, representing an increase of 11.9% compared to 2014. 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 30.3 million MT in
2019, representing compound annual growth rates ("CAGR") of 9.8% and 9.7% by sales volume and revenues from 2015 to 2019. 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), 2009-2019E
6
According to Frost & Sullivan's report, the Chinese automotive modified plastics market has experienced rapid deelopment from 2010 to 2013 with nearly a three-fold growth in terms of revenue and
sales volume during this period. Due to the drop of crude oil price since the latter half of 2014, market price of modified plastics has experienced an obvious decrease, which undulates sales revenue
of the market in 2015. However the overall revenue of Chinese modified plastics has kept stable increase as the fast growing sales volume in different downstream application fields. The market
demand is projected to reach 20.9 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 13.8% and 12.5% from 2015 to 2019, respectively. Approximately 31.5% of the automotive modified plastic consumed in 2014 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, the 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), 2009-2019E
Source: Frost & Sullivan
According to the statistics by the China Association of Automobile Manufacturers ("CAAM") in 2015 China's production volume of automobiles increased from 13.8 million units in 2009 to 24.5
million units in 2015. The market is expected to slow down after several years' rapid growth, though a comparatively high CAGR of 13.8% from 2014 to 2019, reaching 62.0 million units in 2019. 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 106 vehicles per 1,000 inhabitants in 2014, which is significantly below Europe's
average of 793 and United States' average of 503 according to National Bureau of Statistics, US Department of Energy, Eurosta, Frost & Sullivan.
7
Figure 3: Overview of Chinese Macro Economy:
Vehicle Per 1,000 People Comparison (Units per 1,000 People), 2009-2019E
Source: National Bureau of Statistics, US Department of Energy, Eurosta, Frost and Sullivan
•
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 kept a booming trend all the way from 62,880.0 thousand units in 2009 to 144,750.0 thousand units in 2014, and is forecasted to hit a record
of 244,264.0 thousand units by 2019, with a CAGR of 10.7% between 2015 and 2019 as shown in Figure 4.
8
Figure 4: Overview of Chinese Macro Economy: Growth of Automotive Parts, 2009-2018E
Source: National Bureau of Statistics, Frost and Sullivan
•
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
with its GDP increasing from approximately RMB 34,562.9 billion in 2009 to RMB 69,238.0 billion in 2015, and is expected to sustain the steady growth from 2015 to 2019. Per Capita
Consumption Expenditure of Urban Household also shows an optimistic picture with a total nominal increase of 62.8% between 2009 and 2014, and is forecasted to reach RMB 28,243.9 by
the end of 2019. 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.
9
Figure 5: Overview of Chinese Macro Economy: Growth of Nominal GDP and Per Capita Consumption Expenditure of Urban Household (China), [2009-2019E].
Source: National Bureau of Statistics, International Monetory Fund and 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.
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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 31.5% of the total China automotive plastic supply in 2014, decreasing from 35.4% in 2010 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 21.5% by the end of 2019, while the share of domestic manufacturers is forecast to rise to 78.5% in 2019 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.
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 is expected that the 13th Five-Year Plan to be launched in 2016 is likely to include favorable policies toward advanced technologies in developing new materials, aviation and space.
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.
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●
●
●
●
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.
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.
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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 Poly Ether 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)
Modified Polyamide 6 (PA6)
Plastic Alloy
Modified Polypropylene (PP)
Modified Acrylonitrile butadiene styrene (ABS)
Polyoxymethylenes (POM)
Polyphenylene Oxide (PPO)
Modified Polyphenylene Sulfide (PPS)
Modified Polylactic Acid (PLA)
Number of Products
Certified
34
32
110
160
22
1
1
1
-
Characteristics
Abrasive resistance, self-lubrication, high strength, high
temperature resistance, and flame resistance
Automotive or Other Application
Roof handles, door knobs, transmission connection
plates, fan shrouds, glovebox assembles, engine
hoods, stents baffle blocks, trajectory, fasteners, etc.
High temperature resistance, weather resistance, high strength Inner door knobs, door knobs, hand shanks,
transmission connection plates, visor bases, etc.
High impact resistance, high temperature resistance, flame
resistance, platable
Instrument panels, instrument frames, shields,
automotive center stacks, speaker covers, grids, fog
light shells, battery bases, seat armrests, luggage
holders, etc.
Non-toxic, odorless, low density, insulated, and low moisture
uptake
Instrument panels, inner panels, columns, bumpers, air
conditioner shells, door knobs, mudguards, etc.
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
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.
Reproducible, good biological compatibility and totally
degraded
Glove box handle, seat cover, rearview mirror shell,
etc.
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Modified Polyimide (PI)
PEEK*
Total
-
N/A
361
Flame resistance, high strength, high temperature resistance,
corrosion resistance
Compressor blade, piston ring, sealing washer,
bushing, gear, brake block, etc.
Excellent mechanical and chemical resistance and temperature
tolerance
Used in communications and transport electronics
and electrical appliances, machinery, medical and
analytical equipment
*PEEK is primarily used in applications that are unrelated to automotive applications, which does not require certifications and is in the product development stage.
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
54.4% of our total raw materials purchased by volume are sourced from overseas petrochemical enterprises and 45.6% from domestic petrochemical enterprises during the year ended December 31,
2015.
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 or fall in oil prices directly affects the cost of the raw materials. We attempt to mitigate the increase or decrease in our raw materials prices by appropriately raising or lowering the
price for our products to pass the cost or savings 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, 2015, the Company
purchased approximately 80% of the Company's raw materials from seven 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
HLJ Xinda Group and Sichuan Xinda 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 HLJ Xinda Group with 46 employees who have Ph.D. and/or Master's degrees, 284 employees who have Bachelor's degrees,
and 25 employees with Associate Bachelor's degrees. In addition, we have 11 consultants, including one consultant who is a member of the Chinese Academy of Engineering. 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.
To supplement the efforts of our HLJ 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.
14
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:
●
●
●
●
●
●
●
●
●
●
●
Shanyi Du: Member of Chinese Academy of Engineering, Professor of Harbin Institute of Technology
Xiabin Jing: Postdoctoral Advisor and Researcher of Changchun Institute of Applied Chemistry of the Chinese Academy of Sciences
Huixuan Zhang: President of Changchun University of Technology
Baohua Guo: Director of Tsinghua University Laboratory of Polymer
Kai Zheng: Secretary General of China Engineering Plastics Industry Association
Aimin Zhang: Professor of the State Key Laboratory of Polymer Materials Engineering Polymer Research Institute of Sichuan University
Chifei Wu: Professor of East China University of Science and Technology
Chao Bi: Associate Professor of School of Mechanical and Electrical Engineering of Beijing University of Chemical Technology
Tiejun Ge: Professor of Shenyang Chemical University
Yuezhen Bin: Professor of Dalian University of Technology
Su Cheng: Associate Professor of Harbin University of Science and 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.
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 Postdoctoral and Academy Member Workstation in Heilongjiang Province.
Our research and development expenses were US$21,061,345, US$29,434,680 and US$21,258,549 during the years ended December 31, 2015, 2014 and 2013, respectively.
15
Intellectual Property
Patents
As a result of our collection of academic and technological expertise, we have 10 approved patents and 268 pending patent applications in China, as set forth in the following table:
No
1
Patent Name
A sprayed directly material used in car bumper
Supercritical fluid rapid diffusion synthesis of nano calcium carbonate
enhanced microcrystalline polypropylene composites
Application No
200810051570.8
200910073402.3
Date
December 10, 2008
December 11, 2009
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
A method for automotive interior low odor, low VOC, high performance
polypropylene composites
201010258937.0
August 20, 2010
A high heat-resistant PC/ASA alloy material and its preparation method
201010508149.2
A preparation method of polylactic acid used in auto dashboard
A rapid detection method of the tensile property of modified PP used in
auto specially by non-standard situation
201110035716.1
201110094454.6
October 15, 2010
February 11, 2011
April 15, 2011
A high-powered aircraft tail composite material and its preparation
process
A preparation method of polypropylene resin foam particles with
supercritical CO2 act
201110196209.6
July 12, 2011
201110230302.4
August 12, 2011
A high toughness, low warpage and high-mobility PET/PBT/PC alloy
reinforced by glass fiber and its preparation method
201110235189.9
August 17, 2011
A high impact and high heat-resistant flame retardant ABS composite
material reinforce by glass fiber and its preparation process
201110268625.2
September 13, 2011
A high notched impact PA/ASA alloy material and its preparation method
201010230061.9
A method for automotive interior matte, anti-scratch modified
polypropylene composites
201010230064.2
July 19, 2010
July 19, 2010
A high impact and high flow PC/ASA alloy material and its preparation
method
201010258950.6
August 20, 2010
Nano-ZnO filled with modified PEEK film and its preparation method
201010258955.9
August 20, 2010
A lower mold shrinkage ratio method of calcium carbonate /
polypropylene nanocomposites
201010230088.8
September 15, 2010
A preparation method of SiO2/CaCO3 nano-composite particles modified
polypropylene
201010282042.0
September 15, 2010
16
Status
Approved
Approved
Approved
Approved
Approved
Approved
Approved
Approved
Approved
Approved
Pending
Pending
Pending
Pending
Pending
Pending
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
An anti-aging, anti-yellowing, low odor polypropylene composite material
and its preparation method
201010508177.4
October 15, 2010
A alloy material of high-impact, high-brightness ASA
A high heat-resistant and high wear-resistant PEEX composite material
and its preparation process
A preparation process of high weathering color ASA resin
A preparation method of the thermoplastic elastomers PP with high
mobility and high resistance of deformation
201010543439.0
201110347338.0
201110347336.1
201110035725.0
November 15, 2010
January 10, 2011
February 11, 2011
February 11, 2011
A preparation method of polymer composites with high toughness
201110035736.9
February 11, 2011
A special material of cooling grille with high heat resistance and high
weather resistance
201110094466.9
April 15, 2011
A preparation process of ABS alloy with high impact performance and
high heat resistance
201110122586.5
May 12, 2011
A preparation process of centralized control method used in plastic
production line
201110122566.8
May 12, 2011
A preparation method of easily dispersed and easily processed
polyprolene composite material
A preparation method of high heat-resistant and high rigid PLA
composite material reinforced by fully biodegrdable natural fiber
A preparation process of the premixed screening system
A rapid detection method of the impact property of modified plastics
used in automobile specially
201110158511.2
June 14, 2011
201110158512.7
June 14, 2011
201110158488.7
201110158528.8
June 14, 2011
June 14, 2011
A high impact PA6 composite material with core-shell toughening and its
preparation method
201110196226.X
July 13, 2011
A preparation method of the plastic production line with high
performance and high homogeneity
201110233488.9
August 16, 2011
A preparation method of polylactic acid used composite material modified
by hydroxyapatite with supercritical water act
201110268687.3
September 13, 2011
A polypropylene composite material used in battery tank of new source
of energy automobile and its preparation method
201110347320.0
November 7, 2011
A high toughness, low warpage and low mold temperature PET/PA6 alloy
reinforced by glass fiber and preparation method
201110347339.5
November 7, 2011
A preparation method of glass fiber reinforced polyether ether ketone
with high strength and high heat resistance
201110399890.4
December 5, 2011
17
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
A high toughness of polycarbonate blends material and its preparation
method
201110319832.6
December 20, 2011
A high-strength carbon fiber reinforced polyether ether ketone composite
material and its preparation method
201210114931.5
April 20, 2012
A high-impact, green flame retardant PC/ABS alloy material and its
preparation process
201210122281.9
April 25, 2012
A preparation method for heat-resistant and easy processing of natural
fiber reinforced polylactic acid composites
201210147444.9
May 14, 2012
High performance halogen-free flame-retardant PC/ABS composite
material and its preparation method
201210201826.5
June 19, 2012
A high temperature conductive PPO/PA6 alloy material and its
preparation method
201210241856.9
July 13, 2012
High-performance, green flame retardant reinforced PA66 composites
technology
201210260160.0
July 26, 2012
A preparation method of high encapsulation efficiency and stable release
polylactic lysozyme drug microsphere
201210295154.9
August 20, 2012
An antistatic LSOH flame retardant PC/ABS alloy material and its
preparation method
201210296750.9
August 20, 2012
A Supercritical carbon dioxide reactor pressure method for preparing
polypropylene foamed material
201210298694.2
August 22, 2012
A free primer and sprayed directly on the bumper composites
An antimicrobial, dust suppression, halogen-free flame retardant ABS
and its preparation process
201210306240.5
201210305824.0
August 27, 2012
August 27, 2012
A preparation methods of ultra-hydrophobic microporous polymer film
201210358122.9
September 25, 2012
An extrusion grade sisal fiber reinforced polypropylene composite
material and its preparation process
201210357867.3
September 25, 2012
A flame-retardant glass fiber reinforced PA66 and its preparation method
201210370558.X
September 25, 2012
A long glass fiber reinforced polypropylene material and its preparation
method
201210362626.8
September 26, 2012
A modified Kevlar fiber reinforced PA66 material and its preparation
method
201210369747.5
September 29, 2012
The chest protected belts
A non-asbestos and non-metal materials brake pads composite material
and its preparation method
201220526299.0
201210395921.3
October 15, 2012
October 18, 2012
A high toughness wear-resistant fiberglass /PA6 composites for rail
transit fasteners
201210396122.8
October 18, 2012
18
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
A glass fiber reinforced poly (ethylene terephthalate)/polycarbonate alloy
201210403197.4
A wear-resistant, anti-static, flame retardant ultra-high molecular weight
polyethylene composite material
201210402814.9
October 22, 2012
October 22, 2012
A high impact, high heat-resistant PC/PBT alloy material and its
preparation process
201210403095.2
October 22, 2012
A continuous aramid fiber reinforced POM materials and preparation
methods
201210411967.X
October 25, 2012
Graphene/polymer conductive composites
201210411231.2
A production method of antimicrobial, hydrophilic polypropylene particle
201210411680.7
October 25, 2012
October 25, 2012
A glass fiber, SiO2 enhanced toughening polyphenylene sulfide material
and its preparation method
201210439116.6
November 7, 2012
An alcohol solution PA66 material special for intake manifold and its
preparation method
201210442251.6
November 8, 2012
An environmentally friendly self- aromatic polypropylene material and its
preparation process
201210457403.X
November 15, 2012
A mechanical strength polypropylene power lithium battery separator
and its preparation method
201210472283.0
November 21, 2012
A multilayer hot pressing method for preparing hydroxyapatite /
polylactide composite
201210474211.X
November 21, 2012
Preparation of a glass fiber reinforced nylon 66/nylon 6 Composites
201310185041.8
An environmentally friendly foam polypropylene material and preparation
method
201310185228.8
May 20, 2013
May 20, 2013
An ramie fiber reinforced polypropylene composite material and its
preparation process
201310185514.4
May 20, 2013
A high mobility of polyvinyl alcohol/lignin WPC
201310203047.3
A preparation method of reinforced, flame-retardant ABS material
201310367420.9
A applied to electrostatic spraying PPO/PA6 alloy material and its
preparation method
201310367459.0
May 28, 2013
August 22, 2013
August 22, 2013
One kind of aramid pulp-reinforced PA66 composite material and
preparation method
201310367404.X
August 22, 2013
Preparation of a high-performance fiber-reinforced polyphenylene sulfide
composites
201310372289.5
August 24, 2013
19
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
One kind of anti-alcohol solution, low warpage reinforced nylon66
composite material and preparation method
201310372282.3
August 24, 2013
A high-gloss, free paint, scratch-resistant alloy material and preparation
method
201310372789.9
August 26, 2013
A method for preparing an enhanced flame retardant rigid polyurethane
composites
201310467797.1
October 10, 2013
A MARINE with wear-resistant ultra high molecular weight polyethylene
composites
201310468060.1
October 10, 2013
Preparation method of impact-resistant strain of modified polylactic acid
material
201310468059.9
October 10, 2013
A method for preparing low temperature resistance, scratch-resistant
zipper jacket compound for cars
201310468076.2
October 10, 2013
A free spray paint bumper with modified material and preparation method
201310468057.X
An environmentally friendly fire-retardant, high-performance EVA
composite material and preparation method
201310467812.2
October 10, 2013
October 10, 2013
A direct line of long glass fiber reinforced thermoplastic composite
material and its preparation method
201010471859.6
October 12, 2013
A toughening wear-resistant alloy material and preparation method
201310556261.7
November 12, 2013
A high resistance temperature reinforced polyamide 6 material and
preparation method
201310556569.1
November 12, 2013
Preparation of an aircraft engine surrounding high temperature polyimide
composites
201310555389.1
November 12, 2013
Preparation of a high strength of continuous glass fiber reinforced nylon
6 material
201310555451.7
November 12, 2013
A highly weather-resistant polypropylene self-luminous material and
preparation method
201310555483.7
November 12, 2013
A polypropylene foam material and preparation method
One kind of aramid fiber / polyimide composite material and preparation
method
201310559024.6
201310559294.7
November 13, 2013
November 13, 2013
An alloy NiMoB modified talc enhanced Bumper material and its
preparation method
201310559588.X
November 13, 2013
Method for preparing porous polymer composite superhydrophobic
films
201310559589.4
November 13, 2013
A silicone toughening polyphenylene sulfide material and its preparation
method
201310560625.9
November 13, 2013
20
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
A high toughness, wear-resistant rail fasteners with glass/nylon 6
Composites
201310646768.1
December 6, 2013
A high-gloss, avoid spraying PTT/PMMA rearview mirror Compound
and its production process
201310652729.2
December 6, 2013
A keyboard and mouse with anti-bacterial perspiration modified plastics
and its preparation method
201310676101.6
December 13, 2013
A high-strength lightweight hollow glass microspheres toughening PP
material and preparation method
201310721731.0
December 25, 2013
a method for producing a heatproof polyimide composite used for aircraft
engine periphery
201410144739.X
April 12, 2014
Preparation method of a special fiber reinforced skis
A 2D carbon fiber heating cloth
201410144740.2
201410144738.5
A kind of thermoplastic carbon fiber prepreg and its preparation method.
201410145300.9
The preparation method of a kind of special fiber cable oil and gas
exploration
201410146070.8
April 12, 2014
April 12, 2014
April 14, 2014
April 14, 2014
a method for preparing super toughened polylactic acid base composite
material
201410145345.6
April 14, 2014
Preparation method of a glass fiber reinforced polylactic acid base
composite material
201410145388.4
April 14, 2014
Oil and gas exploration prepared by weaving method of special fiber cable
201410205870.2
A high toughness flame retardant PLA/PC alloy
Preparation method of PBO fiber reinforced skis
201410206092.9
201410205670.7
A thermosetting carbon fiber prepreg and its preparation method
201410205668.X
A method for producing a heatproof polyimide composite
201410205669.4
High thermal conductivity high heat resistance carbon fiber heating cloth
201410262691.2
An advantage of specially coupling treated carbon fibers reinforced
PEEK
201410262651.8
May 16, 2014
May 16, 2014
May 16, 2014
May 16, 2014
May 16, 2014
June 13, 2014
June 13, 2014
A high dimensional stability、excellent abrasion resistance PEEK valve
composite
201410262638.2
June 13, 2014
The preparation method of a high-strength PEEK composites
201410262746.X
Preparation of low temperature resistance special fiber reinforced skis
201410262850.9
June 13, 2014
June 14, 2014
21
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
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Pending
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Pending
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
The prepatation method of a kind of long glass fiber reinforced
polypropylene
A Method for preparing high performance PEEK/long glass fiber
composites
201410264159.4
June 16, 2014
201410263606.4
June 16, 2014
A kind of high thermal conductive composite fiber cloth
201410326610.0
Preparation of one kind of ultra light and thin fiber reinforced skids
201410326799.3
A preparation method of jute fiber reinforced polypropylene
A method for producing a polyimide composite
Preparation of Carbon Fiber Reinforced PI Composite Material
Preparation of a high tensile strength of PEEK composites
The preparation method of glass fiber reinforced polypropylene
The preparation method of large tow carbon fiber cable
A toughening polylactic and acid and its preparation method
A high transparent heat-proof polylactic acid based composite material of
the preparation method
201410326831.8
201410326840.7
201410326641.6
201410326616.8
201410365812.6
201410363355.7
201410362495.2
201410413616.1
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
August 21, 2014
A preparation method of PEAK modified epoxy resin system/carbon fiber
cable
201410413361.9
August 21, 2014
The preparation of a high-strength ,high-temperature polyimide
composites
201410413832.6
August 21, 2014
A high-heat-resistant, excellent in abrasion resistance sheet composite
PEEK valve
201410413379.9
August 21, 2014
Toughened prepreg of carbon fiber and its preparation method
201410418312.4
August 25, 2014
A preparation method of poly(lactic 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
22
Pending
Pending
Pending
Pending
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134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
A kind of 3D printing poly lactic acid/leather powder composite materials
and its preparation method
201410690528.6
November 27, 2014
A kind of biodegradable polymer-docetaxel bonding medicine and its
preparation method
201410690529.0
November 27, 2014
A preparation method of polyimide composite material
A preparation method of high toughness biodegradable polylactic acid
foam plastics
A preparation of antibacterial polylactic acid fiber
A kind of poly lactic acid preparation method of lactide ring-opening
polymerization
A modification of PLA material and its preparation method
A method of preparing high strength PLA composites
A kind of twin screw reactive extrusion method ring opening
polymerization preparation of PLA
A method of preparing high toughness PLA composites
A kind of organic molecule catalytic method for preparation of poly lactic
acid
201410691532.4
201410691587.5
201410691901.X
201410697015.8
201410697822.X
201410697790.3
201410697838.0
201410697801.8
201410703493.5
November 27, 2014
November 27, 2014
November 27, 2014
November 28, 2014
November 28, 2014
November 28, 2014
November 28, 2014
November 28, 2014
November 30, 2014
A surface treatment of carbon fiber reinforced thermoplastic polyimide
composites
201410703815.6
November 30, 2014
A carbon fiber-reinforced thermoplastic polyimide composites
A preparation method of the high toughness, high mobility PLA/PP
Alloy
A preparation method of the natural fiber/polylactic acid based
composite materials
201410703816.0
201410704664.6
November 30, 2014
December 4, 2014
201410704612.9
December 4, 2014
A preparation method of the high toughness ABS/PLA-based alloys
201410704588.9
Nanoparticles/CF hybrid reinforced PEEK composite material and its
preparation method
Method for preparing thermoplastic polyimide composites
Boron fiber reinforced polyimide
A method of preparation of carbon fiber prepreg reinforced skis
High mobility TLCP/PES/PEEK composite material and its preparation
method
An PEEK/BaSo4 composite material and its preparation method
Foamed PP and graphite fiber composites preparation methods of
enhancement of skis
201410729719.9
201410730324.0
201410730235.6
201410729635.5
201410729614.3
201410730260.4
201410729634.0
23
December 4, 2014
December 5, 2014
December 5, 2014
December 5, 2014
December 5, 2014
December 5, 2014
December 5, 2014
December 5, 2014
Pending
Pending
Pending
Pending
Pending
Pending
Pending
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157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
Method for increasing the compatibility of PPS/PEEK composite materials
201410730258.7
A compressor valve plate with a modified material and the method
201410733902.6
An automobile air conditioner drive gear with the modified materials and
the method
201410733905.X
December 5, 2014
December 8, 2014
December 8, 2014
Method for preparing high toughness of polycarbonate/polylactic acid-
based alloys
201410733882.2
December 8, 2014
A preparation method of high performance PEEK/carbon fiber composite
material
201410747379.2
December 10, 2014
A preparation method of PEEK composite material
A ternary no return toughening copolymer of polylactic acid composite
material and its preparation method
Sensor with high-performance fiber-reinforced PPS composites
Glass fiber modified wearable Polyimide
An advantage of specially prepared by coupling treatment sio2 reinforced
PEEK
A high-mobility PVA/wood flour composite biomass
One kind of thermal evaporation method graphene Gec
A highly heat-resistant polylactic acid/Wood Flour Composites
201410746978.2
201410747386.2
201410747061.4
201410747053.X
201410747062.9
201410747054.4
201410746877.5
201410747097.2
December 10, 2014
December 10, 2014
December 10, 2014
December 10, 2014
December 10, 2014
December 10, 2014
December 10, 2014
December 10, 2014
Preparation of an enhanced flame retardant polyurethane composites
201410747055.9
December 10, 2014
A process for producing fiber reinforced PA6 dedicated 3D printing
materials processing using a special method
201410747082.6
December 10, 2014
A preparation method of low warpage ABS special 3D printing materials
201410746979.7
December 10, 2014
A preparation method of impact-resistant strain of modified polylactic
acid materials
201410747377.3
December 10, 2014
A preparation method of chemical vapor deposition method graphene
films
201410747180.X
December 10, 2014
A process for producing acrylic polyurethane high-solids coatings
201410747079.4
December 10, 2014
The use of core-shell particles toughening PC and PBT resin
A high strength, high modulus of PEEK composite material and
preparation method
201410747406.6
201410747376.9
December 10, 2014
December 10, 2014
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A modified high-performance carbon fiber composite materials
201410747395.1
December 10, 2014
A kind of microfluidics device prepared by the technology of 3D-printing
201410747264.3
December 10, 2014
A high-retardant polyvinyl alcohol/Wood Flour Composites biomass
201410746938.8
December 10, 2014
A method of processing aids (ACR) improved PVC materials
A preparation method of polylactic acid film
A catalyst with double function activation properties of PLA and
preparation method
A preparation method of high strength and biodegradable PLA
composite material
A high-performance PLA and its preparation method
A kind of biodegradable recycling PLA material and its preparation
method
201410746804.6
201410746939.2
201510949309.x
December 10, 2014
December 10, 2014
December 20, 2015
201510949307.0
December 20, 2015
201510949312.1
201510949306.6
December 20, 2015
December 20, 2015
A high flexibility and heat resistance of PLA modified material and its
preparation method
201510949313.6
December 20, 2015
A kind of inorganic filler biodegradable 3D printing consumables and its
preparation method
201510949636.5
December 20, 2015
A kind of biodegradable 3D printing toughening material and its
preparation method
201510949638.4
December 20, 2015
A low-cost biodegradable 3D printing consumables and its preparation
method
201510949637.x
December 20, 2015
A kind of biodegradable 3D printing reinforced material and its
preparation method
201510949653.9
December 20, 2015
A biodegradable 3D printing alloy material and its preparation method
201510949651.x
December 20, 2015
A kind of suitable for 3D printing chest straps of polylactic acid materials
and its preparation method
201510089885.1
February 28, 2015
A stereoscopic word based on 3D printing
A kind of alloy material for 3D printing
A method of preparation of water-soluble PLA support material for 3D
printing
201520229477.7
201510179994.2
201510180141.0
April 16, 2015
April 16, 2015
April 17, 2015
A kind of high performance PEEK/chopped carbon fiber composite
material and the preparation method
201510180750.6
April 17, 2015
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The preparation method of a high toughness polylactic acid based
composite material
201510180761.4
April 17, 2015
A nylon base composite material for medical strap by 3D printing and the
preparation method
201510180170.7
April 17, 2015
A medical chest straps based on 3D printing technology and its
preparation method
201510290769.6
June 1, 2015
A preparation method of 3D printing support material of PVA with
amylum filled
201510342646.2
June 19, 2015
A preparation method of ASA composite materials for 3D printing
201510342647.7
A kind of PBT/carbon fiber composite material and its preparation method
201510343448.8
A kind of anionic catalytic method for preparation of PLA
A kind of suitable for 3D printing flexible material and its preparation
method
A gear assembly line pen container
201510343470.2
201510343479.3
201510372972.8
A 3D printing PA-12 composite materials and preparation methods
201510425924.0
A kind of PC/ABS alloy for 3D printing
A kind of chitosan fill the PVA support materials for 3D printing
201510425922.1
201510425923.6
A preparation methods of PA-12 composite materials for 3D printing
201510425925.5
A preparation methods of ASA composite materials for 3D printing
201510426034.1
A PCL materials for 3D printing
A PLA/carbon fiber composite materials for 3D printing
A ABS/carbon fiber composite materials for 3D printing
A low-cost PEEK composite materials
A kind of flame retardant PEK-C composite materials
201510426518.6
201510444970.5
201510444857.7
201510442250.5
201510442249.2
June 19, 2015
June 20, 2015
June 20, 2015
June 20, 2015
July 1, 2015
July 21, 2015
July 21, 2015
July 21, 2015
July 21, 2015
July 21, 2015
July 21, 2015
July 21, 2015
July 21, 2015
July 21, 2015
July 21, 2015
The preparation method of PLA composites with higher strength
201510513220.9
High flexibility and heat resistance of modified PLA material and its
preparation method
201510513331.X
August 20, 2015
August 20, 2015
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The preparation method of high toughness PLA composites
201510513381.8
A low hardness material for 3D printing and its preparation method
201510513507.1
A kind of high toughness ABS/PLA base alloy and its preparation
method
201510513987.1
A preparation methods of PLA/carbon fiber composite cable
201510513965.5
A kind of high toughness PC/PLA base alloy and its preparation method
201510513964.0
A PLA/PCL materials for 3D printing
A preparation methods of biodegradable PP composite materials
A kind of twin screw reactive extrusion method ring opening
polymerization preparation of PLA
A 3D printing with PLA wood plastic composite material and its
preparation method
201510513963.6
201510516595.0
201510516697.2
August 21, 2015
August 21, 2015
August 21, 2015
August 21, 2015
August 21, 2015
August 21, 2015
August 21, 2015
August 21, 2015
201510516892.5
August 22, 2015
A kind of biodegradable plastic material
201510516891.0
A water-soluble 3D printing support material and its preparation method
201510517574.0
A kind of modified carbon fiber reinforced PEK-C composite materials
201510518210.4
The preparation method of PLA by catalytic organic molecules
A kind of alloy material for 3D printing
The preparation method of PLA by glue lactide ring-opening
polymerization
A PLA/PCL based materials for 3D printing
A kind of PC/PLA alloy for 3D printing
201510529386.x
201510529324.9
201510529229.9
201510596497.2
201510596496.8
August 22, 2015
August 22, 2015
August 24, 2015
August 26, 2015
August 26, 2015
August 26, 2015
September 19, 2015
September 19, 2015
A preparation methods of PA-12 composite materials for 3D printing
201510596494.9
September 19, 2015
A straw filling masterbatch for car and its preparation method
A kind of flame retardant straw man-made composite panels and its
preparation method
A kind of injection molding with straw powder/PP composite wood
plastic material
201510596493.4
201510598097.5
September 19, 2015
September 21, 2015
201510598151.6
September 21, 2015
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A free aldehyde a two-component straw green adhesive and its
preparation method
A radiation-hardened PEK-C composite materials
A highly transparent and heat resistant PLA based composite materials
and preparation methods
201510598096.0
September 21, 2015
201510598127.2
201510605550.0
September 21, 2015
September 22, 2015
A long natural fiber/PLA based composite materials and preparation
methods
201510605549.8
September 22, 2015
A high toughness, high liquidity PLA/PP alloy and its preparation
method
A kind of chemical modification of two-component straw without
adhesive and its preparation method
201510605551.5
September 22, 2015
201510606502.3
September 23, 2015
A filler masterbatch containing straw fiber and its preparation method
201510620223.2
September 26, 2015
A kind of high toughness of polyolefin/PLA based alloy material and its
preparation method
201510620222.8
September 26, 2015
A straw in organic resin environmental protection plastic masterbatch
and preparation method
201510620187.X
September 26, 2015
A kind of SEBS compound materials for 3D printing and preparation
methods
201510625700.4
September 26, 2015
A straw combined with compound wood plastic material and its
preparation method
201510621223.4
September 28, 2015
A 3D printing in toughening PLA material
201510678609.9
A 3D printing with imitation wood material and its preparation method
201510678582.3
A shock profile ASA modification and preparation method
A kind of suitable for 3D printing PP/SEBS composite materials
A weather resistance type ASA material preparation method
A 3D printing with PA-12/carbon fiber composite material preparation
method
A PEEK composites used for 3D printing
A 3D printing use environmental protection material and its preparation
method
A 3D printing to strengthen PLA material
A 3D printing for PVA/PLA composite materials
201510678508.1
201510678417.8
201510682952.0
201510774246.9
201510776191.5
201510781986.5
201510781729.1
201510781822.2
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Carbon fiber reinforced polylactic acid/hydroxyapatite composite material
preparation method
201510781758.8
November 17, 2015
A PLA/PCL composite materials for 3D printing fixed with chest photo
201510781757.3
November 17, 2015
A carbon fiber thermoplastic composites material and its preparation
method
201510802664.4
November 20, 2015
A kind of plant fiber modified PP composite material and its preparation
process
201510801217.7
November 20, 2015
A straw biodegradable green tableware and its preparation method
201510800686.7
November 20, 2015
A straw packaging products and its preparation method
A long natural fiber/polylactic acid based composite material preparation
method
201510800422.1
201510807808.5
November 20, 2015
November 23, 2015
One kind of resistance to warpage reinforced polyamide 6 material and
preparation method
201310250426.8
June 24,2013
Preparing a polyamide material reinforced with continuous glass fibers
201310250967.0
A low-cost method for preparing hydrophobic material of polypropylene
201310250185.7
A polypropylene self-luminous material and preparation method
A molding method suitable PEEK
A preparation process of heat-stable flame retardant reinforced nylon
composite material
201310250047.9
201010173663.5
201310413691.3
June 24,2013
June 24,2013
June 24,2013
May 17,2010
September 12,2013
An anti-oxidation, high flow, flame retardant ABS and preparation
process
201310413270.0
September 12,2013
An flax oil fiber reinforced polypropylene composite material and its
preparation process
201310413287.6
September 12,2013
A preparation of applying to charging pile casing PC / ABS alloy
compound
A no-spray, high durability, scratch-resistant, flame retardant ABS
Preparation and Process
201310414007.3
September 12,2013
201310414024.7
September 12,2013
An antistatic, low smoke, flame retardant PC/ABS alloy materials and
preparing process
201310414847.X
September 13,2013
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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 361
certifications from automobile manufacturers as of December 31, 2015, which we believe is currently one of the largest portfolios of product certifications in the Chinese automobile modified plastics
industry.
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 2015, approximately 92.6% 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.
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We have been actively extending our distribution network to 8 distributors in 2015 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 84.7%, 86.7% and 79.6% of our revenues for the years ended December 31, 2015,
2014 and 2013, 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. Further information about our major distributors and the director customer, which individually exceeded 10% of our revenues, for the years ended December 31, 2015, 2014
and 2013, is set forth in Note 1 of the notes to the consolidated financial statements of this Annual Report on Form 10-K.
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 completed and run the trial production in the plant in
Dubai, UAE with additional 2,500 metric tons ("Phase 1") targeting high-end products for the overseas markets. We plan to serve customers in oversea markets from our Dubai Composites plant.
Information about geographic revenue is set forth in Note 24 of the notes to the consolidated financial statements of this Annual Report on Form 10-K.
Competition
The PRC automotive modified plastics industry is growing rapidly and highly fragmented with the top three domestic producers occupying less than approximately 26.6% 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 9.5% in 2014 and 11.6% in 2013. In 2015, our sales volume of automotive plastics was approximately 332,144 MT.
As of December 31, 2015, our annual production capacity of automotive plastics was 392,500 MT.
In 2014, the Company developed a customer from the ROK by the sales of mainly higher-end polymer composite materials. Our competitors in the 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.
In addition, we completed and run the trial production in the plant in Dubai, UAE with additional 2,500 metric tons ("Phase 1") targeting high-end products for the overseas markets.
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Currently, HLJ 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 312,000 MT for its modified plastics products used in the automobile industry at the end of
2014, 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 HLJ 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 HLJ 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 136,600 MT and 113,524 MT in 2014 and 2013, 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 35.4% in
2010. 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.
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 9.5% in 2014. The PRC automotive modified plastics industry is growing rapidly and is highly fragmented with the
top three domestic producers occupying less than approximately 26.6% of the market shares in 2014. In 2015, our sales volume of automotive plastics was approximately 332,144 MT,
representing a decrease of 2.7% compared to that in 2014 mostly due to the slowdown of the auto industry in China. As of December 31, 2015, our annual production capacity of
automotive plastics was 392,500 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 361 product certifications from major automotive manufacturers in the PRC as of December 31, 2015,
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.
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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 28 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.
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 professionals, of whom 46 have Ph.D. and/or 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 10 approved patents and 268 pending patent applications with the State Intellectual Property Office of the PRC, or SIPO.
Established Distribution Model. Through 8 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, and in 2014, we entered into South China and Central China market. For the year ended December 31, 2015, Northeast, North, East, Southwest, South, and Central
China account for approximately 38.0%, 15.6%, 31.2%, 1.2%, 1.3% and 5.5% of our revenues, respectively.
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Entry to Overseas Market. In 2015, the Company developed its presence in the Korean market by selling primarily higher-end PA66 and (Long Chain) plastic alloy, US$71.6 million products to
the Korean market, accounting for 7.2% of the total revenues for the year ended December 31, 2015.
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.
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, 2015, we have an installed annual production capacity of 392,500 metric tons, 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 by 2016 and upon its completion, our annual domestic capacity is expected to reach approximately 690,000 MT by 2016. The Company completed
and started the trial production in the plant in Dubai, UAE with additional 2,500 metric tons targeting high-end products for the overseas markets. The Company is planning to complete
installing 75 production lines with additional 14,000 metric tons ("Phase 2") of annual production capacity in that property at the beginning of 2017, bringing total production capacity in
Dubai to 16,500 metric tons.
Focus on R&D and Develop New Product Offerings. We are currently utilizing our R&D 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 Postdoctoral and Academy
Member Workstation in Heilongjiang Province enhancing our research and development capabilities.
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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
9.5% of the market share in 2014, 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 2015. 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.
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,
2015, there were 1,647 employees, including 591 in manufacturing, 362 in R&D, 553 in management, 65 in finance, 58 in sales, purchasing and marketing and 18 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.
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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. In 2015, the China automotive sales and production volume recorded a slower growth rate of 4.68% and 3.25%,
respectively, according to China Association of Automobile Manufacturers. The contraction in automotive sales and production will 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.
Our financial performance may be affected by the prospect of our Dubai facility and the associated expansion into Middle East, Europe and other parts of Asia.
Since 2014, we developed the presence in the ROK by selling to our ROK customer primarily long carbon chain PA plastic alloy and high-performance modified PA66 products, which embarked our
entry into the international market after approximately one year of product development and marketing effort. Although the average number of collection days in 2014 from our ROK customer was
longer than that from customers in China, it was largely within our standard collection term and industry norm (90 days) in 2014. However, we have experienced delayed payments from our ROK
customer in 2015. To better manage its financial risk, we ceased supply to the customer for 60 days. The DSO for ROK customer has increased from 55 days for the year ended December 31, 2014 to
107 days for the year ended December 31, 2015. In addition, we purchased raw materials in the amount of US$70.0 million on behalf of our ROK customer during the second half year of 2015, but did
not receive all the payment. As of December 31, 2015, the amount due from our ROK customer is approximately US$9.5 million. In the event the payment for raw materials and/or the outstanding
accounts receivable become uncollectable despite management's efforts, we will suffer financial losses and as a result, our plan to develop overseas market may be delayed.
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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 has resulted in slower growth of
sales in 2015 and may cause reduction in the sale of vehicles nationwide. The national and local policies over the Chinese automotive industry may continue to impact market demand for
automobiles in 2016 and eventually result in a reduction in our product sales.
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 a slow-down in automobile sales volume growth rate to 4.68% in 2015, compared to 6.86% in 2014, according to 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 84.7% and 86.7% in 2015 and 2014, 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 ROK customer could harm our sales and business operations, financial condition and results of operations. During the third quarter of
2015, the Company experienced a delay in its cash collection from the ROK customer. To better manage its financial risk, the Company ceased supply to the customer while both parties actively
negotiated future pricing and payment terms associated with the Company's high-end products. By the end of 2015, all the outstanding accounts receivable from the ROK customer were collected
and the supply to this customer has been resumed, despite at a slower run rate initially. In the case of any such delay in payment from the ROK customer or other customers in the future, our sales
and business operations, financial conditions and results of operations may be negatively affected.
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, 2015, we
purchased approximately 80.0% of our raw materials from seven major suppliers. The Company purchased equipment from two suppliers, which accounted for 99.8% of the Company's equipment
purchases for the year ended December 31, 2015. 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.
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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.
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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.
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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 HLJ 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 HLJ 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.
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 HLJ 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 HLJ 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.
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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. Subsequently SAT also released the Announcement on Several Issues Related to Enterprise Income Tax for Indirect Asset Transfer by Non-PRC Resident Enterprises
("Announcement 7”), effective from February 3, 2015, which in part supersedes Circular 698.
Announcement 7 addresses indirect share transfer as well as other issues. According to Announcement 7, if a non-PRC resident enterprise transfers the equity interests of or similar rights or
interests in overseas companies which directly or indirectly own PRC taxable assets through an arrangement without a reasonable commercial purpose, but rather to avoid PRC corporate income tax,
the transaction will be re-characterized and treated as a direct transfer of PRC taxable assets subject to PRC corporate income tax. Announcement 7 specifies certain factors that should be considered
in determining whether an indirect transfer has a reasonable commercial purpose. Since Announcement 7 has a short history, there is uncertainty as to its application and in particular, the
interpretation of the term "reasonable commercial purpose.”
Announcement 7 further provides that, the entity which has the obligation to pay the consideration for the transfer to the transferring shareholders has the obligation to withhold any PRC corporate
income tax that is due. If the transferring shareholders do not pay corporate income tax that is due for a transfer and the entity which has the obligation to pay the consideration does not withhold
the tax due, the PRC tax authorities may impose a penalty on the entity that so fails to withhold, which may be relieved or exempted from the withholding obligation and any resulting penalty under
certain circumstances if it reports such transfer to the PRC tax authorities.
We (or a foreign investor) may become at risk of being taxed or imposed a penalty under Announcement 7 and may be required to expend valuable resources to comply with Announcement 7 or to
establish that we (or such foreign investor) should not be taxed under Announcement 7, which could have a material adverse effect on our financial condition and results of operations (or such
foreign investor's investment in us).
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.
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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 HLJ 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
HLJ Xinda Group in 2003. In connection with the construction of Sichuan Xinda Group's factory and production facilities which are in progress and is expected to be completed by the middle of
2016, we obtained the project approvals from Bureau of Development and Reform of Shunqing District, Nanchong City in 2013 and 2015, respectively. In connection with the Phase II construction
of AL Composites which is expected to be completed by the middle of 2016, we obtained the project approval from Engineering & Project Management Department, UAE region Economic Zones
World ("EZW") in June 2015, and the building permit from Department of Planning & Development, Ports, Customs & Free Zone Corporation, Government of Dubai in September 2015, However,
certain other necessary permits relating to the construction and operation of HLJ 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.
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 issued an audit opinion on the financial statements included in our Annual Report filed with the SEC. As auditors of companies that are traded
publicly in the United States and a firm registered with the PCAOB, our auditor is required by the laws of the United States to undergo regular inspections by the PCAOB. However, work papers
located in China are not currently inspected by the PCAOB because the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities.
Inspections of certain other firms that the PCAOB has conducted 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. However, the PCAOB is currently unable to inspect an auditor’s audit work related to a company’s operations in China
and where such documentation of the audit work is located in China. As a result, our investors may be deprived of the benefits of the PCAOB’s oversight of auditors that are located in China
through such inspections.
The inability of the PCAOB to conduct inspections of an auditor’s work papers in China makes it more difficult to evaluate the effectiveness of any of our auditor’s audit procedures or quality
control procedures that may be located in China as compared to auditors outside of China that are subject to PCAOB inspections. Investors may consequently lose confidence in our reported
financial information and procedures and the quality of our financial statements.
42
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.
Our independent registered public accounting firm 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.
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, including our
independent registered public accounting firm, from practicing before the SEC for six months. In February 2014, the initial decision was appealed. While under appeal and in February 2015, the
Chinese member firms of "Big Four” accounting firms reached a settlement with the SEC. As part of the settlement, each of the Chinese member firms of "Big Four” accounting firms agreed to
settlement terms that include a censure, undertakings to make a payment to the SEC, procedures and undertakings as to future requests for documents by the SEC, and possible additional
proceedings and remedies should those undertakings not be adhered to.
If the settlement terms are not adhered to, our independent registered public accounting firm may be suspended from practicing before the SEC which could in turn delay the timely filing of our
financial statements with the SEC. In addition, it could be difficult for us to timely identify and engage another qualified independent auditor to replace our independent registered public accounting
firm. A delinquency in our filings with the SEC may result in NASDAQ initiating procedures, which could adversely harm our reputation and have other material adverse effects on our overall
growth and prospects.
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, 2015, 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.
43
Our management is committed to strengthening our internal controls and complying with Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"). Since 2014 when we were required to comply
with SOX 404, our efforts to improve our internal control over financial reporting include: (1) our accounting staff obtained external training of U.S. GAAP and SEC reporting by qualified entities, (2)
having hired two third-party SOX 404 compliance consultants to help us improve our internal control system, (3) continuing to seek senior qualified people with requisite expertise and knowledge
to help improve our internal control procedures, (4) having adopted internal policies and approval and supervision procedures governing financial reporting, (5) having adopted procedures to
evaluate and assess performance of directors, officers and employees of the Company, and (6) continuing 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, 2015, for U.S. federal income tax purposes, the Company has tax loss carryforwards of US$592,638 and did not owe any U.S. federal income taxes. 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.
44
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, 2015, HLJ 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. HLJ Xinda Group owns the titles to the land and premises of the Qinling Road Factory. HLJ Xinda Group leases the land and premises of the
Dalian Road Factory from Xinda High-Tech. HLJ 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 2016. HLJ 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:
●
●
●
●
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."
45
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 2014 and 2015. 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 HLJ 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.
Governmental control of currency conversions may affect the value of your investment.
A majority of our revenue are earned in Renminbi. 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.
46
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 fluctuation of the Renminbi against the U.S. dollar since July 21, 2005. 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.
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 24.5% 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.
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.
47
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.
48
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 in Heilongjiang is located measures 14,715 square meters (158,391 square feet). The land use right was issued to HLJ 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.
The two lands on which our owned facility in Sichuan are located measures 287,503 square meters (3,094,657 square feet) and 23,859 square meters (256,816 square feet), respectively. The land use
right were issued to Sichuan Xinda by the City of Nanchong and will expire in 2065 and 2085, respectively.
The land on which our owned facility in Dubai is located measures 10,000 square meters (107,639 square feet ) issued to AL Composites by Department of Planning & Development, Ports, Customs
& Free Zone, Government of Dubai.
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"). 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, 2014, the Project was completed. The total cost for the Project was RMB501.5 million. The titles of the five workshops are expected to transfer to the Company in 2016.
As of December 31, 2015, we had approximately 392,500 metric tons of production capacity across 94 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 domestic 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 2,500 metric tons ("Dubai Phase 1”) targeting on high-end products for the overseas markets, which was completed in May 2015. In order to meet the increasing
demand from the ROK and to support penetration in other potential overseas markets, on January 25, 2015, AL Composites Materials FZE obtained a leased property of approximately 10,000 square
meters from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE with constructed building comprising a warehouse, office and service block with lease term granted 15 years. The Company is
planning to complete installing 75 production lines with additional 14,000 metric tons ("Phase 2") of annual production capacity in that property at the beginning of 2017, bringing total production
capacity in Dubai to 16,500 metric tons.
49
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 HLJ 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, HLJ 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 HLJ 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 HLJ Xinda Group as a National Torch Project and a National Spark Plan Project, and has given HLJ Xinda Group the
"Most Valuable High Tech in China" award. HLJ 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 Postdoctoral Workstation.
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. On April 3, 2015, the Company moved to dismiss the Consolidated Class Action Complaint. The Court heard oral argument on the motion
on October 22, 2015, and the motion remains pending.
Based on our initial review of the complaints, the management believes the lawsuits are without merit and intends to vigorously defend against them.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
50
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, 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ending December 31, 2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Number of Holders
As of March 10 2016, there were 454 record holders of our common stock.
Common Stock
High
Low
5.62
6.60
6.45
4.83
5.74
12.70
8.31
6.46
3.76
5.03
4.18
3.91
4.58
5.37
5.05
5.15
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.
Securities Authorized for Issuance under Equity Compensation Plans
The information set forth in Item 12 of this Annual Report on Form 10-K is incorporated herein by reference.
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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.
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, 2010 through December 31, 2015. 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..
52
China XD Plastics Co. Ltd.
Nasdaq Composite Index
Russell Small Cap Completeness Index
$
$
$
81 $
189 $
151 $
100 $
179 $
159 $
97 $
157 $
150 $
70 $
114 $
110 $
98 $
98 $
94 $
100
100
100
12/31/2015
12/31/2014
12/31/2013
12/31/2012
12/31/2011
12/31/2010
Adjusted Closing Stock Price Cumulative Change
*$100 invested on 12/31/2010 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.
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, 2011, 2012, 2013, 2014 and 2015,
and for the last five years in the period ended December 31, 2015. 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
$
$
$
$
2015
2014
2013
2012
2011
999.2
83.7
$
$
1.27
1.27
$
$
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
49,225,566
49,229,460
408.4
1,752.0
107.5
145.6
1,076.4
97.6
578.0
48,833,434
48,833,434
296.5
1,299.7
174.3
148.6
676.8
97.6
525.3
53
47,794,028
47,794,028
47,549,275
47,549,275
47,280,468
47,286,375
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
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 and UAE 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 361 certifications from manufacturers in the automobile industry as of December 31, 2015. 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 362 professionals and 11 consultants, including one consultant who is a 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 integration of our academic
and technological expertise, we have a portfolio of 278 patents, ten of which we have obtained the patent rights and the remaining 268 of which we have applications pending in China as of
December 31, 2015.
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). Since not all the categories have achieved sales during the years of 2015, 2014 and 2013, we only presented the categories which have generated sales.
54
The Company's products are primarily used in the production of exterior and interior trim and functional components of more than 28 automobile brands and 80 automobile models manufactured in
China, including Audi, Mercedes Benz, BMW, Buick, Chevrolet, VW Passat, Golf and Jetta, Mazda, and Toyota. 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. In addition, we completed and run the trial production in the plant in Dubai, UAE with additional 2,500 metric tons ("Phase 1") targeting high-end products
for the overseas markets. As of December 31, 2015, in domestic market, we had approximately 390,000 metric tons of production capacity across 84 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 domestic 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. Sichuan Xinda has supplied to its customers since 2013, backed by production capacity in our Harbin
production base. To streamline the management in Sichuan, the Company completed a restructuring in July 2015 by merging its subsidiary in Nanchong City, the entire registered capital (US$99.99
million) of which was owned by Xinda (Heilongjiang) Investment Co., Ltd, into Sichuan Xinda. The Company expects Sichuan facility to be completed around the middle of 2016. In order to meet the
increasing demand from our customer in the ROK and to develop potential overseas markets, on January 25, 2015, AL Composites Materials FZE obtained a leased property of approximately 10,000
square meters from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE with constructed building comprising a warehouse, office and service block with lease term granted 15 years. The
Company is planning to complete installing 75 production lines with additional 14,000 metric tons ("Phase 2") of annual production capacity in that property at the beginning of 2017, bringing total
production capacity in Dubai to 16,500 metric tons.
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 2015, 2014 or 2013.
55
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 net realizable value (NRV). 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 net realizable value below cost. 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. 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.
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,
2015 and 2014, we had total gross deferred income tax assets of US$1,941,124 and US$727,711 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, 2015 and 2014, our valuation allowance against deferred income tax assets
was US$1,941,124 and US$727,711 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.
56
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.
Recently Issued Accounting Standards
In 2015, the Company elected to early adopt the Accounting Standards Update ("ASU") No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires the debt issuance costs be
presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability, instead of reported on the balance sheet as an asset. The costs will continue to be
amortized to interest expense using the effective interest method. Upon adoption of the guidance, the debt issuance costs in the amount of US$4,243,412 as of December 31, 2014, which were
included in the other non-current assets, have been retrospectively adjusted as a direct deduction of an equivalent amount from the carrying amount of the notes payable as of December 31, 2014.
In 2015, the Company elected to early adopt the ASU No. 2015-11, Simplifying the Measurement of Inventory, which changes the measurement principle of inventory from the lower of cost or market
to lower of cost and net realizable value, and requires prospective adoption. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal and transportation. The ASU eliminates the guidance that entities consider replacement cost or net realizable value less an approximately normal profit
margin when measuring inventory when cost is determined on a first-in-first-out or average cost basis. The Company applied this new measurement principle of inventory as of December 31, 2015.
The adaption of ASU No. 2015-11 does not have any impact on the Company’s consolidated financial statements.
In 2015, the Company elected to early adopt the ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires entities with a classified balance sheet to present all deferred tax
assets and liabilities as noncurrent. The Company adopted this new guidance retrospectively. The adoption of ASU No. 2015-17 does not have any impact on the Company’s consolidated financial
statements.
The Financial Accounting Standards Board issued Accounting Standards Codification ("ASC”) Topic 842, Leases, in February 2016. ASC Topic 842 requires a lessee to recognize all leases,
including operating leases, on balance sheet via a right-of-use asset and lease liability, unless the lease is a short-term lease (one with an accounting lease term of 12 months or less). All (or a
portion of) fixed payments by the lessee to cover lessor costs related to ownership of the underlying assets, or executory costs, that do not represent payments for a good or service will be
considered lease payments and reflected in the measurement of lease assets and lease liabilities by lessees. The new standard does not substantially change lessor accounting from current U.S.
GAAP. The new standard also requires lessees and lessors to disclose more qualitative and quantitative information about their leases than current U.S. GAAP does. The standard is applied
retrospectively, with elective reliefs. The new standard is effective for annual and interim reporting periods beginning after December 15, 2018 for a public business entity. Early adoption is
permitted. The Company has not yet determined the impact of the new standard on its current policies for leases.
The following table sets forth statements of comprehensive income data for the years ended December 31, 2015, 2014 and 2013 in millions 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
2015
Amount
%
Change
%
2014
Amount
%
Change
%
Amount
%
2013
For the Years Ended December 31,
999.2
(817.8)
181.4
(46.4)
135.0
101.9
(18.2)
83.7
100%
(81.8)%
18.2%
(4.6)%
13.6%
10.3%
(1.8)%
8.5%
(10.0)%
(7.9)%
(18.4)%
(8.5)%
(21.4)%
(26.7)%
(0.5)%
(30.7)%
57
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%
Revenues
Fiscal 2015 Highlights
Revenues decreased by 10.0% or US$111.4 million in 2015 as compared to 2014. This was due to approximately 2.7% decrease in sales volume and 5.5% decrease in the average RMB selling price of
our products.
(i) Domestic market
For the year ended December 31, 2015, revenue from domestic market decreased by US$42.9 million as a result of a decrease of 1.0% in sales volume and a decrease of 1.4% in the average RMB
selling price of our products, as compared with those of last year. However more sales were achieved in Southwest China and Central China, because of our marketing efforts to develop new
customers.
Vehicle sales in China grew by 4.7% in 2015, a slower growth than that of 2014, and the slowest rate in approximately 25 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 and dealers by the state backlashed against
automakers contributed to the lower-than-expected growth rate. Further, both automakers and parts manufacturers in China experienced pricing pressure from 2014 to the present. The unusual
volatility of the Chinese stock market since June 2015 also seemed to have certain negative impact on consumer sentiments. As a result, plastic fabricators have been seeking newer products
utilizing lower cost raw materials and more cost-efficient formulations. The pricing of our products is determined with reference to the relatively lower average selling price in response to customer
demand in China.
In order to stimulate the slowdown of the auto industry, on September 29, 2015, the Chinese government implemented a tax incentive policy of 50% reduction of the sales tax for eligible purchase of
vehicles with engines of 1.6 liters and less. This helped the recovery of vehicle sales in China for the fourth quarter of 2015.
(ii) Overseas market
For the year ended December 31, 2015, revenue from overseas market decreased by US$68.5 million, as a result of a decrease of 49.7% in sales volume mostly due to the ceasing supply during the
second half of 2015 to the ROK customer, partially offset by 1.3% increase in the average USD selling price as compared with those of last year. The products sold in overseas market are mainly
higher-end products such as PA66 and Plastic Alloys with much higher selling price for engine bonnet, oil pump, fuse hose and other higher-end auto engine related applications, high-end
appliance components, and circuit boards etc. The Company expects continuing growth opportunities in oversea markets, including the ROK and Europe.
Fiscal 2014 Highlights
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 ROK by selling to a ROK 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, 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. 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.
58
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)
Raw Materials
Others
Sub-total
After-sales Service
Total Revenues
2015
Change
2014
Change
2013
Amount
%
%
Amount
%
%
Amount
%
Revenues
For the Years Ended December 31,
219.1
203.5
350.6
164.8
40.5
3.5
13.0
0
3.4
0.8
999.2
-
999.2
21.9%
20.4%
35.1%
16.5%
4.1%
0.3%
1.3%
0%
0.3%
0.1%
100.0%
-%
100.0%
13.9%
(8.8)%
(12.4)%
(29.1)%
10.1%
(2.8)%
(12.2)%
n/a
(52.8)%
n/a
(10.0)%
%
(10.0)%
59
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%
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%
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)
Raw materials
Total Sales Volume
2015
MT
53,114
58,465
111,314
88,508
16,007
1,049
1,834
1
1,852
332,144
%
Change
%
16.0%
17.6%
33.5%
26.6%
4.8%
0.3%
0.6%
0.0%
0.6%
100.0%
43.6%
18.2%
(2.5)%
(26.5)%
15.3%
0.9%
(8.8)%
n/a
(47.9)%
(2.7)%
2014
MT
36,984
49,447
114,216
120,385
13,884
1,040
2,010
1
3,553
341,520
%
Change
%
MT
2013
10.8%
14.5%
33.4%
35.3%
4.1%
0.3%
0.6%
0.0%
1.0%
100.0%
3.4%
17.8%
8.9%
(14.3)%
23.5%
11.8%
7.5%
n/a
47.2%
0.6%
%
10.5%
12.4%
30.9%
41.3%
35,757
41,989
104,894
140,505
11,244
930
1,870
-
2,413
339,602
3.3%
0.3%
0.6%
-
0.7%
100.0%
The Company continued to shift production mix from traditional Modified Polypropylene (PP) to higher-end products such as PA66, PA6, primarily due to (i) the greater growth potential 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) better quality from
and consumer recognition 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.
Gross Profit and Gross Margin
(in millions, except percentage)
Gross Profit
Gross Margin
Fiscal 2015 Highlights
$
2015
Change
2014
Change
2013
181.4
18.2%
(18.4)% $
(1.8)%
222.4
20.0%
(0.4)% $
(1.3)%
223.4
21.3%
For the Years Ended December 31,
Gross profit was US$181.4 million in the year ended December 31, 2015 compared to US$222.4 million in the same period of 2014, representing a decrease of 18.4%. Our gross margin decreased to
18.2% during the year of 2015 from 20.0% during the same period of 2014 primarily due to pricing pressure resulting from the slowdown of the auto industry in China and lower margin contribution
from the overseas sales. The average RMB selling price of our products reduced by 5.5% for the year ended December 31, 2015 as compared to that of the prior year.
60
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)
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;
(v)
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.
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.
General and Administrative Expenses
(in millions, except percentage)
General and Administrative Expenses
as a percentage of revenues
2015
Change
2014
Change
2013
$
23.8
2.4%
15.5% $
0.5%
20.6
1.9%
26.4% $
0.3%
16.3
1.6%
For the Years Ended December 31,
61
Fiscal 2015 Highlights
General and administrative (G&A) expenses were US$23.8 million in 2015 compared to US$20.6 million in 2014, representing an increase of 15.5%, or US$3.2 million. This increase is primarily due to
the increase of (i) US$1.1 million of corporate events related expenses; (ii) US$0.7 million of travel expenses in connection with our business expansion; (iii) US$0.4 million of fixed assets
depreciation; (iv) US$0.7 other miscellaneous expenses, and (v) US$0.3 million of payroll and welfare expense.
On a percentage basis, G&A expenses in 2015 were 2.4% of revenues, compared to 1.9% of the same period of 2014.
Fiscal 2014 Highlights
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 were 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 2015 Highlights
2015
Change
2014
Change
2013
$
21.1
2.1%
(28.2)% $
(0.5)%
29.4
2.6%
38.0% $
0.6%
21.3
2.0%
For the Years Ended December 31,
Research and development expenses were US$21.1 million in 2015 compared with US$29.4 million in 2014, a decrease of US$8.3 million, or 28.2%, reflecting the Company's efforts to adjust research
and development activities, terminate certain strategically unfit R&D projects earlier and shift to new products primarily for industrialized applications from automotive to other advanced fields such
as ships, airplanes, high-speed rail, 3D printing materials, biodegradable plastics, and medical devices.
As of December 31, 2015, the number of ongoing research and development projects was 144. 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 2015, the Company successfully launched 40 new automobile manufacturers certified products
("AMCP"), which increased its total number of AMCP to 361.
62
Fiscal 2014 Highlights
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. 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, and medical devices.
Operating Income
Total operating income was US$135.0 million in 2015 compared to US$171.7 million in 2014 and US$185.6 million in 2013, representing a decrease of 21.4% or US$36.7 million in 2015, and a decrease of
7.5% or US$13.9 million in 2014. This decrease in 2015 was due to the lower gross profit, higher general and administration expenses and higher selling expenses, partially offset by the lower research
and development expenses, while the decrease in 2014 was primarily due to lower gross profit and higher general and administrative expenses and research and development expenses.
Interest Income (Expenses)
(in millions, except percentage)
Interest Income
Interest Expenses
Net Interest Expenses
as a percentage of revenues
Fiscal 2015 Highlights
2015
Change
For the Years Ended December 31,
2014
Change
2013
$
$
8.2
(42.7)
(34.5)
3.5%
(25.5)% $
2.9%
13.1% $
0.8%
11.0
(41.5)
(30.5)
2.7%
61.8% $
171.2%
258.8% $
1.9%
6.8
(15.3)
(8.5)
0.8%
Net interest expense was US$34.5 million in 2015, compared to net interest expense of US$30.5 million in 2014, primarily due to (i) an increase of US$1.8 million interest expenses resulting from the
issuance of senior notes in 2014. On February 4, 2014, Favor Sea Limited ("Favor Sea (BVI)"), 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 "senior notes"). The senior notes bear interest at a rate of 11.75% per annum and the holding days with the senior
notes in 2015 was 365 days compared to 331 days in 2014 led the interest expense increase; (ii) an decrease of US$2.8 million interest income due to the decrease of average deposit balance in the
amount of US$308.1 million bearing a weighted average interest rate of 2.6% in 2015 compared to US$399.2 million bearing a weighted average interest rate of 2.7% in 2014, leading to the decrease of
interest income;
63
Fiscal 2014 Highlights
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.
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.
Foreign Currency Exchange Gains (Losses)
(in millions, except percentage)
Foreign currency exchange gains (losses)
as a percentage of revenues
2015
Change
2014
Change
2013
$
(2.2)
0.2%
15.8% $
0.0%
(1.9)
0.2%
(176.0)% $
0.0%
2.5
0.2%
For the Years Ended December 31,
Foreign currency exchange losses were US$2.2 million in 2015, compared to US$1.9 million in 2014, and foreign currency exchange gains of US$2.5 million in 2013 mostly due to the appreciation of
US Dollar against RMB during 2014 and 2015 as China loosened the range RMB was allowed to fluctuate.
Gains/losses on foreign currency forward contracts
In 2015, 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$50 million by receiving
RMB4.1 million (equivalent to US$0.7 million) due to the appreciation of US dollars against Chinese Yuan.
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 due to the appreciation of US dollars against Chinese Yuan in June, and had a change of fair value of loss of RMB15,000 for another foreign currency forward contract with a notional amount
of US$50 million.
64
Income Taxes
(in millions, except percentage)
Income before Income Taxes
Income Tax Expense
Effective income tax rate
$
2015
Change
2014
Change
2013
101.9
(18.2)
17.9%
(26.7)% $
(0.5)%
4.8%
139.0
(18.3)
13.1%
(23.0)% $
(60.8)%
(12.8)%
180.5
(46.7)
25.9%
For the Years Ended December 31,
The effective income tax rate in 2015, 2014 and 2013 was 17.9%, 13.1% and 25.9%, respectively. The effective income tax rate increased from 13.1% in 2014 to 17.9% in 2015, primarily due to less profit
generated by Dubai Composites in 2015 compared with that of 2014, which was exempted from income taxes. The effective income tax rate decreased from 25.9% in 2013 to 13.1% in 2014, primarily
due to significant portion of the consolidated profit was generated by Dubai Composites which was established in 2014 and exempted from income taxes.
The effective income tax rate in 2015 differs from the PRC statutory income tax rate of 25% primarily due to (i) Sichuan Xinda's preferential income tax rate, exemption of income tax for the income
earned by Dubai Composites and R&D additional deduction of HLJ Xinda Group and Sichuan Xinda, partially offsetting by (i) non-deductible stock-based compensation expenses; (ii) increase of
valuation allowances against deferred income tax assets of certain subsidiaries, which were at cumulative loss position.
The effective income tax rate in 2014 differs from the PRC statutory income tax rate of 25% primarily due to (i) Sichuan Xinda'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.
Our PRC and Dubai subsidiaries have US$408.1 million of cash and cash equivalents, restricted cash and time deposits as of December 31, 2015, 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.
Net Income
As a result of the above factors, we had a net income of US$83.7 million in 2015, compared to US$120.7 million in 2014 and US$133.8 million in 2013.
65
Selected Balance Sheet Data as of December 31, 2015 and 2014:
(in millions, except percentage)
Cash and cash equivalents
Restricted cash
Time deposits
Accounts receivable, net of allowance for doubtful accounts
Inventories
Prepaid expenses and other current assets
Property, plant and equipment, net
Land use rights, net
Prepayments to equipment and construction 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
Deferred income
Redeemable Series D convertible preferred stock
Stockholders' equity
2015
2014
Change
Amount
119.9
50.9
237.6
234.5
294.7
15.7
571.7
24.5
183.2
19.0
1,752.0
284.3
33.5
257.4
28.0
141.0
107.5
145.6
62.0
97.6
578.0
45.5
12.5
238.5
204.0
249.8
11.3
318.3
11.9
182.2
21.3
1,295.5
99.7
43.4
152.1
17.3
24.5
174.3
144.4
-
97.6
525.3
74.4
38.4
(0.9)
30.5
44.9
4.4
253.4
12.6
1.0
(2.3)
456.5
184.6
(9.9)
105.3
10.7
116.5
(66.8)
1.2
62.0
-
52.7
%
163.5%
307.2%
(0.4)%
15.0%
18.0%
38.9%
79.6%
105.9%
0.5%
(10.8)%
35.2%
185.2%
(22.8)%
69.2%
61.8%
475.5%
(38.3)%
0.8%
N/A
-
10.0%
Our financial condition continued to improve as measured by an increase of 10.0% in stockholders' equity as of December 31, 2015 compared to the prior year. Cash and cash equivalents, restricted
cash and time deposits increased by 37.7% due to cash flows provided by operating activities and increase of short-term and long-term bank loans of US$117.8 million, to meet the need in the capital
expenditures, partially offset by the purchase of and prepayments for property, plant and equipment. Inventories increased by 18.0% as a result of more purchases made by the Company to take
advantage of the lower purchase price of the raw materials and the Company's strategy to stock up the inventory. Increase of deferred income was due to RMB403.6 million (equivalent to US$62.0
million) government grant from authorities in Sichuan Province for the construction of our 4th production base in Sichuan Province. The aggregate short-term and long-term bank loans and notes
payable increased by 28.4% due to utilization of existing lines of credit. We believe our current debt level is manageable. We defined the manageable debt level as the sum of aggregate short-term
and long-term loans, and notes payable over the total assets. Accounts payable and bills payable increased by 48.8% due to utilizing an extension of purchase credit term. As of December 31, 2015,
notes payable was US$145.6 million relating to the 11.75% guaranteed senior notes due in 2019, net of discount.
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, 2015 and 2014, we had US$119.9 million and US$45.5
million, respectively, in cash and cash equivalents, which were primarily deposited with banks in China (including Hong Kong and Macau). As of December 31, 2015, we had US$ 284.3 million
outstanding short-term bank loans (including the current portion of long-term bank loans), including US$64.6 million unsecured loan and US$43.0 million loans secured by accounts receivable,
US$27.1 million loans secured by restricted cash, and US$149.6 long-term bank loans that due in one year. We also had US$107.5 million long-term bank loans (excluding the current portion),
including US$46.0 million loans secured by long-term deposits and US$61.5 million unsecured loan. Short-term and long-term bank loans in total bear a weighted average interest rate of 4.2% 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$145.6 million of 11.75% guaranteed senior notes due
in 2019.
66
A summary of lines of credit and the remaining line of credit as of December 31, 2015 is as below:
(in millions)
Name of Financial Institution
Bank of Communications
Bank of Longjiang, Heilongjiang
Bank of China
HSBC
Agriculture Bank of China
China Construction Bank
ICBC
Subtotal (credit term<=1 year)
Bank of China
Agriculture Bank of China
Subtotal (credit term>1 year)
Total
Date of Approval
December 09, 2014
June 29, 2015
April 28, 2015
September 2, 2014
June 27, 2015
December 25, 2013
October 28, 2015
April 28, 2015
September 2, 2014
December 31, 2015
Lines of Credit, Obtained
Remaining Available
RMB
USD
USD
300.0
300.0
1,394.5
618.1
260.0
300.0
500.0
3,672.6
957.4
140.0
1,097.4
4,770.0
46.1
46.1
214.3
95.0
40.0
46.1
76.9
564.5
147.2
21.5
168.7
733.2
0.3
0
75.4
78.4
30.7
23.1
72.2
280.1
61.2
-
61.2
341.3
We have historically been able to make repayments when due. As of December 31, 2015, we have contractual obligations to pay (i) lease commitments in the amount of US$5.0 million, including
US$1.5 million due in one year; (ii) equipment acquisition and facility construction in the amount of US$127.4 million; (iii) long-term bank loan in the amount of US$274.0 million (including principals
and interests); and (iv) notes payable in the amount of US$211.7 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.
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, 2015, 2014, and 2013:
(in millions, except percentage)
Net cash provided by 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
67
2015
Years Ended December 31,
2014
2013
227.4
(280.3)
131.7
(4.4)
74.4
148.7
(299.3)
99.4
1.1
(50.1)
115.6
(249.9)
143.2
2.8
11.7
FY 2015 Highlights
Operating Activities
Net cash provided by operating activities increased by US$78.7 million for the year ended December 31, 2015 from US$148.7 million for the year ended December 31, 2014, primarily due to (i) the
decrease of approximately US$267.5 million in operating cash payment, including raw material purchases, rental and personnel costs for the year ended December 31, 2015, (ii) the decrease of
US$20.3 million in income tax payments, (iii) the increase of US$3.6 million received from government grant and (iv) cash received of US$0.6 million in 2015 as a result of exercise of forward contract
whereas cash payment of US$1.1 million in 2014 which led to increase of US$1.7 million partially offset by (v) the decrease of approximately US$208.1 million cash collected from our customers and
(vi) the increase of US$6.6 million interest payments for the year ended December 31, 2015.
Investing Activities
Net cash used in the investing activities was US$280.3 million for the year ended December 31, 2015 compared to US$299.3 million for the same period of last year, mainly due to (i) the decrease of
US$152.7 million purchase of time deposits, (ii) the decrease of US$66.7 million purchase of property, plant and equipment, (iii) the increase of US$11.5 million government grant related to the
construction of Sichuan plant, partially offset by (iv) the decrease of US$199.4 million proceeds from maturity of time deposits, and (v) the increase of US$12.5 million acquisition of land use right for
the year ended December 31, 2015.
Financing Activities
Net cash provided by the financing activities was US$131.7 million for the year ended December 31, 2015, as compared to US$99.4 million for the same period of last year, primarily as a result of (i) )
the decrease of US$492.4 million repayments of bank borrowings, (ii) ) the decrease of US$4.7 million issuance costs paid, partially offset by (iii) the decrease of US$293.4 million borrowings of bank
loans, (iv) the decrease of US$148.4 million proceeds from senior notes issued, (v) the increase of US$12.5 million of placement of restricted cash as collateral for bank borrowings, (vi) the decrease
of US$10.0 million release from restricted cash as collateral for bank borrowings, and (vii) the decrease of US$0.6 million proceeds from exercise of Series A investor warrants.
FY 2014 Highlights
Operating Activities
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.
68
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.
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, 2015, our cash and cash equivalents balance was US$119.9 million, compared to US$45.5 million at December 31, 2014.
69
Days Sales Outstanding ("DSO") has increased from 77 days for the year ended December 31, 2014 to 78 days for the year ended December 31, 2015 DSO in the PRC was shorter than the overall
level, which was negatively affected by longer DSO overseas because of prolonged cash collection from the customer in the ROK. The DSO for domestic market has decreased from 81 days for the
year ended December 31, 2014 to 76 days for the year ended December 31, 2015 while the DSO for ROK customer has increased from 55 days for the year ended December 31, 2014 to 107 days for the
year ended December 31,2015. While our DSO overseas was longer than our overall level due to longer collection period from the ROK customer in 2015, we have collected all outstanding accounts
receivable from the ROK customer as of December 31, 2015 and believe that our DSO in PRC is still well below industry average Industry Standard Customer and Supplier Payment Terms (days) as
below:
Customer Payment Term
Purchase Credit Term
Year ended December 31, 2015
Payment in advance/up to 90 days
Payment in advance/up to 90 days
Year ended December 31, 2014 and 2013
Payment in advance/up to 90 days
Payment in advance/up to 60 days
Inventory turnover days has increased from 80 days for the year ended December 31, 2014 to 120 days for the year ended December 31, 2015 due to inventory of raw
materials buildup in anticipation of increasing demand from our customers, especially those located in longer distance.
The Company extended its credit terms with major suppliers from 60 days in 2014 to 90 days in 2015, in order to better manage its operating cash flows. Turnover days of
payables have increased from 56 days for the year ended December 31, 2014 to 90 days for the year ended December 31, 2015.
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.
COMMITMENTS AND CONTINGENCIES
Contractual Obligations
Our contractual obligations as of December 31, 2015 are as follows:
Contractual obligations
Lease commitments
Purchase of land use rights, plant equipment, and
construction in progress (3) (4) (5)
Long-term bank loans (1)
Notes payable (2)
Total
Total
4,950,092
127,369,737
273,975,994
211,687,500
617,983,323
Payment due
less than 1 year
1,469,537
127,083,376
158,171,684
17,625,000
304,349,597
1 – 3 years
3-5 years
2,222,368
286,361
72,234,217
35,250,000
109,992,946
227,042
-
43,570,093
158,812,500
202,609,635
More than 5
years
1,031,145
-
-
-
1,031,145
(1) Includes interest of US$ 16.9 million accrued at the interest rate under the loan agreements. For borrowings with a floating rate, the most recent rate as of December 31, 2015 was applied.
(2) On February 4, 2014, Favor Sea (BVI), 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.
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(3) 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 in property, plant and
equipment and approximately RMB0.6 billion in working capital, for the construction of Sichuan plant. As of December 31, 2015, the Company has a remaining commitment of RMB137.2 million
(equivalent to US$21.1 million) mainly for facility construction, and RMB17.9 million (equivalent to US$2.8 million) for the acquisition of equipment.
(4) On January 5, 2015, AL Composites entered into an equipment purchase contract with Peaceful Treasure Limited ("Peaceful") for a total consideration of US$271.2 million to purchase certain
production and testing equipment. As of December 31, 2015, the Company has a commitment of US$101.2 million for the remaining equipment acquisition. On April 28, 2015, AL Composites entered
into a warehouse construction contract with Falcon Red Eye Contracting Co. L.L.C. for a total consideration of AED6.7 million (equivalent to US$1.8 million). As of December 31, 2015, the Company
has a remaining commitment of US$0.9 million.
(5) As of December 31, 2015, HLJ Xinda Group has a remaining commitment of RMB 8.9 million (equivalent to US$ 1.4 million) for the acquisition of equipment, including 3D printer and storage racks
Off-Balance Sheet Arrangements
Neither us, nor any of our subsidiaries has any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on their financial condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, 2015 would decrease income before income taxes
by approximately US$5.4 million for the year ended December 31, 2015. 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. The People's Bank of China allowed the RMB and U.S. dollar exchange rate to fluctuate within 1%
on April 16, 2012 and 2% on March 17, 2014 respectively. On December 31, 2015, the RMB traded at 6.5060 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.
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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, 2015, 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, 2015 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.
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(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 (2013) issued by the committee of Sponsoring Organizations of the Treadway
Commission (COSO) as of December 31, 2015. 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, 2015 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, 2015, 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, 2015.
Changes in Internal Control Over Financial Reporting
During the twelve months ended December 31, 2015, our efforts to improve our internal controls over financial reporting (1) external training of U.S. GAAP and SEC reporting by qualified entities to
our accounting staff, (2) recruiting qualified accounting staff in AL Composites with requisite expertise and knowledge to help improve our internal control procedures, (3) adopting internal policies
and approval and supervision procedures governing financial reporting, (4) adopting procedures to evaluate and assess performance of directors, officers and employees of the Company, (5)
internal meetings, discussions, trainings and seminars periodically to review and improve our internal control procedures. We plan to improve on the above-referenced weakness by the end of the
fiscal year ending December 31, 2016.
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.
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(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, 2015, based on criteria established in Internal Control – Integrated Framework
(2013) 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, 2015 and 2014, 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, 2015. This material weakness was considered in determining the nature,
timing, and extent of audit tests applied in our audit of the December 31, 2015 financial statements, and this report does not affect our report dated March 15, 2016, 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, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
/s/ KPMG Huazhen LLP
Beijing, China
March 15, 2016
ITEM 9B. OTHER INFORMATION
None.
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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
(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.
Age
50
37
41
81
53
66
44
40
40
Title
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
Date of Initial Appointment
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
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.
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Taylor Zhang. Mr. Zhang has over 13 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 17 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, 66, 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.
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Homer Sun. Mr. Sun, 44, is the Chief Investment Officer of Morgan Stanley Private Equity Asia and leads the fund's China Investments. Mr. Sun is also a Managing Director at Morgan Stanley and
has been at the Firm since 2000 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 Pharmaceuticals Group, Tianhe Chemicals Group and Nature Home. 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.
Jun Xu. Mr. Xu, 40, is a Managing 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 currently serves as a director on the boards of companies including Morgan Stanley (China) Private Equity Investment Management Co., Ltd.,
Dashenlin Medical Group Co., Ltd., Shanghai SVG Yonghui Fresh Foods Co., Ltd., Shanghai Shangshu Agr-Byproducts Co., Ltd., and Inner Mongolia Kerchin Cattle Industry Co., Ltd. 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.
Feng Li. Mr. Li, 53, 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.
77
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 5 meetings during 2015. 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 2015.
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.
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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:
●
●
●
●
●
●
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 2015. The members of the Audit Committee during 2015 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, 2015, 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, 2015.
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 2 meeting during 2015.
The members of the Nominating Committee during 2015 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.
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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.
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 three meeting
during 2015.
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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
2015, 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, 2015 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.
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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.
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:
•
•
•
•
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, 2015, 3,789,376 stock awards and 670,500 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.
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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.
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.
In 2015, 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 2015, Mr. Han is entitled to a base salary of $40,659 (RMB 256,000) per month from January 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.
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Compensation for Mr. Taylor Zhang, the Company's Chief Financial Officer : For fiscal year 2015, Mr. Zhang is entitled to a monthly base salary of $18,060. 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, August 7, 2014 and August 8, 2015, Mr. Zhang received 14,000, 17,220 and 20,440 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 2015, Mr. Ma is entitled to a base salary of $17,947 (RMB 113,000) per month from January 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 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. Ma didn't exercise the options, which expired in 2013. On August 7, 2013, August 7, 2014 and on August 7, 2015, Mr. Ma received 14,000, 17,220 and 20,440 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 2015, Mr. Ma is entitled to a base salary of $7,782 (RMB49,000) per month from January 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 $8.01 per share and 8,000 non-vested shares under our 2009
Stock Option / Stock Issuance Plan. One-third of the stock options shall vest on each anniversary of the grant date over a three-year period. The non-vested shares will vest on the third anniversary
of the grant date. Mr. Ma didn't exercise the options, which expired in 2013. On August 7, 2013, August 7, 2014 and on August 7, 2015, Mr. Ma received 13,530, 16,060 and 18,590 non-vested shares,
respectively, under our 2009 Stock Option/Stock Issuance Plan. The restricted shares shall vest on the third anniversary of the grant date. In addition, Mr. Ma may receive a discretionary bonus as
determined by the Compensation Committee of the Board of Directors at the end of the fiscal year.
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this filing on Form 10-K with management. Based on the Compensation
Committee's review of and the discussions with management with respect to the Compensation Discussion and Analysis, the Compensation Committee has recommended to the Board of Directors
that the Compensation Discussion and Analysis be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 for filing with the SEC.
COMPENSATION COMMITTEE REPORT
Respectfully submitted,
COMPENSATION COMMITTEE
Lawrence W. Leighton
Feng Li
Linyuan Zhai
Homer Sun
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The following table is a summary of the compensation paid to our executive officers for the two years ended December 31, 2015, 2014 and 2013.
SUMMARY COMPENSATION TABLE
Name and Principal Position
Year
Salary ($)
Bonus ($)
Stock
Awards
($)
Option
Awards
($)
Jie Han,
CEO
Qingwei Ma,
COO
Taylor Zhang,
CFO and Secretary to the
Board of Directors
Junjie Ma,
CTO
Rujun Dai
General Manager of HLJ
Xinda Group
2015
2014
2013
2015
2014
2013
2015
2014
2013
2015
2014
2013
2015
2014
2013
487,913
456,729
282,762
268,858
259,284
198,990
216,720
211,414
143,316
128,948
117,334
138,711
55,464
35,257
30,495
-
498,604
166,867
-
-
44,088
-
41,137
-
-
10,812
-
-
-
122,844
73,076
67,536
122,844
73,076
64,920
111,726
62,787
50,664
60,040
-
-
-
-
-
-
11,149
-
-
14,865
-
-
-
Non-Equity
Incentive Plan
Compen-
sation
($)
Change in Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compens-
ation
($)
Total
($)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
487,913
955,333
282,762
391,702
499,227
277,675
339,564
284,490
267,189
240,674
221,258
189,375
115,504
46,069
30,495
(1)
Stock and option awards represent the amount of stock compensation expense recognized in 2015, 2014 and 2013 in accordance with FASB ASC 718.
The following is a summary of all options, unvested stock and equity incentive plans for our executive officers for the year ended December 31, 2015.
89
GRANTS OF PLAN-BASED AWARDS
Grant Date
(Grant
Approval
Date) (1)
Estimated Future Payouts
Under Non-Equity Incentive Plan Awards
Target
Threshold
($)
($)
Maximum
($)
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 (#)
Exercise or
Base Price
of
Option
Awards
($/Sh)
Grant
Date Fair
Value of
Stock and
Option
Awards
Option
Awards
August 7, 2015
August 7, 2015
August 7, 2015
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
20,440
20,440
18,590
-
9,990
-
-
-
-
-
-
-
-
-
122,844
122,844
111,726
-
60,040
Name
Jie Han, CEO
Taylor Zhang, CFO and
Secretary to the Board of
Directors
Qingwei Ma, COO
Junjie Ma, CTO
Rujun Dai
General manager of HLJ
Xinda Group
(1)
(2)
(3)
The "Grant Approval Date" is the date on which our Board of Directors approved the grant.
The Company's equity incentive plan does not provide for thresholds or maximums; the amounts listed represent the actual awards to the named executive officers for fiscal 2014.
These awards represent restricted stock units granted to the individual pursuant to the Company's 2009 Stock Option / Stock Issuance Plan, as amended, for services rendered to the
Company. The Shares shall vest on the date that is three years after August 7, 2014, the date on which our Board of Directors approved such grant. No purchase price was paid for these
awards.
90
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Option Awards
Number of
securities
underlying
unexercised
options (#)
exercisable
Number of securities
underlying
unexercised options
(#) unexercisable
Number of securities
underlying
unexercised options
(#) unexercisable
Option exercise
price ($)
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
($)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
51,660
51,660
48,180
18,910
-
271,491
271,491
252,403
102,510
Name
Jie Han, CEO
Taylor Zhang, CFO and Secretary to
the Board of Directors
Qingwei Ma, COO
Junjie Ma, CTO
Rujun Dai, General Manager of HLJ
Xinda Group
Options Exercised and Stock Vested
The following table shows stock option exercises by the named executive officers during the last fiscal year, including the aggregate value realized upon exercise. This represents the excess of
the fair market value, at the time of exercise, of the common stock acquired at exercise over the exercise price of the options. In addition, the table shows the number of shares of restricted stock held
by the named executive officers that vested during the last fiscal year, including the aggregate value realized upon vesting.
Name
Jie Han
Qingwei Ma
Taylor Zhang
Junjie Ma
Rujun Dai
Pension Benefits
Option Exercises and Stock Vested—Fiscal 2015
Number of
Shares
Acquired on
Exercise (#)
-
-
-
-
-
Option Awards
Value Realized
on Exercise ($)
-
-
-
-
-
Number of
Shares
Acquired on
Vesting (#)
-
-
-
-
-
Stock Awards
Value Realized
on Vesting ($)
-
-
-
-
-
The following table shows the actuarial present value of the pension benefit for the named executive officers as of December 31, 2015.
Pension Benefits—Fiscal 2015
Name
Jie Han
Qingwei Ma
Taylor Zhang
Junjie Ma
Rujun Dai
Employment Agreements
Plan Name
Number of Years
Credited Service (#)
Present Value of
Accumulated Benefit ($)
Payments During
Fiscal 2015 ($)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
All of our officers have entered into employment agreements with the Company.
On December 31, 2011, Jie Han and China XD's subsidiary, HLJ Xinda Group, entered into an employment agreement and an employment memorandum, pursuant to which Mr. Han received a
monthly salary of RMB256,000 (approximately US$40,659) from January to December for 2015. Also, Mr. Han will receive an annual bonus of RMB 3,072,000 (approximately US$487,913), 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 HLJ
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 HLJ Xinda Group, and HLJ 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 HLJ Xinda Group entered into an employment agreement and an employment memorandum, pursuant to which Mr. Zhang received a monthly salary of
US$18,060 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. 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 HLJ Xinda Group at any
time and HLJ 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 HLJ Xinda Group on December 31, 2011.
91
On December 31, 2011, Qingwei Ma and HLJ Xinda Group entered into an employment agreement and an employment memorandum, pursuant to which Mr. Ma received a monthly salary of
RMB113,000 (approximately US$17,947 from January to December 2015. Also, Mr. Ma will receive a performance based bonus of RMB2,382,000 (approximately US$378,323), 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 HLJ 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 HLJ Xinda Group at any time and HLJ 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 HLJ Xinda Group on December 31, 2011.
On December 31, 2011, Junjie Ma and HLJ Xinda Group entered into an employment agreement and an employment memorandum, pursuant to which Mr. Ma received a monthly salary of $7,782
(RMB49,000) per month from January to December, 2015. In addition, Mr. Ma will receive a performance based bonus of RMB963,000 (approximately US$152,949), 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 HLJ 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 HLJ
Xinda Group at any time and HLJ 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, Rujun Dai and HLJ Xinda Group entered into an employment agreement and an employment memorandum, pursuant to which Mr. Dai received a monthly salary of $3,335
(RMB21,000) per month from January to December, 2015. In addition, Mr. Dai will receive a performance based bonus of RMB417,000 (approximately US$66,230), 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 HLJ Xinda Group's
compensation management policy. The term of employment is three years beginning on January 1, 2014. The employer and employee may reach consent to terminate Mr. Dai's employment with HLJ
Xinda Group at any time and HLJ Xinda Group has the right to unilaterally terminate Mr. Dai's employment prior to the expiration of the employment term under certain circumstances, with a one-
month prior notice.
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 RMB60,000 (approximately $9,530) after the first 18 months of
continuous directorship and RMB36,000 (approximately $5,718) 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 $7,941) 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 $7,941) after 18 months of continuous directorship. During the year ended December 31, 2015, the Company issued this
stock award of 10,907 for the service rendered during the year ended December 31, 2014. The Company also accrued and recorded the stock award for the service rendered during the year ended
December 31, 2015 as share base compensation expense. The Company has repurchase rights on the unvested shares of the stock award.
92
The following is a summary of the compensation paid to our non-employee directors for the year ended December 31, 2015. Our employee directors do not receive compensation for their services to
the Company as directors.
DIRECTOR COMPENSATION
Name (1) (2)
Lawrence Leighton
Feng Li
Linyuan Zhai
Fees earned or
paid in cash ($)
60,000
9,530
9,530
Stock awards
($)
Option awards
($)
50,000
7,941
7,941
Non-equity incentive
plan compensation ($)
-
-
-
-
-
-
Nonqualified deferred
compensation
earnings ($)
All other
compensation ($)
Total ($)
110,000
17,471
17,471
-
-
-
-
-
-
(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.
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.
93
During fiscal year 2015, 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.
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, 2015.
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
1,136,727
1,136,727
0.24
0.24
3,340,124
3,340,124
(a)
(b)
All securities are unvested shares.
Shares issued to employees are subject to a three-year vesting schedule.
As of December 31, 2015, the number of securities remaining available for future issuance under equity compensation plans was 3,340,124 shares.
94
Security Ownership Of Certain Beneficial Owners and Management
The following table sets forth certain information, as of December 31, 2015, 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
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
* Less than 1%
95
Amount and
Nature of
Beneficial
Ownership
(1)
Percent of Class
(2)
1,000,000(3)
32,510,131(3)
100.0%
65.9%
91,660
78,180
93,660
71,730
10,879
10,440
*
*
*
*
*
*
1,000,000(3)
24,382,598(3)
16,000,000(4)
32,827,333
100.0%
49.4%
100.0%
74.8%
(1)
(2)
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.
Based upon 49,323,284 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, 2015
(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.
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 $120,000 and in which any current or former director of officer of the Company, any 5% or greater shareholder of the Company or any member of
the immediate family of any such persons had, or will have, a direct or indirect material interest other than as disclosed below.
During the years presented, the Company entered into related party transactions with (i) Xinda High-Tech, an entity controlled by the wife of Mr. Han, the chief executive officer and controlling
stockholder of the Company, Ms. Limei Sun, and (ii) Mr. Han's son, Mr. Tiexin Han.
The Company rents the following plant and office buildings in Harbin, Heilongjiang province from Xinda High-Tech.
Premise Leased
Office building
Area (M2)
23,894
Annual Rental Fee
(US$)
758,983
Period of Lease
Between January 1, 2014 and December 31, 2018
96
The Company rents the following facilities in Harbin, Heilongjiang province from Mr. Tiexin Han:
Premise Leased
Facility
Facility
Area (M2)
Annual Rental Fee (US$) Period of Lease
3,134
200
11,912 Between January 1, 2015 and September 30, 2015
6,353 Between August 17, 2014 and August 16, 2016
Total rental expenses paid or payable to Xinda High-Tech amounted to US$758,983, US$775,189 and US$785,449 during the years ended December 31, 2015, 2014 and 2013, respectively. Total rental
expenses paid or payable to Mr. Tiexin Han amounted to US$18,265, US$16,271 and US$16,266 during the years ended December 31, 2015, 2014 and 2013, 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.
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.
97
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our independent accountants for the audit of our annual financial statements for the year ended December 31, 2015 was KPMG Huazhen LLP (formerly known as KPMG Huazhen (SGP)). Our
independent accountants for the audit of our annual financial statements for the year ended December 31, 2014 was KPMG. The following table shows the fees paid and to be paid by us to our
independent accountants.
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total paid to independent public audit firms
Audit Fees
$
$
2015
1,335,421 $
41,594
62,284
-
1,439,299 $
2014
1,298,175
44,674
20,769
-
1,363,618
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$1,335,421 and US$1,298,175 related to audits of our annual financial statements, reviews of our quarterly financial statements and statutory audits for the years ended December 31,
2015 and 2014, respectively.
Audit-Related Fees
Fees for audit-related services were US$41,594 and US$44,674, respectively, for the years ended December 31, 2015 and 2014, for assistance in documenting internal control policies and procedures
over financial reporting.
Tax Fees
During the years ended December 31, 2015 and 2014, we paid or accrued expense of US$62,284 and US20,769, respectively for professional services relating to evaluate potential restructuring,
statutory tax filing and transfer pricing.
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.
98
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.
99
Exhibit No.
3.1
Description of Exhibit
Articles of Incorporation
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
Bylaws
Form of Second Amendment to Articles of Incorporation of the
Company
Second Amended and Restated Bylaws
Forms of Certificates of Correction
Specimen Stock Certificate
Certificate of Designation of Series A Convertible Preferred Stock
Certificate of Designation of Series B Preferred Stock
Form of Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock
Form of Series A Warrant to Purchase Common Stock
Form of Series B Warrant to Purchase Common Stock
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
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
EXHIBIT INDEX
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.
Filed as Appendix I of 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 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.
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 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 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 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.
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 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.
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.
100
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
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
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
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.
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 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 annual 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 annual 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 annual 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 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.
101
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
14.1
16.1
16.2
16.3
16.4
21.1
23.1
31.1
31.2
32.1
101.
Form of Indemnification Agreement
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 *
English translation of the Equity Transfer and Merger Agreement dated
March 6, 2015 entered into by Xinda (Heilongjiang) Investment Co.,
Ltd., Sichuan Xinda and Nanchong Xinda Composite Material Co., Ltd.
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
Letter of KPMG dated May 8, 2015 to the Securities and Exchange
Commission
Subsidiaries of Registrant
Consent of KPMG Huazhen LLP
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
* English translation
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 annual 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 annual 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 annual 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 annual 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 annual 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 annual 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 annual 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 annual 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 annual 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 quarterly report on Form 10-Q, as filed with the Securities and
Exchange Commission on August 6, 2015.
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, 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 as an exhibit to the Company's current report on Form 8-K, as filed with the Securities and Exchange
Commission on May 8, 2015.
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
102
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 15, 2016
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
103
Date
March 15, 2016
March 15, 2016
March 15, 2016
March 15, 2016
March 15, 2016
March 15, 2016
March 15, 2016
March 15, 2016
FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2015, 2014 and 2013
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013
Notes to the Consolidated Financial Statements
F-1
Page
F-2
F-3
F-4
F-5
F-6
F-7
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, 2015 and 2014, 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, 2015. 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, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, 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, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 15, 2016 expressed an adverse opinion on the effectiveness of the Company's internal control over financial reporting.
/s/ KPMG Huazhen LLP
Beijing, China
March 15, 2016
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 and construction 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
Amounts due to a related party
Income taxes payable
Accrued expenses and other current liabilities
Total current liabilities
Long-term bank loans, excluding current portion
Notes payable
Deferred income
Other non-current liabilities
Total liabilities
Redeemable Series D convertible preferred stock (redemption amount of US$184,461,800 and US$160,401,600 as of December 31, 2015
and 2014, respectively)
Stockholders' equity:
Series B preferred stock
Common stock, US$0.0001 par value, 500,000,000 shares authorized, 49,344,284 shares and 49,172,796 shares issued, 49,323,284 shares and
49,151,796 shares outstanding as of December 31, 2015 and 2014, respectively
Treasury stock, 21,000 shares at cost
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders' equity
Commitments and contingencies
Total liabilities, redeemable convertible preferred stocks and stockholders' equity
See accompanying notes to consolidated financial statements.
F-3
December 31,
2015
US$
2014
US$
119,928,485
50,852,327
237,626,806
234,542,739
244,836
294,665,195
15,675,848
953,536,236
571,746,507
24,506,837
183,226,006
18,966,622
1,751,982,208
284,339,089
33,522,287
257,417,000
8,439
6,881,946
140,988,712
723,157,473
107,481,709
145,634,996
62,039,050
38,046,917
1,076,360,145
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
21,256,332
1,295,541,610
99,735,422
43,389,928
152,073,014
-
3,269,115
24,484,583
322,952,062
174,274,446
144,373,645
-
30,977,376
672,577,529
97,576,465
97,576,465
100
4,933
(92,694)
81,919,932
515,555,985
(19,342,658)
578,045,598
100
4,916
(92,694)
80,875,787
431,823,706
12,775,801
525,387,616
1,751,982,208
1,295,541,610
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)
Gains (losses) on foreign currency forward contracts
Loss on change in fair value of warrants liability
Government grant
Total non-operating 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
2015
US$
Years Ended December 31,
2014
US$
2013
US$
999,192,894
(817,811,445)
181,381,449
(1,458,658)
(23,816,148)
(21,061,345)
(46,336,151)
1,110,685,692
(888,227,868)
222,457,824
(728,232)
(20,564,820)
(29,434,680)
(50,727,732)
1,050,816,364
(827,419,861)
223,396,503
(243,975)
(16,284,528)
(21,258,549)
(37,787,052)
135,045,298
171,730,092
185,609,451
8,221,532
(42,704,097)
(2,237,541)
653,569
-
2,991,493
(33,075,044)
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)
101,970,254
139,042,646
180,535,965
(18,237,975)
(18,266,277)
(46,697,120)
83,732,279
120,776,369
133,838,845
1.27
1.85
2.08
83,732,279
120,776,369
133,838,845
(32,118,459)
(12,268,113)
10,385,656
51,613,820
108,508,256
144,224,501
See accompanying notes to consolidated financial statements.
F-4
Balance at January
1, 2013
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
Net 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
Net income
Other comprehensive
loss-Foreign currency
translation
adjustment, net of nil
income taxes
Stock based
compensation
Vesting of unvested
shares
Balance as of
December 31, 2015
CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Series B Preferred Stock
Common Stock
Number of
Shares
Number of
Shares
Amount
US$
100
-
-
-
-
100
-
-
-
-
-
100
-
-
-
-
1,000,000
-
-
-
-
1,000,000
-
-
-
-
-
1,000,000
-
-
-
-
Amount
US$
4,758
-
-
-
31
4,789
-
-
-
60
67
4,916
-
-
-
17
47,563,772
-
-
-
311,361
47,875,133
-
-
-
602,458
674,205
49,151,796
-
-
-
171,488
Treasury
Stock
US$
(92,694)
-
Additional
Paid-in
Capital
US$
72,583,910
-
Retained
Earnings
US$
177,208,492
133,838,845
Accumulated
Other
Comprehensive
Income (Loss)
US$
14,658,258
-
Total
Stockholders'
Equity
US$
264,362,824
133,838,845
-
-
-
-
3,757,780
(31)
-
-
-
(92,694)
-
76,341,659
-
311,047,337
120,776,369
-
-
-
-
(92,694)
-
-
1,003,040
3,531,155
(67)
80,875,787
-
-
-
-
431,823,706
83,732,279
10,385,656
-
-
25,043,914
-
(12,268,113)
-
-
12,775,801
-
-
-
-
-
1,044,162
(17)
-
-
-
(32,118,459)
-
10,385,656
3,757,780
-
412,345,105
120,776,369
(12,268,113)
1,003,040
3,531,215
-
525,387,616
83,732,279
(32,118,459)
1,044,162
-
1,000,000
100
49,323,284
4,933
(92,694)
81,919,932
515,555,985
(19,342,658)
578,045,598
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 operating activities:
Net reversal for doubtful accounts
Depreciation and amortization
Stock-based compensation
Loss on change in fair value of warrants liability
Amortization of discount and issuance cost of the Notes
Loss on 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
Amounts due to a related party
Income taxes payable
Accrued expenses and other current liabilities
Deferred income
Other non-current liabilities
Net cash provided by 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
Government grant related to the construction of Sichuan plant
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from bank borrowings
Repayment of bank borrowings
Proceeds from Senior Notes Payable
Payment of issuance costs of the Notes
Proceeds from exercise of Series A investor warrants
Proceeds from early exercise of options
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 RMB 231,356, RMB 113,317 and nil capitalized for the years ended December 31, 2015,
2014 and 2013, respectively
Income taxes paid
Non-cash investing and financing activities:
Government grant related to construction in the form of repayment of bank loans on behalf of the Company by the
government (note 13)
Government grant related to the construction of Sichuan plant in the form of restricted cash (note 13)
Accrual for purchase of equipment
Accrual for issuance cost of the Notes
2015
US$
83,732,279
(69,281)
27,540,212
1,044,162
-
1,086,010
-
2,720,131
9,036
(2,380,236)
4,011,349
(40,614,289)
(35,937)
(58,103,919)
(4,542,796)
(371,872)
(8,119,365)
116,133,982
8,167
3,889,710
86,963,823
3,371,249
11,098,323
227,370,738
(474,254,312)
463,771,799
(267,427,681)
(13,931,804)
11,499,000
(280,342,998)
504,218,741
(339,528,477)
-
-
-
121,725
-
(33,077,094)
131,734,895
(4,290,762)
74,471,873
45,456,612
119,928,485
40,136,978
8,982,167
38,118,231
11,117,817
41,251,663
-
Years Ended December 31,
2014
US$
2013
US$
120,776,369
133,838,845
(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
-
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 Nevada of the United States of America. 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: Polypropylene ("PP"), Acrylonitrile Butadiene Styrene ("ABS"), Polyamid6 ("PA6"), Polyamid66 ("PA66"), Polyformaldehyde ("POM"), Polyphenylene
Oxide ("PPO"), Plastic Alloy, Polyphenylene Sulfide ("PPS"), Poly Imide ("PI"), Polylactide Acid ("PLA") and Poly Ether Ether Ketone ("PEEK").
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 in the Republic of Korea (the
"ROK”). The Company's sales are highly concentrated. Sales to distributors and the end customer in the ROK, which individually exceeded 10% of the Company's revenues, for the years ended
December 31, 2015, 2014 and 2013, 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
Distributor F, located in PRC
Direct Customer G, located in the ROK
Total
US$
2015
192.0
155.3
127.3
112.1
106.5
81.8
71.6
846.6
%
19.2%
15.5%
12.7%
11.2%
10.7%
8.2%
7.2%
84.7%
Years Ended December 31,
2014
US$
%
US$
176.6
136.4
138.5
134.0
98.0
139.8
140.1
963.4
15.9%
12.3%
12.5%
12.1%
8.8%
12.6%
12.6%
86.7%
2013
209.4
250.7
63.8
136.0
38.8
138.1
-
836.8
%
19.9%
23.9%
6.1%
12.9%
3.7%
13.1%
-
79.6%
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, electronic application industry in the ROK or the business operations of these customers will have a material effect on the Company's business, financial position and results of
operations.
F-7
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 a limited number of distributors. Raw material purchases from these distributors, which individually exceeded 10% of the Company's total raw material purchases, accounted
for approximately 80.0% (seven distributors), 88.3% (eight distributors), 65.5% (three distributors), of the Company's total raw material purchases for the years ended December 31, 2015, 2014 and
2013, 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 99.8%, 99.6% and 34.6% of the Company's total equipment purchases for the years ended December 31,
2015, 2014 and 2013, 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 84.8%, 1.9% and 34.6% of the Company's total equipment purchases, is also the majority owner of a major raw material supplier that supplied approximately
nil, 0.4% and 13.2% of the Company's total raw material purchases for the years ended December 31, 2015, 2014 and 2013, respectively. In addition, the majority owner of the equipment distributor is
also the majority owner of sales Distributor D presented above.
Cash concentration
Cash and cash equivalents, restricted cash, time deposits and other non-current assets mentioned below maintained at banks consist of the following:
RMB denominated bank deposits with:
Financial Institutions in the PRC
Financial Institutions in Hong Kong Special Administrative Region ("Hong Kong SAR")
Financial Institution in Dubai, United Arab Emirates ("UAE")
U.S. dollar denominated bank deposits with:
Financial Institution in the U.S.
Financial Institutions in the PRC
Financial Institution in Hong Kong SAR
Financial Institution in Macau Special Administrative Region ("Macau SAR")
Financial Institution in Dubai, UAE
Euro denominated bank deposits with:
Financial institution in Hong Kong SAR
Financial institution in Dubai, UAE
HK dollar denominated bank deposits with:
Financial institution in Hong Kong SAR
Dirham denominated bank deposits with:
Financial institution in Dubai, UAE
December 31, 2015 December 31, 2014
US$
US$
417,430,412
13,778
3,023
226,010
17,109
63,854
37,120
7,474,960
-
3,011
336
37,278
311,377,750
2,617
170
770,704
17,139
1,366,224
47,868
481,179
83,017
3,355
581
112,815
The bank deposits with financial institutions in the PRC are insured by the government authority up to RMB500,000. 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$500,000. The bank deposits with
financial institutions in UAE are not insured by any government authority. To limit exposure to credit risk, the Company primarily places bank deposits with large financial institutions in the PRC,
HK SAR, Macau SAR and Dubai, UAE with acceptable credit rating.
F-8
Note 2 – Summary of significant accounting policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
(b) Consolidation
The accompanying consolidated financial statements include the financial statements of China XD and its wholly-owned subsidiaries. All significant intercompany transactions and balances have
been eliminated upon consolidation.
(c) Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the recoverability of the carrying amounts of property, plant and
equipment, the realizability of inventories, the useful lives of property, plant and equipment, the collectability of accounts receivable, the fair values of stock-based compensation awards and the
accruals for tax uncertainties and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.
(d) Foreign Currency
The Company's reporting currency is the U.S. dollar (US$). The functional currency of China XD Plastics and its subsidiaries in the United States, BVI, Hong Kong and Dubai, UAE is the US$. The
functional currency of China XD's subsidiaries in the PRC is Renminbi (RMB).
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the date of the transaction. Monetary
assets and liabilities denominated in foreign currencies are translated into the functional currency using the applicable exchange rates at the balance sheet date. The resulting exchange differences
are recorded in foreign currency exchange gains (losses) in the consolidated statements of comprehensive income.
Assets and liabilities of subsidiaries with functional currencies other than US$ 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 (loss)
within stockholders' 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.
F-9
(e) Cash and cash equivalents, time deposits and restricted cash
Cash and cash equivalents consists 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, 2015 and 2014, the Company's time deposits bear a weighted average
interest rate of 2.6% and 3.0% per annum, respectively.
Cash deposits in bank that are restricted as to withdrawal or usage for up to 12 months are reported as restricted cash in the consolidated balance sheets and excluded from cash and cash
equivalents in the consolidated statements of cash flows. Cash deposits of US$16,907,470 and US$17,728,782 as of December 31, 2015 and 2014 that are restricted for period beyond 12 months from
the balance sheet date are included in other non-current assets in the consolidated balance sheets and also excluded from 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$8,069,475 and US11,868,855 as of
December 31, 2015 and 2014, 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 nil and US$676,917 as of December 31, 2015 and
2014, 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 and long-term bank borrowings are reported as restricted cash and amounted to US$32,010,452 and nil as of December 31, 2015
and 2014, respectively. Long-term bank deposits that are pledged as collateral for long-term bank borrowings are reported as other non-current assets and amounted to US$16,907,470 and
US$17,728,782 as of December 31, 2015 and 2014, respectively. The cash flows from such bank deposits are reported within cash flows from financing activities in the consolidated statements of
cash flows.
Short-term bank deposits that are related to government grant are reported as restricted cash and amounted to US$10,772,400 and nil as of December 31, 2015 and 2014 respectively. The amount is
reported as non-cash investing and 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.
(g) Inventories
Inventories are stated at the lower of cost or net realizable value. 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.
F-10
(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 based 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.
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 a land use right is usually paid in
one lump sum at the date the right is granted. The prepayment usually covers the entire 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$411,178, US$259,310 and US$224,587 for the years ended December 31, 2015, 2014 and 2013, 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-11
(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
ROK, 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, 2015, 2014 and 2013, sales returns were minimal.
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 consolidated balance sheets 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-12
(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 related to the acquisition of assets are recorded as deferred income on the consolidated balance sheets when the grants become receivable, and recognized as other income in the
consolidated statements of comprehensive income on a straight-line basis over the estimated useful lives of those assets.
(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-13
(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, 2015, 2014 and 2013, the costs of the Company's
contributions to the defined contribution plans amounted to US$1,788,552, US$1,555,471and US1,024,728, respectively.
For the years ended December 31, 2015, 2014 and 2013, 77%, 78% and 80% 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 and redeemable 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-14
(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, 2015 and 2014 are categorized as Level 2 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, which was measured at fair value on a recurring basis as of December 31, 2014, 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, 2015 and 2014. 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, 2015, the carrying amount and estimated fair value of the notes payable were US$145,634,996 and US$127,219,500, respectively.
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.
F-15
(x) Recently Issued Accounting Standards
In 2015, the Company elected to early adopt the Accounting Standards Update ("ASU") No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires the debt issuance costs be
presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability, instead of reported on the balance sheet as an asset. The costs will continue to be
amortized to interest expense using the effective interest method. Upon adoption of the guidance, the debt issuance costs in the amount of US$4,243,412 as of December 31, 2014, which were
included in the other non-current assets, have been retrospectively adjusted as a direct deduction of an equivalent amount from the carrying amount of the notes payable as of December 31, 2014.
In 2015, the Company elected to early adopt the ASU No. 2015-11, Simplifying the Measurement of Inventory, which changes the measurement principle of inventory from the lower of cost or market
to lower of cost and net realizable value, and requires prospective adoption. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal and transportation. The ASU eliminates the guidance that entities consider replacement cost or net realizable value less an approximately normal profit
margin when measuring inventory when cost is determined on a first-in-first-out or average cost basis. The Company applied this new measurement principle of inventory as of December 31, 2015.
The adoption of ASU No. 2015-11 did not have any impact on the Company’s consolidated financial statements.
In 2015, the Company elected to early adopt the ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires entities with a classified balance sheet to present all deferred tax
assets and liabilities as noncurrent. The Company adopted this new guidance retrospectively. The adoption of ASU No. 2015-17 did not have any impact on the Company’s consolidated financial
statements.
The Financial Accounting Standards Board issued Accounting Standards Codification ("ASC”) Topic 842, Leases, in February 2016. ASC Topic 842 requires a lessee to recognize all leases,
including operating leases, on balance sheet via a right-of-use asset and lease liability, unless the lease is a short-term lease (one with an accounting lease term of 12 months or less). All (or a
portion of) fixed payments by the lessee to cover lessor costs related to ownership of the underlying assets, or executory costs, that do not represent payments for a good or service will be
considered lease payments and reflected in the measurement of lease assets and lease liabilities by lessees. The new standard does not substantially change lessor accounting from current U.S.
GAAP. The new standard also requires lessees and lessors to disclose more qualitative and quantitative information about their leases than current U.S. GAAP does. The standard is applied
retrospectively, with elective reliefs. The new standard is effective for annual and interim reporting periods beginning after December 15, 2018 for a public business entity. Early adoption is
permitted. The Company has not yet determined the impact of the new standard on its current policies for leases.
Note 3 – Accounts receivable
Accounts receivable consists of the following:
Accounts receivable
Allowance for doubtful accounts
Accounts receivable, net
December 31,
2015
US$
234,583,370
(40,631)
234,542,739
2014
US$
204,108,050
(109,912)
203,998,138
As of December 31, 2015 and 2014, the accounts receivable balances also include notes receivable in the amount of US$2,048,186 and US$921,907, respectively. As of December 31, 2015 and 2014,
US$54,664,219 and US$50,473,063 respectively of accounts receivable are pledged for the short-term bank loans.
F-16
The following table provides an analysis of the aging of accounts receivable as of December 31, 2015 and 2014:
Aging:
– current
– 1-3 months past due
– 4-6 months past due
– 7-12 months past due
– greater than one year past due
Total accounts receivable
The movements of the allowance for doubtful accounts are as follows:
Balance at the beginning of the year
Reversal of bad debt allowance
Balance at the end of the year
Note 4 – Inventories
Inventories consist of the following:
Raw materials
Work in progress
Finished goods
Total inventories
There were no write down of inventories during the years ended December 31, 2015, 2014 and 2013.
F-17
December 31, 2015 December 31, 2014
US$
US$
234,396,244
146,495
-
-
40,631
234,583,370
203,760,775
208,482
-
5,560
133,233
204,108,050
Year ended December 31,
2015
US$
2014
US$
(109,912)
69,281
(40,631)
(145,761)
35,849
(109,912)
December 31,
2015
US$
287,995,933
164,034
6,505,228
294,665,195
2014
US$
241,853,814
207,181
7,736,249
249,797,244
Note 5 – Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
Receivables due from a customer in the ROK (i)
Interest receivable (ii)
Value added taxes receivables
Advances to suppliers
Others (iii)
Total prepaid expenses and other current assets
December 31,
2015
US$
2014
US$
9,471,222
3,306,974
698,286
68,354
2,131,012
15,675,848
-
3,351,672
6,407,547
168,614
1,325,995
11,253,828
(i)
(ii)
(iii)
As of December 31, 2015, receivables due from a customer in the ROK represents the amount the Company paid to purchase raw materials on behalf of the customer in the ROK.
Interest receivable mainly represents interest income accrued from time deposits and restricted cash.
Others mainly include prepaid miscellaneous service fee, staff advance and prepaid rental fee.
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
December 31,
2015
US$
258,173,175
2,009,440
76,924,199
323,955,531
661,062,345
(89,315,838)
571,746,507
2014
US$
209,509,700
1,854,985
79,009,346
93,970,716
384,344,747
(66,020,147)
318,324,600
All of the property, plant and equipment, net as of December 31, 2015 and 2014 were located in the PRC, except for US$83.8 million and US$82.0 million of property, plant and equipment, net were
located in Dubai, UAE. The Company capitalized US$231,356, US$113,317 and nil of interest costs as a component of the cost of construction in progress for the years ended December 31, 2015,
2014 and 2013 respectively.
F-18
Depreciation expense on property, plant and equipment was allocated to the following expense items:
Cost of revenues
General and administrative expenses
Research and development expenses
Selling expenses
Total depreciation expense
Note 7 – Prepayments to equipment and construction suppliers
Jiamu (i)
Peaceful (ii)
Others
Total Prepayments to equipment and construction suppliers
2015
US$
21,980,993
1,531,389
3,615,758
894
27,129,034
Years Ended December 31,
2014
US$
2013
US$
19,407,668
1,155,419
2,094,496
18,578,088
958,976
1,659,072
22,657,583
21,196,136
December 31,
2015
US$
11,712,843
170,009,200
1,503,963
183,226,006
2014
US$
182,259,578
-
-
182,259,578
(i)
In December 2013, the Company entered into an equipment purchase contract with Harbin Jiamu Import & Export Trading Co., Ltd ("Jiamu Trading") for a total consideration of
RMB1,629.3 million to purchase 70 production lines and RMB89.7 million to purchase testing equipment. In August 2015, the Company signed a supplemental contract with Harbin Jiamu
Science and Technology Co., Ltd. (together with Jiamu Trading as "Jiamu") to purchase testing equipment in the amount of RMB16.3 million (equivalent to US$2.5 million). As of December
31, 2015 and 2014, the Company has paid RMB1,608.2 million (equivalent to US$247.2 million) and RMB1,130.9 million (equivalent to US$182.3 million) for production lines and testing
equipment, respectively. As of December 31, 2015, the Company has received the equipment of 70 production lines, and hence recorded the related amount from prepayments to construction
in progress. The balance of Jiamu as of December 31, 2015 mainly represents the prepayment for testing equipment.
(ii) On January 5, 2015, AL Composites Materials FZE ("AL Composites") entered into an equipment purchase contract with Peaceful Treasure Limited ("Peaceful") for a total consideration of
US$271.2 million to purchase certain production and testing equipment. Pursuant to the contract with Peaceful, the Company has paid US$170.0 million as prepayments as of December 31,
2015.
F-19
Note 8 – Borrowings
The Company has credit facilities with several banks under which they draw short-term and long-term bank loans as described below.
(a) Current
Unsecured loans
Loans secured by accounts receivable
Loans secured by restricted cash
Current portion of long-term bank loans (note b)
Total short-term loans, including current portion of long-term bank loans
December 31,
2015
US$
64,555,795
43,037,196
27,100,000
149,646,098
2014
US$
47,223,028
40,292,686
-
12,219,708
284,339,089
99,735,422
As of December 31, 2015 and 2014, the Company's short-term bank loans (including the current portion of long-term bank loans) bear a weighted average interest rate of 4.2% and 5.7% per annum,
respectively. All short-term bank loans mature at various times within one year and contain no renewal terms.
In January 2015, the Company obtained a one-year secured loan of US$12.0 million from HSBC Middle East at an annual interest rate of three-month LIBOR (0.6127% as of December 31, 2015) plus
1.8%. These loans were secured by restricted cash of RMB16.5 million (equivalent to US$2.5 million) by the HSBC Bank in Harbin, China. The company repaid this loan on December 31, 2015.
In February 2015, the Company obtained a one-year secured loan of US$16.6 million from HSBC Middle East at an annual interest rate of three-month LIBOR (0.6127% as of December 31, 2015) plus
1.8%. These loans were secured by restricted cash of RMB22.8 million (equivalent to US$3.5 million) by the HSBC Bank in Harbin, China.
In June 2015, the Company obtained a one-year secured loan of US$7.0 million from Bank of China Luxemburg Branch at an annual interest rate of one-year LIBOR (1.1780% as of December 31, 2015)
plus 0.8%. These loans were secured by restricted cash of RMB45.9 million (equivalent to US$7.1 million) by the Bank of China in Harbin, China.
In July 2015, the Company obtained a one-year secured loan of US$3.5 million from Bank of China Luxemburg Branch at an annual interest rate of one-year LIBOR (1.1780% as of December 31, 2015)
plus 0.75%. These loans were secured by restricted cash of RMB23.0 million (equivalent to US$3.5 million) by the Bank of China in Harbin, China.
On September 28, 2015, the company obtained four six-month secured loans of RMB 110 million (equivalent to US$16.9 million) by accounts receivables of RMB170 million (equivalent to US$27.2
million) at an annual interest rate of 4.60% from Harbin Longjiang Bank.
On October 16, 2015, the Company obtained five six-month secured loans of RMB140 million (equivalent to US$21.5 million) by accounts receivables of RMB139.3 million (equivalent to US$21.4
million) at an annual interest rate of 4.60% from Harbin Longjiang Bank.
On December 7, 2015, the Company obtained a six-month secured loan of RMB30 million (equivalent to US$4.6 million) by accounts receivables of RMB39.4 million (equivalent to US$6.1 million) at
an annual interest rate of 4.79% from ICBC in Harbin.
F-20
(b) Non-current
Secured loans
Unsecured loans
Less: current portion
Total long-term bank loans, excluding current portion
December 31,
2015
US$
81,164,800
175,963,007
149,646,098
107,481,709
2014
US$
70,000,000
116,494,154
12,219,708
174,274,446
During March and April 2014, the Company obtained two 15-month unsecured loans of RMB50 million at an interest rate of 6.15% per annum from the Bank of Heilongjiang. The Company repaid
these loans in advance by the end of March 2015.
On December 11, 2014, the Company obtained a two-year unsecured loan of RMB199 million from Bank of Communication at an annual interest rate of 6.60%.
On December 16, 2014, the Company obtained a one and a half-year unsecured loan of US$76.4 million from Bank of China Macau Branch at an interest of three-month LIBOR (0.6127% as of
December 31, 2015) plus 1.7%. The interest rate is reset every three months.
On June 12, 2014, the Company obtained a three-year secured loan of US$70 million from Bank of China Paris Branch at interest rate of 3-month LIBOR (0.6127% as of December 31, 2015). The loan is
secured by restricted cash of RMB 110 million. The Company has repaid US$2 million on June 9, 2015 and US$2 million December 9, 2015.
On January 23, 2015, the Company obtained a two-year unsecured loan of RMB100 million (equivalent to US$15.4 million) at an annual interest rate of 6.0% from Agriculture Bank of China.
On January 27, 2015, the Company obtained a one and half year secured loan of US$15.2 million from Bank of China Macau Branch, at an interest rate of three-month LIBOR (0. 6127% as of
December 31, 2015) plus 1.5%. The interest rate is reset every three months. The loan is secured by restricted cash of RMB100 million (equivalent to US$15.4 million).
On April 22, 2015, the Company obtained a two-year unsecured loan of RMB40 million (equivalent to US$6.1 million) at an annual interest rate of 5.75% from Agriculture Bank of China.
On July 30, 2015, the Company obtained a thirteen-month unsecured loan of RMB50 million (equivalent to US$7.7 million) at an annual interest rate of 5.25% from Harbin Longjiang Bank.
In October and November, 2015, the Company obtained three five-year unsecured loans of RMB260 million (equivalent to US$40.0 million) at an annual interest rate of 4.75% from Bank of China.
As of December 31, 2015, the Company had total lines of credit of RMB4,770.0 million (US$733.2 million) including unused lines of credit of RMB1,822.7 million (US$280.1 million) with remaining
terms less than 12 months and RMB398.1 million (US$61.2 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, 2015, the Company has
met these financial covenants.
F-21
Note 9 – 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 are presented on the consolidated balance sheets as a direct
deduction from the carrying amount of notes payable and amortized to interest expense using the effective interest method.
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, 2015 and 2014, the Company recognized interest expenses of the Notes in the amount of US$18,710,825 and US$16,870,122, respectively.
Unamortized discount and debt issuance costs as of December 31, 2015 and 2014 were US$4,365,004 and US$5,626,355, respectively.
F-22
Note 10 – Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consist of the following:
Payables for purchase of property, plant and equipment
Accrued freight expenses
Accrued interest expenses
Advance from customers (i)
Non income tax payables
Others(ii)
Total accrued expenses and other current liabilities
December 31,
2015
US$
42,524,903
1,579,936
7,800,481
82,009,002
4,353,730
2,720,660
140,988,712
2014
US$
7,234,607
1,688,431
9,031,741
63,414
2,322,006
4,144,384
24,484,583
(i) Advance from customers mainly represent the advance received from two customers in the PRC for the raw material purchases during the 4th quarter of 2015.
(ii) Others mainly represent accrued payroll and employee benefits and other accrued miscellaneous operating expenses.
Note 11 – 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 related party balances are summarized as follows:
Amounts due from a related party:
Prepaid rental expenses to Xinda High-Tech
2015
US$
Years Ended December 31,
2014
US$
2013
US$
777,248
791,460
801,715
December 31,
2015
US$
2014
US$
244,836
220,262
F-23
Amounts due to a related party
Rental payable to Mr Han's son
December 31,
2015
US$
2014
US$
8,439
-
The Company rents the following plant and office buildings in Harbin, Heilongjiang province from Xinda High-Tech:
Premise Leased
Office building
Area (M2)
Annual Rental Fee (US$) Period of Lease
23,894
758,983 Between January 1, 2014 and December 31, 2018
The Company rents the following facilities in Harbin, Heilongjiang province from Mr. Han's son:
Premise Leased
Facility
Facility
Note 12– Income Taxes
Area (M2)
Annual Rental Fee
(US$)
Period of Lease
3,134
200
11,912 Between January 1, 2015 and September 30, 2015
6,353 Between August 17, 2014 and August 16, 2016
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", liquidated in February 2015), and Xinda (HK) Trade Company Limited. ("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.
F-24
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.
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$488,303,847 and US$434,416,319 as of December
31, 2015 and 2014, 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$117,827,046 and US$83,272,307 as of December 31, 2015 and 2014, respectively. It is not practicable to estimate the amounts of unrecognized deferred income tax
liabilities thereof.
The components of income before income taxes are as follows:
US
BVI
Hong Kong
Dubai
PRC, excluding Hong Kong
Total income before income taxes
2015
US$
(3,512,598)
(18,685,588)
(306,945)
34,554,739
89,920,646
101,970,254
Years Ended December 31,
2014
US$
(4,957,190)
(16,070,146)
(973,523)
83,267,935
77,775,570
139,042,646
2013
US$
(4,768,725)
(7,685)
(815,408)
-
186,127,783
180,535,965
The Company's income tax expense (benefit) recognized in the consolidated statements of comprehensive income consists of the following:
Years Ended December 31,
Current income tax expense-PRC
Current income tax expense-US
Deferred income tax benefit-PRC
Total income tax expense
2015
US$
20,618,211
-
(2,380,236)
18,237,975
F-25
2014
US$
20,089,436
195,598
(2,018,757)
18,266,277
2013
US$
47,559,763
1,017,585
(1,880,228)
46,697,120
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 US entities not subject to PRC income tax
Tax rate differential on HK entities not subject to PRC income tax
Tax rate differential on BVI entities not subject to PRC income tax
Tax rate differential on UAE entities not subject to PRC income tax
Non-deductible expenses
Preferential tax rate
Change in valuation allowance
R&D additional deduction
Others
Effective income tax rate
2015
US$
Years Ended December 31,
2014
US$
2013
US$
25%
-
-
4.6%
(8.5)%
0.4%
(4.5)%
1.2%
(2.6)%
2.3%
17.9%
25%
-
-
2.9%
(15.0)%
0.6%
(3.3)%
0.5%
0.0%
2.4%
13.1%
25%
(0.2)%
0.1%
-
-
0.8%
(0.7)%
(0.0)%
0.0%
0.9%
25.9%
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 carry forwards
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 (included in other non-current liabilities)
December 31,
2015
US$
2014
US$
1,941,124
(1,941,124)
-
-
-
13,874,224
13,874,224
727,711
(727,711)
-
1,185,638
(604)
15,766,517
16,951,551
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$21.5 million in connection with the net assets granted to the Research Center as of December 31, 2010. To the extent that the Company has spent on research and development
equipment during the five years from the date of grant, deferred income tax liabilities relating to the net assets of Research Institute granted to Research Center will be reclassified to deferred income
tax liabilities relating to property, plant and equipment, and recognized in profit or loss over the useful life of the asset.
F-26
The movements of the valuation allowance are as follows:
Balance at the beginning of the year
Expiration due to liquidation
Additions of valuation allowance
Reduction of valuation allowance
Balance at the end of the year
2015
US$
Years Ended December 31,
2014
US$
2013
US$
727,711
(68,070)
1,333,527
(52,044)
1,941,124
73,182
-
662,151
(7,622)
727,711
556,677
(437,762)
72,305
(118,038)
73,182
The valuation allowance as of December 31, 2015, 2014 and 2013 was primarily provided for the deferred income tax assets of certain entities, which were at cumulative loss positions. As of
December 31, 2015, for U.S. federal income tax purposes, the Company had tax loss carryforwards of (i) US$590,057 from US Entities, of which US$212,659, US$159,481 and US$217,917 would expire
by 2033, 2034 and 2035, respectively, if unused, (ii) US$5,827,090 from subsidiaries in PRC, of which US$67,201, US$1,160,448 and US$4,599,441 would expire by 2018, 2019 and 2020, respectively, if
unused, and (iii) US$2,018,829 from subsidiaries in HK, which could be carried forward indefinitely to be offset against future profits. In view of the cumulative losses for the entities concerned,
100% valuation allowances were provided against their deferred income tax assets as of December 31, 2015, 2014 and 2013, which in the judgment of the management, are not more likely than not to
be realized.
A reconciliation of the beginning and ending amount of total unrecognized tax benefits for the year ended December 31, 2015 is as follows:
Balance at beginning of year
Increase related to current year tax positions
Balance at end of year
2015
US$
Year ended December 31,
2014
US$
2013
US$
14,609,258
7,051,049
21,660,307
8,807,490
5,801,768
14,609,258
-
8,807,490
8,807,490
At December 31, 2015, 2014 and 2013, there are US$18,370,729, US$12,544,088 and US$6,690,841 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,
2015, 2014 and 2013, the Company recognized approximately US$1,905,191, US$1,322,135 and nil of interest expense. The Company had approximately US$3,095,819
and US$1,322,135 for the payment of interest accrued related to unrecognized tax benefits at December 31, 2015 and 2014, respectively which were included in other non-
current liabilities. As of December 31, 2015 and 2014, US$21,076,874 and US$14,025,825 of unrecognized tax benefits were included in other non-current liabilities,
respectively. US$583,433 of unrecognized tax benefit were presented as a reduction of the deferred income tax assets for tax loss carry forwards since the uncertain tax
position would reduce the tax loss carry forwards 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 2013 to 2015. 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$15,000. In the case of transfer pricing issues, the statute of limitations is ten years. There is no statute of limitations
in the case of tax evasion. The tax returns of the Company's PRC subsidiaries for the years from 2013 to 2015 are open to examination by the PRC tax authorities.
F-27
Note 13 – Deferred Income
On January 26, 2015, the Company entered into a memorandum and a fund support agreement (the "Agreement") with the People's Government of Shunqing District, Nanchong City, Sichuan
Province ("Shunqing Government") pursuant to which Shunqing Government, through its investment vehicle, will extend to the Company RMB350 million (equivalent to US$ 53.8 million) to support
the construction of the Sichuan plant. As of December 31, 2015, the Company has received RMB280 million (equivalent to US$ 43.0 million) in total from Shunqing Government in the form of
government repayment of bank loans on behalf of the Company. The Company also received RMB70 million (equivalent to US$ 10.8 million) pursuant to the Agreement for which the amount was
restricted to use subject to the progress of the construction, which has been recorded as restricted cash as of December 31, 2015.
The Company also received RMB32.4 million (equivalent to US$5.0 million) from Shunqing Government to support the construction of the Sichuan plant and RMB6.4 million (equivalent to US$ 1.0
million) subsidy for development of additive manufacturing industry for the year ended December 31, 2015.
Since the funding is related to construction of long-term assets, the amounts were recognized as government grant, which is included in deferred income on the consolidated balance sheets, and to
be recognized as other income in the consolidated statements of comprehensive income over the periods and in the proportions in which depreciation expense on the long-term assets is recognized.
In addition, the Company received RMB22 million (equivalent to US$3.4 million) interest subsidy for strategic emerging industry development, among which RMB7.2 million (equivalent to US$ 1.1
million) have been recognized as other income when related interest expense was recognized as of December 31, 2015.
Note 14 – Other non-current liabilities
Income tax payable-noncurrent (i)
Deferred income tax liabilities (note 12)
Total other non-current liabilities
2015
US$
2014
US$
24,172,693
13,874,224
38,046,917
14,025,825
16,951,551
30,977,376
(i) Income tax payable-noncurrent represents the accumulative balance of unrecognized tax benefits and related accrued interest.
Note 15 – 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).
F-28
Note 16 – 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.
F-29
(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).
(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. The Mandatory Redemption Price per share was US$11.53 and US$10.03 as of
December 31, 2015 and 2014, respectively.
F-30
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, 2015. Therefore no changes in the redemption value were
recognized for any of the periods presented. The Company will assess the probability of whether the Series D Preferred Stock is redeemable at each reporting period end.
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-31
Note 17 – 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$7.50 per share to a third party as part of the placement fee. The warrants expired on July 6, 2013.
Pursuant to the agreements of the Series A investor warrants, if the Company issues its common stock for a consideration per share less than the exercise price of the Series A investor warrants, the
exercise price of the Series A investor warrants shall be reduced to the lower issuance price. Also, if the Company grants any options or other securities convertible to its common stock for which
the exercise or conversion price is less than the exercise price of the Series A investor warrants, the exercise price of the Series A investor warrants shall be reduced to the lowest exercise or
conversion price. The holders of the Series A placement agent warrants have the same down-round protection as the holders of the Series A investor warrants. The Company’s Series A investor
warrants and Series A placement agent warrants with down-round protection are not considered indexed to a company’s own stock under ASC Subtopic 815-40, Contracts in Entity’s Own Equity ,
and accordingly are accounted as derivatives.
The Company also determined that the Series C placement agent warrants are derivatives because the warrants require a net cash settlement if the Company fails to cause the transfer agent to timely
transmit to the warrant holders a certificate or certificates representing the shares of common stock upon exercise.
Accordingly, the Company accounted for these warrants at fair value with changes in fair value recorded in earnings at each reporting period.
There were no outstanding warrants as of December 31, 2014.
The changes in the fair value of warrants during the years presented is as follow:
As of December 31, 2012
Change in fair value
As of December 31, 2013
Change in fair value
Exercise of warrants
As of December 31, 2014
Series A investor
warrants
US$
Series A placement
agent warrants
US$
Series C placement
agent warrants
US$
Total
US$
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)
-
915,189
89,721
1,004,910
1,929,565
(2,934,475)
-
F-32
Note 18– 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 vested 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 all of which vested on February 7, 2015.
On August 7, 2015, the Company's Board of Directors approved the grant of (i) 192,300 nonvested shares to certain executive officers and employees which will vest on August 7, 2018; (ii) 10,907
nonvested shares to three independent directors which will vest on February 7, 2016.
F-33
A summary of the nonvested shares activity for the years ended December 31, 2015, 2014 and 2013 is as follows:
Outstanding as of December 31, 2012
Granted
Vested
Forfeited
Outstanding as of December 31, 2013
Granted
Vested
Forfeited
Outstanding as of December 31, 2014
Granted
Vested
Forfeited
Outstanding as of December 31, 2015
Expected to vest as of December 31, 2015
Number of Nonvested
Shares
513,000
892,936
(311,361)
(4,000)
1,090,575
291,948
(674,205)
(61,030)
647,288
203,207
(171,488)
(64,280)
614,727
561,237
Weighted Average
Grant date Fair Value
US$
4.66
4.52
4.74
4.37
4.89
5.13
4.58
4.47
5.00
6.00
4.40
4.65
5.54
5.54
The total fair value of shares vested during the years ended December 31, 2015, 2014 and 2013 was US$754,547, US$3,090,766 and US$1,499,941, respectively.
The Company recognized US$813,699, US$1,003,040 and US$3,630,565 of compensation expense in general and administrative expenses relating to nonvested shares for the years ended December
31, 2015, 2014 and 2013, respectively.
As of December 31, 2015, total unrecognized compensation cost relating to nonvested shares was US$1,903,077, which is to be recognized over a weighted average period of 1.65 years.
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.
On October 10, 2015, the Company's Board of Directors approved the grant of stock options to purchase 72,000 shares of the Company's common stock to six consultants at an exercise price of
US$0.24. The options vest over a three-month period and vested on February 1, 2016.
On October 10, 2015, the Company's Board of Directors also approved the grant of stock options to purchase 450,000 shares of the Company's common stock to three sales consultants at an exercise
price of US$0.24. The options have a performance condition which requires the consultants to develop specified number of new end customers during the service period of one year. The options
can be vested at the end of six month if the performance condition is met. The awards will be forfeited if such performance condition is not met at the end of the service period. Selling and marketing
expenses are recognized through the period of service as the service is performed and adjusted for changes in fair value until performance is complete.
F-34
A summary of stock options activity for the years ended December 31, 2015, 2014 and 2013 is as follows.
Outstanding as of December 31, 2012
Expired
Outstanding as of December 31, 2013 and 2014
Granted
Outstanding as of December 31, 2015
Number of
Options
Outstanding
Weighted Average
Exercise Price
US$
148,500
(148,500)
-
72,000
72,000
8.01
8.01
-
0.24
0.24
The Company recognized US$230,463, nil and US$127,215 of share-based compensation expense in general and administration expenses relating to stock options for the years ended December 31,
2015, 2014 and 2013, respectively.
Note 19– Earnings per share
Basic and diluted earnings per share are calculated as follows:
Numerator:
Net income
Less:
Earnings allocated to participating Series D convertible preferred stock
Earnings allocated to participating nonvested shares
Net income for basic and diluted earnings per share
Denominator:
Denominator for basic earnings per share
Dilutive effect of outstanding share options
Denominator for diluted earnings per share
Earnings per common share:
Basic and diluted earnings per common share
2015
US$
Years Ended December 31,
2014
US$
2013
US$
83,732,279
(20,350,826)
(770,145)
62,611,308
49,225,566
3,894
49,229,460
120,776,369
(29,552,623)
(1,026,493)
90,197,253
48,833,434
-
48,833,434
133,838,845
(33,229,887)
(1,347,073)
99,261,885
47,794,028
-
47,794,028
1.27
1.85
2.08
The following table summarizes potentially dilutive securities excluded from the calculation of diluted earnings per share for the years ended December 31, 2015, 2014 and 2013, 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
2015
US$
Years Ended December 31,
2014
US$
2013
US$
16,000,000
-
-
16,000,000
-
-
16,000,000
1,320,696
117,261
F-35
Note 20– 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, 2015, 2014 and 2013, China XD' subsidiaries in the PRC made appropriations to the reserve fund of RMB48,174,525 (equivalent to US$7,651,365), RMB37,156,541
and RMB30,075,331 respectively. As of December 31, 2015, 2014 and 2013, the accumulated balance of the statutory surplus reserve was 140,005,280 (equivalent to US$22,575,538), RMB91,830,755
and RMB54,674,214, respectively.
Note 21– Commitments and contingencies
(1)
Lease commitments
Future minimum lease payments under non-cancellable operating leases agreements as of December 31, 2015 were as follows. The Company's leases do not contain any contingent rent payments
terms.
Years ending December 31,
2016
2017
2018
2019
2020
2021 and thereafter
US$
1,469,537
1,336,389
885,979
113,521
113,521
1,031,145
Rental expenses incurred for operating leases of plant and equipment and office spaces were US$1,698,088, US$1,476,640 and US$1,042,894 in 2015, 2014 and 2013, 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) Company Limited ("Xinda Holding (HK)") entered into an investment agreement with Shunqing Government, pursuant to which Xinda Holding (HK) will
invest RMB1.8 billion in property, plant and equipment and approximately RMB0.6 billion in working capital, for the construction of Sichuan plant. As of December 31, 2015, the Company has a
remaining commitment of RMB137.2 million (equivalent to US$21.1 million) mainly for facility construction, and RMB17.9 million (equivalent to US$2.8 million) for the acquisition of equipment.
F-36
(3) Dubai plant construction and equipment
On January 5, 2015, AL Composites entered into an equipment purchase contract with Peaceful for a total consideration of US$271.2 million to purchase certain production and testing equipment.
As of December 31, 2015, the Company has a remaining commitment of US$101.2 million for the remaining equipment acquisition. On April 28, 2015, AL Composites entered into a warehouse
construction contract with Falcon Red Eye Contracting Co. L.L.C. for a total consideration of AED6.7 million (equivalent to US$1.8 million). As of December 31, 2015, the Company has a remaining
commitment of US$0.9 million.
(4) Xinda Group construction and equipment
As of December 31, 2015, Xinda Group has a remaining commitment of RMB8.9 million (equivalent to US$ 1.4 million) for the acquisition of equipment.
(5) 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 Court held a hearing on the Company's motion to dismiss on October 22, 2015, but has not yet issued a ruling. 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, 2015 since the possible loss or range of loss cannot be reasonably estimated.
Note 22 – 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)
Raw materials
Others
Subtotal
Service revenue
Total Revenue
2015
US$
219,082,301
203,485,029
350,620,202
164,828,880
40,510,344
3,481,072
12,984,368
5,661
3,373,854
821,183
999,192,894
-
999,192,894
Years Ended December 31,
2014
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
2013
US$
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
F-37
Note 23 – 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 2015 and 2014 (in millions, except gross margin and per share amounts):
2015:
Revenues
Gross profit
Net income
Earnings per share
Basic and diluted
2014:
Revenues
Gross profit
Net income
Earnings per share
Basic
Diluted
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
272.8
52.0
26.8
$
$
$
239.1 $
29.3 $
6.0 $
265.4 $
51.5 $
25.5 $
0.41
$
0.09 $
0.39 $
221.9
48.6
25.4
0.39
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
$
$
$
$
$
$
$
$
$
Note 24 – 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
2015
US$
Years Ended December 31,
2014
US$
2013
US$
927.6
71.6
999.2
970.5
140.1
1,110.6
1,050.8
-
1,050.8
F-38
Exhibit 21.1
Company Name:
China XD Plastic Company Limited
Favor Sea Limited
Xinda Holding (HK) Company Limited
Xinda Holding (HK) US Sub Inc
Xinda (HK) Trading 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
Harbin Xinda Plastics New Material Company Limited
Sichuan Xinda Enterprise Group Company Limited
Heilongjiang Xinda Enterprise Group Technology Center Company Limited
Heilongjiang Xinda Software Development Company Limited
Heilongjiang Xinda Enterprise Group Meiyuan Training Center Company Limited
Heilongjiang Xinda Enterprise Group Macromolecule Materials Research Center Company Limited
Sichuan Xinda Enterprise Group Meiyuan Training Center Company Limited
Sichuan Xinda Enterprise Group Software Development Company Limited
Sichuan Xinda Enterprise Group Sales Company Limited
Nanchong Xinda Composite Materials Company Limited
Heilongjiang Meiyuan Tennis Club Company Limited
Jurisdiction
Nevada, United States of America
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
*This list of subsidiaries corrected the names of certain entities in prior years due to translation from Chinese to English.
Exhibit 23.1
The Board of Directors
China XD Plastics Company Limited:
Consent of Independent Registered Public Accounting Firm
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
15, 2016, with respect to the consolidated balance sheets of China XD Plastics Company Limited as of December 31, 2015 and 2014, 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, 2015, and the effectiveness of internal control over financial reporting as of December 31,
2015, which reports appear in the December 31, 2015 annual report on Form 10-K of China XD Plastics Company Limited.
Our report dated March 15, 2016, on the effectiveness of internal control over financial reporting as of December 31, 2015, expresses our opinion that China XD Plastics Company Limited did not
maintain effective internal control over financial reporting as of December 31, 2015 because of the effect of a material weakness on the achievement of the objectives of the control criteria and
contains an explanatory paragraph that states 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 Huazhen LLP
Beijing, China
March 15, 2016
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, 2015.
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 15, 2016
/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, 2015.
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 15, 2016
/s/ Taylor Zhang
Name:
Title:
Taylor Zhang
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, 2015 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 15, 2016
/s/ Taylor Zhang
Name:
Title:
Taylor Zhang
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 15, 2016