UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _____________
Commission File No. 001-34546
CHINA XD PLASTICS COMPANY LIMITED
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
04-3836208
(I.R.S. Employer Identification No.)
No. 9 Dalian North Road, Haping Road Centralized Industrial Park,
Harbin Development Zone,
Heilongjiang Province, P. R. China
(Address of principal executive offices)
150060
(Zip Code)
Registrant's telephone number, including area code: (86) 451-8434-6600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.0001
Name of each exchange on which registered
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No X
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No X
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes X No ☐
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☐
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Non-accelerated filer ☐
(Do not check if a smaller reporting company)
Accelerated filer X
Smaller reporting company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No X
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2017 was approximately $83,414,335.70.
As of March 9, 2018, there were 49,727,731 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, 2017
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
PART IV
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Item 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-2
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F-4
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F-7
PART I
ITEM 1. BUSINESS.
Our Business
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"), Sichuan Xinda Enterprise Group Company Limited ("Sichuan Xinda"), and AL Composites Materials FZE ("Dubai Xinda"), 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 owned by HLJ Xinda Group and has 444 certifications from manufacturers in the
automobile industry as of December 31, 2017. 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 522 professionals and 11 consultants, including one consultant who is an
academician of Chinese Academy of Engineering. As a result of the combination of our academic and technological expertise, we have a portfolio of 442
patents, 31 of which we have obtained the patent registration in China and the applications for the remaining 411 of which are pending in China as of December
31, 2017.
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 30 automobile brands manufactured in China, including leading brands
such as Audi, Mercedes Benz, BMW, Toyota, Buick, Chevrolet, Mazda, Volvo, Ford, Citroen, Jinbei and VW Passat, Golf, Jetta, etc.. As of December 31,
2017, 444 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, 2017, 277 of our products were in the process of product certification by automobile manufacturers. In
addition, since the second quarter of 2016, the Company has resumed its presence in the Republic of Korea (the "ROK") by selling to the ROK customer
primarily higher-end Plastic Alloy after the suspension of the sales to the ROK customer, which resumed our entry into the international market.
We operate three manufacturing bases in Harbin, Heilongjiang and one manufacturing base in Nanchong, Sichuan Province, 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 under 10 trial production
lines targeting high-end products for the overseas markets. As of December 31, 2017, in domestic market, we had approximately 606,000 metric tons of
production capacity across 134 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 site of our fourth production plant
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 plant. Sichuan Xinda has
supplied to its customers since 2013, mainly backed by production capacity in our Harbin production plant in its inception. We installed 50 production lines with
production capacity of 216,000 metric tons in the second half of 2016 in our Sichuan plant. As of December 31, 2017, there is still construction ongoing on the
site of our Sichuan plant which is to be expected to be completed by the end of the second quarter of 2018. In order to meet the increasing demand from our
customer in the ROK and to develop potential overseas markets, Dubai Xinda obtained one leased property and two purchased properties, approximately
52,530 square meters in total, including one leased 10,000 square meters, and two purchased 20,206 and 22,324 square meters on January 25, 2015, June 28,
2016 and September 21, 2016, respectively, from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE, with constructed building comprising warehouses,
offices and service blocks. In addition to the earlier 10 trial production lines in Dubai Xinda, the Company is planning to complete installing 45 production lines
with 12,000 metric tons of annual production capacity by end of April, 2018, and an additional 50 production lines with 13,000 metric tons of annual production
capacity by end of 2018, bringing total installed production capacity in Dubai Xinda to 25,000 metric tons, targeting high-end products for the overseas market.
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In July 2017, the HLJ Xinda Group launched new industrial development project with the Management Committee of Harbin Economic - Technological
Development Zone. It includes an industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastic resins, which we expect
will be completed by the end of June 2018. Also included is an industrial project for 300,000 metric tons of biological composite materials, an industrial project
for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory, all of which we expect to be completed
by the end of July 2019.
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 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. Xinda Software was deregistered on December 5, 2016.
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 certain beneficial tax policies for certain regions in China, we undertook 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. Meiyuan Training ceased business in the third quarter of 2016 and Xinda Group Technology Center was
deregistered in 2016.
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.
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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 Heilongjiang Xinda Enterprise Group
Macromolecule Material Research Center Co., Ltd. ("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. Xinda Group Material Research was deregistered in 2016 as a
result of group restructuring.
On March 19, 2013, HLJ 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. In 2016, Sichuan Meiyuan and Sichuan Software were
deregistered and Sichuan Sales merged into Sichuan Xinda as a result of group restructuring.
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. In February 2015, Xinda (HK) Int'l
Trading was deregistered.
Heilongjiang Xinda Composite Material Co., Ltd. ("Xinda Composite") was established on November 27, 2013.
On January 8, 2014, Xinda Holding (HK) set up AL Composites Materials FZE ("Dubai Xinda") for international expansion business.
On March 5, 2014, Xinda Holding (HK) set up Xinda (HK) Trade Co., Ltd ("Xinda (HK) 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 October 19, 2016, Heilongjiang Investment was deregistered.
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. In July 2015, Nanchong Composite Materials merged into Sichuan Xinda as part of the efforts to
streamline the Company's management in Sichuan.
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.
On October 16, 2015, Xinda Holding (HK) set up Xinda CI (Beijing) Investment Holding Co., Ltd. ("Xinda Beijing Investment") in order to manage domestic
companies in mainland China. Pursuant to the agreement of shareholders of Xinda Beijing Investment signed on December 1, 2017, 100% equity of Xinda
Beijing Investment was transferred to HLJ Xinda Group at the cost of RMB1.00 (equivalent to US$0.15). On December 27, 2017, Xinda Beijing Investment
was renamed as Xinda CI (Beijing) Enterprise Management Co., Ltd. ("Xinda CI (Beijing)").
In 2016, as a result of group restructuring, Heilongjiang Investment and Meiyuan Tennis Club were dissolved.
On August 29, 2016, Xinda Holding US, a subsidiary of Xinda Holding (HK), was dissolved in New York.
Harbin Xinda Plastics New Materials Co., Ltd. ("Xinda Plastics New Materials") ceased business in the third quarter of 2016.
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On September 5, 2016, Sichuan Xinda set up Chongqing Wanshengxiang Macromolecule Materials Co., Ltd. ("Chongqing Wanshengxiang") in order to engage
in import and export business in the free-trade zone in Chongqing and to expand our business in Southwest China.
On February 16, 2017, the Board has received a preliminary nonbinding proposal letter from the Chairman and Chief Executive Officer, Mr. Jie Han ("Mr.
Han"), XD Engineering Plastics Company Limited ("XD Engineering"), a company incorporated in the British Virgin Islands and wholly owned by Mr. Han, and
MSPEA Modified Plastics Holding Limited, an affiliate of Morgan Stanley Private Equity Asia III, Inc. (collectively, the "Buyer Consortium"), to acquire all of
the outstanding shares of common stock of the Company not already beneficially owned by the Buyer Consortium in a "going-private" transaction (the
"Transaction") for US$5.21 per share of common stock in cash. The proposal letter states that the Buyer Consortium expects that the Board will appoint a
special committee of independent directors to consider the proposal and make a recommendation to the Board. The proposal letter also states that the Buyer
Consortium will not move forward with the proposed Transaction unless it is approved by such a special committee, and the proposed Transaction will be
subject to a nonwaivable condition requiring approval by majority shareholder vote of shareholders other than the Buyer Consortium members. The Buyer
Consortium currently beneficially owns approximately 74% of the issued and outstanding shares of common stock of the Company on a fully diluted and as-
converted basis. The Board has established a special committee (the "Special Committee") of disinterested directors to consider the proposal The Special
Committee is composed of the following independent directors of the Company: Mr. Lawrence W. Leighton (Mr. Lawrence W. Leighton resigned on May 15,
2017), Mr. Feng Li, and Mr. Linyuan Zha, with Mr. Li serving as chairperson of the Special Committee. The Special Committee will be responsible for
evaluating, negotiating and recommending to the Board any proposals involving a strategic transaction by the Company with one or more third parties. The
Special Committee intends to retain advisors, including an independent financial advisor, to assist in the evaluation of the proposal and any additional proposals
that may be made by the Buyer Consortium.
In June 2017, HLJ Xinda Group set up Xinda (Hong Kong) Macromolecule Material Ltd. (HK Macromolecule) and Xinda Deluxe Faith Ltd. (Xinda Faith) in
order to expand the international business in Hong Kong.
In December 2017, HLJ Xinda Group set up (i) Heilongjiang Xinda Enterprise Group Shanghai New Materials Sales Co., Ltd. ("Shanghai Sales"); (ii)
Heilongjiang Xinda Enterprise Group (Shanghai) New Materials Research and Development Co., Ltd. ("Shanghai New Materials R&D"); (iii) Heilongjiang
Xinda Enterprise Group (Daqing) New Materials Industry and Trade Co., Ltd. ("Daqing New Materials); and (iv) Sichuan Xinda Composite Materials Co., Ltd.
("Sichuan Composite Materials"), in order to promote sales, engage in & research & development in new materials such as biological composite materials,
ships, airplanes, high-speed rail, 3D printing materials, biodegradable plastics, and medical devices.
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Corporate Structure
The corporate structure of the Company as of December 31, 2017 was as follows:
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Our Industry
According to a research report prepared exclusively for the Company and issued by Frost & Sullivan in 2017, China is estimated to have consumed
approximately 22.7 million Metric Tons ("MT") of modified plastic products in 2017, representing an increase of 9.7% compared to 2016. 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 30.7 million MT in 2021, representing compound
annual growth rates ("CAGR") of 7.8% and 7.5% by sales volume and revenues from 2017 to 2021. 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 2011-2021E
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According to Frost & Sullivan's report, stimulated by the development of China's automotive industry, the Chinese automotive modified plastics market
experienced significant expansion from 2011 to 2016, with a CAGR of 16.2% in sales volume and 16.0% in sales revenue 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 production capacity is expected to reach 8.2 million MT in 2021, with a growth of 58.4% from 5.2 million MT in 2016. As illustrated in
Figure 2, the Chinese automotive modified plastics market is expected to maintain the decent increase, with CAGR of 12.2% in both sales volume and sales
revenue from 2017 to 2021, respectively. In terms of different manufacturer types, domestic manufacturers expanded their production more rapidly than non-
local manufacturers, which accounted for 75.1% of the total production capacity in 2016 and is expected to take up to 80.1% by the end of 2021. 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), 2011-2021E
Source: Frost & Sullivan
According to the statistics by the China Association of Automobile Manufacturers ("CAAM") in 2016 production volume of automobiles in China rose from
18,418.9 thousand units in 2011 to 28,118.8 thousand units in 2016 . The growth of Chinese automotive industry is expected to slightly slow down after several
years' rapid growth, with a relatively high CAGR of 8.4% from 2017 to 2021. 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 135 vehicles per 1,000 inhabitants in 2016, which is significantly below
Europe's average of 515 and United States' average of 785 according to National Bureau of Statistics, US Department of Energy, Eurosta, Frost &
Sullivan.
The obvious gap of automotive ownership per 1,000 people among China, United States and Europe indicates that the Chinese automotive industry still has huge
development potential.
The gap is expected to be further narrowed with China's vehicle per 1,000 people growing to 189 in 2021.
Figure 3: Overview of Chinese Macro Economy:
Vehicle Per 1000 People Comparison (Units per 1,000 people), 2011-2021E
Source: National Bureau of Statistics, US Department of Energy, Eurosta, Frost and Sullivan
8
•
According to the National Bureau of Statistics, the total number of Chinese automobile parts has experienced a rapid growth because of the
economic development and the incentive policies issued by the government. The number kept a booming trend and increased from 93,500.0
thousand units in 2011 to 185,590.0 thousand units in 2016, and is forecasted to hit a record of
268,385.8 thousand units by 2021, with a CAGR of 6.7% from 2017 to 2021.
Figure 4: Overview of Chinese Macro Economy: Growth of Automotive Parts(China), 2011-2021E
Source: National Bureau of Statistics, Frost and Sullivan
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•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 achieved
strong economic growth with nominal GDP increasing from approximately RMB 36,073.8 in 2011 to RMB 53,974.8 in 2016 . And it is expected that China will
maintain a steady economic growth during the period from 2017 to 2021. Per Capita Consumption Expenditure of Urban Household in China also shows a
decent increase of 49% from 2011 to 2016, and is forecasted to reach RMB 78,647.20 by the end of 2021. Moreover, cars have become more affordable in
China as local or joint venture automobile manufacturers continuously expand their production to achieve economies of scale to lower production cost and
source cheaper auto parts locally. Growing income and decreasing vehicle prices will continue to make car ownership more affordable for China's rising middle
class.
Figure 5: Overview of Chinese Macro Economy and Chinese Auto Market: Growth of Nominal GDP and Per Capita Consumption Expenditure
of Urban Household (China), 2011-2021E
Source: National Bureau of Statistics, International Monetary Fund, and Frost & Sullivan
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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.
Production volume of electric vehicle (EV) in China grew from 8.6 thousand units in 2011 to 516.6 thousand units in 2016 dramatically, with a CAGR of
126.6% from 2011 to 2016. China was also the largest market of EV in the world in 2016. In the future, backed by capital and incentive policies, EV is still a
development focus of auto industry in China. The production of battery packs for EV increased the demand for automotive modified plastics. Additionally, the
level of overall light-weight designs of EV is high. Therefore, the development of EV will be a strong driver of auto modified plastics market in China.
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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 24.9% of the total China
automotive plastic supply in 2016, decreasing from 33.0% in 2011 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 19.9% by the end of 2021, while the share of domestic manufacturers is forecast to rise
to 80.1% in 2021as 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.
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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:
● The 13th Five Year Plan for Development of Strategic Emerging Industries in China launched in 2016 included favorable policies toward advanced
technologies in developing new aviation and space materials, encouraging the application of biodegradable plastics and the development of high-performance
plastics used for additive manufacturing , as well as encouraging the development of new material industries
● The "Made in China 2025" initiative launched on May 8, 2015 by State Council, encouraged development of new materials, energy-saving and new energy
vehicles, power equipment, aerospace and aeronautical equipment, marine engineering and high-tech ships, modern railway equipment and agricultural
machinery.
● The "Development Plan of Additive Manufacturing (2015-2016)" initiative promulgated by the National Development and Reform Commission, Ministry of
Industry and Information Technology and Ministry of Finance of People's Republic of China on February 28, 2015, advocated domestic production of several
types of plastics with high heat resistance and high strength for additive manufacturing industry .
● It was stated in the "Outline of China's Twelfth Five-year Plan (2011)" that new functional materials, advanced structural materials, common base materials,
fiber of high performance and its compounded material are key development directions of new material industry.
● It was stated in the "Catalogue for Guidance on Adjustment of Industrial Structure (2011)" promulgated by the National Development and Reform
Commission on March 27, 2011, that the country is currently promoting (i) the development of production equipment of polycarbonate by the use of non-
phosgene method, with annual output of 60000t/year and above, (ii) the production of engineering plastic including liquid crystalline polymer (LCP) and
development and application of bleeding modification and alloying; (iii) the development and production of water – absorbed resin, conductible resin and
biodegradable polymers; (iv) the 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.
It was stated in the "Investment Guide for Industrial Transforming and Upgrading" (2011) promulgated by Ministry of Industry and Information Technology of
ghd People's Republic of China promoted the modification of waste plastics via the comprehensive utilization of related technologies and suggested the future
trend of the application of new materials in the industrial area, including biodegradable plastics, engineering plastics, etc.
● 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
weight reduction progress.
13
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.
14
Our Products
Modified plastic is processed by adding chemical agents and other additives to basic plastic resins to generate or improve certain physical and/or chemical
characteristics of plastic, such as heat resistance, hardness, tensile strength, wear resistance, and flame retardance. Based on the type of materials, our
products include twelve 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), Poly Ether Ether Ketone (PEEK), and Polyethylene (PE).
Our products are organized into twelve product groups, based on their physical characteristics, as set forth below:
Automotive or Other Application
Roof handles, door knobs, transmission connection
plates, fan shrouds, glovebox assembles, engine
hoods, stents baffle blocks, trajectory, fasteners,
etc.
Inner door knobs, door knobs, hand shanks,
transmission connection plates, visor bases, etc.
Instrument panels, instrument frames, shields,
automotive center stacks, speaker covers, grids, fog
light shells, battery bases, seat armrests, luggage
holders, etc.
Instrument panels, inner panels, columns, bumpers,
air conditioner shells, door knobs, mudguards, etc.
Heat dissipating grids, steering wheel shells, cup
holders, seal banks, instrument panels, inner door
knobs, wheel covers, etc.
Heater fans, signal lamps switches, gas reseior
covers, door knobs, hand shanks, fuel pumps,
dynamic valves, accelerator pedals, rampetior
elements, etc.
Battery plants, lamp holder insulation parts, anti
freezer grids, booms, instrument panels, window
frames, tool cabinet covers, handwheel boxes,
heater holders, heater baffles, cooling system
connections, pump strainer nets, ammeler
frameworks, rearview, 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.
Product Group
Modified Polyamide 66 (PA66)
Number of Products
Certified
50
Characteristics
Abrasive resistance, self-lubrication, high strength,
high temperature resistance, and flame resistance
Modified Polyamide 6 (PA6)
40
High temperature resistance, weather resistance,
high strength
Plastic Alloy
163
High impact resistance, high temperature resistance,
flame resistance, platable
Modified Polypropylene (PP)
165
Non-toxic, odorless, low density, insulated, and low
moisture uptake
Modified Acrylonitrile butadiene styrene
(ABS)
23
High rigidity, low density, rigidity toughness
balance, slow burn, and corrosion resistance
High strength, low moisture uptake, size stability,
high glass, high temperature resistance, fatigue
resistance
High rigidity, flame retardant, abrasive resistance,
pollution resistance, high temperature resistance
High temperature resistance, corrosion resistance,
radiation resistance, flame resistance, size stability
1
1
1
-
-
Polyoxymethylenes (POM)
Polyphenylene Oxide (PPO)
Modified Polyphenylene Sulfide (PPS)
Modified Polylactic Acid (PLA)
Modified Polyimide (PI)
PEEK*
Polyethylene
Total
Reproducible, good biological compatibility and
totally degraded
Glove box handle, seat cover, rearview mirror shell,
etc.
Flame resistance, high strength, high temperature
resistance, corrosion resistance
Compressor blade, piston ring, sealing washer,
bushing, gear, brake block, etc.
N/A
Excellent mechanical and chemical resistance and
temperature tolerance
Used in communications and transport electronics
and electrical appliances, machinery, medical and
analytical equipment
Resistance to shock, low temperature resistance,
excellent electrical insulation, corosion resistance
Agricultural film, screw cap, water pipe, gear, food
packa
-
444
*PEEK is primarily used in applications that are unrelated to automotive applications, which does not require certifications and is in the product development
stage.
15
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 67.0% of our total raw materials purchased by volume are sourced from overseas
petrochemical enterprises and 33.0% from domestic petrochemical enterprises during the year ended December 31, 2017.
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, 2017, the Company purchased approximately 54.3% of the Company's raw materials from five 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 HLJ Xinda Group Sichuan Xinda and AL Composites
with 109 employees who have Ph.D. and/or Master's degrees, 392 employees who have Bachelor's degrees, and 21 employees with Associate Bachelor's
degrees. In addition, we have 11 consultants, including one consultant who is an academician 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 and Sichuan Xinda, 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 Xinda focuses on more advanced research and development in high-end applications relative to our research and development efforts in
China.
16
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:
●
●
●
●
●
●
●
●
●
●
●
Xigao Jian: Member of Chinese Academy of Engineering, Professor of Dalian University of Technology
Chao Bi: Associate Professor of School of Mechanical and Electrical Engineering of Beijing University of Chemical Technology
Jian Yu: Professor of Institute of Polymer Science, Tsinghua University
Huiliang Zhang: Researcher of Researcher of Changchun Institute of Applied Chemistry of the Chinese Academy of Sciences
Yanbin Chi: Professor of Xi'an University of Architecture and Technology
Bin Zhao: General Manager of Ningbo ZHongniyiEnergy Saving Technology Co., Ltd.
Yan Jin: Professor of Beijing Research Institute of Chemical Engineering, China Petroleum Chemical Corporation
Meiying Han: Vice General Manager of Yantai Dongyi Plastics Co., Ltd.
Yongquan Li: Researcher of China Petroleum & Chemical Corporation Beijing Chemical Industry Research Institute
Shuxi Chang: Engineer in Field of Nanjing Branch of Valeo Automotive Air Conditioning Co., Ltd.(Hu Bei )
Yanwen Du: General Manager of Key Point Inc., General Motors
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$36,838,261, US$47,989,665 and US$21,061,345 during the years ended December 31, 2017, 2016, and
2015, respectively.
17
Intellectual Property
Patents
As a result of our collection of academic and technological expertise, we have 31 approved patents and 411 pending patent applications in China, as set forth in
the following table:
No
1
Patent Name
A preparation method of polylactic acid used in auto dashboard
Application No
201110035716.10
Date
February 11, 2011
Status
Authorized
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
A high impact and high heat-resistant flame retardant ABS composite material
reinforce by glass fiber and its preparation process
201110268625.20
September 13, 2011
Authorized
Supercritical fluid rapid diffusion synthesis of nano calcium carbonate enhanced
microcrystalline polypropylene composites
200910073402.30
December 11, 2009
Authorized
A rapid detection method of the tensile propertie of modified PP used in auto
specially by non-standard situation
201110094454.60
April 15, 2015
Authorized
A high toughness,low warpage and high-mobility PET/PBT/PC alloy renforced
by glass fiber and its preparation method
201110235189.90
August 17,2011
Authorized
A preparation method of polypropylene resin foam particles with supercritical
CO2 act
201110230302.40
August 12,2011
Authorized
A high-powered aircraft tail composite material and its preparation process
201110196209.60
July 13, 2011
Authorized
A method for automotive interior low odor, low VOC, high performance
polypropylene composites
201010258937.00
August 20, 2010
Authorized
A high-strength carbon fiber reinforced polyetheretherketone composite material
and its preparation method
201210114931.50
April 20, 2012
Authorized
High performance halogen-free flame-retardant PC / ABS composite material
and its preparation method
201210201826.50
June 19, 2012
Authorized
Graphene / polymer conductive composites
201210411231.20
October 25, 2012
Authorized
A high temperature conductive PPO/PA6 alloy material and its preparation
method
201210241856.90
July 13, 2012
Authorized
High-performance, green flame retardant reinforced PA66 composites
technology
201210260160.00
July 26, 2012
Authorized
An antistatic LSOH flame retardant PC / ABS alloy material and its preparation
method
201210296750.90
August 20, 2012
Authorized
A free primer and sprayed directly on the bumper composites
201210306240.50
August 27, 2012
Authorized
A long glass fiber reinforced polypropylene material and its preparation method
201210362626.80
September 26, 2012
Authorized
18
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
A modified Kevlar fiber reinforced PA66 material and its preparation method
201210369747.50
September 29, 2012
Authorized
A high toughness wear-resistant fiberglass /PA6 composites for rail transit
fasteners
201210396122.80
October 18, 2012
Authorized
A glass fiber reinforced poly (ethylene terephthalate) / polycarbonate alloy
201210403197.40
October 22, 2012
Authorized
A production method of antimicrobial, hydrophilic polypropylene particle
201210411680.70
October 25, 2012
Authorized
A glass fiber, SiO2 enhanced toughening polyphenylene sulfide material and its
preparation method
201210439116.60
November 7, 2012
Authorized
A high mobility of polyvinyl alcohol / lignin WPC
201310203047.30
May 28, 2013
Authorized
A applied to electrostatic spraying PPO/PA6 alloy material and its preparation
method
201310367459.00
August 22, 2013
Authorized
Preparation method of impact-resistant strain of modified polylactic acid material
201310468059.90
October 10, 2013
Authorized
A free spray paint bumper with modified material and preparation method
201310468057.X
October 10, 2013
Authorized
A stereoscopic word based on 3D printing
201520229477.70
April 16, 2015
Authorized
A medical chest straps based on 3D printing technology and its preparation
method
201510290769.60
June 1, 2015
Authorized
A 3D printing withABS composite material and its preparation method
201610073934.70
February 3, 2016
Authorized
A kind of starch based biodegradable plastics and its preparation method
201610078670.40
February 5, 2016
Authorized
A high heat-resistant PC / ASA alloy material and its preparation method
201010508149.20
October 15, 2010
Authorized
An extrusion grade sisal fiber reinforced polypropylene composite material and
its preparation process
201210357867.30
September 25, 2012
Authorized
A preparation method of the thermoplastic elastomers PP with high mobility and
high resistance of deformation
201110035725.00
February 11, 2011
Pending
A special material of cooling grille with high heat resistance and high weather
resistance
201110094466.90
April 15, 2011
Pending
A preparation method of easily dispersed and easily processimg polyprolene
composite material
201110158511.20
June 14, 2011
Pending
19
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
A preparation method of high heat-resistant and high rigid PLA composite
material reinforced by fully biodegrdable natural fiber
201110158512.70
June 14, 2011
Pending
A preparation method of polylactic acid used composite material modified by
hydroxyapatite with supercritical water act
201110268687.30
September 13, 2011
Pending
Apreparation process of ABS alloy with high impact performance and high heat
resistance
201110122586.50
May 12, 2011
Pending
A preperation process of high weathering colour ASA resin
201110347336.10
February 11, 2011
Pending
A high impact PA6 composite material with core-shell toughening and its
preparation method
201110196226.X
July 13, 2011
Pending
A preparation method of polymer composites with high toughness
201110035736.90
February 11, 2011
Pending
A polypropylene composite material used in battery tank of new source of
energy automobile and its preperation method
201110347320.00
November 7, 2011
Pending
A high toughness of polycarbonate blends material and its preparation method
201110319832.60
December 20, 2011
Pending
A preparation method of glass fiber reinforced polyether ether ketone with high
strength and high heat resestance
201110399890.40
December 5, 2011
Pending
A preparation process of the premixed screening system
201110158488.70
June 14, 2011
A molding method suitable PEEK
201010173663.50
May 17, 2010
Pending
Pending
An anti-aging, anti-yellowing, low odor polypropylene composite material and its
preparation method
201010508177.40
October 15, 2010
Pending
A preparation process of centralized control method used in plastic production
line
201110122566.80
May 12, 2011
Pending
A preparation methed of the plastic production line with high performance and
high honogeneity
201110233488.90
August 16, 2011
Pending
A rapid detection method of the impact propertie of midfide plastics used in
automobile specially
201110158528.80
June 14, 2011
Pending
A alloy material of high-impact, high-brightness ASA
201010543439.00
November 15, 2010
Pending
A high notched impact PA / ASA alloy material and its preparation method
201010230061.90
July 19, 2010
Pending
A preparation method of SiO2/CaCO3 nano-composite particles modified
polypropylene
201010282042.00
September 15, 2010
Pending
Nano-ZnO filled with modified PEEK film and its preparation method
201010258955.90
August 20, 2010
Pending
A method for automotive interior matte, anti-scratch modified polypropylene
composites
201010230064.20
July 19, 2010
Pending
20
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
A microporous zeolite materials modified PEEK and its preparation method
201010282022.30
September 15,2010
Pending
A lower mold shrinkage ratio method of calcium carbonate / polypropylene
nanocomposites
201010230088.80
July 19, 2010
Pending
A high toughnees,low warpage and low mold temperature PET/PA6 alloy
reinfoced by glass fiber and preperation method
201110347339.50
Nobember 7, 2011
Pending
A high impact and high flow PC / ASA alloy material and its preparation method
201010258950.60
August 20, 2010
Pending
A high heat-resistant and high wear-resistant PEEX composite material and its
preperation process
201110347338.00
Janauary 10, 2011
Pending
A preparation method for heat-resistant and easy processing of natural fiber
reinforced polylactic acid composites
201210147444.90
May 14, 2012
Pending
A preparation method of high encapsulation efficiency and stable release
polylactic lysozyme drug microsphere
201210295154.90
August 20, 2012
Pending
A preparation methods of ultra-hydrophobic microporous polymer film
201210358122.90
September 25, 2012
Pending
A mechanical strength polypropylene power lithium battery separator and its
preparation method
201210472283.00
November 21, 2012
Pending
A multilayer hot pressing method for preparating hydroxyapatite / polylactide
composite
201210474211.X
November 21, 2012
Pending
A high-impact, green flame retardant PC / ABS alloy material and its
preparation process
A Supercritical carbon dioxide reactor pressure method for preparating
polypropylene foamed material
201210122281.90
April 25, 2012
Pending
201210298694.20
August 22, 2012
Pending
An antimicrobial, dust suppression, halogen-free flame retardant ABS and its
preparation process
201210305824.00
August 27, 2012
Pending
A flame-retardant glass fiber reinforced PA66 and its preparation method
201210370558.X
September 29, 2012
Pending
The chest protected belts
201220526299.00
October 15, 2012
Pending
A non-asbestos and non-metal materials brake pads composite material and its
preparation method
201210395921.30
October 18, 2012
Pending
A wear-resistant, anti-static, flame retardant ultra-high molecular weight
polyethylene composite material
201210402814.90
October 22, 2012
Pending
21
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
A high impact, high heat-resistant PC / PBT alloy material and its preparation
process
201210403095.20
October 22, 2012
Pending
A continuous aramid fiber reinforced POM materials and preparation methods
201210411967.X
October 25, 2012
Pending
An alcohol solution PA66 material special for intake manifold and its preparation
method
201210442251.60
November 8, 2011
Pending
An environmentally friendly self- aromatic polypropylene material and its
preparation process
201210457403.X
November 15, 2012
Pending
Preparation of a glass fiber reinforced nylon 66 / nylon 6 Composites
201310185041.80
May 20, 2013
An environmentally friendly foam polypropylene material and preparation
method
201310185228.80
May 20, 2013
Pending
Pending
An ramie fiber reinforced polypropylene composite material and its preparation
process
201310185514.40
May 20, 2013
Pending
One kind of resistance to warpage reinforced polyamide 6 material and
preparation method
201310250426.80
June 24, 2013
Pending
Preparing a polyamide material reinforced with continuous glass fibers
201310250967.00
June 24, 2013
A low-cost method for preparing hydrophobic material of polypropylene
201310250185.70
June 24, 2013
A polypropylene self-luminous material and preparation method
201310250047.90
June 24, 2013
Pending
Pending
Pending
A preparation method of reinforced, flame-retardant ABS material
201310367420.90
August 22, 2013
Pending
One kind of aramid pulp-reinforced PA66 composite material and preparation
method
201310367404.X
August 22, 2013
Pending
Preparation of a high-performance fiber-reinforced polyphenylene sulfide
composites
201310372289.50
August 24, 2013
Pending
One kind of anti-alcohol solution, low warpage reinforced nylon66 composite
material and preparation method
201310372282.30
August 24, 2013
Pending
A high-gloss, free paint, scratch-resistant alloy material and preparation method
201310372789.90
August 26, 2013
Pending
A preparation process of heat-stable flame retardant reinforced nylon composite
material
201310413691.30
September 12, 2013
Pending
An anti-oxidation, high flow, flame retardant ABS and preparation process
201310413270.00
September 12, 2013
Pending
An antistatic, low smoke, flame retardant PC / ABS alloy materials and
preparing process
201310414847.X
September 13, 2013
Pending
22
91
92
93
94
95
96
97
98
An flax noil fiber reinforced polypropylene composite material and its
preparation process
201310413287.60
September 12, 2013
Pending
A Preparation of appling to charging pile casing PC / ABS alloy compound
201310414007.30
September 12, 2013
Pending
A no-spray, high durability, scratch-resistant, flame retardant ABS Preparation
and Process
201310414024.70
September 12, 2013
Pending
A direct line of long glass fiber reinforced thermoplastic composite material and
its preparation method
201310471859.60
October 12, 2013
Pending
A method for preparing an enhanced flame retardant rigid polyurethane
composites
201310467797.10
October 12, 2013
Pending
A MARINE with wear-resistant ultra high molecular weight polyethylene
composites
201310468060.10
October 10, 2013
Pending
A method for preparing low temperature resistance, scratch-resistant zipper
jacket compound for cars
201310468076.20
October 10, 2013
Pending
An environmentally friendly fire-retardant, high-performance EVA composite
material and preparation method
201310467812.20
October 10, 2013
Pending
99
A polypropylene foam material and preparation method
201310559024.60
November 13, 2013
Pending
100
101
One kind of aramid fiber / polyimide composite material and preparation method
201310559294.70
November 13, 2013
Pending
An alloy NiMoB modified talc enhanced Bumper material and its preparation
method
201310559588.X
November 13, 2013
Pending
102 Method for preparing porous polymer composite superhydrophobic films
201310559589.40
November 13, 2013
Pending
103
104
105
106
107
108
A silicone toughening polyphenylene sulfide material and its preparation method
201310560625.90
November 13, 2013
Pending
A toughening wear-resistant alloy material and preparation method
201310556261.70
November 12, 2013
Pending
A high resistance temperature reinforced polyamide 6 material and preparation
method
201310556569.10
November 12, 2013
Pending
Preparation of an aircraft engine surrounding high temperature polyimide
composites
201310555389.10
November 12, 2013
Pending
Preparation of a high strength of continuous glass fiber reinforced nylon 6
material
201310555451.70
November 12, 2013
Pending
A highly weather-resistant polypropylene self-luminous material and preparation
method
201310555483.70
November 12, 2013
Pending
23
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
A high toughness, wear-resistant rail fasteners with glass / nylon 6 Composites
201310646768.10
December 6, 2013
Pending
A high-gloss, avoid spraying PTT / PMMA rearview mirror Compound and its
production process
201310652729.20
December 6, 2013
Pending
A keyboard and mouse with anti-bacterial perspiration modified plastics and its
preparation method
201310676101.60
December 13, 2013
Pending
A high-strength lightweight hollow glass microspheres toughening PP material
and preparation method
201310721731.00
December 25, 2013
Pending
a method for producing a heatproof polyimide composite used for aircraft engine
periphery
201410144739.X
April 12, 2014
Pending
a method for producing a heatproof polyimide composite
201410205669.40
May 16, 2014
An advantage of specially coupling treated carbon fibers reinforced PEEK
201410262651.80
June 13, 2014
A high dimensional stability、excellent abrasion resistance PEEK valve
composite
201410262638.20
June 13, 2014
The preparation method of a high-strength PEEK composites
201410262746.X
June 13, 2014
A Method for preparing high performance PEEK/long glass fiber composites
201410263606.40
June 16, 2014
a method for producing a polyimide composite
201410326840.70
July 10,2014
Preparation of Carbon Fiber Reinforced PI Composite Material
201410326641.60
July 10,2014
Preparation of a high tensile strength of PEEK composites
201410326616.80
July 10,2014
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
The prepatation of a high-strength ,high-temperature polyimide composites
201410413832.60
August 21, 2014
Pending
A high-heat-resistant,excellent in abrasion resistance sheet composite PEEK
valve
201410413379.90
August 21, 2014
Pending
Preparation of PI composite material by coupling agent treated glass fiber
201410481809.00
September 22, 2014
Pending
A kind of 3D printing poly lactic acid/leather powder composite materials and its
preparation method
201410690528.60
November 27, 2014
Pending
A kind of biodegradable polymer-docetaxel bonding medicine and its
preparation method
201410690529.00
November 27, 2014
Pending
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A prepatation method of polyimide composite material
201410691532.40
November 27, 2014
Pending
A prepatation method of high toughness biodegradable polylactic acid foam
plastics
201410691587.50
November 27, 2014
Pending
A preparation of antibacterial polylactic acid fiber
201410691901.X
November 27, 2014
Pending
A kind of poly lactic acid preparation method of lactide ring-opening
polymerization
201410697015.80
November 28, 2014
Pending
A modification of PLA material and its preparation method
201410697822.X
November 28, 2014
Pending
A method of preparing high strenght PLA composites
201410697790.30
November 28, 2014
Pending
A kind of twin screw reactive extrusion method ring opening polymerization
preparation of PLA
201410697838.00
November 28, 2014
Pending
A method of preparing high toughness PLA composites
201410697801.80
November 28, 2014
Pending
A kind of organic molecule catalytic method for preparation of poly lactic acid
201410703493.50
November 30, 2014
Pending
A surface treatment of carbon fiber reinforced thermoplastic polyimide
composites
201410703815.60
November 30, 2014
Pending
A carbon fiber-reinforced thermoplastic polyimide composites
201410703816.00
November 30, 2014
Pending
A prepatation method of high performance PEEK/carbon fiber composite
material
201410747379.20
December 10, 2014
Pending
A prepatation method of PEEK composite material
201410746978.20
December 10, 2014
Pending
A ternary no return toughening copolymer of polylactic acid composite material
and its preparation method
201410747386.20
December 10, 2014
Pending
Sensor with high-performance fiber-reinforced PPS composites
201410747061.40
December 10, 2014
Pending
Glass fiber modified wearable Polyimide
201410747053.X
December 10, 2014
Pending
An advantage of specially prepared by coupling treatment sio2 reinforced PEEK 201410747062.90
December 10, 2014
Pending
A high-mobility PVA/wood flour composite biomass
201410747054.40
December 10, 2014
Pending
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One kind of thermal evaporation method graphene Gec
201410746877.50
December 10, 2014
Pending
A highly heat-resistant polylactic acid/Wood Flour Composites
201410747097.20
December 10, 2014
Pending
Preparation of an enhanced flame retardant polyurethane composites
201410747055.90
December 10, 2014
Pending
A process for producing fiber reinforced PA6 dedicated 3D printing materials
processing using a special method
201410747082.60
December 10, 2014
Pending
A preparation method of low warpage ABS special 3D printing materials
201410746979.70
December 10, 2014
Pending
A preparation method of impact-resistant strain of modified polylactic acid
materials
201410747377.30
December 10, 2014
Pending
A preparation method of chemical vapor deposition method graphene films
201410747180.X
December 10, 2014
Pending
A process for producing acrylic polyurethane high-solids coatings
201410747079.40
December 10, 2014
Pending
The use of core-shell particles toughening PC and PBT resin
201410747406.60
December 10, 2014
Pending
A high strength,high modulus of PEEK composite material and preparation
method
201410747376.90
December 10, 2014
Pending
A modified high-performance carbon fiber composite materials
201410747395.10
December 10, 2014
Pending
A kind of microfluids device prepared by the technology of 3D-printing
201410747264.30
December 10, 2014
Pending
A high-retardant polyvinyl alcohol/Wood Flour Composites biomass
201410746938.80
December 10, 2014
Pending
A method of processing aids (ACR) improved PVC materials
201410746804.60
December 10, 2014
Pending
A preparation method of polylactic acid film
201410746939.20
December 10, 2014
Pending
A compressor valve plate with a modified material and the method
201410733902.60
December 8, 2014
Pending
An automobile air conditioner drive gear with the modified materials and the
method
201410733905.X
December 8, 2014
Pending
Nanoparticles/CF hybrid reinforced PEEK composite material and its
preparation method
201410729719.90
December 5, 2014
Pending
26
163 Method for preparing thermoplastic polyimide composites
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December 5, 2014
Pending
164
165
166
Boron fiber reinforced polyimide
201410730235.60
December 5, 2014
Pending
A method of preparation of carbon fiber prepreg reinforced skis
201410729635.50
December 5, 2014
Pending
High mobility TLCP/PES/PEEK composite material and its preparation method
201410729614.30
December 5, 2014
Pending
167 Method for preparing high toughness of polycarbonate/polylactic acid-bassed
201410733882.20
December 5, 2014
Pending
alloys
168
169
An PEEK/BaSo4 composite material and its preparation method
201410730260.40
December 5, 2014
Pending
Foamed PP and graphite fiber composites preparation methods of enhancement
of skis
201410729634.00
December 5, 2014
Pending
170 Method for increasing the compatibility of PPS/PEEK composite materials
201410730258.70
December 5, 2014
Pending
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A preparation method of the high toughness,high mobility PLA/PP Alloy
201410704664.60
December 4, 2014
Pending
A preparation method of the natural fiber/polylactic acidbased composite
materials
201410704612.90
December 4, 2014
Pending
A preparation method of the high toughness ABS/PLA-based alloys
201410704588.90
December 4, 2014
Pending
A kind of suitable for 3D printing chest straps of polylactic acid materials and its
preparation method
201510089885.10
February 28, 2015
Pending
A method of preparation of water-soluble PLA support material for 3D printing
201510180141.00
April 17, 2015
A kind of high performance PEEK/chopped carbon fiber composite material
and the preparation method
201510180750.60
April 17, 2015
Pending
Pending
The prepatation method of a high toughness polylactic acid based composite
material
201510180761.40
April 17, 2015
Pending
A nylon base composite material for medical strap by 3D printing and the
preparation method
201510180170.70
April 17, 2015
Pending
A kind of alloy material for 3D printing
A preparation method of 3D printing support material of PVA with amylum
filled
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April 16, 2015
201510342646.20
June 19, 2015
Pending
Pending
181
A preparation method of ASA composite materials for 3D printing
201510342647.70
June 19, 2015
Pending
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A kind of PBT/carbon fiber composite material and its preparation method
201510343448.80
June 20, 2015
A kind of anionic catalytic method for preparation of PLA
201510343470.20
June 20, 2015
A kind of suitable for 3D printing flexible material and its preparation method
201510343479.30
June 20, 2015
A gear assembly line pen container
201510372972.80
July 1, 2015
A 3D printing PA-12 composite materials and preparation methods
201510425924.00
July 21, 2015
A kind Of PC/ABS alloy for 3D printing
201510425922.10
July 21, 2015
A kind Of chitosan fill the PVA support materials for 3D printing
201510425923.60
July 21, 2015
A preparation methods of PA-12 composite materials for 3D printing
201510425925.50
July 21, 2015
A preparation methods of ASA composite materials for 3D printing
201510426034.10
July 21, 2015
A PCL materials for 3D printing
201510426518.60
July 21, 2015
A PLA/carbon fiber composite materials for 3D printing
201510444970.50
July 27, 2015
A ABS/carbon fiber composite materials for 3D printing
201510444857.70
July 27, 2015
A low-cost PEEK composite materials
201510442250.50
July 27, 2015
A kind of flame retardant PEK-C composite materials
201510442249.20
July 27, 2015
The preparation method of PLA composites with higher strength
201510513220.90
Augut 20, 2015
High flexibility and heat resistance of modified PLA material and its preparation
method
201510513331.X
Augut 20, 2015
The preparation method of high toughness PLA composites
201510513381.80
Augut 21, 2015
A low hardness material for 3D printing and its preparation method
201510513507.10
Augut 21, 2015
A kind of high toughness ABS/PLA base alloy and its preparation method
201510513987.10
Augut 21, 2015
A preparation methods of PLA/carbon fiber composite cable
201510513965.50
Augut 21, 2015
A kind of high toughness PC/PLA base alloy and its preparation method
201510513964.00
Augut 21, 2015
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
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A PLA/PCL materials for 3D printing
201510513963.60
Augut 21, 2015
A preparation methods of biodegradable PP composite materials
201510516595.00
Augut 21, 2015
A kind of twin screw reactive extrusion method ring opening polymerization
preparation of PLA
201510516697.20
Augut 21, 2015
Pending
Pending
Pending
A 3D printing with PLA wood plastic composite material and its preparation
method
201510516892.50
Augut 22, 2015
Pending
A kind of biodegradable plastic material
201510516891.00
Augut 22, 2015
A water-soluble 3D printing support material and its preparation method
201510517574.00
Augut 22, 2015
The preparation method of PLA by catalytic organic molecules
201510529386.x
Augut 26, 2015
A kind of alloy material for 3D printing
201510529324.90
Augut 26, 2015
The preparation method of PLA by glue lactide ring-opening polymerization
201510529229.90
Augut 26, 2015
A kind of modified carbon fiber reinforced PEK-C composite materials
201510518210.40
Augut 24, 2015
Pending
Pending
Pending
Pending
Pending
Pending
A kind of flame retardant straw man-made composite panels and its preparation
method
201510598097.50
September 21, 2015
Pending
A kind of injection molding with straw powder/PP composite wood plastic
material
201510598151.60
September 21, 2015
Pending
A free aldehyde a two-component straw green adhesive and its preparation
method
201510598096.00
September 21, 2015
Pending
A radiation-hardened PEK-C composite materials
201510598127.20
September 21, 2015
Pending
A PLA/PCLbased materials for 3D printing
201510596497.20
September 19, 2015
Pending
A kind of PC/PLA alloy for 3D printing
201510596496.80
September 19, 2015
Pending
A preparation methods of PA-12 composite materials for 3D printing
201510596494.90
September 19, 2015
Pending
A straw filling masterbatch for car and its preparation method
201510596493.40
September 19, 2015
Pending
A kind of chemical modification of two-component straw without adhesive and
its preparation method
201510606502.30
September 23, 2015
Pending
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A highly transparent and heat resistant PLA based composite materials and
preparation methods
201510605550.00
September 22, 2015
Pending
A long natural fiber/PLA based composite materials and preparation methods
201510605549.80
September 22, 2015
Pending
A high toughness,high liquidity PLA/PP alloy and its preparation method
201510605551.50
September 22, 2015
Pending
A straw combined with compound wood plastic material and its preparation
method
201510621223.40
September 28, 2015
Pending
A filler masterbatch containing straw fiber and its preparation method
201510620223.20
September 26, 2015
Pending
A kind of high toughness of polyolefin/PLA based alloy material and its
preparation method
201510620222.80
September 26, 2015
Pending
A straw in organic resin environmental protection plastic masterbatch and
preparation method
201510620187.X
September 26, 2015
Pending
A kind of SEBS compound materials for 3D printing and preparation methods
201510625700.40
September 26, 2015
Pending
A 3D printing in toughenning PLA material
201510678609.90
October 21, 2015
Pending
A 3D printing with imitation wood material and its preparation method
201510678582.30
October 21, 2015
Pending
A shock profile ASA modification and preparation metgod
201510678508.10
October 21, 2015
Pending
A kind of suitable for 3D printing PP/SEBS composite materials
201510678417.80
October 21, 2015
Pending
A werther resistance type ASA material preparation method
201510682952.00
October 22, 2015
Pending
A carbon fiber thermoplastic composites material and its preparation method
201510802664.40
November 20, 2015
Pending
A kind of plant fiber modified PP composite material and its preparation process
201510801217.70
November 20, 2015
Pending
A straw biodegradable green tableware and its preparation method
201510800686.70
November 20, 2015
Pending
A straw packaging products and its preparation method
201510800422.10
November 20, 2015
Pending
A 3D printing use environmental protection material and its preparation method
201510781986.50
November 17, 2015
Pending
30
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A 3D printing to atrengthen PLA material
201510781729.10
November 17, 2015
Pending
A 3D printing for PVA/PLA composite materials
201510781822.20
November 17, 2015
Pending
Carbon fiber reinforced polylactic acid/hydroxyapatite composite material
preparation method
201510781758.80
November 17, 2015
Pending
A PLA/PCL composite materials for 3D printing fixed with chest photo
201510781757.30
November 17, 2015
Pending
A PEEK composites used for 3D printing
201510776191.50
November 16, 2015
Pending
A long natural fiber/polylactic acid based composite material preparation
method
201510807808.50
November 23, 2015
Pending
A 3D printing with PA-12/carbon fiber composite material preparation method
201510774246.90
November 14, 2015
Pending
A synthetic PLA composite and its preparation method
201510994685.00
December 30, 2015
Pending
The preparation method of high toughness PLA composites
201510994684.60
December 30, 2015
Pending
A kind of high strength polypropylene fiber and its manufacturing method
201510994680.80
December 30, 2015
Pending
The method of preparation of polypropylene fiber
201510994693.50
December 30, 2015
Pending
The preparation method of the high toughness PP composites
201510994695.40
December 30, 2015
Pending
Carbon fiber reinforced polylactic acid/hydroxyapatite composite material
preparation method
201510994697.30
December 30, 2015
Pending
The preparation method of PLA/PP bicomponent fiber filtering material and
products
201510994720.90
December 30, 2015
Pending
A kind of carbon fiber reinforced halogen-free flame retardant PA66 composite
materials and preparation methods
201510995630.10
December 30, 2015
Pending
A kind of high toughness polylactic acid based composite material preparation
method
201510995642.40
December 30, 2015
Pending
Carbon fiber reinforced halogen-free flame retardant PBT composite material
and its preparation method
201510995644.30
December 30, 2015
Pending
A kind of starch based biodegradable plastics and its preparation method
201510995643.90
December 30, 2015
Pending
A highly transparent heat-proof PLA based composite material preparation
method
201510995641.X
December 30, 2015
Pending
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A kind of modified PET material and its preparation method
201610071902.30
February 3, 2016
Pending
A kind of environmental protection type plastic pipe and its preparation method
201610073495.X
February 3, 2016
Pending
The medical adjustable chest abdomen fixing belt based on FDM printing
technology
201610073497.90
February 3, 2016
Pending
A kind of human pipeline support for controllable safety PLA/PCL composite
material
201610068028.80
February 2, 2016
Pending
A kind of wood material for 3D printing and its preparation method
201610068060.60
February 2, 2016
Pending
A kind of PBS/PHB material for 3D pringting and its preparation method
201610068519.20
February 2, 2016
Pending
A preparation method of high toughness PP wood plastic composite materials
201610068969.10
February 2, 2016
Pending
A kind of glass fiber reinforced polyetheretheketone 3D printing supplies and
preparation method thereof
201610069556.50
February 2, 2016
Pending
A kind of biodegradable polylactic acid protection film and its preparation
method
201610070678.60
February 2, 2016
Pending
A kind of straw degradable plastic film and its preparation method
201610070677.10
February 2, 2016
Pending
A poly lactic acid/starch/straw powder bio based biodegradable composite
material and its preparation method
201610070676.70
February 2, 2016
Pending
An enhanced impact modification of polylactic acid material and its preparation
method
201610072317.50
February 3, 2016
Pending
A shape of thermotropic polymers material with memoty
201610117090.10
March 2, 2016
A kind of low cost straw polyethylene film and its preparation method
201610117151.40
March 2, 2016
Preparation method of wood plastic composite materials PP
201610117088.40
March 2, 2016
A kind of degradable plastic film and its preparation method
201610117087.X
March 2, 2016
A kind of biodegradable thoughening heat-resistant polylactic acid modified resin
and its preparation method
201610117085.00
March 2, 2016
Pending
Pending
Pending
Pending
Pending
A preparation method and application of glass fiber reinforced polylactic acid
composite material
201610117084.60
March 2, 2016
Pending
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A kind of automobile sheet witn the 3D printing technology
201610117083.10
March 2, 2016
A kind of environmental protection engineering plastics for plate
201610117082.70
March 2, 2016
A kind of environmental protection engineering plastics for automobile
201610117081.20
A kind of preparation of the 3D printing technology based on medical lesions
201610117080.80
March 2, 2016
A kind of PA-12 wood plastic composite powder for 3D printung and its
preparation method
201610117079.50
March 2, 2016
Pending
Pending
Pending
Pending
Pending
A kind of PBS/carbon material composite wire used for 3D printing and its
preparation method
201610117815.70
March 3, 2016
Pending
283
A kind of shape memory polymer material of poly and its preparation method
201610205124.20
April 6, 2016
284 Method for preparing poly lactic acid foaming material by supercritical carbon
201610205122.30
April 6, 2016
dioxide autoclave pressure method
Pending
Pending
285
286
287
288
289
290
291
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293
294
295
A kind of degradable straw polyethylene film and the preparation method
thereof
201610206640.70
April 6, 2016
Pending
A kind of high transparent heat-resistant polylactic acid composite material
preparation method
201610206661.90
April 6, 2016
Pending
A kind of Environment friendly type poly lactic acid film and the preparation
method thereof
201610207898.90
April 6, 2016
Pending
A starch based degradable biological plastic PP and the preparation method
thereof
201610208232.50
April 6, 2016
Pending
A kind of heat resistant PEEK composite material
201610208393.40
April 6, 2016
A kind of PA12/PA6 alloy material powder for 3D printing
201610208432.00
April 6, 2016
A preparation of the 3D printing technology of medical equipment based on the
elbow
201610208548.40
April 6, 2016
A kind of PBS/PBC printing 3D material and the preparation method thereof
201610209276.X
April 7, 2016
A kind of environmental protection engineering plastic for pipe
201610208583.60
April 7, 2016
A kind of Glass fiber reinforced 3D printing plate
201610209379.60
April 7, 2016
A kind of environmental protection engineering plastic for pipe
201610283803.10
May 4, 2016
Pending
Pending
Pending
Pending
Pending
Pending
Pending
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A kind of environmental protection engineering plastic for plate
201610286257.70
May 4, 2016
A kind of environmental protection engineering plastic for automobile
201610286746.20
May 4, 2016
A carbon fiber composite material suitable for 3D printing
201610291577.10
May 6, 2016
A kind of wood material for 3D printing and preparation method thereof
201610291576.70
May 6, 2016
A kind of special material for 3D printing lamp
201610291575.20
May 6, 2016
A kind of long fiber reinforced nylon composite material and the preparation
method thereof
201610288368.10
May 5, 2016
Pending
Pending
Pending
Pending
Pending
Pending
A kind of preparation method of high toughness PP wood plastic composite
materials
201610287792.40
May 5, 2016
Pending
A kind of Environment friendly polyethylene film and itspreparation method
201610290594.30
May 5, 2016
Thermally conductive PBT composite material with shielding function and its
preparation method
201610291019.50
May 5, 2016
Pending
Pending
A kind of degradable shape memory lumen inner bracket and the preparation
method thereof
201610291432.10
May 5, 2016
Pending
A kind of biodegradable plastic materials PLA
201610291430.20
May 5, 2016
A kind of PA12/PA66 alloy material powder for 3D printing
201610381000.X
June 1, 2016
A kind of PBS/C printing 3D material and preparation method thereof
201610380995.80
June 1, 2016
A kind of environmental protection material for 3D printing and the preparation
method thereof
201610380993.90
June 1, 2016
A kind of PBT composite flame retardant material and its preparation method
201610380999.60
June 1, 2016
A kind of preparation method of talc PP composite wood
201610380997.70
June 1, 2016
A kind of anti bending PEEK composite material
201610381001.40
June 1, 2016
A kind of environmental protection engineering plastic for automobile
201610381002.90
June 1, 2016
A kind of flexible material suitable for 3D printing chest and abdomen fixing
band and the preparation method thereof
201610380992.40
June 1, 2016
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
315
A method for preparing medical lactide
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June 1, 2016
Pending
34
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324
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326
327
328
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333
334
A kind of functional type polyethylene film material and preparation method
thereof
201610381752.60
June 1, 2016
Pending
A kind of high performance long fiber reinforced nylon composite material and
the preparation method thereof
201610381709.X
June 3, 2016
Pending
A kind of full biological degradation heat resistant poly lactic acid foaming
material and the preparation method thereof
201610381706.60
June 3, 2016
Pending
A kind of low cost and high heat-resistant PEEK composites
201610515565.20
July 4, 2016
A high performance with environmental protection engineering plastic pipes
201610519136.20
July 5, 2016
An amphiphilic polymer based on oil phase inverse microemulsion preparation
method
201610516931.60
July 4, 2016
A straw plastic film and its preparation method
201610516933.50
July 5, 2016
A PBT/PC insulating thermal conductive composite materials
201610516932.00
July 4, 2016
A continuous glass fiber reinforced nylon material and its preparation method
201610515566.70
July 4, 2016
A heat-resistant environmental engineering plastics
201610519137.70
July 5, 2016
A uniform bubble hole high cushioning foaming materials preparation methods of
PLA
201610516835.10
July 5, 2016
A preparation method of flax fiber wood plastic PP composites
201610515567.10
July 4, 2016
A 3D printing with ABS material and its preparation method
201610536415.X
July 11, 2016
A 3D printing chest straps of PLA/POE composite materials
201610542588.20
July 12, 2016
A kind of toughening for 3D printing plate material
201610536433.80
July 11, 2016
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
Pending
A kind of 3D printing neck gear nylon base composite material and its
preparation method
201610680095.50
August 18, 2016
Pending
A 3D printing in toughenning PLA material
201610680636.40
August 18, 2016
Pending
A supercritical CO2 micro foaming polylactic acid/wood powder composite
materials
201610680071.X
August 18, 2016
Pending
A kind of super toughness plank with environmental protection engineering
plastic
201610680093.60
August 18, 2016
Pending
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The treatment a lung targeted therapy drugs preparation of PLGA microspheres
201610680058.40
August 18, 2016
Pending
An efficient composite PBT guide the cooling material and its preparation
method and application
201610680624.10
August 18, 2016
Pending
A high-performance automotive environmental protection engineering plastics
201610680094.00
August 18, 2016
Pending
A kind of biomass polyethylene film and its preparation method
201610680625.60
August 18, 2016
Pending
A kind of suitable for 3D printing carbon fiber composite materials
201610680068.80
August 18, 2016
Pending
A kind of selective laser sintering of 3D printing with PA-12 composite powder
201610680072.40
August 18, 2016
Pending
A kind of flax fiber and rise husk powder preparation methods of wood plastic
PP composites
201610680069.20
August 18, 2016
Pending
A kind of long fiber reinforced PP/nylon composite material and its preparation
method
201610680642.X
August 18, 2016
Pending
A TPU material for 3D printers and its preparation method
201610828189.20
September 19, 2016
Pending
A 3D printing wood plastic composite material
201610829085.3
September 19, 2016
Pending
A PLA material for 3D printing and its preparation
201610826923.1
September 18, 2016
Pending
A SLS3D printing PA-12/GB composite material
201610831955.0
September 20, 2016
Pending
A kind of thermal insulation flame retardant performance enhancing PBT
plastics and its preparation method
201610829136.2
September 19, 2016
Pending
A kind of thermoplastic starch/PLA foam and its production method
201610826922.7
September 19, 2016
Pending
A kind of impact resistance PEEK composites
201610827117.6
September 18, 2016
Pending
A permanent plastic tubing special material and its preparation method
201610831634.0
September 20, 2016
Pending
Toughening endurance of biodegradable polylactic acid modified resin and
preparation method
201610831721.60
September 20, 2016
Pending
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A newtype of PLA membrane material and its preparation method
201610832327.4
September 20, 2016
Pending
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A preparation method of PLA by the lactide
201610826893.4
September 18, 2016
Pending
A long glass fiber reinforced nylon material preparation and mechanical
properties of research
A multi-segmented polyurethane shape memory polymer material and its
preparation method
201610831722.0
September 20, 2016
Pending
201610909927.60
October 19, 2016
Pending
A polymer gene drug carrier and its preparation method
201610909926.10
October 19, 2016
Pending
A modified poly lactic and preparation method thereof
201610909903.00
October 19, 2016
Pending
Preparation of continuous glass fiber reinforced nylon composite materials
201610916278.20
October 21, 2016
Pending
The invention relates to an environment - friendly film adsorption traditional
tableware process and its preparation method
201610910743.10
October 19, 2016
Pending
One Kind of Environmental Engineering Plastics for Lightweight Automobile
201610909759.00
October 19, 2016
Pending
A Method of Preparation of PC/ABS for 3D Printing
201610909754.80
October 19, 2016
Pending
A Methodfor preparing PP/SEBS for Rapid prototyping
201610909905.x
October 19, 2016
Pending
A Method of Preparation of High-rigidity Engineering Plastics for Pipe
201610909762.20
October 19, 2016
Pending
A Method for Preparing Environmental Engineering Plastics for High-strength
Pipe
201610909760.30
October 19, 2016
Pending
The invention relates to an environment - friendly film adsorption hollowing
tableware process and its preparation method
201610941346.00
November 2, 2016
Pending
Environmental protection engineering plastic for weather resistant automobile
201610943159.60
November 5, 2016
Pending
An eco-friendly tableware traditional film adsorption process for its preparation
201610943233.40
November 2, 2016
Pending
Preparation of continuous glass fiber reinforced nylon composite materials
201610960086.10
November 2, 2016
Pending
A kind of PEEK/PES composite material
201610999301.90
November 15, 2016
Pending
Heat conductive flame retardant poly ethylene terephthalate and preparation
method thereof
201610971556.40
November 7, 2016
Pending
A kind of shape memory polyurethane polymer materials and its synthesis
process
201610971345.00
November 7, 2016
Pending
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A kind of containing folic acid targeted polymer drug carrier and its preparation
method
201610971300.30
November 7, 2016
Pending
PA12/PA6/GB Alloy Material for SLS 3D Printing
201610961256.80
November 2, 2016
Pending
A Kind Composite Of PLA/TPU for 3D printing
201610971583.10
November 7, 2016
Pending
A low hardness composite material forRapid prototyping and the preparation
method
201611001390.x
November 17, 2016
Pending
A hydrolysis modified poly lactic fiber and the preparation method
201610998812.90
November 21, 2016
Pending
An environmental wood material for 3D printing and its preparation method
201610999438.40
November 21, 2016
Pending
An easy separation and environmental protection film is used for absorbing the
hollow type tableware and the preparation method
201611149005.60
December 14, 2016
Pending
A shock polylactic acid material preparation method
201611115340.40
December 7, 2016
Pending
Preparation of high content glass fiber reinforced nylon-66 composite materials
201611149148.70
December 14, 2016
Pending
A Method for Preparing Environmental Engineering Plastics for Weather
resistance Pipe
201611116482.20
December 7,2016
Pending
A Method of Preparation of Abrasion resistance Engineering Plastics for Pipe
201611115376.20
December 7,2016
Pending
A kind of glass fiber reinforced PEEK/PES composite material
201611122470.20
December 7,2016
Pending
A modified ABS Resin for 3D Printing and Preparation Method
201611149042.70
December 14,2016
Pending
An environment - friendly Wood-plastic Composite for 3D printing
201611114397.20
December 7,2016
Pending
A kind offiber reinforced composite materials for 3D printing
201611149031.90
December 14, 2016
Pending
Polypyrrolidone type of polymeric drug carrier micelles
201611149041.20
December 14, 2016
Pending
A PBT heat conduction and heat resisting material for an LED lamp socket
201611149004.10
December 14, 2016
Pending
One kind of resistance to warpage reinforced PA6 material and preparation
method
201710784584.X
September 4, 2017
Pending
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An antistatic LSOH retardant PC / ABS alloy material and its preparation
method
201710784585.40
September 4, 2017
Pending
Preparation method of an aircraft engine surrounding high temperature polyimide
composites
201710784591.X
September 4, 2017
Pending
A silicone toughening polyphenylene sulfide material and its preparation method
201710784588.80
September 4, 2017
Pending
A kind of preparation method of rice husk powder / Talc Composite Reinforced
starch based degradable plastics
201610293135.00
June 5, 2016
Pending
A kind of nylon reinforced 3D material special material and the preparation
method thereof
201610293621.20
June 5, 2016
Pending
A kind of preparation method of straw powder filled PP composite material
201610294471.70
June 5, 2016
A kind of special material for 3D ABS/PC consumable material and the
preparation method thereof
201610443577.90
August 6, 2016
A kind of special material of modified nylon 3D consumable material and the
preparation method thereof
201610442209.20
An application on starch based biodegradable plastic food packaging
201610442190.10
June 8, 2016
A kind of can be used for 3D printing enhanced toughenting nylon material and
the preparation method thereof
201610593945.80
July 27, 2016
Pending
Pending
Pending
Pending
Pending
A kind of plant fiber filling modified polypropylene composite material and the
preparation method thereof
201610591739.30
July 26, 2016
Pending
A plant fiber reinforced different type polypropylene compound with the
preparation of composite materials
201610711148.50
August 24, 2016
Pending
A kind of material can be used to increase manufacturing polyamide 6 modifide
material and the preparation method thereof
201610714901.60
August 25, 2016
Pending
A material can be used to increase manufacturing preparation methods of
toughening nylon materials
201610829480.10
September 19, 2016
Pending
A KT-1 as compatibilizer modified polypropylene composite material
201610827269.60
September 18, 2016
Pending
A kind of material can be used to increase manufacturing ASA/PC alloy and
the preparation method thereof
201610875348.40
October 8, 2016
Pending
406
A high modulus fibeer/polypropylene composite material preparation method
201610874802.40
October 10, 2016
Pending
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A kind of material can be used to increase manufacturing ABS/PC alloy
modified material
201610940316.80
November 2, 2016
Pending
A moderate melt index of plant fiber filling modificationg of polypropylene
composites
201610940204.20
November 2, 2016
Pending
A short cut glass fiber reinforced nylon material and its preparation method
201610940275.20
November 2, 2016
Pending
A high performance fiber modified polypropylene composite material and its
preparation method
201611088126.40
December 1, 2016
Pending
A car interior with environmentally friendly scratch resistant polypropylene
materials and preparation method
201611088117.50
December 1, 2016
Pending
A kind of material can be used to increase manufacturing nylon material and
the preparation method thereof
201611088041.60
December 1, 2016
Pending
A glass fiber reinforced polypropylene composite material preparation method
201710535349.90
July 4, 2017
A carbon fiberprepreg preleaching and preparation method
201710535350.10
July 4, 2017
A kind of high toughness flame-retardant PC/PLA alloy material preparation
method
201710535381.70
July 4, 2017
Pending
Pending
Pending
A kind of glass fiber reinforced polypropylene base composite material
preparation method
201710535406.30
July 4, 2017
Pending
Preparation of a glass fiber reinforced PA6/PA66Composites
201710651178.60
August 2, 2017
A Kind of preparation of appling to charging pile casing PC / ABS alloy
material preparation
201710650880.00
August 2, 2017
A toughening wear-resistant plastic alloy material and preparation method
201710651176.70
August 2, 2017
Preparation of a continuous glass fiber reinforced PA6 material
201710651146.60
August 2, 2017
Pending
Pending
Pending
Pending
A toughening level agricultural film composite material and its preparation
method
201710938370.30
October 11, 2017
Pending
A high-performance lightweight plant fiber /PP composite material and its
preparation method
201710938405.30
October 11, 2017
Pending
A toughening type bastose modified polypropylene composite
201710938369.00
October 11, 2017
Pending
A kind of ABS/ biomass composite materials and its preparation method
201710938406.80
October 11, 2017
Pending
Preparation of one kind of ultra light and thin fiber reinforced skids
201410326799.30
July 10, 2014
Pending
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The prepatation method of glass fiber reinforced polypropylene
201410365812.60
July 29, 2014
The prepatation method of large tow carborn fiber cable
201410363355.70
July 29, 2014
A toughening polylactic and acid and its preparation method
201410362495.20
July 29, 2014
Pending
Pending
Pending
A high transparent heat-proof polylactic acid based composite material of the
preparation method
201410413616.10
August 21, 2014
Pending
A preparation method of PEAK modified epoxyresin system/carbon fiber cable
201410413361.90
August 21, 2014
Pending
A preparation method of poly(lacticacid)/starch composite foams
201410489544.90
September 22, 2014
Pending
New type of composite carbon fiber heating cloth
201410481306.30
September 24, 2014
Pending
A catalyst with double function activation properties of PLA and preparation
method
201510949309.x
December 20, 2015
Pending
A preparation method of high strength and biodegradable PLA composite
material
201510949307.00
December 20, 2015
Pending
A high-performance PLA and its preparation method
201510949312.10
December 20, 2015
Pending
A kind of biodegradable recycling PLA material and its preparation method
201510949306.60
December 20, 2015
Pending
A high flexibility and heat resistance of PLA modified material and its
preparation method
A kind of inorganic filler biodegradable 3D printing consumables and its
preparation method
201510949313.60
December 20, 2015
Pending
201510949636.50
December 20, 2015
Pending
A kind of biodegradable 3D printing toughening material and its preparation
method
201510949638.40
December 20, 2015
Pending
A low-cost biodegradable 3D printing consumables and its preparation method
201510949637.x
December 20, 2015
Pending
A kind of biodegradable 3D printing reinforced material and its preparation
method
201510949653.90
December 20, 2015
Pending
442
A biodegradable 3D printing alloy material and its preparation method
201510949651.x
December 20, 2015
Pending
41
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 444 certifications from automobile manufacturers as of December 31, 2017, 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 2017, approximately 87.3% of our sales were generated from
approved distributors.
42
We enter into distribution agreements with local distributors in areas where large automobile manufacturers are located. The distribution agreements usually
have a term of one year, during which period we can enter into distribution agreements with other distributors for our products. The distributors are responsible
for marketing and distributing our products. Through the established sales channels, we can quickly respond to local market demand, address customer needs,
enhance our ability to provide technical support and after-sales services, and lower our marketing expenses. Our general credit term with our distributors is
three months and our collection of payment from distributors is not contingent upon their cash collection from end customers. We manufacture products
according to orders received from our distributors and maintain a certain quantity of raw materials based on our experience and the distributors order patterns.
By doing this we hope to ensure the smooth implementation of the production plan of major automobile manufacturers and avoid risks of inventory
shortage. We do not provide the distributors nor end customers with the right of return, price protection or any other concessions. We allow for an exchange
of products or return only if the products are defective.
We have been actively engaging our distribution network with 14 distributors in 2017 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
40.2%, 52.1%, 69.3% of our revenues for the years ended December 31, 2017, 2016 and 2015, 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, 2017, 2016 and
2015, 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 Plastic Alloy, most manufactured in Heilongjiang plants and a small portion manufactured in Dubai plant since
the second quarter of 2014. In January 2015, we completed and run the trial production in the plant in Dubai, UAE with additional 2,500 metric tons targeting
high-end products for the overseas markets. During the second quarter of 2016, we resumed entry into ROK market by selling to the ROK customer. We plan
to serve customers in oversea markets from our Dubai Xinda plant. In order to meet the increasing demand from our customer in the ROK and to develop
potential overseas markets, Dubai Xinda obtained one leased property and two purchased properties, approximately 52,530 square meters in total from Jebel Ali
Free Zone Authority ("JAFZA") in Dubai, UAE, with constructed building comprising warehouses, offices and service blocks. In addition to the earlier 10 trial
production lines in Dubai Xinda, the Company is planning to complete installing 45 production lines with 12,000 metric tons of annual production capacity by end
of April, 2018, and additional 50 production lines with 13,000 metric tons of annual production capacity by end of 2018, bringing total installed production
capacity in Dubai Xinda to 25,000 metric tons, targeting high-end products for the overseas market. The Company expects to expand the international markets
into Middle East and Europe. Information about geographic revenue is set forth in Note 25 of the notes to the consolidated financial statements of this Annual
Report on Form 10-K.
43
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 8.0% in 2016 and 8.2% in 2015. In 2017, our sales volume of automotive plastics was approximately 457,385 MT. As of December 31, 2017, our
annual production capacity of automotive plastics was 608,500 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.
Currently, the Company'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 had a sales volume of 450,800 MT in 2016 with a market share of 10.5% in
2016, according to the research report by Frost and Sullivan. Guangzhou Kingfa has the largest capacity expansion with 1.67 million MT annual capacity at the
end of 2016 based on Guangzhou Kingfa's public disclosure. 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 and Sichuan Xinda.
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 and Sichuan Xinda. 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 a sales volume of 175,600 MT with a market share of 4.1% in
2016, 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 24.9% of the total China automotive plastic supply in 2016, decreased from 33.0% in 2011. 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.
44
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:
●
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 8.0% in 2016. The PRC automotive
modified plastics industry is growing rapidly and is highly fragmented with the top three domestic producers occupying less than approximately 22.6%
of the market shares in 2016. We installed 50 new product lines in 2012 and 2013, 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 July 2017,
the HLJ Xinda Group launched new industrial development project with the Management Committee of Harbin Economic - Technological Development
Zone. It includes an industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics, which we expect will be
completed by the end of June 2018. Also included is an industrial project for 300,000 metric tons of biological composite materials, an industrial project
for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory, all of which we expect to be
completed by the end of July 2019.
In December 2013, we broke ground on the construction of our fourth production plant in Nanchong City, Sichuan Province, with additional 300,000
metric tons of annual production capacity, expecting to bring total domestic installed production annual capacity to 690,000 metric tons with additional 70
new production lines at the completion of the construction of our fourth production plant. Sichuan Xinda has supplied to its customers since 2013, mainly
backed by production capacity in our Harbin production plant till we installed 50 production lines with production capacity of 216,000 metric tons in the
second half year of 2016 in our Sichuan plant. We installed 50 production lines with production capacity of 216,000 metric tons in the second half year
of 2016 in our Sichuan plant. As of December 31, 2017, there is still construction ongoing on the site of our Sichuan plant to be expected to be
completed by the end of the second quarter of 2018.
In addition, we completed and run the trial production in the plant in Dubai, UAE with additional 2,500 metric tons targeting high-end products for the
overseas markets. In order to meet the increasing demand from our customer in the ROK and to develop potential overseas markets, Dubai Xinda
obtained one leased property and two purchased properties, approximately 52,530 square meters in total, including one leased 10,000 square meters, and
two purchased 20,206 and 22,324 square meters on January 25, 2015, June 28, 2016, and September 21, 2016, respectively, from Jebel Ali Free Zone
Authority ("JAFZA") in Dubai, UAE, with constructed building comprising warehouses, offices and service blocks. In 2017, our sales volume of
automotive plastics was approximately 457,385 MT, representing an increase of 14.3% compared to that in 2016 mostly due to our accelerated growth
in South, East and Central China. As of December 31, 2017, our annual production capacity of automotive plastics was 606,000 MT. In addition to the
earlier 10 trial production lines in Dubai Xinda, the Company is planning to complete installing 45 production lines with 12,000 metric tons of annual
production capacity by the end of April, 2018, and additional 50 production lines with 13,000 metric tons of annual production capacity by end of 2018,
bringing total installed production capacity in Dubai Xinda to 25,000 metric tons, targeting high-end products for the overseas market. 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 444 product certifications from major automotive manufacturers in
the PRC as of December 31, 2017, 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.
45
● 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 30 automobile brands and over 92 automobile models
manufactured in China, including Audi, Mercedes Benz, BMW, Toyota, Buick, Chevrolet, Mazda, Volvo, Ford, Citroen, Jinbei and VW Passat, Golf, Jetta,
etc.We believe that our brand and our products are well recognized and respected in China's automotive modified plastics market.
● 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 109 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 31 approved patents and 411 pending patent applications with the
State Intellectual Property Office of the PRC, or SIPO.
● Established Distribution Model. Through 16 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, 2017, Northeast, North, East, South, Central and Southwest account for approximately 30.4%, 16.1%, 33.5%, 3.0%, 3.0% and 7.5% of our
revenues, respectively.
●Stable Presence to Overseas Market. Since 2014, the Company developed its presence in the Korean market by selling primarily higher-end (Long Chain)
Plastic Alloy, US$82.5 million products to the Korean market, accounting for 6.4% of the total revenues for the year ended December 31, 2017.
● 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. Our chief executive officer, chief technology officer and chief operating officer have over 50
years combined experience in the modified plastics industry and we believe their extensive expertise and knowledge can well serve our customers.
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Our Strategies
Our goal is to capitalize on China's modified plastics growth trend, with a specific focus on applications in the auto sector, and to eventually be the leading
modified plastics manufacturer in China. We are committed to enhancing our sales and profitability and achieving our goals through the following strategies:
● 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, 2017, we have an installed annual production capacity of 606,000 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 installed 50 production lines with production capacity of 216,000 metric tons in the second half of 2016 in our Sichuan plant. As of
December 31, 2017, there is still construction ongoing on the site of our Sichuan plant to be expected to be completed by the end of the second quarter of 2018.
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 45 production lines with 12,000 metric tons of annual production capacity by end of April,
2018, and an additional 50 production lines with 13,000 metric tons of annual production capacity by end of 2018, bringing total installed production capacity in
Dubai Xinda to 25,000 metric tons, targeting high-end products for the overseas market.
In July 2017, the HLJ Xinda Group launched new industrial development project with the Management Committee of Harbin Economic - Technological
Development Zone. It includes an industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics, which we expect will be
completed by the end of June 2018. Also included is an industrial project for 300,000 metric tons of biological composite materials, an industrial project for a 3D
printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory, all of which we expect to be completed by the
end of July 2019.
● 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 also have increased efforts directed towards applications in new
electrical equipment and electronics, alternative energy applications, power devices, aviation equipment and ocean engineering, in addition to other new products
primarily for advanced industrialized applications in the automobile sector and in new verticals such as ships, airplanes, high-speed rail, 3D printing materials,
biodegradable plastics, and medical devices. 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.
● Expand Customer Base Domestically and Internationally. The automotive plastics market in the PRC is highly fragmented with significant barriers to
entry. In 2015, we had 8.2% of the market share with our customer coverage was originally 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 East China, Central China, Southwest China and South China. In addition,
we have conducted sales in overseas markets and exported our products including non-auto sectors since 2014. In 2016, we had 8.0% of the market share,
ranking the second in terms of sales volume of automotive modified plastics in China. 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.
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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, 2017, there were 2,461 employees, including 995 in manufacturing, 523 in R&D, 514 in management, 75 in finance,
205 in sales, purchasing and marketing and 149 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, the fluctuations 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. According to China
Association of Automobile Manufacturers, for the year ended December 31, 2017, the China automotive sales and production volume recorded a stable growth
rate of 3.2% and 3.0%, respectively, lower than the growth rate of 11.3% and 10.6% in 2016. There can be no assurance that the market conditions,
government policies and other factors leading to the increase in the growth rate will continue. Any 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.
The Company has experienced a delay in cash collection from the ROK customer mainly due to the customer's tight funding. As of December 31, 2017, the
amount due from our ROK customer is approximately US$80.2 million. In the event 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 for many years prior to the reintroduction of the preferential policies in September 2015. The national and local policies over
the Chinese automotive industry may continue to impact market demand for automobiles in 2018 and any future withdrawal of preferential government policies
and the further tightening of control and restrictions may 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. In order to stimulate the
growth 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 since the fourth quarter of 2015 and automobile
sales volume growth rate reached to 13.7% in 2016. However, the automobile sales in China had a lower growth rate of 3.0% in 2017, according to China
Association of Automobile Manufacturers. There can be no assurance that the market conditions, government policies and other factors leading to the current
growth in demand for automobiles will continue. Any significant 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 40.2% and 52.1% in 2017 and 2016, 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 second quarter of 2016, we resumed entry into ROK
market by developing a customer. As of December 31, 2017, the amount due from our ROK customer is approximately US$80.2 million, among which balance
of US$37.7 million was overdue The overdue payment was due to the ROK customer's expansion and tight funding. In the case of any such delay in payment
from the ROK customer or our major distributors or they cease to be our customers or distributors in the future, our sales and business operations, financial
conditions and results of operations may be negatively affected.
49
We may not be able to manage our business expansion effectively, which could harm our business.
We have expanded rapidly by making substantial investments in new markets and geographic regions. For example, on March 17, 2017, we entered into a
definitive agreement with People's Government of Shunqing District, Nanchong City of Sichuan Province for the production of 300,000 metric tons of bio-
composite materials and additive manufacturing and 20,000 metric tons of functional masterbatch, a high-end color additive process in plastics
manufacturing. On July 21, 2017, Heilongjiang Xinda Enterprise Group Company Limited ("HLJ Xinda Group) entered into three investment agreements with
the Management Committee of Harbin Economic- Technological Development Zone with respect to the industrial project for 300,000 metric tons of biological
composite materials, the industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics and the industrial project for a 3D
printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory. We anticipate continuous expansion in our
business by entering into new markets serving different industries and geographic regions. Such business expansion requires significant local management
resources and personnel, knowledges and expertise in new markets and geographies and building relationship with local suppliers and clients. In order to
manage the planned business expansion, we will be required to expand, train and manage our growing employee base. Furthermore, our management will be
required to learn new markets and geographies and build relationship with local suppliers and clients. We cannot assure you that our current resources,
knowledges and business relationships will be adequate to support our current expansion plans. If we are not successful in expanding our personnel, acquiring
knowledge and expertise in the new markets and geographies and building relationship with local suppliers and clients, our business may be materially and
adversely 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, 2017, we purchased approximately 54.3% of our raw materials from five major suppliers. The Company purchased equipment from two
suppliers, which accounted for 96.0% of the Company's equipment purchases for the year ended December 31, 2017. 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.
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. Consistent with rapid growth and expansion in many businesses, there are risks associated with quality of
newly developed products, especially during the initial stage and time and efforts needed to improve our technology and techniques in order to supply quality and
batch consistency to our new customers, in particular, high-end products to overseas customers. 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.
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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 and have a material adverse effect on our results of operations, financial condition and/or liquidity.
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 or become subject to liability under PRC laws, and our ability
to compensate our staff through equity compensation may be hindered and business operation may be adversely affected.
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.
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.
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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.
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.
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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.
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.
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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.
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.
54
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 has been partially completed in the second half 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 has been 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. In July 2017, HLJ Xinda Group launched new industrial development project with the Management
Committee of Harbin Economic - Technological Development Zone for upgrading existing equipment for 100,000 metric tons of engineering plastics and
building 300,000 metric tons of biological composite materials, an industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D
printing display and experience cloud factory. On December 21, 2017 and February 7, 2018, we got building and planning permit from Harbin Municipal Urban
and Rural Bureau, respectively. 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.
55
Our independent registered public accounting firm's audit documentation related to their audit reports included in our annual report is located in
China. The PCAOB 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 reports filed with the SEC. Our
independent registered public accounting firm's audit documentation related to their audit reports included in our annual reports is located in China, and audit
procedures take place within China's borders. As auditors of companies that are traded publicly in the United States and a firm registered with the Public
Company Accounting Oversight Board, or 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.
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
bodies in China. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is 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
disclosure.
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. Unlike public reporting companies whose operations are located primarily in the
United States, however, substantially all of our operations are located in China. Since substantially all of our operations and business takes place in China, it may
be more difficult for the Staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosure. These same
obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, 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 our 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 scrutinized by any local regulator.
56
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.
The vast majority of our sales are to customers in China, and we have all of our operations in China. Like many U.S. companies with significant operations in
China, our independent registered public accounting firm is located in China.
On January 22, 2014, Judge Cameron Elliot, an SEC administrative law judge, issued an initial decision suspending the Chinese member firms of the "Big Four"
accounting firms, 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, Chinese member firms of "Big four" accounting firms 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, 2016, due to one material weakness
which relates to the lack of sufficient accounting and financial reporting personnel to formalize certain key controls over the financial reporting process and
report financial information based on US GAAP and SEC reporting requirements.
Our management is committed to strengthening our internal controls and complying with Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"). Since
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 develop and 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 develop and 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.
57
We may be subject to or be liable for US taxes, interest and penalties.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the "Act"), which significantly changed U.S. tax law. The Act lowered the Company's
U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income.
The Act also created a new minimum tax on certain future foreign earnings.
The Company recorded a charge of approximately $71.0 million for the repatriation tax on deemed repatriation to the United States of accumulated earnings.
The charge for deemed repatriation will be payable by the Company over an eight-year period commencing April 2018. $71.0 million repatriation tax, as a
provisional amount, represents the Company's reasonable estimate for income tax effects of the Tax Act, to the extent that the Company's accounting for
certain income tax effects is incomplete as additional information is needed to be prepared, analyzed and computations.
The actual impact of the U.S. Tax Reform on the Company may differ from management's estimates, and management may update the provisional amount
upon obtaining, preparing or analyzing additional information, based on its review of future regulations or guidance issued by the U.S. Department of the
Treasury, and specific actions the Company may take in the future.
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.
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.
58
We may be unable to renew the leases for our factories on acceptable terms or these leases may be terminated.
As of December 31, 2017, 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 2018. 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.
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 2017 and 2016. 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.
59
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.
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. Renminbi appreciated by more than 20%
against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the
Renminbi and the U.S. dollar remained within a narrow band. Between July 2008 and June 2010, this appreciation halted and the exchange rate between
the Renminbi and the U.S. dollar remained within a narrow band. On June 19, 2010, the People's Bank of China decided to further promote the reform of
the Renminbi exchange rate formation mechanism, and improve the flexibility of Renminbi exchange rate. The Company and its subsidiaries (both domestic and
overseas) have debts denominated in foreign currencies, fluctuations in the exchange rates of Renminbi and Singapore dollar into foreign currencies creates
exchange risk for the Company. With the internationalization process and RMB joining the SDR, RMB exchange rate may continue to fluctuate in the future.
In August 2015, the People's Bank of China perfected its midpoint rate determination mechanism, which led to a 2% depreciation of Renminbi against the U.S.
dollar. However, it is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the
U.S. dollar in the future. There remains significant international pressure on the PRC Government to further liberalize its currency policy, which could result in
further fluctuations in the value of the Renminbi against the U.S. dollar. However, there is no assurance that there will not be a devaluation of Renminbi in the
future. If there is such devaluation, our debt servicing cost will increase and the return to our overseas investors may decrease.
60
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 24.3% 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.
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.
61
The consummation of the proposed going-private transaction is uncertain, and the announcement and pendency of such transaction could adversely
affect our business, results of operations and financial condition.
On February 16, 2017, the Board has received a preliminary nonbinding proposal letter from the Buyer Consortium to acquire all of the outstanding shares of
common stock of the Company not already beneficially owned by the Buyer Consortium in a "going-private" transaction (the "Transaction") for US$5.21 per
share of common stock in cash. The proposal letter states that the Buyer Consortium expects that the Board will appoint a special committee of independent
directors to consider the proposal and make a recommendation to the Board. The proposal letter also states that the Buyer Consortium will not move forward
with the proposed Transaction unless it is approved by such a special committee, and the proposed Transaction will be subject to a nonwaivable condition
requiring approval by majority shareholder vote of shareholders other than the Buyer Consortium members. The Buyer Consortium currently beneficially owns
approximately 74% of the issued and outstanding shares of common stock of the Company on a fully diluted and as-converted basis. The Board has established
a special committee (the "Special Committee") of disinterested directors to consider the proposal The Special Committee is composed of the following
independent directors of the Company:, Mr. Feng Li, and Mr. Linyuan Zha, with Mr. Li serving as chairperson of the Special Committee. The Special
Committee will be responsible for evaluating, negotiating and recommending to the Board any proposals involving a strategic transaction by the Company with
one or more third parties.
There can be no assurance that any definitive offer will be made, that any agreement will be executed or that a transaction with the Buyer Consortium or any
other transaction will be approved or consummated. The process of consummating the proposed Transaction or any other significant strategic transaction
involving our company could cause disruptions in our business and divert our management's attention and other resources from day-to-day operations, which
could have an adverse effect on our business, results of operations and financial condition. Additionally, current and prospective employees and members of
management could become uncertain about their future roles with us in the event the Transaction is completed. This uncertainty could adversely affect our
ability to retain and hire employees and members of management.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Physical Plant and Production
Our executive offices are located in Chaoyang District, Beijing, the capital city of China. Our owned facility includes two-floor office space (2,331.90 square
meters) and 5-parking-lot spaces (288.17 square meters). The Company obtained the title of such offices and parking lots on April 28, 2017.
We had production facilities 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. In October 2017, HLJ Xinda Group gained additional 95,758 square meters (1,030,734 square feet)
land use right by the City of Harbin and will expire in 2067. 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.
62
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 52,530 square meters (565,428 square feet) issued to Dubai Xinda 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 2018.
As of December 31, 2017, we had approximately 608,500 metric tons of production capacity across 144 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 plant 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 plant. Sichuan Xinda has supplied to its customers since 2013, mainly backed by production capacity
in our Harbin production plant. We installed 50 production lines with production capacity of 216,000 metric tons in the second half of 2016 in our Sichuan plant
as of December 31, 2017. There is still construction ongoing on the site of our Sichuan plant to be expected to be completed by the end of the second quarter of
2018. In order to meet the increasing demand from our customer in the ROK and to develop potential overseas markets, Dubai Xinda obtained one leased
property and two purchased properties, approximately 52,530 square meters in total, including leased 10,000 square meters, and purchased 20,206 and 22,324
square meters on January 25, 2015, June 28, 2016 and September 21, 2016, respectively, from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE, with
constructed building comprising warehouses, offices and service blocks. In addition to the earlier 10 trial production lines in Dubai Xinda, the Company is
planning to complete installing 45 production lines with 12,000 metric tons of annual production capacity by the end of April, 2018, and additional 50 production
lines with 13,000 metric tons of annual production capacity by end of 2018, bringing total installed production capacity in Dubai Xinda to 25,000 metric tons,
targeting high-end products for the overseas market.
In July 2017, the HLJ Xinda Group launched new industrial development project with the Management Committee of Harbin Economic - Technological
Development Zone. It includes an industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics, which we expect will be
completed by the end of June 2018. Also included is an industrial project for 300,000 metric tons of biological composite materials, an industrial project for a 3D
printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory, all of which we expect to be completed by the
end of July 2019.
63
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 were 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 alleged violations of Section 10(b) and Section 20(a) of the Securities Exchange
Act of 1934, 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, both dates inclusive. Specifically, the lead plaintiffs
alleged 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 asserted 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 sought damages in unspecified amounts. On April 3, 2015, the Company moved to dismiss the Consolidated Class Action Complaint. On March
23, 2016, the Court entered an Opinion and Order dismissing the Consolidated Class Action Complaint without prejudice. On May 6, 2016, the lead plaintiffs
moved the Court for leave to amend the Consolidated Class Action Complaint. On June 24, 2016, the Company filed its opposition to the lead plaintiffs'
motion. On August 8, 2016, in conjunction with filing the reply brief in support of their motion, the lead plaintiffs moved to strike certain documents referred to
in the Company's opposition. The Company filed its opposition to the lead plaintiffs' motion to strike on September 16, 2016. The lead plaintiffs filed their reply
on October 7, 2016. On March 8, 2017, the Court entered an Order in the Company's favor denying the lead plaintiffs' motion for leave to amend and denying
the lead plaintiffs' motion to strike. The time for the lead plaintiffs to appeal the dismissal of their lawsuits has expired.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
64
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Prior to November 27, 2009, our common stock was quoted on the 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.
Fiscal Year Ending December 31, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ending December 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Number of Holders
As of March 9, 2018, there were 456 record holders of our common stock.
Common Stock
High
Low
5.03
4.95
4.80
5.00
4.13
3.86
5.36
4.70
3.95
4.65
4.50
4.58
2.70
2.82
3.21
3.85
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.
65
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.
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, 2012 through December 31, 2017. The graph assumes an initial investment of $100 at the
closing price on December 31, 2012 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.
66
Adjusted Closing Stock Price Cumulative Change
China XD Plastics Co. Ltd.
$
$
Nasdaq Composite Index
Russell Small Cap Completeness Index $
120 $
229 $
193 $
105 $
178 $
158 $
116 $
166 $
138 $
142 $
157 $
145 $
138 $
138 $
1137 $
100
100
100
12/31/2017
12/31/2016
12/31/2015
12/31/2014
12/31/2013
12/31/2012
*$100 invested on 12/31/2012 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, 2013, 2014, 2015, 2016 and 2017, and for the last five years in the period ended December 31, 2017. 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
2017
2016
2015
2014
2013
1,290.4 $
31.6 $
0.48 $
0.48 $
1,201.7 $
101.6 $
1.54 $
1.54 $
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
49,598,609
49,598,609
49,418,188
49,419,197
49,225,566
49,229,460
48,833,434
48,833,434
47,794,028
47,794,028
408.4
1,752.0
107.5
145.6
1,076.4
97.6
578.0
296.5
1,299.7
174.3
148.6
676.8
97.6
525.3
390.5
1,075.9
-
-
566.0
97.6
412.3
608.1
2,544.1
114.2
-
1,733.7
97.6
712.8
456.4
2,126.5
249.5
-
1,394.7
97.6
634.3
67
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 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 444 certifications from manufacturers in the automobile industry as of December 31, 2017. 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 522
professionals and 11 consultants, including one consultant who is a member of Chinese Academy of Engineering. As a result of the integration of our academic
and technological expertise, we have a portfolio of 442 patents, 31 of which we have obtained the patent rights and the remaining 411 of which we have
applications pending in China as of December 31, 2017.
Our products include twelve 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), Poly Ether Ether Ketone (PEEK), and Polyethylene (PE).
The Company's products are primarily used in the production of exterior and interior trim and functional components of 30 automobile brands and 92 automobile
models manufactured in China, including Audi, Mercedes Benz, BMW, Toyota, Buick, Chevrolet, Mazda, Volvo, Ford, Citroen, Jinbei, VW Passat, Golf, Jetta,
etc. 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 plants in Harbin, Heilongjiang in the PRC. As of December 31, 2017, in Harbin, Heilongjiang
Province, 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 plant
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 plant. Sichuan Xinda has
supplied to its customers since 2013, mainly backed by production capacity in our Harbin production plant. We installed 50 production lines in the second half of
2016 in our Sichuan plant with production capacity of 216,000 metric tons during the year of 2017. As of December 31, 2017, there is still construction ongoing
on the site of our Sichuan plant which is to be expected to be completed by the end of the second quarter of 2018. In order to meet the increasing demand from
our customer in the ROK and to develop potential overseas markets, Dubai Xinda obtained one leased property and two purchased properties, approximately
52,530 square meters in total, including one leased 10,000 square meters, and two purchased 20,206 and 22,324 square meters on January 25, 2015, June 28,
2016 and September 21, 2016, respectively, from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE, with constructed building comprising warehouses,
offices and service blocks. In addition to the earlier 10 trial production lines in Dubai Xinda, the Company is planning to complete installing 45 production lines
with 12,000 metric tons of annual production capacity by the end of April, 2018, and an additional 50 production lines with 13,000 metric tons of annual
production capacity by end of 2018, bringing total installed production capacity in Dubai Xinda to 25,000 metric tons, targeting high-end products for the
overseas market.
In July 2017, the HLJ Xinda Group launched new industrial development project with the Management Committee of Harbin Economic - Technological
Development Zone. It includes an industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics, which we expect will be
completed by the end of June 2018. Also included is an industrial project for 300,000 metric tons of biological composite materials, an industrial project for a 3D
printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory, all of which we expect to be completed by the
end of July 2019.
68
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 2017, 2016 and 2015.
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.
69
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, 2017 and 2016, we had total gross
deferred income tax assets of US$8,089,033 and US$3,951,012, 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, 2017 and 2016, our valuation allowance against deferred income tax assets was US$7,818,069 and US$3,951,012, respectively.
We recognize the impact of a tax position if we determine the position is more likely than not to be sustained upon examination, including resolution of any
related appeals or litigation processes, based solely on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not
recognition threshold, it is presumed that the position will be examined by the appropriate tax authority that has full knowledge of all relevant information. In
addition, a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial
statements. The tax position is measured at the largest amount of benefit that is greater than fifty percent (50%) likely of being realized upon settlement. The
tax positions are regularly re-evaluated based on the results of the examination of income tax filings, statute of limitations expirations and changes in tax law
that would either increase or decrease the technical merits of a position relative to the more-likely-than-not recognition threshold. In the normal course of
business, we are regularly audited by the PRC tax authorities. The settlement of any particular issue with the applicable tax authority could have a material
impact on our consolidated financial statements.
Stock Based Compensation
We measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award and
recognize the cost over the period the employee is required to provide service in exchange for the award, which generally is the vesting period. We have
elected to recognize the compensation cost for an award with only service conditions and a graded vesting schedule on a straight-line basis over the requisite
service period for the entire award. However, the cumulative amount of compensation cost recognized at any date equals at least the portion of the grant date
value of such award that is vested at that date.
We estimated the fair value of our share options using the Black-Scholes Option Pricing model. The model incorporates subjective assumptions. The expected
volatility was based on implied volatilities from traded options and historical volatility of the Company's common stock. The risk free interest rate assumption is
determined using the Federal Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award
being valued. There is no expected dividend yield, as the Company has not paid dividend and does not anticipate paying dividend over the term of the grants.
70
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with
Customers (Topic 606) ("ASU 2014-09"), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that
govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. The original effective date for
ASU 2014-09 would have required the Company to adopt beginning in its first quarter of 2017. In August 2015, the FASB issued ASU No. 2015-14, Revenue
from Contracts with Customers (Topic 606) – Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for one year and permits early
adoption as early as the original effective date of ASU 2014-09. The new revenue standard may be applied retrospectively to each prior period presented ("full
retrospective method) or retrospectively with the cumulative effect recognized as of the date of adoption ("modified retrospective method"). The Company
plans to apply the modified retrospective method to those contracts that are not completed contracts on January 1, 2018 upon adoption of ASU 2014-09. The
Company has completed its evaluation by the end of 2017 and concluded that there is no impact on the retained earnings as of January 1, 2018 and there is no
material impact on its consolidated financial statements and related disclosures as a result of the new adoption of the guidance.
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASU
2016-02"), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease
liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing
arrangements. ASU 2016-02 is effective for public companies for annual reporting periods, and interim periods within those years, beginning after December
15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which addressed and provided guidance for
each of eight specific cash flow issues with the objective of reducing the existing diversity in practice. This standard will be effective for public companies for
fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has early adopted ASU 2016-15 on its consolidated
financial statements and there was no impact as a result of the adoption.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This standard
required that companies recognize the income tax consequences of an intra-entity transfer of an asset (other than inventory) when the transfer occurs. Current
guidance prohibits companies from recognizing current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside
party. This standard will be effective for public companies for annual periods beginning after December 15, 2017, including interim periods within that reporting
period. The Company has early adopted ASU 2016-16 on its consolidated financial statements and there was no impact as a result of the adoption.
Effective January 1, 2017, the Company adopted the FASB ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The standard
simplified certain aspects of the accounting for share-based payment transactions, including recognition of excess tax benefits and deficiencies, classification of
awards and classification in the statement of cash flows and forfeitures. As a result of adoption, the Company elected to estimate the number of awards that
are expected to vest. The adoption of this standard had no impact on the Company's consolidated financial statements.
71
The following table sets forth statements of comprehensive income data for the years ended December 31, 2017, 2016 and 2015 in millions of US$:
(millions of US$, except the
percentage)
For the Years Ended December 31,
2017
2016
2015
Amount
%
Change
%
Amount
%
Change
%
Amount
Revenues
Cost of revenues
Gross profit
Total operating expenses
Operating income
Income before income taxes
Income tax expense
Net income
1,290.4
(1,053.7)
236.7
(78.5)
158.2
122.1
(90.5)
31.6
100%
(81.7)%
18.3%
(6.1)%
12.2%
9.5%
(7.0)%
2.5%
7.4%
10.4%
(4.2)%
(1.0)%
(5.7)%
2.6%
420.1%
(68.9)%
1,201.7
(954.7)
247.0
(79.3)
167.7
119.0
(17.4)
101.6
100%
(79.4)%
20.6%
(6.6)%
14.0%
9.9%
(1.4)%
8.5%
20.3%
16.7%
36.2%
70.9%
24.2%
16.8%
(4.4)%
21.4%
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%
Revenues
Fiscal 2017 Highlights
Revenues increased by 7.4% or US$88.7 million in 2017 as compared to 2016. This was due to approximately 14.3% increase in sales volume and 3.9%
decrease in the average RMB selling price of our products.
(i) Domestic market
For the year ended December 31, 2017, revenue from domestic market increased by US$116.6 million as a result of an increase of 15.2% in sales volume and
a decrease of 1.8% in the average RMB selling price of our products, as compared with those of last year.
According to the China Association of Automobile Manufacturers, Automobile production in China increased by 3.2% for the twelve months of 2017 as
compared to the same period of 2016. An improvement in macroeconomic conditions since 2016 has improved business conditions.
Driven by accelerating growth of 53.8% in Central China, 33.7% in Southwest China, 21.5% in North China, 21.1% in South China, 7.6% in East China, and
1.3% in Northeast China, our domestic sales in 2017 increased by 10.7% as compared to the same period of the prior year.
As for the RMB selling price, the Company also implemented a marketing strategy of offering lower-end products with lower RMB pricing to further penetrate
the new regional markets in Central China and Southwest China.
(ii) Overseas market
For the year ended December 31, 2017, revenues from overseas market decreased by US$27.9 million and accounted for 6.4% of the total sales as compared
to 9.2% of that in 2016.
In 2017, the Company has received all of the outstanding balance as of December 31, 2016 from the ROK customer. During the second quarter of 2017, we
resumed sales into ROK market by selling to the ROK customer. As of December 31, 2017, the ROK customer has an outstanding balance of US$80.2
million, among which balance of US$37.7 million was overdue. The overdue payment has been explained to the Company as due to this customer's business
expansion and tight funding conditions. Subsequently the Company has collected $32.0 million from the ROK customer. The Company has discussed this
situation with the ROK customer and obtained an understanding that they will pay off all of the outstanding balance by March 31, 2018. As the account
receivable balance was overdue, the Company suspended sales to the ROK customer in 2018.
72
Fiscal 2016 Highlights
Revenues increased by 20.3% or US$202.5 million in 2016 as compared to 2015. This was due to approximately 20.5% increase in sales volume and 4.8%
increase in the average RMB selling price of our products.
(i) Domestic market
For the year ended December 31, 2016, revenue from domestic market increased by US$163.7 million as a result of an increase of 19.7% in sales volume and
an increase of 3.2% in the average RMB selling price of our products, as compared with those of last year.
In order to stimulate the growth 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 since the fourth quarter of
2015. According to the China Association of Automobile Manufacturers, Automobile production in China increased by 14.5% for the year of 2016 as compared
to that of 2015. An improvement in macroeconomic conditions in 2016 has improved business conditions and ease pricing pressures which have resulted in
stronger company profit margins.
Driven by accelerating growth of 196.7% in South China, 112.4% in Central China, 39.4% in Southwest China and 35.6% in East China, our domestic sales in
2016 increased by 17.6% as compared to the same period of the prior year.
As for the RMB selling price, the increase was mainly due to higher-end product of modified PA6, PA66 and Plastic Alloy in China.
(ii) Overseas market
For the year ended December 31, 2016, revenue from overseas market increased by US$38.6 million, as a result of the significant increase of 65.3% in sales
volume, partially offset by 6.7% decrease in the average selling price as compared with those of last year. Sales overseas accounted for 9.2% of the total
sales, reflecting our efforts to reduce the domestic concentration in China market.
During the second quarter of 2016, we resumed entry into ROK market by selling to the ROK customer. Sales to the customer were US$110.2 million,
accounting for 9.2% of our total sales. The ROK customer has an outstanding balance of US$74.6 million, among which balance of US$23.6 million was
overdue as of December 31, 2016. Subsequently the Company has collected $32.1 million from the ROK customer. The overdue payment has been explained
to the Company as due to this customer's business expansion and tight funding conditions. As the account receivable balance was overdue, the Company
suspended the sales to the ROK customer in 2017.
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.
73
(ii) Overseas market
For the year ended December 31, 2015, revenue from overseas market decreased by US$68.5 million, as a result of a decrease of 49.7% in sales volume
mostly due to the ceasing supply during the second half of 2015 to the ROK customer, partially offset by 1.3% increase in the average USD selling price as
compared with those of last year. The products sold in overseas market are mainly higher-end products such as PA66 and Plastic Alloys with much higher
selling price for engine bonnet, oil pump, fuse hose and other higher-end auto engine related applications, high-end appliance components, and circuit boards etc.
The Company expects continuing growth opportunities in oversea markets, including the ROK and Europe.
The following table summarizes the breakdown of revenues by categories in millions of US$:
(millions of US$, except the
percentage)
2017
Amount
%
Revenues
For the Years Ended December 31,
2016
Amount
%
Change
%
Change
%
2015
Amount
%
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)
Polyethylene (PE)
Raw Materials
Others
Total Revenues
286.5
224.1
363.3
231.3
43.3
12.0
17.5
88.6
22.8
1.0
-
1,290.4
22.2%
17.4%
28.2%
17.9%
3.3%
0.9%
1.3%
6.9%
1.8%
0.1%
-
100.0%
10.1%
(20.0)%
(9.6)%
29.4%
2.9%
(10.4)%
14.4%
260.1
280.1
401.7
178.7
42.1
13.4
15.3
3,307.7%
n/a
(58.3)%
(100.0)%
7.4%
2.6
-
2.4
5.3
1,201.7
21.7%
23.3%
33.4%
14.9%
3.5%
1.1%
1.3%
0.2%
-
0.2%
0.4%
100.0%
18.7%
37.6%
14.6%
8.4%
4.0%
282.9%
17.7%
n/a
n/a
(29.4)%
562.5%
20.3%
219.1
203.5
350.6
164.8
40.5
3.5
13.0
0.0
-
3.4
0.8
999.2
21.9%
20.4%
35.1%
16.5%
4.1%
0.3%
1.3%
0.0%
n/a
0.3%
0.1%
100.0%
The following table summarizes the breakdown of metric tons (MT) by product mix:
2017
MT
%
Change
%
Change
%
2015
MT
%
Sales Volume
For the Years Ended December 31,
2016
MT
%
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)
Polyethylene (PE)
Raw materials
Total Sales Volume
66,662
72,792
110,614
152,630
20,778
3,720
2,832
14.6%
15.9%
24.2%
33.4%
4.5%
0.8%
0.6%
2.8%
(12.5)%
(10.1)%
48.6%
20.7%
(15.0)%
20.3%
64,831
83,159
123,041
102,745
17,215
4,375
2,355
16.2%
20.8%
30.7%
25.7%
4.3%
1.1%
0.6%
22.1%
42.2%
10.5%
16.1%
7.5%
317.1%
28.4%
53,114
58,465
111,314
88,508
16,007
1,049
1,834
16.0%
17.6%
33.5%
26.6%
4.8%
0.3%
0.6%
9,224
18,133
-
457,385
2.0%
4.0%
-
100.0%
2,144.3%
n/a
(100.0)%
14.3%
411
-
2,184
400,316
0.1%
-
0.5%
100.0%
41000.0%
n/a
17.9%
20.5%
1
-
1,852
332,144
0.0%
-
0.6%
100.0%
The Company continued to shift production mix from traditional lower-end products to higher-end products such as PA66, PLA, and PPO, primarily due to (i)
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.
74
Gross Profit and Gross Margin
(in millions, except percentage)
Gross Profit
Gross Margin
Fiscal 2017 Highlights
2017
$
236.7
18.3%
For the Years Ended December 31,
2016
Change
Change
2015
(4.2)% $
(2.3)%
247.0
20.6%
36.2% $
2.4%
181.4
18.2%
Gross profit was US$236.7 million in the year ended December 31, 2017, compared to US$247.0 million in 2016, representing a decrease of 4.2%.
Our gross margin decreased to 18.3% during the year of 2017 from 20.6% in 2016 primarily due to (i) lower sales of higher-end products by Dubai Xinda; and
(ii) implementing a marketing strategy of offering lower-end products with lower RMB pricing to further penetrate the new regional markets in Central China
and Southwest China, since the third quarter of 2017 as compared to that of the prior year.
Fiscal 2016 Highlights
Gross profit was US$247.0 million in the year ended December 31, 2016, compared to US$181.4 million in the same period of 2015, representing an increase of
36.2%. Our gross margin increased to 20.6% during the year of 2016 from 18.2% during the same period of 2015, primarily due to higher contribution
of higher-margin product sales in overseas market for the year ended December 31, 2016 as compared to that of the prior year.
Fiscal 2015 Highlights
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.
75
General and Administrative Expenses
(in millions, except percentage)
General and Administrative Expenses
as a percentage of revenues
Fiscal 2017 Highlights
2017
$
For the Years Ended December 31,
2016
Change
Change
38.5
3.0%
28.3% $
0.5%
30.0
2.5%
2015
26.1% $
0.1%
23.8
2.4%
General and administrative (G&A) expenses were US$38.5 million in 2017, compared to US$30.0 million in 2016, representing an increase of 28.3%, or US$8.5
million. This increase is primarily due to the increase of (i) US$5.6 million in salary, bonus and welfare which was resulted from the increase in the number of
management and general staff from supporting departments and in the average salary and bonus; (ii) US$0.7 million in depreciation; (iii) US0.5 million in non-
income taxation expenses; (iv) US$1.8 million in compensation for the terminated contracts with Harbin Hailezi Science and Technology Co., Ltd; and partially
offset by (v) the decrease of US$ 0.1 million in share based compensation.
On a percentage basis, G&A expenses in 2017 were 3.0%, compared to 2.5% of the same period of 2016.
Fiscal 2016 Highlights
General and administrative (G&A) expenses were US$30.0 million in 2016, compared to US$23.8 million in 2015, representing an increase of 26.1%, or US$6.2
million. This increase is primarily due to the increase of (i) US$5.8 million in salary, bonus and welfare which was due to the increase in the number of
management and general staff from supporting departments and in the salary and bonus; (ii) US$0.8 million in travelling and transportation expense; (iii) US$0.4
million in professional fee; (iv) US$ 0.4 million in rental fee; and partially offset by (v) the decrease of US$1.5 million in non-income taxation expenses.
On a percentage basis, G&A expenses in 2016 were 2.5%, compared to 2.4% of the same period of 2015.
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.
76
Research and Development Expenses
(in millions, except percentage)
Research and Development Expenses
as a percentage of revenues
Fiscal 2017 Highlights
2017
$
For the Years Ended December 31,
2016
Change
Change
2015
36.8
2.9%
(23.3)% $
(1.1)%
48.0
4.0%
127.5% $
1.9%
21.1
2.1%
Research and development expenses were US$36.8 million in 2017 compared with US$48.0 million in 2016, a decrease of US$11.2 million, or 23.3%. The
decrease was primarily due to the decrease of raw materials used in two specific research and development projects in Sichuan Xinda.
As of December 31, 2017, the number of ongoing research and development projects was 376. We expect to complete and commence to realize economic
benefits from 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.
Fiscal 2016 Highlights
Research and development expenses were US$48.0 million in 2016 compared with US$21.1 million in 2015, an increase of US$26.9 million, or 127.5%. This
increase was primarily due to i) elevated Research and development activities to meet the higher quality requirements of potential customers from Europe
which resulted in an increase amount of US$15.3 million; ii) increased efforts directed towards applications in new electrical equipment and electronics,
alternative energy applications, power devices, aviation equipment and ocean engineering, in addition to other new products primarily for advanced industrialized
applications in the automobile sector and in new verticals such as ships, airplanes, high-speed rail, 3D printing materials, biodegradable plastics, and medical
devices which resulted in an increase amount of US$10.0 million; and iii) an increase in depreciation expenses after additional R&D equipment was put into use
at Sichuan Xinda which resulted in an increase of $0.09 million
As of December 31, 2016, the number of ongoing research and development projects was 212. 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.
Fiscal 2015 Highlights
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.
77
Operating Income
Total operating income was US$156.7 million in 2017 compared to US$167.7 million in 2016 and US$135.0 million in 2015, representing a decrease of 6.6% or
US$11.0 million in 2017, and an increase of 24.2% or US$32.7 million in 2016. This decrease in 2017 was due to the lower gross margin and the higher general
and administration expenses, partially offset by the lower research and development expenses. While the increase in 2016 was due to the higher gross margin,
partially offset by the higher general and administration expenses and higher research and development expenses.
Interest Income (Expenses)
(in millions, except percentage)
Interest Income
Interest Expenses
Net Interest Expenses
as a percentage of revenues
Fiscal 2017 Highlights
2017
$
$
5.3
(45.4)
(40.1)
3.1%
For the Years Ended December 31,
2016
Change
Change
(8.6)% $
9.7%
12.6% $
0.2%
5.8
(41.4)
(35.6)
2.9%
(29.3)% $
(3.0)%
3.2% $
(0.6)%
2015
8.2
(42.7)
(34.5)
3.5%
Net interest expense was US$40.1 million in 2017, compared to net interest expense of US$35.6 million in 2016, primarily due to (i) the increase of interest
expense due to the increase of average short-term and long-term loan balance in amount of US$850.0 million for the twelve month ended December 31, 2017
compared to US$576.0 million for the same period in 2016, partially offset by the decrease of interest rate to 4.61% for the twelve month ended December
31, 2017 from 4.71% in 2016, and (ii) the decrease of interest income resulting from the average interest rate for deposits decreased to 1.28% for the year
ended December 31, 2017 compared to 1.36% in 2016, which was partially offset by the increase of average deposit balance in the amount of US$441.2 million
for the year ended December 31, 2017 compared to US$420.3 million in 2016.
Fiscal 2016 Highlights
Net interest expense was US$35.6 million in 2016, compared to net interest expense of US$34.5 million in 2015, primarily due to (i) a decrease of interest
income resulting from the average interest rate decreased to 1.4% for the twelve months ended December 31, 2016 compared to 2.6 % of the same period in
2015; (ii) the increase of average short-term and long-term loan balance in amount of US$576.0 million for the twelve months ended December 31, 2016
compared to US$395.6 million for the same period in 2015, partially offset by (iii) the increase of average deposit balance in amount of US$420.3 million for
the twelve months ended December 31, 2016 compared to US$308.1 million for the same period in prior year; (iv) a decrease of interest expense which was
due to the average interest rate decreased to 4.7% for the twelve months ended December 31, 2016 compared to 5.5% of the same period in 2015.
Fiscal 2015 Highlights
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 (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.
78
Foreign Currency Exchange Gains (Losses)
(in millions, except percentage)
2017
For the Years Ended December 31,
2016
Change
Change
2015
Foreign currency exchange gains (losses)
as a percentage of revenues
$
(6.5)
0.5%
(425.0)% $
0.3%
2.0
0.2%
190.9% $
0.0%
(2.2)
0.2%
Foreign currency exchange losses were US$6.5 million in 2017, compared to foreign currency exchange gains of US$2.0 million in 2016, and foreign currency
exchange losses of US$2.2 million in 2015 mostly due to the appreciation of RMB again US Dollar during 2017 as China loosened the range RMB was allowed
to fluctuate.
Loss on Debt Extinguishment
(in millions, except percentage)
Loss on Debt Extinguishment
as a percentage of revenues
2017
$
For the Years Ended December 31,
2016
Change
Change
-
0.0%
(100.0) % $
(1.6)%
19.0
1.6%
2015
n/a
1.6%
-
0.0%
On August 29, 2016 (the "Redemption Date"), the Company fully redeemed all of its 11.75% guaranteed senior notes due on February 4, 2019 (the "Notes")
plus accrued and unpaid interest to the redemption date. The aggregate amount paid to redeem the Notes was US$166.6 million, plus accrued and unpaid
interest to the redemption date, which resulted in a charge of U$19.0 million as loss on debt extinguishment for the twelve-month period ended 2016.
Income Taxes
(in millions, except percentage)
Income before Income Taxes
Income Tax Expense
Effective income tax rate
2017
$
For the Years Ended December 31,
2016
Change
Change
122.1
(90.5)
74.1%
2.6% $
420.1%
59.5%
119.0
(17.4)
14.6%
16.8% $
(4.4)%
(3.3)%
2015
101.9
(18.2)
17.9%
The effective income tax rate in 2017, 2016 and 2015 was 74.1%, 14.6% and 17.9%, respectively.
Income tax expense in 2017 includes a charge of US$71.0 million, which represents management's estimate of the amount of U.S. corporate tax based on the
deemed repatriation of the United States of accumulated earnings mandated by the U.S. tax reform.
Excluding the impact of repatriation tax for 2017, our effective tax rate would be 16.0% for the year ended December 31, 2017. The effective income rate
increased 1.4% from 14.6% in 2016, primarily due to the less portion of the consolidated profit was generated by Dubai Xinda which was exempted from
income taxes and the decrease of the 50% additional deduction of R&D expense.
The effective income tax rate decreased from 17.9% in 2015 to 14.6% in 2016, primarily due to the more portion of the consolidated profit was generated by
Dubai Xinda which was exempted from income taxes.
79
Excluding the impact of repatriation tax for 2017, the effective income tax rate (16.0%) in 2017 differs from the PRC statutory income tax rate of 25%
primarily due to the effect of the preferential tax rate of Dubai Xinda not subject to PRC income tax, Sichuan Xinda's preferential tax rate and R&D 50%
additional deduction of HLJ Xinda Group and Sichuan Xinda and partially offset by (i) the increase of valuation allowances against deferred income tax assets
of certain subsidiaries, which were at cumulative loss position, and (ii) the effect of non-deductible expenses.
The effective income tax rate in 2016 differs from the PRC statutory income tax rate of 25% primarily due to the effect of the preferential tax rate of Dubai
Xinda not subject to PRC income tax, the preferential tax rate of Sichuan Xinda additional deduction of R&D expense and partially offset by (i) the loss
generated by the debt extinguishment of FS BVI not subject to PRC income tax, (ii) the increase of valuation allowances against deferred income tax assets of
certain subsidiaries, which were at cumulative loss position, and (iii) the effect of non-deductible expenses.
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 Xinda 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.
Our PRC and Dubai subsidiaries have US$606.1 million of cash and cash equivalents, restricted cash and time deposits as of December 31, 2017, 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 Xinda in Dubai, UAE, on undistributed
earnings.
Net Income
As a result of the above factors, we had a net income of US$31.6 million in 2017, as compared to US$101.6 in 2016 and US$83.7 million in 2015.
Selected Balance Sheet Data as of December 31, 2017 and 2016:
(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
Deferred income
Redeemable Series D convertible preferred stock
Stockholders' equity
2017
2016
Change
Amount
%
168.1
103.5
184.8
410.0
280.9
125.3
806.4
22.5
14.2
10.5
2,126.5
444.8
148.4
320.0
26.7
119. 3
249.5
69.3
97.6
634.3
22.3
26.2
103.2
(111.1)
140.8
19.0
29.2
9.4
176.4
2.4
417.6
330.6
104.4
(92.0)
81.7
19.3
(135.3)
29.9
-
78.5
13.3%
25.3%
55.8%
(27.1)%
50.1%
15.2%
3.6%
41.8%
1,242.3%
22.9%
19.6%
74.3%
70.4%
(28.8)%
306.0%
16.2%
(54.2)%
43.1%
-
12.4%
190.4
129.7
288.0
298.9
421.7
144.3
835.6
31.9
190.6
12.9
2,544.1
775.4
252.8
228.0
108.4
138.6
114.2
99.2
97.6
712.8
80
Our financial condition continued to improve as measured by an increase of 12.4% in stockholders' equity as of December 31, 2017 as compared to that of
December 31, 2016. Cash and cash equivalents, restricted cash and time deposits increased by 33.2% or US$151.7 million due to the operating cash inflows.
Accounts receivable decreased by 27.1% or US$111.1 million due to the management efforts to collect outstanding balances due from the domestic customers.
Inventories increased by 50.1% as a result of more purchases of the raw materials and the Company's strategy to stock up the finished goods for the upcoming
orders. Prepayment to equipment and construction suppliers increased by 1,242.3% mainly because advance to purchases for the storage facility and other
equipment of HLJ Xinda group.
The aggregate short-term and long-term bank loans increased by 28.1% mainly because the Xinda Group obtained a seven-year unsecured loan of RMB526.3
million (equivalent to US$80.6 million) due to the utilization of existing lines of credit to support the expansion of the Sichuan and Dubai facilities. We believe
our current debt level is manageable. We define the manageable debt level as the sum of aggregate short-term and long-term loans, and notes payable over
total assets.
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, 2017 and 2016, we had US$190.4 million and US$168.1 million, respectively, in cash and cash equivalents, which were primarily deposited with
banks in China (including Hong Kong and Macau SAR), UAE and U.S. As of December 31, 2017, we had US$775.4 million outstanding short-term bank loans
(including the current portion of long-term bank loans), including US$363.3 million unsecured loan and US$68.9 million loans secured by accounts receivable,
US$41.5 million loans secured by restricted cash, US$30.6 million loans secured by land use rights, and US$271.1 long-term bank loans that due in one year.
We also had US$114.2 million unsecured long-term loans (excluding the current portion). Short-term and long-term bank loans in total bear a weighted average
interest rate of 4.3% per annum and do not contain any renewal terms. We have historically been able to make repayments when due.
A summary of lines of credit and the remaining line of credit as of December 31, 2017 is as below:
(in millions)
Name of Financial Institution
Bank of Longjiang, Heilongjiang
China Everbright Bank
China CITIC Bank
Standard Chartered Bank
Bank of China
Industrial & Commercial Bank of China (ICBC)
Agriculture Bank of China
China Construction Bank
Kunlun Bank
Export-Import Bank of China
Bank of Communications
Postal Savings Bank of China
Sichuan Tianfu Bank
Daqing State owned assets management company
Nanchong Shuntou Development Group Ltc.
Subtotal (credit term<=1 year)
Bank of China
Bank of Longjiang, Heilongjiang
Subtotal (credit term>1 year)
Total
Date of Approval
September 12, 2017
July 19, 2017
February 26 , 2017
August 22, 2016
July 28, 2017
September 18, 2017
March 17, 2017
January 8, 2016
August 23, 2017
September 2, 2017
August 13, 2017
March 30, 2017
May 19, 2017
December 1, 2017
January 5, 2017
July 28, 2016
November 28, 2017
December 31, 2017
Lines of Credit, Obtained
RMB
USD
Remaining
Available
USD
500.0
100.0
100.0
1,017.8
1,506.2
1,300.0
200.0
348.6
20.0
200.0
300.0
400.0
300.0
200.0
630.0
7,122.6
275.0
700.0
975.0
8,097.6
76.5
15.3
15.3
155.8
230.5
199.0
30.6
53.4
3.1
30.6
45.9
61.2
45.9
30.6
96.4
1,090.1
42.1
107.1
149.2
1,239.3
-
15.3
15.3
-
137.7
92.8
-
-
-
-
-
15.3
38.3
-
314.7
8.4
26.6
35.0
349.7
We have historically been able to make repayments when due. As of December 31, 2017, we have contractual obligations to pay (i) lease commitments in the
amount of US$11.7 million, including US$1.4 million due in one year; (ii) equipment acquisition and facility construction in the amount of US$92.4 million; and
(iii) long-term bank loan in the amount of US$414.2 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.
81
Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2017, 2016, and 2015:
(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
FY 2017 Highlights
Operating Activities
2017
Years Ended December 31,
2016
2015
82.7
(255.3)
183.6
11.3
22.3
84.5
(148.6)
121.8
(9.5)
48.2
227.4
(280.3)
131.7
(4.4)
74.4
Net cash provided by operating activities decreased by US$1.8 million for the year ended December 31, 2017 from US$84.5 million for the year ended
December 31, 2016, primarily due to (i) the increase of approximately US$373.2 million in cash operating payments, including raw material purchases, rental
and personnel costs, (ii) the decrease of approximately US$4.3 million released from restricted cash, partially offset by (iii) the increase of approximately
US$358.4 million in cash collected from our customers for the year ended December 31, 2017, (iv) the decrease of US$6.4 million in income tax payments,
(v) the increase of US$0.4 million in interest income received, (vi) the decrease of US$7.1 million interest payments and (vii) the increase of US$3.4 million
received from government grant.
Investing Activities
Net cash used in the investing activities was US$255.3 million for the year ended December 31, 2017 compared to US$148.6 million for the same period of last
year, mainly due to (i) the increase of US$245.6 million purchase of property, plant and equipment, (ii) the decrease of US$39.2 million proceeds from maturity
of time deposits, and (iii) the increase of US$89.4 million purchase of time deposits, (iv) the increase of US$8.3 million acquisition of land use right, (v) the
deposits for acquisition of equity amounted to US$11.9 million and partially offset by (vi) the increase of US$6.9 million government grant related to the
construction of Sichuan plant for the twelve month period ended December 31, 2017, and (vii) the increase of US$280.8 million refund of deposit from an
equipment supplier.
Financing Activities
Net cash provided by the financing activities was US$183.6 million for the year ended December 31, 2017, as compared to US$121.8 million for the same
period of last year, primarily as a result of (i) the increase of the proceeds of US$155.4 million from bank borrowings, (ii) the decrease of US$165.4 million
payment for notes redemption, and (iii) the increase of US$60.8 million of release from restricted cash as collateral for bank borrowings, (iv) the decrease of
US$6.8 million issuance costs related to the syndicate loans, partially offset by (v) the increase of US$145.1 million repayments of bank borrowings; (vi) the
decrease of US$180.0 million proceeds from the Syndicate loan facility in 2016, and (vii) the increase of US$1.5 million payment for restricted cash as
collateral for bank borrowings.
82
FY 2016 Highlights
Operating Activities
Net cash provided by operating activities decreased by US$142.9 million for the year ended December 31, 2016 from US$227.4 million for the year ended
December 31, 2015, primarily due to (i) the increase of approximately US$159.7 million in cash operating payments, including raw material purchases, rental
and personnel costs, (ii) the increase of US$10.5 million in income tax payments, (iii) the decrease of US$2.3 million in interest income received, (iv) the
increase of US$5.6 million interest payments, (v) the decrease of approximately US$0.7 million cash inflow due to the forward contract settlement, (vi) the
decrease of approximately US$31.3 million released from restricted cash and (vii) the decrease of US$2.8 million received from government grant, partially
offset by (viii) the increase of approximately US$70.0 million in cash collected from our customers for the twelve-month period ended December 31, 2016.
Investing Activities
Net cash used in the investing activities was US$148.6 million for the year ended December 31, 2016 compared to US$280.3 million for the same period of last
year, mainly due to (i) the decrease of US$56.6 million purchase of property, plant and equipment, (ii) the decrease of US$13.9 million payment for land use
right (iii) the increase of US$11.0 million government grant related to the construction of Sichuan plant and (iv) the increase of US$51.3 million proceeds from
maturity of time deposits, partially offset by (v) the increase of US$1.1 million purchase of time deposits for the year ended December 31, 2016.
Financing Activities
Net cash provided by the financing activities was US$121.8 million for the year ended December 31, 2016, as compared to US$131.7 million for the same
period of last year, primarily as a result of i) the increase of US$198.3 million repayments of bank borrowings, (ii) the redemption of US$165.4 million notes
payable, (iii) the increase of US$33.7 million of placement of restricted cash as collateral for bank borrowings, and (iv) the US$6.8 million issuance costs
related to the syndicate loans, partially offset by (v) the increase of US$362.9 million borrowings of bank loans including the US$180.0 million syndicate loans,
and (vi) the increase of US$31.4 million release from restricted cash as collateral for bank borrowings for the twelve-month period ended December 31, 2016.
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.
83
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.
As of December 31, 2017, our cash and cash equivalents balance was US$190.4 million, compared to US$168.1 million at December 31, 2016.
Days Sales Outstanding ("DSO") has increased from 96 days for the year ended December 31, 2016 to 99 days for the year ended December 31, 2017, as a
result of the delay in cash collection from the ROK customer.
We believe that our DSO 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, 2017
and 2016
Payment in advance/up to 90 days
Payment in advance/up to 90 days
Year ended December 31, 2015
Payment in advance/up to 90 days
Payment in advance/up to 60 days
Inventory turnover days increased from 109 days for the year ended December 31, 2016 to 120 days for the year ended December 31, 2017.
Turnover days of payables have decreased from 109 days for the year ended December 31, 2016 to 94 days for the year ended December 31, 2017. The
Company started to develop new suppliers since the second half year of 2017 to purchase different types of raw materials. At the beginning of co-oporation
with new suppliers, the Company paid money timely when received the goods, which led to the decrease of turnover days.
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.
84
COMMITMENTS AND CONTINGENCIES
Contractual Obligations
Our contractual obligations as of December 31, 2017 are as follows:
Contractual obligations
Lease commitments
Purchase of land use rights, plant
equipment, and construction in progress
(2) (3) (4) (5) (6)
Long-term bank loans (1)
Total
Payment due
less than 1 year
1 – 3 years
3-5 years
More than 5
years
11,694,408
1,381,380
1,643,179
1,351,719
7,318,130
92,354,153
414,177,485
89,054,444
285,576,312
3,299,709
59,040,979
-
53,641,376
-
15,918,818
Total
518,226,046
376,012,136
63,983,867
54,993,095
23,236,948
(1) Includes interest of US$27.1 million accrued at the interest rate under the loan agreements. For borrowings with a floating rate, the most recent rate as of
December 31, 2017 was applied.
(2) Sichuan plant construction and equipment purchase
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, 2017, the Company has a remaining commitment of RMB55.7 million (equivalent to US$8.5 million) mainly for facility construction.
In September 2016, Sichuan Xinda entered into equipment purchase contracts with Hailezi for a consideration of RMB17.0 million (equivalent to US$2.6
million) to purchase storage facility and testing equipment. Afterward, Sichuan Xinda cancelled two contracts with Hailezi for a consideration of RMB1.6
million (equivalent to US$0.2 million). As of December 31, 2017, Sichuan Xinda prepaid RMB6.0 million (equivalent to US$0.9 million) and has a remaining
commitment of RMB9.4 million (equivalent to US$1.5 million).
On October 20, 2016, Sichuan Xinda entered into an equipment purchase agreement purchase contract with Peaceful for a total consideration of RMB89.8
million (equivalent to US$13.7 million) to purchase certain production and testing equipment. As of December 31, 2017, the Company has a commitment of
RMB55.9 million (equivalent to US$8.5 million).
On November 15, 2016, Sichuan Xinda entered into decoration contract with Beijin Construction to perform indoor and outdoor decoration work for a
consideration of RMB237.6 million (equivalent to US$36.4 million). On February 20, 2017, Sichuan Xinda entered into another decoration contract with Beijin
Construction to perform outdoor decoration work for a consideration of RMB2.9 million (equivalent to US$0.5 million). On June 10, 2017, Sichuan Xinda
entered into another decoration contract with Beijin Construction to perform ground decoration work for a consideration of RMB23.8 million (equivalent to
US$3.6 million). As of December 31, 2017, Sichuan Xinda prepaid RMB119.8 million (equivalent to US$18.3 million) of which RMB54.4 million (equivalent to
US$8.3 million) was transferred to construction in progress and has a remaining commitment of RMB144.5 million (equivalent to US$22.2 million).
In March 2017, Sichuan Xinda entered into equipment purchase contracts with Hailezi for a consideration of RMB2,242.8 million (equivalent to US$343.2
million) to purchase production equipment and testing equipment. By the end of June 2017, Sichuan Xinda expected to launch an integrated ERP system, which
resulted in the equipment to be purchased under the original contracts with Hailezi not meeting the production requirements. Thus the original contracts have
been terminated with the amount of RMB2,222.9 million (equivalent to US$340.2 million), and Hailezi agreed to refund the prepayment in the amount of
RMB1,704.9 million (equivalent to US$260.9 million) by the end of March 2018, out of the total prepayment made by Sichuan Xinda of RMB1,722.9 million
(equivalent to US$263.7 million). As of December 31, 2017, Sichuan Xinda signed a supplementary agreement with Hailezi, pursuant to the agreement, Sichuan
Xinda agreed to pay RMB12.4 million (equivalent to USD1.9 million) to Hailezi for the compensation of Hailezi due to the termination of the purchase
contracts. As of December 31, 2017, Hailezi has refunded the prepayment in the amount of RMB1,245.5 million (equivalent to US$190.6 million) and the
remaining part of the prepayment has been reclassified as prepaid expenses and other current assets. As of December 31, 2017, Sichuan Xinda prepaid
RMB18.0 million (equivalent to US$2.7 million) and has a remaining commitment of RMB1.9 million (equivalent to US$0.3 million).
85
(3) Heilongjiang plant construction and equipment purchase
On September 26, 2016 and February 28, 2017, HLJ Xinda Group entered into two equipment purchase contracts with Hailezi for a total consideration of
RMB782.2 million (equivalent to US$119.7 million) to purchase storage facility and other equipment, which will be used for upgrading the storage system of
warehouse located in Harbin, China. Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB621.6 million (equivalent to US$95.1 million) as
of December 31, 2017. Due to a redesign of outdoor storage facility in June 2017, HLJ Xinda Group entered into a supplementary agreement with Hailezi,
which decreased the original contracts amounts to RMB283.7 million (equivalent to US$43.4 million). Hailezi refunded RMB369.1 million (equivalent to
US$56.5 million) to HLJ Xinda Group on June 22, 2017. As of December 31, 2017, HLJ Xinda Group had a remaining commitment of RMB31.1 million
(equivalent to US$4.8 million).
In November, 2017, HLJ Xinda Group entered into an equipment purchase contract with Hailezi for a total consideration of RMB939.7 million (equivalent to
US$143.8 million). As of December 31, 2017, HLJ Xinda Group has prepaid RMB751.8 million (equivalent to US$115.3 million) and has a remaining
commitment of RMB187.9 million (equivalent to US$28.7 million).
(4) Dubai plant construction and equipment
On April 28, 2015, Dubai Xinda 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, 2017, the Company has a remaining commitment of AED2.1 million (equivalent to US$0.6
million).
(5) Xinda CI (Beijing) office building decoration
On March 30, 2017, Xinda CI (Beijing) entered into a decoration contract with Beijing Fangyuan Decoration Engineering Co., Ltd for a total consideration of
RMB5.8 million (equivalent to US$0.9 million) to decorate office building. As of December 31, 2017, the decoration work in the amount of RMB2.0 million
(equivalent to US$0.3 million) was recorded in construction in progress. As of December 31, 2017, the Company has a remaining commitment of RMB3.8
million (equivalent to US$0.6 million).
On June 9, 2017, Xinda CI (Beijing) entered into a decoration contract with Beijing Zhonghongwufang Stone Co., Ltd for a total consideration of RMB1.2
million (equivalent to US$0.2 million) to decorate office building. As of December 31, 2017, the decoration work in the amount of RMB0.6 million (equivalent to
US$0.1 million) was recorded in construction in progress. As of December 31, 2017, the Company has a remaining commitment of RMB0.6 million (equivalent
to US$0.1 million).
(6) Xinda Shanghai Research & Development office building
In December, 2017, HLJ Xinda Group entered into a building purchase contract with Shanghai Caohejing Kangqiao Science & Green River Construction &
Development Co., Ltd. for a total consideration of RMB216.6 million (equivalent to US$33.2 million). As of December 31, 2017, HLJ Xinda Group has a
remaining commitment of RMB108.3 million (equivalent to US$16.6 million).
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.
86
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, 2017
would decrease income before income taxes by approximately US$8.9 million for the year ended December 31, 2017. 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, 2017, the RMB traded at 6.5342 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.
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.
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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, 2017, 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, 2017 due to the material
weakness described below under Management's Report on Internal Control Over Financial Reporting, we believe that the consolidated financial statements
included in this Annual Report on Form 10-K correctly present our financial condition, results of operations and cash flows for the fiscal years covered thereby
in all material respects.
(a) Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over the Company's financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act. The Company's internal control over financial reporting is a process that is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States and includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States and that our receipts and expenditures are being made only in accordance with the authorization of our
management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
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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, 2017. 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, 2017 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, 2017, 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, 2017.
Changes in Internal Control Over Financial Reporting
During the twelve months ended December 31, 2017, our efforts to improve our internal controls over financial reporting 1) adopting procedures to evaluate and
assess performance of directors, officers and employees of the Company, (2) internal meetings, discussions, trainings and seminars periodically to review and
improve our internal control procedures; (3) recruiting qualified accounting staff in Xinda CI (Beijing) with requisite expertise and knowledge to help improve
our internal control procedures. We plan to improve on the above-referenced weakness by the end of the fiscal year ending December 31, 2018.
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, 2017 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
(b) Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
China XD Plastics Company Limited:
Opinion on Internal Control Over Financial Reporting
We have audited China XD Plastics Company Limited's and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2017,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the
Company has not maintained effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
balance sheets of the Company as of December 31, 2017 and 2016, 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, 2017, and the related notes (collectively, the consolidated financial statements), and
our report dated March 15, 2018 expressed an unqualified opinion on those consolidated financial statements.
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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. The material
weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2017 consolidated financial statements, and this
report does not affect our report on those consolidated financial statements.
Basis for Opinion
The Company'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 are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial
reporting 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ KPMG Huazhen LLP
Beijing, China
March 15, 2018
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
Joseph Chow (1)(3)
Feng Li (1)(2)(3)
Linyuan Zhai (1)(2)(3)
Homer Sun (2)(4)
Jun Xu(4)
Age
Title
Date of Initial Appointment
52
39
43
54
55
68
46
42
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
December 31, 2008
May 14, 2009
December 31, 2008
November 16, 2017
November 14, 2012
May 14, 2009
January 1, 2012
September 28, 2011
(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.
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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 30 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.
Taylor Zhang. Mr. Zhang has over 15 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 18 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.
Joseph Chow, Mr. Chow has over 20 years of experience in corporate finance, financial advisory and management and has held senior executive and
managerial positions in various public and private companies. Mr. Chow is Managing Director of Centurium Capital, prior to the current position, He also served
as the member of the board, the audit committee and the compensation committee of China Lodging Group, Limited, a NASDAQ listed company and was a
managing director of Moelis & Company, a managing director at Goldman Sachs Asia LLP. Before that, he served as an independent financial consultant, as
chief financial officer of Harbor Networks Limited, and as chief financial officer of China Netcom (Holdings) Company Limited. Prior to that, Mr. Chow
served as the director of strategic planning of Bombardier Capital, Inc., as vice president of international operations of Citigroup and as the corporate auditor of
GE Capital. Mr. Chow currently sits on the board as independent non-executive director for China ZhongDi Dairy Holdings Company Limited, Intime
Department Store (Group) Co., Ltd. and CAR, Inc., respectively, which are companies listed on the Stock Exchange of Hong Kong. Since 2014, Mr. Chow has
served as a member of the board of directors of China Biologic Products, Inc., a NASDAQ listed company. Mr. Chow obtained a Bachelor of Arts degree in
political science from Nanjing Institute of International Relations and a Master of Business Administration degree from the University of Maryland at College
Park. Mr. Chow contributes to our Board of Directors with extensive financial experience and corporate executive advisory experience.
Linyuan Zhai. Mr. Zhai, 67, 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. Homer Sun is the Chief Investment Officer of Morgan Stanley Private Equity Asia, a Managing Director of Morgan Stanley and leads the Fund's
China Investment Operations. Mr. Sun also serves on the Firm's China Management Committee, which is comprised of the Firm's senior business leaders
within China. Mr. Sun joined the Firm in 2000 and has led MSPE Asia's private equity transactions in China for three funds to date: Fund II (2005), Fund III
(2007) and Fund IV (2013). Mr. Sun currently serves as a director on the boards of several Chinese companies, including Tianhe Chemicals, Sihuan
Pharmaceutical and Nature Home; he was previously a director of Shanshui Cement. Prior to joining Morgan Stanley, Mr. Sun was a mergers and acquisitions
lawyer with the law firm Simpson Thacher & Bartlett in New York and Hong Kong. Mr. Sun is Chinese and is based in Hong Kong. Mr. Sun received a BSE
in Chemical Engineering, magna cum laude, from the University of Michigan and a JD, cum laude, from the University of Michigan Law School.
Jun Xu. Mr. Xu 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 Pharmaceutical Group Co.,
Ltd., Shanghai Shangshu Agricultural & By-products Co., Ltd., and Shanghai Vimiu Foods 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, 54, is a deputy director at Plastics Processing R&D Center of Beijing Research Institute of the Chemical Industry, as well as a member of
the Science and Technology Committee of Beijing Research Institute of the Chemical Industry. He has and contributes to our Board of Directors substantial
experience in technology, production, and business management in the chemical industry. Under his leadership in various senior roles including Vice General
Manager, Director, and Chief Engineer, responsible for project design, investment, management and finance, Mr. Li successfully launched and operated several
joint ventures between Beijing Chemical Industry Research Institute (Group), a subsidiary of China Petroleum & Chemical Corp (Sinopec), the largest refiner
in Asia, and Jiangnan Mould & Plastic Co. Ltd., Shenzhen Petrochemical and Plastics Co. Ltd., Suzhou Anli Chemical Co., Ltd., and others. Mr. Li is also on
the committee of Venture Capital for Innovative Small-Medium size Enterprises under the Ministry of Science and Technology of the People's Republic of
China. Mr. Li received a B.S. in polymer material from Nanjing Institute of Chemical Technology and a Master's Degree from Beijing University of Chemical
Technology. Mr. Li also attended MBA program at China Sinopec Management Institute of Business Administration and studied as an exchange scholar at the
University of Technology in Sydney, Australia.
Family Relationships
There are no family relationships between or among any of the executive officers or directors of the Company.
Board Leadership Structure
The Board of Directors believes that Jie Han's service as both Chairman of the Board of Directors and Chief Executive Officer is in the best interest of the
Company and its stockholders. Mr. Han possesses detailed and in-depth knowledge of the issues, opportunities, and challenges facing the Company, and is thus
best positioned to develop agendas that ensure that the time and attention of our Board of Directors are focused on the most critical matters. His combined role
enables decisive leadership, ensures clear accountability, and enhances the Company's ability to communicate its message and strategy clearly and consistently
to the Company's stockholders, employees and customers.
Each of the directors other than Jie Han, Taylor Zhang and Qingwei Ma is independent (see "Director Independence" below), and the Board of Directors
believes that the independent directors provide effective oversight of management. The Board of Directors has not designated a lead director. Our independent
directors call and plan their executive sessions collaboratively and, between Board of Directors meetings, communicate with management and one another
directly. In the circumstances, the directors believe that formalizing in a lead director functions in which they all participate might detract from rather than
enhance performance of their responsibilities as directors.
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Director Qualifications
We seek directors with established strong professional reputations and experience in areas relevant to the strategy and operations of our businesses. We also
seek directors who possess the qualities of integrity and candor, who have strong analytical skills and who are willing to engage management and each other in
a constructive and collaborative fashion, in addition to the ability and commitment to devote significant time and energy to service on the Board of Directors and
its committees. We believe that all of our directors meet the foregoing qualifications.
The Nominating Committee and the Board of Directors believe that the leadership skills and other experiences of the members of its Board of Directors, as
described "Item 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE – Directors and Executive Officers", provide the
Company with a range of perspectives and judgment necessary to guide our strategies and monitor their execution.
Board of Directors Practices
Our business and affairs are managed under the direction of our Board of Directors. The primary responsibilities of our Board of Directors are to provide
oversight, strategic guidance, counseling and direction to our management. It is our expectation that the Board of Directors will meet regularly on a quarterly
basis and additionally as required.
Board of Directors' Role in Risk Oversight
The Board of Directors as a whole has responsibility for risk oversight, with reviews of certain areas being conducted by the relevant Board of Directors
committees. These committees then provide reports to the full Board of Directors. The oversight responsibility of the Board of Directors and its committees is
enabled by management reporting processes that are designed to provide visibility to the Board of Directors about the identification, assessment, and
management of critical risks. These areas of focus include strategic, operational, financial and reporting, succession and compensation, compliance, and other
risks. The Board of Directors and its committees oversee risks associated with their respective areas of responsibility, as summarized below.
Meetings of the Board of Directors
The Board of Directors held 8 meetings during 2017 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 2017.
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.
94
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 5605(a)(2) 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 2017. The members of the Audit Committee during 2017 were Lawrence Leighton (resigned on May 15, 2017),
Feng Li, Linyuan Zhai and Joseph Chow (appointed on November 16, 2017). Mr. Leighton served as the Chairman of the Audit Committee till his resignation
and Mr. Chow started since November 16, 2017. Each of the above-listed Audit Committee members were or are considered "independent" under the current
independence standards of NASDAQ Marketplace Rule 5605(a)(2) 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, 2017, 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, 2017.
Respectfully submitted by:
Lawrence Leighton (till May 15, 2017)
Joseph Chow , chairman, since November 16, 2017
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 meetings during 2017.
The members of the Nominating Committee during 2017 were Lawrence Leighton (resigned on May 15, 2017), Feng Li, Linyuan Zhai. Mr. Zhai and Joseph
Chow (appointed on November 16, 2017) 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 5605(a)(2) 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.
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The Nominating Committee operates under a written charter. The Nominating Committee Charter can be found on our website at www.chinaxd.net and can
be made available in print free of charge to any shareholder who requests it.
On September 28, 2011 the Company filed a Certificate of Designation with the Secretary of State of the State of Nevada (amended on January 24, 2014 and
filed with the Secretary of State of the State of Nevada on January 27, 2014), which provides the holders of the Series D Preferred Stock with the right to elect
up to two (2) directors to the Company's Board of Directors on the terms and conditions set forth therein. There have been no other changes to the procedures
by which the stockholders of the Company may recommend nominees to the Board of Directors since the filing of the Company's Definitive Proxy Statement
on November 19, 2009 for its Annual Meeting of Stockholders, which was held on December 1, 2009. The Nominating Committee will consider director
candidates recommended by any reasonable source, including current Board of Directors members, stockholders, professional search firms or other
persons. The directors will not evaluate candidates differently based on who has made the recommendation. The Board of Directors does not have a formal
policy on Board of Directors candidate qualifications. The Board of Directors may consider those factors it deems appropriate in evaluating director nominees
made either by the Board of Directors or stockholders, including judgment, skill, strength of character, experience with businesses and organizations comparable
in size or scope to the Company, experience and skill relative to other Board of Directors members, and specialized knowledge or experience in business or
financial matters as would make such nominee an asset to the Board of Directors and may, under certain circumstances, be required to be "independent," as
such term is defined in the NASDAQ Marketplace Rules and applicable SEC regulations. Depending upon the current needs of the Board of Directors, certain
factors may be weighed more or less heavily. In considering candidates for the Board of Directors, the directors evaluate the entirety of each candidate's
credentials and do not have any specific minimum qualifications that must be met.
Security holders wishing to submit the name of a person as a potential nominee to the Board of Directors must send the name, address, and a brief (no more
than 500 words) biographical description of such potential nominee to the Nominating Committee at the following address: Nominating Committee of the Board
of Directors, c/o China XD Plastics Company Limited, 500 Fifth Ave Suite 938, 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 2017 were Lawrence Leighton (till
May 15, 2017) 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 5605(a)(2) and meet
the criteria for independence set forth in Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, as amended, as determined by the Board of Directors. The
Compensation Committee operates under a written charter. The Compensation Committee Charter can be found on our website at www.chinaxd.net and can
be made available in print free of charge to any shareholder who requests it.
The Compensation Committee discharges the Board of Directors' responsibilities relating to compensation of the Company's executive officers and administers
our 2009 Stock Incentive Plan. The Committee has overall responsibility for approving and evaluating the executive officer compensation plans, policies and
programs of the Company. The Compensation Committee held one meeting during 2017.
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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 938, 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 Feng Li at c/o China XD Plastics Company Limited, 500 Fifth Ave Suite 938, 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 938, 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 2017 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.
98
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, 2017 detailing what we pay
to our named executive officers and how our compensation objectives and policies help achieve our business objectives.
Overview of Compensation Program
Our Compensation Committee has responsibility for establishing, implementing and monitoring adherence to our compensation philosophy and objectives. Our
Compensation Committee is responsible for ensuring that the total compensation paid to our executive officers is fair, reasonable and competitive. Our
compensation decisions with respect to executive officer salaries, annual incentives and long-term incentive opportunities are influenced by (a) the officer's
level of responsibility and function; (b) our overall financial performance and, in some cases, the officer's business unit; and (c) our assessment of the
competitive marketplace, including other peer companies.
Compensation Philosophy and Objectives
All of our compensation programs, including our executive compensation programs, are designed to attract and retain key employees in the highly competitive
modified plastic marketplace in China. Our executive compensation programs are also designed to motivate our executives to achieve and reward them for
superior performance in attaining corporate and individual objectives that create stockholder value. Different programs, including both cash and stock-based
compensation, are geared towards short-term and long-term performance, respectively, with the goal of aligning employee interests with stockholder interests
and increasing stockholder value over the long term. Executive compensation programs impact all employees by setting general levels of compensation and
creating an environment of goals, reward and expectations. Finally, we endeavor to ensure that our compensation programs are viewed as fundamentally fair to
our stockholders.
Compensation Programs and Process
Elements of Compensation
Elements of compensation for our named executive officers include base salary, non-equity incentive compensation, equity incentive awards, pension plan,
health, disability and life insurance and certain other perquisites. We use salary as the base amount necessary to match our competitors for executive talent.
We utilize cash incentive payments to reward performance achievements over the course of a one-year horizon and we use equity incentive awards to reward
long-term performance, with excellent corporate performance and extended tenure producing potentially significant value for our named executive officers. We
believe that this combination of programs provides an appropriate mix of fixed and variable pay, balances short-term operational performance with long-term
stockholder value, and encourages executive recruitment and retention.
Compensation Process
Our Compensation Committee is responsible for establishing, implementing and monitoring the compensation of our named executive officers. When making
compensation decisions, our Compensation Committee analyzes the dollar amount of each component of the executive officer's compensation, including current
cash compensation (base salary and non-equity plan incentive compensation), long-term equity incentive program compensation, and any other compensation.
Except as set forth below, our Compensation Committee has not adopted any formal or informal policies or guidelines for allocating compensation between
long-term and currently paid out compensation, or between cash and non-cash compensation. However, our philosophy is to pay our executive officers
competitive levels of compensation that best reflect their individual responsibilities and contributions to us.
99
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, 2017, 3,789,376 stock awards
and 670,500 stock options have been granted under the Plan. Currently, approximately 92 employees and directors are eligible to participate in the Plan.
If the Company declares a dividend or other distribution or engages in a recapitalization, stock split, reverse stock split, reorganization, merger, consolidation,
split-up, spin-off, combination, repurchase, or exchange of shares or other securities of the Company, or other change in the corporate structure of the
Company affecting the Company's common stock, the Board of Directors will adjust the number and class of shares that may be delivered under the Plan, the
number, class, and price of shares covered by each outstanding Award, and the numerical per-person limits on Awards.
Shares of common stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent (1) the options expire or
terminate for any reason prior to exercise in full or (2) the options are cancelled in accordance with the Plan. Unvested shares issued under the Plan and
subsequently repurchased by the Company, at a price per share not greater than the option exercise or direct issue price paid per share, pursuant to the
Company's repurchase rights under the Plan shall be added back to the number of shares of common stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option grants or direct stock issuances under the Plan.
100
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.
101
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.
102
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 2017, 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 2017 Mr. Han is entitled to a base salary of $44,419 (RMB
300,000) 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.
103
Compensation for Mr. Taylor Zhang, the Company's Chief Financial Officer: For fiscal year 2017, 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 2017, Mr. Ma is entitled to a base salary of $29,613 (RMB
200,000) 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 2017, Mr. Ma is entitled to a base salary of $11,845 (RMB
80,000) 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 $8.01 per share and 8,000 non-vested shares under our 2009 Stock Option / Stock Issuance Plan. One-third of the stock options
shall vest on each anniversary of the grant date over a three-year period. The non-vested shares will vest on the third anniversary of the grant date. Mr. Ma
didn't exercise the options, which expired in 2013. On August 7, 2013, August 7, 2014 and on August 7, 2015, Mr. Ma received 13,530, 16,060 and 18,590 non-
vested shares, respectively, under our 2009 Stock Option/Stock Issuance Plan. The restricted shares shall vest on the third anniversary of the grant date. In
addition, Mr. Ma may receive a discretionary bonus as determined by the Compensation Committee of the Board of Directors at the end of the fiscal year.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this filing on Form 10-K with management.
Based on the Compensation Committee's review of and the discussions with management with respect to the Compensation Discussion and Analysis, the
Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2017 for filing with the SEC.
Respectfully submitted,
COMPENSATION COMMITTEE
Feng Li, Chairman
Linyuan Zhai
Homer Sun
Lawrence W. Leighton (until May 15, 2017)
104
The following table is a summary of the compensation paid to our executive officers for the three years ended December 31, 2017, 2016 and 2015.
SUMMARY COMPENSATION TABLE
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
Non-Equity
Incentive
Plan
Compen-
sation
($)
All Other
Compens-
ation
($)
Stock
Awards
($)
Option
Awards
($)
Name and
Principal
Position
Jie Han,
CEO
Year Salary ($) Bonus ($)
385,555
2017 533,025
439,478
2016 451,964
-
2015 487,913
-
-
-
Qingwei Ma,
COO
2017 355,350
2016 296,127
2015 268,858
-
303,720
-
-
-
122,844
Taylor Zhang,
CFO
2017 201,056
2016 201,056
2015 216,720
201,056
201,056
-
-
-
122,844
Junjie Ma,
CTO
2017 142,140
2016 115,703
2015 128,948
-
115,703
-
-
-
111,726
Rujun Dai
General Manager
of HLJ Xinda
Group
2017 399,769
-
-
2016 168,311
55,464
2015
177,170
-
-
60,040
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
($)
918,580
891,442
487,913
355,350
599,846
391,702
402,112
402,112
339,564
142,140
231,405
240,674
-
-
-
-
-
-
-
-
-
-
-
-
-
399,769
-
-
345,481
115,504
(1)
Stock and option awards represent the amount of stock compensation expense recognized in 2017, 2016 and 2015 in accordance with FASB ASC
718.
105
The following is a summary of all options, unvested stock and equity incentive plans for our executive officers for the year ended December 31, 2017.
GRANTS OF PLAN-BASED AWARDS
Grant Date
(Grant
Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards
Estimated Future Payouts
Under Equity Incentive Plan
(2)
Approval
Date) (1)
Threshold
($)
Target
($)
Maximum
($)
Threshold
(#)
Target
(#)
Maximum
(#)
-
-
-
Underlying
Options (#)
-
Awards
($/Sh)
Option
Awards
-
-
-
Grant
Date
Fair
Value
of
Stock
and
Option
Awards
All Other
Option
Awards:
Number of
Securities
Exercise
or
Base
Price of
Option
All
Other
Stocks
Awards:
Number
of
Shares
of
Stock or
Units
(#)
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
August 7,
2015
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
(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.
106
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Option Awards
Stock 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 ($)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Name
Jie Han, CEO
Taylor Zhang, CFO
Qingwei Ma, COO
Junjie Ma, CTO
Rujun Dai, General Manager
of HLJ Xinda Group
Options Exercised and Stock Vested
Number of
shares or
units of
stock that
have not
vested (#)
-
20,440
20,440
18,590
Market
value of
stock or
units of
stock that
have not
vested ($)
-
128,844
128,844
111,726
Option
expiration date
-
-
-
-
-
-
-
-
-
-
9,990
60,040
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
Option Exercises and Stock Vested—Fiscal 2017
Option Awards
Stock Awards
Number of
Shares
Acquired on
Exercise (#)
Value Realized
on Exercise ($)
Number of
Shares
Acquired on
Vesting (#)
Value Realized
on Vesting ($)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
107
Pension Benefits
The following table shows the actuarial present value of the pension benefit for the named executive officers as of December 31, 2017.
Pension Benefits—Fiscal 2017
Plan Name
Number of Years
Credited Service
(#)
Present Value of
Accumulated Benefit
($)
Payments During
Fiscal 2017 ($)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Name
Jie Han
Qingwei Ma
Taylor Zhang
Junjie Ma
Rujun Dai
Employment Agreements
All of our officers have entered into employment agreements with the Company.
On December 31, 2011, Jie Han and China XD's subsidiary, HLJ Xinda Group, entered into an employment agreement and an employment
memorandum, pursuant to which Mr. Han received a monthly salary of RMB250,000 (approximately US$37,664) from January to December for 2016. Also,
Mr. Han will receive an annual bonus of RMB 3,000,000 (approximately US$451,964), 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. On January 1, 2017, Jie Han and HLJ Xinda Group extended the term of employment for additional five years beginning on
January 1, 2017, pursuant to which Mr. Han was entitled to a monthly salary of RMB300,000 (equivalent to US$44,419). 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, and
extended on January 1, 2017 for another 5 years. 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.
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 RMB168,000 (approximately US$25,310 from January to December 2016. Also, Mr. Ma will receive a performance based
bonus of RMB2,016,000 (approximately US$303,720), 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.
On January 1, 2017, Qingwei Ma and HLJ Xinda Group extended the term of employment for additional five years beginning on January 1, 2017, pursuant to
which Mr. Ma was entitled to a monthly salary of RMB200,000 (equivalent to US$29,613). 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.
108
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 RMB 64,000 (approximately US$9,642) from January to December, 2016. In addition, Mr. Ma will receive a performance based
bonus of RMB 768,000 (approximately US$115,703), 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. On
January 1, 2017, Junjie Ma and HLJ Xinda Group extended the term of employment for additional five years beginning on January 1, 2017, pursuant to which
Mr. Ma was entitled to a monthly salary of RMB80,000 (equivalent to US$11,845). 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 RMB 98,000 (approximately US$14,764) from January to December, 2016. In addition, Mr. Dai will receive a performance based
bonus of RMB 1,176,000 (approximately US$177,170), 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, 2017. 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.
109
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 2015, all non-
employee directors who reside in China received an annual cash compensation of RMB60,000 (approximately $9,039) after the first 18 months of continuous
directorship and RMB36,000 (approximately $5,424) during the initial 18 months directorship and Lawrence Leighton (resigned on May 15, 2017), 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 $7,532) 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 $7,533) after 18 months of continuous directorship.
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. The Company did not issue this stock award the service rendered
during the year ended December 31, 2017, and 2016, respectively.
Pursant to the service agreement with Joseph Chow dated on November 16, 2017, Mr. Chow is entitled to receive an annual cash compensation of US$60,000
(US$5,000 per month) and without stock award.
The following is a summary of the compensation paid to our non-employee directors for the year ended December 31, 2017. Our employee directors do not
receive compensation for their services to the Company as directors.
DIRECTOR COMPENSATION
Name (1) (2)
Lawrence Leighton (3)
Joseph Chow (3)
Feng Li
Linyuan Zhai
Fees
earned or
paid in
cash ($)
22,420
7,500
8,884
8,884
Stock
awards ($)
-
Option
awards ($)
-
-
-
-
-
Non-equity
incentive plan
compensation
($)
Nonqualified
deferred
compensation
earnings ($)
All other
compensation
($)
-
-
-
-
-
-
Total ($)
22,420
-
7,500
8,884
8,884
-
-
(1)
(2)
(3)
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.
Mr. Leighton resigned on May 15, 2017 and Mr. Chow was appointed on November 16, 2017.
110
Service Agreements
On November 16, 2017, the Company entered into a Service Agreement with Joseph Chow. Pursuant to the terms of the Service Agreement, the Company
shall pay Mr. Chow a fee of $5,000 per month ($60,000 annually).
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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year 2017, none of the members of our Compensation Committee was our current or former officer or employee.
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.
111
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, 2017.
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)
Plan category
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, 2017, the number of securities remaining available for future issuance under equity compensation plans was 3,340,124 shares.
CEO Pay Ratio
Our 2017 CEO to median employee pay ratio is 1:29.4. Our CEO had 2017 annual total compensation of $ US$918,580 , while our median employee had 2017
annual total compensation of US$26,957,425.
Our CEO to median employee pay ratio is calculated in accordance with Item 402(u) of Regulation S-K. We identified the median employee by examining the
all employees, excluding our CEO, who were employed by us on December 31, 2017. We included all employees, whether employed on a full-time, part-time,
or seasonal basis. We did not make any assumptions or estimates with respect to total compensation, but we did annualize the compensation for any full-time
employees that were hired during 2017 so that we could compare data on a similar basis. We believe the use of all employees is a consistently applied
compensation measure that allowed us to efficiently identify the median employee in order to calculate the CEO pay ratio. We define "total compensation" as
the aggregate of salary, bonus, stock awards, option awards, and "all other compensation", as applicable, as set forth in the 2017 Summary Compensation Table
above.
112
Security Ownership Of Certain Beneficial Owners and Management
The following table sets forth certain information, as of December 31, 2017, 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 938, New York, New York
10110)
Jie Han
Qingwei Ma
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 938, New York, New York
10110)
Junjie Ma
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 938, New York, New York
10110)
Taylor Zhang
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 938, New York, New York
10110)
Joseph Chow
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 938, New York, New York
10110)
Linyuan Zhai
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 938, New York, New York
10110)
Feng Li
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 938, New York, New York
10110)
Rujun Dai
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 938, New York, New York
10110)
Kenan Gong
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 938, New York, New York
10110)
XD. Engineering Plastics Company Limited
(address: Palm Grove House, P.O. Box 438, Road
Town,
Tortola, British Virgin Islands)
XD. Engineering Plastics Company Limited
MSPEA Modified Plastics Holding Limited
(address: c/o Walkers Corporate Services Limited,
Walker House,
87 Mary Street, George Town, Grand Cayman KY1-
9005, Cayman Islands)
Total Ownership of Common Stock by All
Directors and Executive Officers as a Group
* Less than 1%
Title of Class
Amount and
Nature of
Beneficial
Ownership
(1)
Percent of Class
(2)
Series B Preferred Stock
Common Stock
1,000,000 (3)
32,510,131 (3)
100.0%
65.4%
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
91,660
78,180
93,660
-
10,879
10,440
24,910
37,520
*
*
*
*
*
*
*
*
Series B Preferred Stock
Common Stock
1,000,000 (3)
24,382,598 (3)
100.0%
49.0%
Series D Preferred Stock
16,000,000 (4)
32,857,110
100.0%
66.1%
113
(1)
(2)
(3)
(4)
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 49,727,731 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, 2017.
Mr. Jie Han beneficially owns (i) 32,510,131 shares of Common Stock, representing 65.4% 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.
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 $120,000 and in which any current or former director of
officer of the Company, any 5% or greater shareholder of the Company or any member of the immediate family of any such persons had, or will have, a direct
or indirect material interest other than as disclosed below.
During the years presented, the Company entered into related party transactions with (i) Xinda High-Tech, an entity controlled by the wife of Mr. Han, the
chief executive officer and controlling stockholder of the Company, Ms. Limei Sun, and (ii) Mr. Han's son, Mr. Tiexin Han. In 2017, the wife of Mr. Han was
no longer the director of Xinda High-Tech, therefore, Xinda High-Tech was no longer the related party of the Company.
The Company rents the following plant and office buildings in Harbin, Heilongjiang province from Xinda High-Tech.
Premise Leased
Office building
Area (M2)
Annual Rental
Fee (US$)
Period of Lease
23,894
707,543 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
Area (M2)
Annual Rental
Fee (US$)
Period of Lease
200
5,922 Between August 17, 2014 and August 16, 2016
Total rental expenses paid or payable to Xinda High-Tech amounted to US$630,595, US$719,934 and US$758,983 during the years ended December 31, 2017,
2016 and 2015, respectively. Total rental expenses paid or payable to Mr. Tiexin Han amounted to nil, US$3,835 and US$18,265 during the years ended
December 31, 2017, 2016 and 2015, 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: Joseph Chow, 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.
114
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our independent accountants for the audit of our annual financial statements for the year ended December 31, 2017 and December 31, 2016 was KPMG
Huazhen LLP (formerly known as KPMG Huazhen (SGP)). The following table shows the fees paid and to be paid by us to our independent accountants.
Audit Fees
Audit-Related Fees
Tax Fees
Total paid to independent public audit firms
Audit Fees
2017
2016
1,297,696 $
-
-
1,297,696 $
1,327,435
-
-
1,327,435
$
$
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$1,297,696 and US$1,327,435, related to audits of our annual financial statements, reviews of our quarterly
financial statements and statutory audits for the years ended December 31, 2017 and 2016, respectively.
Audit-Related Fees
Fees for audit-related services were US$ nil, US$ nil, respectively, for the years ended December 31, 2017 and 2016, for assistance in documenting internal
control policies and procedures over financial reporting.
Tax Fees
During the years ended December 31, 2017 and 2016, we paid or accrued expense of US$ nil, and US$ nil, 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.
115
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 January 1, 2017 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 January 1, 2017 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 January 1, 2017 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 January 1, 2017 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 Agreement dated January 1, 2016 between Heilongjiang Xinda Enterprise Group Co., Ltd and Kenan Gong
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.
116
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
Exhibit No. Description of Exhibit
Articles of Incorporation
3.1
Amendment to Articles of Incorporation
Bylaws
Form of Second Amendment to Articles of Incorporation
of the Company
Second Amended and Restated Bylaws
Specimen Stock Certificate
Certificate of Designation of Series A Convertible
Preferred Stock
Certificate of Designation of Series B Preferred Stock
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.
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
Forms of Certificates of Correction
Filed as an exhibit to the Company's current report on Form 8-K, as filed with the
Form of Certificate of Designations, Preferences and
Rights of Series C Convertible Preferred Stock
Form of Series A Warrant to Purchase Common Stock Filed as an exhibit to the Company's current report on Form 8-K, as filed with the
Securities and Exchange Commission on November 30, 2009.
Form of Series B Warrant to Purchase Common Stock Filed as an exhibit to the Company's current report on Form 8-K, as filed with the
Securities and Exchange Commission on November 30, 2009.
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
Securities and Exchange Commission on November 30, 2009.
Filed as an exhibit to the Company's registration statement on Form S-1, 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-1, 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.
117
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.
118
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
Form of Indemnification Agreement
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.
Employment Agreement dated January 1, 2017 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 January 1, 2017 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 January 1, 2017 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 January 1, 2017 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.
Facility Agreement dated August 22, 2016 among Xinda
Holding (HK) Company Limited, as borrower, China XD
Plastics Company Limited, Favor Sea Limited, Xinda
(HK) Trading Company Limited, Al Composites Materials
FZE, as guarantors, Standard Chartered Bank (Hong
Kong) Limited, as lead arranger, book runner and security
agent, and a consortium of banks and financial institutions
named therein as lenders
Filed as an exhibit to the Company's annual report on Form 10-K, as filed with the
Securities and Exchange Commission on March 16, 2017.
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 16, 2017.
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 16, 2017.
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 16, 2017.
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 16, 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 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 current report on Form 8-K, as filed with the
Securities and Exchange Commission on August 26, 2016, and incorporated herein by
this reference.
119
10.26
10.27
10.28
10.29
10.30
10.31
14.1
16.1
16.2
16.3
16.4
21.1
23.1
31.1
31.2
32.1
101.
Strategic Investment Agreement dated December 12,
2016 between Sichuan Xinda Enterprise Group Company
Limited, Shunqing District Government, Nanchong City,
Sichuan Province and Nanchong City Government,
Sichuan Province
Equipment Purchase Contract dated January 3, 2017
between Sichuan Xinda Enterprise Group Company
Limited and Harbin Hailezi Science and Technology Co.,
Ltd.
Equipment Purchase Contract dated January 3, 2017
between Sichuan Xinda Enterprise Group Company
Limited and Harbin Hailezi Science and Technology Co.,
Ltd.
Land Use Right Transfer Agreement dated March 13,
2017 between Sichuan Xinda Enterprise Group Company
Limited, Nanchong City Bureau of Land Resources -
Shunqing District and Shunqing District Yinghua Industrial
Park
Employment Agreement dated January 1, 2016 between
Heilongjiang Xinda Enterprise Group Co. Ltd and Kenan
Gong
English translation of the Equity Transfer
dated November 21, 2017 entered into by Wang
Yongqiang and Liu Qiang and Heilongjiang Xinda
Enterprise Group 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 annual report on Form 10-K, as filed with the
Securities and Exchange Commission on March 16, 2017.
Filed as an exhibit to the Company's annual report on Form 10-K, as filed with the
Securities and Exchange Commission on March 16, 2017.
Filed as an exhibit to the Company's annual report on Form 10-K, as filed with the
Securities and Exchange Commission on March 16, 2017.
Filed as an exhibit to the Company's annual report on Form 10-K, as filed with the
Securities and Exchange Commission on March 16, 2017.
Filed as an exhibit to the Company's annual report on Form 10-K, as filed with the
Securities and Exchange Commission on March 16, 2017.
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 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 11, 2015.
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
120
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, 2018
CHINA XD PLASTICS COMPANY
LIMITED
By:
/s/ Jie Han
Jie Han
Chief Executive Officer
(Principal Executive Officer)
By:
/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/ Joseph Chow
Joseph Chow
/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
121
Date
March 15, 2018
March 15, 2018
March 15 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Notes to the Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
China XD Plastics Company Limited:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of China XD Plastics Company Limited and subsidiaries (the Company) as of December 31,
2017 and 2016, 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, 2017 and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2017, 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) (PCAOB), the Company's
internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 15, 2018 expressed an adverse opinion on the
effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2011.
/s/ KPMG Huazhen LLP
Beijing, China
March 15, 2018
F-2
CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2017
US$
2016
US$
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
Long-term prepayments to equipment and construction suppliers
Other non-current assets
Total assets
190,392,211
129,699,454
288,023,017
298,868,984
-
421,736,682
144,326,151
1,473,046,499
835,561,739
31,943,652
190,627,514
12,924,279
2,544,103,683
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK 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
Deferred income
Other non-current liabilities
Total liabilities
775,396,929
252,768,510
227,993,140
-
17,710,217
138,605,509
1,412,474,305
114,208,319
99,168,276
107,898,318
1,733,749,218
168,086,445
103,489,402
184,806,112
410,049,559
229,624
280,939,008
125,310,309
1,272,910,459
806,363,692
22,536,397
14,167,702
10,521,949
2,126,500,199
444,757,476
148,392,677
320,013,040
11,548
897,625
119,339,366
1,033,411,732
249,520,615
69,311,102
42,420,619
1,394,664,068
Redeemable Series D convertible preferred stock (redemption amount of US$244,044,200 and
US$212,212,300 as of December 31, 2017 and 2016, respectively)
Stockholders' equity:
Series B preferred stock
Common stock, US$0.0001 par value, 500,000,000 shares authorized, 49,748,731 shares and
49,532,541 shares issued, 49,727,731 shares and 49,511,541 shares outstanding as of December
31, 2017 and 2016, respectively
Treasury stock, 21,000 shares at cost
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
Commitments and contingencies
Total liabilities, redeemable convertible preferred stock and stockholders' equity
97,576,465
97,576,465
100
100
4,975
(92,694)
83,159,893
648,790,469
(19,084,743)
712,778,000
4,952
(92,694)
82,606,404
617,168,735
(65,427,831)
634,259,666
2,544,103,683
2,126,500,199
See accompanying notes to consolidated financial statements.
F-3
CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Revenues
Cost of revenues
Gross profit
Selling expenses
General and administrative expenses
Research and development expenses
Total operating expenses
Operating income
Interest income
Interest expense
Foreign currency exchange gains (losses)
Gains (losses) on foreign currency contracts
Loss on debt extinguishment
Government grant
Total non-operating expenses, net
2017
US$
Years Ended December 31,
2016
US$
2015
US$
1,290,447,748
(1,053,782,105)
236,665,643
1,201,678,898
(954,723,617)
246,955,281
999,192,894
(817,811,445)
181,381,449
(3,176,928)
(38,495,704)
(36,838,261)
(78,510 893)
(1,356,843)
(29,952,304)
(47,989,665)
(79,298,812)
(1,458,658)
(23,816,148)
(21,061,345)
(46,336,151)
158, 154,750
167,656,469
135,045,298
5,290,705
(45,370,872)
(6,498,908)
(1,048,599)
-
11,619,037
(36,008,637)
5,847,274
(41,370,432)
1,951,732
-
(18,963,834)
3,914,360
(48,620,900)
8,221,532
(42,704,097)
(2,237,541)
653,569
-
2,991,493
(33,075,044)
Income before income taxes
122,146,113
119,035,569
101,970,254
Income tax expense
Net income
Earnings per common stock:
Basic and diluted
Net Income
(90,524,379)
(17,422,819)
(18,237,975)
31,621,734
101,612,750
83,732,279
0.48
1.54
1.27
31,621,734
101,612,750
83,732,279
Other comprehensive income (loss)
Foreign currency translation adjustment, net of nil income taxes
46,343,088
(46,085,173)
(32,118,459)
Comprehensive income
77,964,822
55,527,577
51,613,820
See accompanying notes to consolidated financial statements.
F-4
Balance at January 1, 2015
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
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,
2016
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,
2017
CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Series B Preferred Stock
Common Stock
Number of
Shares
Amount
Number of
Shares
Amount
US$
1,000,000
-
100 49,151,796
-
-
US$
4,916
-
Additional
Paid-in
Capital
US$
Treasury
Stock
US$
(92,694) 80,875,787 431,823,706
- 83,732,279
Retained
Earnings
US$
-
Accumulated
Other
Comprehensive
Income (Loss)
US$
12,775,801
-
Total
Stockholders'
Equity
US$
525,387,616
83,732,279
-
-
-
-
-
-
-
-
171,488
-
-
17
-
-
-
-
1,044,162
(17)
-
-
-
(32,118,459)
-
(32,118,459)
1,044,162
-
1,000,000
-
100 49,323,284
-
-
4,933
-
(92,694) 81,919,932 515,555,985
- 101,612,750
-
(19,342,658)
-
578,045,598
101,612,750
-
-
-
-
-
-
-
-
188,257
-
-
19
-
-
-
-
686,491
(19)
-
-
-
(46,085,173)
-
(46,085,173)
686,491
-
1,000,000
-
100 49,511,541
-
-
4,952
-
(92,694) 82,606,404 617,168,735
31,621,734
-
(65,427,831)
-
634,259,666
31,621,734
-
-
-
-
-
-
-
-
216,190
-
-
23
-
-
-
-
553,512
(23)
-
-
-
46,343,088
-
-
1,000,000
100 49,727,731
4,975
(92,694) 83,159,893 648,790,469
(19,084,743)
46,343,088
553,512
-
712,778,000
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
Amortization of discount and issuance cost of the Notes
Amortization of issuance cost of the Syndicate loan facility
Change in fair value of foreign currency option contracts
Foreign currency exchange losses (gains)
Losses on disposals of property, plant and equipment
Deferred income tax benefit
Loss on debt extinguishment
Restricted cash
Accounts receivable
Amounts due from a related party
Inventories
Prepaid expenses and other current assets
Value added tax in long-term prepayments to equipment suppliers
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:
Proceeds from maturity of time deposits
Purchase of time deposits
Purchase of land use rights
Purchases of and deposits for property, plant and equipment
Refund of deposit from an equipment supplier
Deposits for acquisition of equity
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
Redemption of notes payable
Proceeds from Syndicate loan facility
Proceeds from early exercise of options
Release of restricted cash as collateral for bank borrowings
Placement of restricted cash as collateral for bank borrowings
Payments of issuance cost of bank borrowings
Net cash provided by financing activities
Effect of foreign currency exchange rate changes on cash and cash equivalents
Net increase 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 US$2,893,630, US$ 2,562,026 and US$ 231,356
capitalized for the years ended December 31, 2017, 2016 and 2015,
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
Government grant related to the construction of Sichuan plant in the form of
restricted cash (note 2(e))
Accrual for purchase of equipment
2017
US$
Years Ended December 31,
2016
US$
2015
US$
31,621,734
101,612,750
83,732,279
-
43,055,976
553,512
-
3,750,028
1,048,599
6,038,799
17,509
(2,407,706)
-
(31,588,120)
120,443,715
243,779
(120,026,438)
(26,354,886)
(23,267,330)
45,674
92,130,473
(108,053,082)
(12,155)
16,581,508
18,609,923
(4,630,632)
64,895,667
82,696,547
475,873,199
(564,710,760)
(8,279,334)
(456,474,007)
280,814,137
(11,937,192)
29,382,885
(255,331,072)
842,571,025
(682,921,893)
-
-
-
92,186,142
(68,227,246)
-
183,608,028
11,332,263
22,305,766
168,086,445
190,392,211
-
34,244,842
686,491
767,170
1,273,438
-
(2,965,949)
259,104
(2,292,830)
18,963,834
(27,269,199)
(190,860,210)
-
(3,764,167)
21,222,125
(575,483)
1,386,939
122,226,675
82,085,904
3,792
(5,807,300)
(75,664,932)
(304,465)
9,255,439
84,483,968
515,088,058
(475,315,245)
-
(210,840,098)
-
-
22,478,569
(148,588,716)
687,164,318
(537,809,334)
(165,366,000)
180,000,000
-
31,375,326
(66,757,459)
(6,770,000)
121,836,851
(9,574,143)
48,157,960
119,928,485
168,086,445
(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
463,771,799
(474,254,312)
(13,931,804)
(267,427,681)
-
-
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
38,695,738
13,030,643
45,782,010
19,521,472
40,136,978
8,982,167
-
-
38,118,231
1,537,935
5,144,134
-
94,031,275
11,117,817
41,251,663
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
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") , Poly Ether Ether Ketone ("PEEK") and Polyethylene ("PE") .
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, which individually exceeded 10% of the
Company's revenues, for the years ended December 31, 2017, 2016 and 2015, 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
Total
2017
Years Ended December 31,
2016
2015
US$
%
US$
%
US$
%
186.8
136.5
106.5
88.3
0.1
518.2
14.5%
10.6%
8.3%
6.8%
0.0%
40.2%
179.6
149.4
127.0
114.5
55.9
626.4
14.9%
12.4%
10.6%
9.5%
4.7%
52.1%
192.0
155.3
127.3
106.5
112.1
693.2
19.2%
15.5%
12.7%
10.7%
11.2%
69.3%
The Company expects revenues from these distributors to continue to represent a substantial portion of its revenue in the future. Any factor adversely affecting
the automobile industry in the PRC, or the business operations of these customers will have a material effect on the Company's business, financial position and
results of operations.
Purchase concentration of raw materials and equipment
The principal raw materials used for the Company's production of modified plastics products are plastic resins, such as polypropylene, ABS and nylon. The
Company purchases substantially all of its raw materials through 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 35.9% (three distributors), 67.3% (five distributors) and
80.0% (seven distributors) of the Company's total raw material purchases for the years ended December 31, 2017, 2016 and 2015, 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 91.0% and 99.8% of the Company's total equipment purchases for
the years ended December 31, 2016 and 2015, respectively. The Company didn't have equipment purchase from these two major equipment distributors for the
year ended December 31, 2017. 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.
F-7
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")
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
HK dollar denominated bank deposits with:
Financial institution in Hong Kong SAR
Dirham denominated bank deposits with:
Financial institution in Dubai, UAE
December 31,
2017
US$
December 31,
2016
US$
605,125,974
8280
464,427,328
7,946
121,756
17,772
1,895,508
55,206
879,012
131
11,043
20,192
18,025
1,629,199
1,810
139,201
148
53,647
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 Hong Kong 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 the Dubai, UAE are not insured by the government
authority. Total bank deposits amounted to $1,505,747 and $1,207,996 are insured as of December 31, 2017 and December 31, 2016, respectively. The
Company has not experienced any losses in uninsured bank deposits and does not believe that it is exposed to any significant risks on cash held in bank
accounts. To limit exposure to credit risk, the Company primarily places bank deposits with large financial institutions in the PRC, Hong Kong SAR, Macau
SAR and Dubai, UAE with acceptable credit rating.
Note 2 – Summary of significant accounting policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America ("U.S. GAAP").
(b) Consolidation
The accompanying consolidated financial statements include the financial statements of China XD and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated upon consolidation.
(c) Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates
and assumptions include the recoverability of the carrying amounts of property, plant and equipment, the realizability of inventories, the useful lives of property,
plant and equipment, the collectability of accounts receivable, the fair values of stock-based compensation awards and the accruals for tax uncertainties and
other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.
F-8
(d) Foreign Currency
The Company's reporting currency is the U.S. dollar (US$). 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 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.
(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, 2017 and 2016, the Company's
time deposits bear a weighted average interest rate of 1.3% and 1.3% 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 nil and US$9,917,832 as of December 31, 2017 and
2016 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$65,766,735 and US$33,673,057 as of December 31, 2017 and 2016, respectively. Upon maturity and repayment of the bills payable, which is generally
within 6 months, the cash becomes available for use by the Company. 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$59,884,913 and US$69,816,345 as of December 31, 2017 and 2016, respectively. Long-term bank deposits that are pledged as collateral for issuance of
letter of guarantee are reported as other non-current assets and amounted to nil and US$9,917,832 as of December 31, 2017 and 2016, respectively. The cash
flows from such bank deposits are reported within cash flows from financing activities in the consolidated statements of cash flows.
F-9
Short-term bank deposits that are related to government grant are reported as restricted cash and amounted to US$1,537,935 and nil as of December 31, 2017
and December 31, 2016, respectively. On February 11, 2017, the Company entered into a fund support agreement with the People's Government of Shunqing
District, Nanchong City, Sichuan Province, pursuant to which the Company was granted RMB10 million (equivalent to US$1.5 million) to support the
construction of the Sichuan plant. Such amount has been received in full in the Company's bank account with reimbursement be subject to the Government's
preapproval and will be released by the Government when the construction progress of the plant is 60%. Such balance is reported as restricted cash.
Short-term bank deposits that are pledged as collateral for foreign currency option contract are reported as restricted cash and amounted to US$2,509,871 and
nil as of December 31, 2017 and December 31, 2016, respectively. The cash flows from such bank deposits are reported within operating 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.
(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$522,153, US$468,007 and US$411,178 for the years ended December 31, 2017, 2016 and 2015, respectively,
and is included in general and administrative expenses.
F-10
(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.
(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, 2017, 2016 and 2015, 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.
(l) Cost of revenues
Cost of revenues represents costs of raw materials (including purchasing, receiving and inspection costs), packaging materials, labor, utilities, depreciation and
amortization of manufacturing facilities and warehouses, handling costs, outbound freight and inventory write-down. Depreciation and amortization of
manufacturing facilities and warehouses attributable to manufacturing activities is capitalized as part of the cost of inventory, and expensed in costs of revenues
when the inventory is sold.
F-11
(m) Selling, general and administrative expenses
Selling expenses represents primarily costs of payroll, benefits, commissions for sales representatives and advertising expenses. General and administrative
expenses represents primarily payroll and benefits costs for administrative employees, rent and operating costs of office premises, depreciation and amortization
of office facilities, and other administrative expenses.
(n) Research and Development Expense
Research and development costs are expensed as incurred.
(o) Government Grants
Government grants are recognized when there is reasonable assurance that the Company will comply with the conditions attaching to them and the grants will
be received. Government grants for the purpose of giving immediate financial support to the Company with no future related costs are recognized as other
income in the Company's consolidated statements of comprehensive income. Government grants 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.
(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, 2017, 2016 and 2015, the costs of the Company's contributions to the defined contribution plans amounted to
US$6,223,903, US$3,878,202, and US$1,788,552, respectively.
For the years ended December 31, 2017, 2016 and 2015, 64%, 70% and 77% 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.
F-12
(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.
(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.
-
allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
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
F-13
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, 2017 and 2016 are categorized as Level 2 measurement.
The fair value of foreign currency contracts as of December 31, 2017 is categorized as Level 3 measurement.
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, 2017 and 2016. 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, amounts due to a related party 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.
-
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.
Derivative liabilities on foreign currency option contracts-fair values are determined using Black-Scholes model. It considers the following significant
-
inputs: risk-free rate, foreign exchange rate and volatility.
(x) Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with
Customers (Topic 606) ("ASU 2014-09"), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that
govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. The original effective date for
ASU 2014-09 would have required the Company to adopt beginning in its first quarter of 2017. In August 2015, the FASB issued ASU No. 2015-14, Revenue
from Contracts with Customers (Topic 606) – Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for one year and permits early
adoption as early as the original effective date of ASU 2014-09. The new revenue standard may be applied retrospectively to each prior period presented ("full
retrospective method) or retrospectively with the cumulative effect recognized as of the date of adoption ("modified retrospective method"). The Company
plans to apply the modified retrospective method to those contracts that are not completed contracts on January 1, 2018 upon adoption of ASU 2014-09. The
Company has completed its evaluation by the end of 2017 and concluded that there is no impact on the retained earnings as of January 1, 2018 and there is no
material impact on its consolidated financial statements and related disclosures as a result of the new adoption of the guidance.
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASU
2016-02"), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease
liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing
arrangements. ASU 2016-02 is effective for public companies for annual reporting periods, and interim periods within those years, beginning after December
15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements.
F-14
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which addressed and provided guidance for
each of eight specific cash flow issues with the objective of reducing the existing diversity in practice. This standard will be effective for public companies for
fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has early adopted ASU 2016-15 on its consolidated
financial statements and there was no impact as a result of the adoption.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This standard
required that companies recognize the income tax consequences of an intra-entity transfer of an asset (other than inventory) when the transfer occurs. Current
guidance prohibits companies from recognizing current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside
party. This standard will be effective for public companies for annual periods beginning after December 15, 2017, including interim periods within that reporting
period. The Company has early adopted ASU 2016-16 on its consolidated financial statements and there was no impact as a result of the adoption.
Effective January 1, 2017, the Company adopted the FASB ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The standard
simplified certain aspects of the accounting for share-based payment transactions, including recognition of excess tax benefits and deficiencies, classification of
awards and classification in the statement of cash flows and forfeitures. As a result of adoption, the Company elected to estimate the number of awards that
are expected to vest. The adoption of this standard had no impact on the Company's consolidated financial statements.
Note 3 – Accounts receivable
Accounts receivable consists of the following:
Accounts receivable
Allowance for doubtful accounts
Accounts receivable, net
December 31,
2017
US$
298,909,440
(40,456)
298,868,984
2016
US$
410,087,666
(38,107)
410,049,559
As of December 31, 2017 and 2016, the accounts receivable balances also include notes receivable in the amount of US$1,181,029 and US$374,296,
respectively. As of December 31, 2017 and 2016, US$99,526,978 and US$63,301,966 respectively of accounts receivable are pledged for the short-term bank
loans.
The following table provides an analysis of the aging of accounts receivable as of December 31, 2017 and 2016:
Aging:
– current
– 1-3 months past due
– 4-6 months past due
– 7-12 months past due
– greater than one year past due
Total accounts receivable
F-15
December 31,
2017
US$
December 31,
2016
US$
259,870,056
8,299,000
30,699,928
-
40,456
298,909,440
373,108,359
36,941,200
-
-
38,107
410,087,666
The movements of the allowance for doubtful accounts are as follows:
Balance at the beginning of the year
Effect of foreign currency exchange rate changes
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, 2017, 2016 and 2015.
Note 5 – Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
Receivables from Hailezi (i)
Receivables from Jiamu (ii)
Value added taxes receivables (iii)
Advances to suppliers (iv)
Interest receivable (v)
Others (vi)
Total prepaid expenses and other current assets
Year ended December 31,
2016
2017
US$
US$
(38,107)
(2,349)
(40,456)
(40,631)
2,524
(38,107)
December 31,
2017
US$
405,731,330
18,876
15,986,476
421,736,682
2016
US$
270,605,823
157,953
10,175,232
280,939,008
December 31,
2017
US$
68,430,244
-
6,840,774
62,376,588
2,235,902
4,442,643
144,326,151
2016
US$
88,286,651
20,628,987
4,814,920
3,365,930
3,231,763
4,982,058
125,310,309
(i) In September 2016, the Company's two subsidiaries, Heilongjiang Xinda Enterprise Group Company Limited ("HLJ Xinda Group") and Sichuan Xinda
Enterprise Group Co., Ltd ("Sichuan Xinda") each entered into equipment purchase contracts with Harbin Hailezi Science and Technology Co., Ltd. ("Hailezi")
to purchase production equipment, testing equipment and storage facility. Pursuant to the contracts with Hailezi, HLJ Xinda Group and Sichuan Xinda have
prepaid RMB612.5 million (equivalent to US$88.3 million) as of December 31, 2016, which was recognized in investing activities in the statements of cash
flows. In November 2016, the three parties agreed to terminate the contracts and Hailezi agreed to refund all the prepayment. As of December 31, 2017,
Hailezi has refunded the above mentioned prepayment to HLJ Xinda Group and Sichuan Xinda.
In March 2017, Sichuan Xinda signed a series of contracts with Hailezi to purchase production equipment, and prepaid RMB1,728.9 million (equivalent
to US$264.6 million ) to Hailezi, which was recognized in investing activities in the statements of cash flows. In June 2017, the two parties agreed to partially
terminate the contracts and Hailezi agreed to refund the prepayment amounting to RMB1,704.9 million (equivalent to US$260.9 million) by the end of March
2018. For details, please refer to Note 7.
F-16
(ii) Sichuan Xinda prepaid RMB143.1 million (equivalent to US$20.6 million) to purchase equipment from Harbin Jiamu Import and Export Co., Ltd. ("Jiamu"),
in November 2016. As Harbin Jiamu Import and Export Co., Ltd. had cancelled its registration and transferred its business to Harbin Jiamu Science and
Technology Co., Ltd., Harbin Jiamu Import and Export Co., Ltd. agreed to refund the prepayment. As of December 31, 2017, Harbin Jiamu Import and Export
Co., Ltd. has refunded all the prepayment. The prepayments and refund were recognized in operating activities in the statements of cash flows.
The majority owner of Hailezi is also the majority owner of Harbin Jiamu Import and Export Co., Ltd and Harbin Jiamu Science and Technology Co., Ltd.
(collectedly "Jiamu Group"), which is one of the major equipment distributors.
(iii) Value added taxes receivables mainly represent the input taxes on purchasing equipment by Sichuan Xinda, which are to be net off with output taxes.
Value added taxes receivables were recognized in operating activities in condensed consolidated statements of cash flows.
(iv) Advances to suppliers are the advances to purchase raw materials as of December 31, 2017.
(v) Interest receivable mainly represents interest income accrued from time deposits and restricted cash.
(vi) Others mainly include prepaid miscellaneous service fee, staff advance and prepaid rental fee.
Note 6 – Property, plant and equipment, net
Property, plant and equipment consist of the following:
Machinery, equipment and furniture
Motor vehicles
Workshops and buildings
Construction in progress
Total property, plant and equipment
Less: accumulated depreciation
Property, plant and equipment, net
December 31,
2017
US$
413,551,963
2,838,540
146,595,501
439,116,574
1,002,102,578
(166,540,839)
835,561,739
2016
US$
391,149,907
2,640,477
119,503,091
409,257,584
922,551,059
(116,187,367)
806,363,692
The Company capitalized US$2,893,631, US$2,562,026, US$231,356 of interest costs as a component of the cost of construction in progress for the years
ended December 31, 2017, 2016 and 2015 respectively.
Depreciation expense on property, plant and equipment was allocated to the following expense items:
Cost of revenues
General and administrative expenses
Research and development expenses
Selling expenses
Total depreciation expense
2017
US$
Years Ended December 31,
2016
US$
2015
US$
35,758,544
2,723,839
4,047,893
3,546
42,533,822
28,245,742
1,808,284
3,720,126
2,683
33,776,835
21,980,993
1,531,389
3,615,758
894
27,129,034
F-17
Note 7 – Prepayments to equipment and construction suppliers
Hailezi (i)
Shanghai Green River (ii)
Beijin Construction (iii)
Sichuan Construction (iv)
Samim Group FZE (v)
Sports City (vi)
Others
Total Prepayments to equipment and construction suppliers
December 31,
2017
US$
December 31,
2016
US$
157,358,774
16,572,489
10,001,333
6,177,647
-
-
517,271
190,627,514
-
-
4,324,636
907,024
5,308,737
2,859,952
767,353
14,167,702
(i) On September 26, 2016 and February 28, 2017, HLJ Xinda Group entered into equipment purchase contracts with Hailezi for a total consideration of
RMB782.2 million (equivalent to US$119.7 million) to purchase storage facility and other equipment, which will be used for upgrading the storage system of
warehouse located in Harbin, China. Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB621.6 million (equivalent to US$95.1 million) as
of December 31, 2017. Due to a redesign of outdoor storage facility in June 2017, HLJ Xinda Group entered into a supplementary agreement with Hailezi,
which decreased the original contract amount to RMB283.7 million (equivalent to US$43.4 million). Hailezi refunded RMB369.1 million (equivalent to US$56.5
million) to HLJ Xinda Group on June 22, 2017. The prepayment and refund were recognized in investing activities in the statements of cash flows.
On July 21, 2017, HLJ Xinda Group entered into three investment agreements with the Management Committee of Harbin Economic- Technological
Development Zone with respect to the industrial project for 300,000 metric tons of biological composite materials, the industrial project for upgrading existing
equipment for 100,000 metric tons of engineering plastics and the industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D
printing display and experience cloud factory (the "HLJ Project"). In order to fulfill the agreements, HLJ Xinda Group entered into an equipment purchase
contract with Hailezi to purchase production equipment in November 2017, which will be used for 100,000 metric tons of engineering plastics located in Harbin,
for a consideration of RMB939.7 million (equivalent to US$143.8 million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB751.8
million (equivalent to US$115.1 million) as of December 31, 2017.
On March 17, 2017, Sichuan Xinda entered into a definitive agreement with the People's Government of Shunqing District, Nanchong City of Sichuan Province
for the production of 300,000 metric tons of bio-composite materials and additive manufacturing and 20,000 metric tons of functional masterbatch, a high-end
color additive process in plastics manufacturing ("the Nanchong Project"). The Nanchong Project will be located in a land area of 250 mu (equivalent to 41.2
acres), with 215 mu designated for bio-composite materials and additive manufacturing production and 35 mu to be designated for functional masterbatch
production. The projected total capital expenditures for the project is approximately RMB2.5 billion (estimated to be US$376.7 million) with anticipated
completion by the end of December 2018.
In connection with the Nanchong Project, Sichuan Xinda entered into equipment purchase contracts with Hailezi to purchase production equipment and testing
equipment. Pursuant to the contracts with Hailezi, Sichuan Xinda has prepaid RMB1,728.9 million (equivalent to US$264.6 million) as of December 31, 2017.
By the end of June 2017, in order to ensure the traceability of the product and management of supply chain, Sichuan Xinda expected to launch an integrated
ERP system, which resulted in the equipment to be purchased under the original contracts with Hailezi not meeting the production requirements. Hailezi agreed
to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$260.9 million) by the end of March 2018. As of December 31, 2017, Sichuan
Xinda signed a supplementary agreement with Hailezi, pursuant to the agreement, Sichuan Xinda agreed to pay RMB12.4 million (equivalent to USD1.9 million)
to Hailezi for the compensation of Hailezi due to the termination of the purchase contracts. As of December 31, 2017, Hailezi has refunded the prepayment in
the amount of RMB1,245.5 million (equivalent to US$190.6 million) and the remaining part of the prepayment has been reclassified as prepaid expenses and
other current assets, for details, please refer to Note 5.
F-18
(ii) In December, 2017, HLJ Xinda Group entered into a building purchase contract with Shanghai Caohejing Kangqiao Science & Green River Construction &
Development Co., Ltd. ("Green River") for a total consideration of RMB216.6 million (equivalent to US$33.2 million) , with a total area of 13,972.64 square
meters. According to the contract, the Company will be entitled to obtain the property by March 31, 2018 upon the 50% payment by end of 2017. The
Company is planning to use this building as the offices of the newly set up Shanghai Research and Development Center, which was established on December
27, 2017. As of December 31, 2017, the Company has prepaid RMB108.3 million (equivalent to US$16.6 million).
(iii) Since November 15, 2016, Sichuan Xinda entered into decoration contracts with Sichuan Beijin Construction Engineering Company Limited ("Beijin
Construction") to perform indoor and outdoor decoration work for a consideration of RMB237.6 million (equivalent to US$36.4 million). Pursuant to the contract
with Beijin Construction, Sichuan Xinda has prepaid RMB119.8 million (equivalent to US$18.3 million) as of December 31, 2017, in which RMB54.4 million
(equivalent to US$8.3 million) was transferred to construction in progress. The prepayment was recognized in investing activities in the statements of cash
flows.
(iv) On October 20, 2016, Sichuan Xinda entered into an equipment purchase contract with Peaceful Treasure Limited ("Peaceful") for a total consideration of
US$13.7 million to purchase certain production and testing equipment. The Company prepaid RMB33.9 million (equivalent to USD5.2M) as of December 31,
2017. The equipment will be delivered when the construction of plants and buildings of the Nanchong project completed in June 2018.
(v) On September 21, 2016, AL Composites Materials FZE ("Dubai Xinda") entered into a purchase contract with Samim Group FZE pertaining approximately
22,324 square meters property in JAFZA in Dubai, UAE with constructed building including a warehouse, office and service block for a total consideration of
AED55.3 million (equivalent to US$15.0 million). As of December 31, 2017, the Company has paid the full amount of the contract, which was recognized in
investing activities in the statements of cash flow. As of December 31, 2017, the building has been delivered, and the amount has been transferred to property,
plant and equipment.
(vi) In September 2016, Dubai Xinda entered into apartment purchase contracts with Dubai Sports City LLC ("Sports City") for a total consideration of
AED14.0 million (equivalent to US$4.0 million), which was recognized in investing activities in the statements of cash flows. As of December 31, 2017, the
apartments have been occupied by the Company, and the amount has been transferred to property, plant and equipment.
Note 8 – Other non-current assets
On November 21, 2017, HLJ Xinda Group signed a purchase contract with Xinda High-Tech Co.,Ltd. ("Xinda High-Tech") on 100% equity transfer of Xinda
High-Tech for a total consideration of RMB105 million (US$16.1 million). Pursuant to the contract, HLJ Xinda Group prepaid deposits of RMB78 million
(equivalent to US$11.9 million) in November and December, 2017, with the remaining RMB27 million (equivalent to US$4.2 million) with the thirty days of the
completion of the legal transfer. The Company is in the process of obtaining the government approval.
F-19
Note 9 – Foreign currency option contracts
On February 24, 2017, the Company entered into two foreign currency option contracts with Bank of China ("BOC"), Harbin Branch, pursuant to which the
Company and BOC both have options to excise the foreign currency contracts depending on the future currency fluctuation, and the nominal values are US$5.0
million and US$10.0 million respectively, with the defined exchange rates for settlement on March 15, 2018. Changes in fair value of the above foreign
currency options amounted to US$0.4 million and US$0.7 million, respectively, from the date of its inception to December 31, 2017 and were recognized in
earnings because they did not qualify or was designated for hedge accounting.
Note 10 – Borrowings
The Company has credit facilities with several banks under which they draw short-term and long-term bank loans as described below.
(a) Current
Unsecured loans
Loans secured by accounts receivable
Loans secured by restricted cash
Loans secured by land use right
Current portion of long-term bank loans (note b)
December 31,
2017
US$
363,319,152
68,868,415
41,500,000
30,608,184
271,101,178
2016
US$
273,147,455
50,454,086
32,474,300
-
88,681,635
Total short-term loans, including current portion of long-term bank loans
775,396,929
444,757,476
As of December 31, 2017 and 2016, the Company's short-term bank loans (including the current portion of long-term bank loans) bear a weighted average
interest rate of 4.1% and 4.0% per annum, respectively. All short-term bank loans mature at various times within one year and contain no renewal terms.
In January 2016, the Company obtained a one-year secured loan of US$16.6 million from HSBC Middle East at an annual interest rate of one-month LIBOR
(1.5678% as of December 31, 2017) plus 1.8%. This loan was secured by restricted cash of RMB25.5 million (equivalent to US$3.7 million) in the HSBC Bank
in Harbin, China. The Company repaid the loan on January 23, 2017.
In April 2016, the Company obtained ten six-month loans in a total amount of RMB350 million (equivalent to US$50.5 million) secured by accounts receivables
of RMB439.2 million (equivalent to US$63.3 million) at an annual interest rate of 4.350% from Harbin Longjiang Bank. The Company repaid the above loans in
year 2017. During year 2017, the Company obtained another fifty-six loans in a total amount of RMB1,351.0 million (equivalent to US$206.8 million) secured by
accounts receivables of RMB1,762.3 million (equivalent to US$269.7 million) at an annual interest rate of 4.350%. The Company repaid thirty-seven loans in
total RMB901.0 million (equivalent to US$137.9 million) in year 2017, and retrieved accounts receivables of RMB1,112.0 million (equivalent to US$170.2
million).
In August 2016, the Company obtained a one-year secured loan of US$13.9 million from Industrial and Commercial Bank of China (Abu Dhabi Branch) at an
interest of three-month LIBOR (1.6947% as of December 31, 2017) plus 2.0%. This loan was secured by restricted cash of RMB100.0 million (equivalent to
US$14.6 million) in the Industrial and Commercial Bank of China in Harbin, China. The interest rate is reset every three months. The company repaid the loan
in August 2017.
On October 7, 2016, the Company obtained a one-year secured loan of US$2.0 million from Bank of China (Macau Branch) at an annual interest rate of 1.8%.
The loan was secured by restricted cash of RMB15.0 million (equivalent to US$2.2 million) in Bank of China in Harbin, China. The Company repaid the loan in
September 2017 in advance, with the restricted cash remained restricted until October 2017.
In January 2017, the Company obtained a one-year secured loan of US$12.0 million from HSBC Middle East at an annual interest rate of one-month LIBOR
(1.5678% as of December 31, 2017) plus 1.8%. This loan was secured by restricted cash of RMB18.5 million (equivalent to US$2.8 million) in the HSBC Bank
in Harbin, China. The company repaid the loan in December 2017.
In January 2017, the Company obtained a one-year secured loan of US$12.0 million from Bank of China (Macau Branch) at an annual interest rate of 2.3%.
The loan was secured by restricted cash of RMB94.0 million (equivalent to US$14.1 million) in Bank of China in Harbin, China. The company repaid the loan in
December 2017.
F-20
In February 2017, the Company obtained a one-year secured loan of US$17.0 million from Bank of China (Abu Dhabi Branch) at an annual interest rate of
2.3%. The loan was secured by restricted cash of RMB136.0 million (equivalent to US$20.8 million) in Bank of China in Harbin, China.
In July 2017, the Company obtained a one-year secured loan of US$14.0 million from Bank of China (Paris Branch) at an annual interest rate of 2.5%. The
loan was secured by restricted cash of RMB107.0 million (equivalent to US$16.4 million) in Bank of China in Harbin, China.
In October 2017, the Company obtained a one-year secured loan of US$5.0 million from Bank of China (Paris Branch) at an annual interest rate of 2.5%. The
loan was secured by restricted cash of RMB37.5 million (equivalent to US$5.8 million) in Bank of China in Harbin, China.
In October 2017, the Company obtained a one-year secured loan of US$5.5 million from Bank of China (Paris Branch) at an annual interest rate of 2.5%. The
loan was secured by restricted cash of RMB42.0 million (equivalent to US$6.4 million) in Bank of China in Harbin, China.
In November 2017, the Company obtained a three-month secured short-term loan of RMB200 million (equivalent to US$30.6 million) from Nanchong Shuntou
Development Group Co., Ltd. at an annual interest rate of 4.35%. The loan was secured by one of the land use rights of RMB43.5 million (equivalent to
US$6.7 million).
(b) Non-current
Secured loans
Unsecured loans
Syndicate loan facility
Less: current portion
Total long-term bank loans, excluding current portion
December 31,
2017
US$
30,400,000
199,146,032
155,763,465
(271,101,178)
114,208,319
2016
US$
90,170,000
73,518,812
174,513,438
(88,681,635)
249,520,615
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 three-month LIBOR
(1.6947% as of December 31, 2017). The loan is secured by restricted cash of RMB110 million (equivalent to US$15.9 million). In accordance with the
requirements of the bank, additional RMB109 million (equivalent to US$15.7 million) is pledged as restricted cash for this long-term bank loan on July 22, 2016.
The Company repaid US$4 million in 2015, US$5 million on June 9, 2016, US$15 million on December 9, 2016, and US$46 million on June 9, 2017.
On January 23, 2015, the Company obtained two two-year unsecured loans in the total amount of RMB100 million (equivalent to US$14.4 million) from
Agriculture Bank of China at an annual interest rate of 6.0%. Both loans were due and repaid by the Company in January 2017.
On April 22, 2015, the Company obtained a two-year unsecured loan of RMB40 million (equivalent to US$5.8 million) from Agriculture Bank of China at an
annual interest rate of 5.75%. The Company repaid the loan on April 20, 2017.
In October and November, 2015, the Company obtained three long term unsecured loans of RMB260 million (equivalent to US$39.8 million) from Bank of
China at an annual interest rate of 4.75%. In January 2016, the Company obtained a long term unsecured loan of RMB80 million (equivalent to US$12.2
million) from Bank of China at an annual interest rate of 4.75%. On December 9, 2016, the Company obtained a long term unsecured loan of RMB30 million
(equivalent to US$4.6 million) from Bank of China at an annual interest rate of 4.75%. On March 23, 2017, the Company obtained a long term unsecured loan
of RMB25.0 million (equivalent to US$3.8 million) from Bank of China at an annual interest rate of 4.75%. The Company repaid RMB10 million (equivalent to
US$1.5 million) on April 28, 2017 and RMB40 million (equivalent to US$6.1 million) on October 28, 2017. RMB25 million (equivalent to US$3.8 million),
RMB100 million (equivalent to US$15.3 million), RMB25 million (equivalent to US$3.8 million), RMB100 million (equivalent to US$15.3 million), RMB20
million (equivalent to US$3.1 million), and RMB75 million (equivalent to US$11.5 million) will be repaid on April 28, 2018, October 28, 2018, April 28, 2019,
October 28, 2019, April 28, 2020 and October 28, 2020, respectively.
F-21
On May 13, 2016, the Company obtained two two-year secured loans of US$14.3 million from China Construction Bank (Dubai) at an interest of three-month
LIBOR (1.6947% as of December 31, 2017, 2017) plus 1.6%. On May 17, 2016, the Company obtained two two-year secured loans of US$12.3 million from
China Construction Bank (Dubai) at an interest of three-month LIBOR (1.6947% as of December 31, 2017) plus 1.6%. On May 22, 2016, the Company
obtained a two-year secured loan of US$3.8 million from China Construction Bank (Dubai) at an interest of three-month LIBOR (1.6947% as of December 31,
2017) plus 1.6%. The interest rate is reset every three months. These loans are secured by restricted cash of RMB68.8 million (equivalent to US$10.5 million).
All of these loans will be due on March 22, 2018.
On August 22, 2016, Xinda Holding (HK) Company Limited ("Xinda Holding (HK)") a wholly owned subsidiary of the Company, entered into a facility
agreement for a loan facility in an aggregate amount of US$180 million with a consortium of banks and financial institutions led by Standard Chartered Bank
(Hong Kong) Limited. The Company paid arrangement fees and legal fees in the amount of US$6.77 million of which the unamortized balance is US$1.74
million as of December 31, 2017 for the related loan. Debt issuance costs are presented on the consolidated balance sheets as a direct deduction from the
carrying amount of the loan and amortized to interest expense using the effective interest rate of 5.594% as of December 31, 2017. The Company repaid
US$22.5 million on November 22, 2017. US$22.5 million, US$45.0 million and US$90.0 million of the principal amount will be repaid on February 22, 2018, May
22, 2018 and August 22, 2018, respectively.
On November 7, 2016, the Company obtained a fifteen-month secured loan of US$3.3 million from Industrial and Commercial Bank of China (Abu Dhabi
Branch) at an annual interest rate of 2.2%. The loan is secured by restricted cash of RMB25 million (equivalent to US$3.6 million). The loan will be due on
February 7, 2018. The Company repaid the loan in October 2017 in advance.
On November 30, 2016, the Company obtained a fifteen-month secured loan of US$10.5 million from Industrial and Commercial Bank of China (Abu Dhabi
Branch) at an annual interest rate of 2.2%. The loan is secured by restricted cash of RMB80 million (equivalent to US$11.5 million). The loan will be due on
February 28, 2018. The Company repaid the loan in November 2017 in advance.
During year 2017, the Company obtained four long-term unsecured loans of RMB430 million (equivalent to US$65.8 million) from Nanchong Shuntou
Development Group Co., Ltd. at an annual interest rate of 4.35%. The repayment terms were extended and the loans will be due on December 31, 2018.
On December 1, 2017, the Company obtained a seven-year unsecured loan of RMB526.3 million (equivalent to US$80.6 million) from Longjiang Bank, Harbin
Branch at an annual interest rate of 4.9%. RMB15 million (equivalent to US$2.3 million), RMB20 million (equivalent to US$3.1 million), RMB35 million
(equivalent to US$5.4 million), RMB35 million (equivalent to US$5.4 million), RMB70 million (equivalent to US$10.7 million), RMB70 million (equivalent to
US$10.7 million), and RMB281.26 million (equivalent to US$43.0 million) will be repaid on June 30, 2019, December 30, 2019, June 30, 2020, December 30,
2020, June 30, 2021, December 30, 2021, and after 2021, respectively.
As of December 31, 2017, the Company had total lines of credit of RMB8,097.6 million (US$1,239.3 million) including unused lines of credit of RMB2,056.0
million (US$314.7 million) with remaining terms less than 12 months and RMB228.7million (US$35.0 million) with remaining terms beyond 12 months.
Certain lines of credit contain financial covenants such as total stockholders' equity, debt asset ratio, contingent liability ratio and net profit. As of December 31,
2017, the Company has met these financial covenants.
F-22
Maturities on long-term bank loans (including current portion) are as follows:
2018
2019
2020
2021
After 2021
Total
December 31, 2017
US$
271,101,178
24,486,547
25,251,753
21,425,729
43,044,290
385,309,497
Note 11 –Redemption of the senior notes
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 (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 were due to mature on February 4, 2019. Net proceeds after debt issuance costs and debt
discount in the amount of US$6.5 million 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 of 13.338% per annum.
The Notes can be redeemed prior to their maturity.
On August 29, 2016, the Company redeemed the Notes outstanding, which had an aggregate principal of US$150,000,000 and a carrying of US$147,626,121
(including accrued and unpaid interest of US$1,194,081) at a redemption price equal to 100% of the principal amount of the Notes plus the applicable
premium of US$15,382,395 and accrued and unpaid interest of US$1,223,958. The total aggregate amount paid to redeem the Notes was US$166,606,353,
which resulted in a US$18,963,834 loss on debt extinguishment.
Note 12 – Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consist of the following:
Payables for purchase of property, plant and equipment
Accrued freight expenses
Accrued interest expenses
Advance from customers (i)
Non income tax payables
Others (ii)
Total accrued expenses and other current liabilities
December 31,
2017
US$
98,791,115
10,491,635
3,997,036
8,843,649
4,002,092
12,479,982
138,605,509
December 31,
2016
US$
98,472,641
7,972,067
885,290
93,066
4,499,161
7,417,141
119,339,366
(i) Advance from customers mainly represents the advance received from five customers in the PRC for the raw material purchases during the twelve-month
ended December 31, 2017.
(ii) Others mainly represent accrued payroll and employee benefits, accrued audit and consulting fees, electricity fee and other accrued miscellaneous operating
expenses.
F-23
Note 13 – 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:
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
Amounts due to a related party:
Rental payable to Mr Han's son
2017
US$
Years Ended December 31,
2016
US$
2015
US$
-
723,769
777,248
2017
US$
2017
US$
December 31,
2016
US$
-
229,624
2016
US$
-
11,548
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$)
Period of Lease
23,894
707,543 Between January 1, 2014 and December 31, 2018
The Company rents the following facilities in Harbin, Heilongjiang province from Mr. Han's son:
Premise Leased
Facility
Area (M2)
Annual Rental
Fee (US$)
Period of Lease
200
5,922 Between August 17, 2014 and August 16, 2016
F-24
Note 14 – Income Taxes
China XD and Xinda Holding (HK) US Sub Inc. ("Xinda Holding (US) ") (collectively referred to as the "U.S. Entities") are each subject to a tax rate of 34%
before 2018 and 21% per the new tax rules beginning 2018, and file separate U.S. federal income tax returns. Xinda Holding (US) was dissolved in 2016 as a
result of the group re-organization.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted. The Tax Act has made significant changes to the U.S. Internal Revenue
Code, including the taxation of U.S. corporations, by, among other things, limiting interest deductions, reducing the U.S. corporate income tax rate, disallowing
certain deductions that had previously been allowed, altering the expensing of capital expenditures, adopting elements of a territorial tax system, assessing a
repatriation tax or "toll-charge" on undistributed earnings and profits of U.S.-owned foreign corporations, and introducing certain anti-base erosion provisions.
The Company recorded a charge of approximately US$71.0 million for the repatriation tax on deemed repatriation to the United States of accumulated
earnings. The charge for deemed repatriation will be payable by the Company over an eight-year period commencing April 2018.
US$71.0 million repatriation tax, as a provisional amount, represents the Company's reasonable estimate for income tax effects of the Tax Act, to the extent
that the Company's accounting for certain income tax effects is incomplete as additional information is needed to be prepared, analyzed and computations.
The actual impact of the U.S. Tax Reform on the Company may differ from management's estimates, and management may update the provisional amount
upon obtaining, preparing or analyzing additional information, based on its review of future regulations or guidance issued by the U.S. Department of the
Treasury, and specific actions the Company may take in the future.
Under the current laws of the British Virgin Island ("BVI"), Favor Sea (BVI) and Xinda Deluxe Faith Limited, subsidiaries of China XD, these two are 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 Holding (HK) "), (formerly known as Hong Kong Engineering
Plastics Co., Ltd.), Xinda (HK) International Trading Co., Ltd. ("Xinda Trading", liquidated in February 2015), Xinda (HONGKONG) Macromolecule Material
Limited and Xinda (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 Xinda"), a subsidiary of China XD, is exempted from income taxes.
The Company's PRC subsidiaries file separate income tax returns in the PRC. Effective from January 1, 2008, the PRC statutory income tax rate is 25%
according to the Corporate Income Tax ("CIT") Law which was passed by the National People's Congress on March 16, 2007.
Pursuant to an approval from the local tax authority in July 2013, Sichuan Xinda, 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$673,784,710 and US$546,430,378 as of December 31, 2017 and 2016, 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$206,128,306
and US$172,774,247 as of December 31, 2017 and 2016, respectively. It is not practicable to estimate the amounts of unrecognized deferred income tax
liabilities thereof.
F-25
The components of income (loss) before income taxes are as follows:
US
BVI
Hong Kong SAR
Dubai
PRC, excluding Hong Kong SAR
Total income before income taxes
2017
US$
Years Ended December 31,
2016
US$
(2,490,668)
(394)
(12,544,625)
33,354,059
103,827,741
122,146,113
(3,221,934)
(31,424,331)
(5,447,344)
54,947,200
104,181,978
119,035,569
The Company's income tax expense (benefit) recognized in the consolidated statements of comprehensive income consists of the following:
Current income tax expense-PRC
Current income tax expense-US
Deferred income tax benefit-PRC
Total income tax expense
2017
US$
Years Ended December 31,
2016
US$
21,966,937
70,965,148
(2,407,706)
90,524,379
19,715,649
-
(2,292,830)
17,422,819
2015
US$
(3,512,598)
(18,685,588)
(306,945)
34,554,739
89,920,646
101,970,254
2015
US$
20,618,211
-
(2,380,236)
18,237,975
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 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
Repatriation tax
Others
Effective income tax rate
F-26
2017
US$
Years Ended December 31,
2016
US$
2015
US$
25%
0.9%
0.1%
(6.9)%
0.2%
(4.5)%
3.1%
(3.9)%
58.1%
2.0%
74.1%
25%
0.4%
6.6%
(11.5)%
0.3%
(4.2)%
2.3%
(5.1)%
-
0.8%
14.6%
25%
-
4.6%
(8.5)%
0.4%
(4.5)%
1.2%
(2.6)%
-
2.3%
17.9%
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
Foreign currency contracts
Less: valuation allowance
Deferred income tax assets, net (included in other non-current assets)
Deferred income tax liabilities (included in other non-current liabilities):
Property, plant and equipment
December 31,
2017
US$
2016
US$
7,818,069
270,964
(7,818,069)
270,964
3,951,012
-
(3,951,012)
-
9,267,501
10,818,305
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. The Company spent a total of US$84.0 million on research and development equipment by the end of December 31, 2015, and the deferred income tax
liabilities was US$9,267,501 and US$10,818,305 as of December 31, 2017 and 2016, respectively.
The movements of the valuation allowance are as follows:
Balance at the beginning of the year
Expiration due to liquidation
Additions of valuation allowance
Reduction of valuation allowance
Balance at the end of the year
2017
US$
Years Ended December 31,
2016
US$
2015
US$
3,951,012
(86,139)
3,960,392
(7,196)
7,818,069
1,941,124
(661,144)
2,801,055
(130,023)
3,951,012
727,711
(68,070)
1,333,527
(52,044)
1,941,124
The valuation allowance as of December 31, 2017, 2016 and 2015 was primarily provided for the deferred income tax assets of certain entities, which were at
cumulative loss positions. As of December 31, 2017, for U.S. federal income tax purposes, the Company had tax loss carry forwards of (i) US$673,763 from
US Entity, of which US$153,565, US$520,617 and nil would expire by 2035, 2036 and 2037, respectively, if unused, (ii) US$18,804,872 from subsidiaries in
PRC, of which US$3,423,410, US$6,900,933 and US$8,480,529 would expire by 2020, 2021 and 2022, respectively, if unused, and (iii) US$18,298,922 from
subsidiaries in HK, which could be carried forward indefinitely to be offset against future profits. In view of the cumulative losses for the entities concerned,
100% valuation allowances were provided against their deferred income tax assets as of December 31, 2017, 2016 and 2015, which in the judgment of the
management, are not more likely than not to be realized.
F-27
A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows:
Balance at beginning of year
Increase related to current year tax positions
Balance at end of year
2017
US$
Year ended December 31,
2016
US$
2015
US$
25,929,112
8,267,958
34,197,070
21,660,307
4,268,805
25,929,112
14,609,258
7,051,049
21,660,307
At December 31, 2017, 2016 and 2015, there are US$28,149,386, US$21,547,559 and US$18,370,729 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, 2017, 2016 and 2015, the Company recognized approximately US$4,092,605, US$2,982,479, and US$1,905,191 interest expense. The Company
had approximately US$10,342,390 and US$5,757,273 for the interest accrued related to unrecognized tax benefits amounting to US$34,045,550 and
US$25,845,041 as of December 31, 2017 and 2016, respectively. The unrecognized tax benefits in 2012 amounting to US$2,934,853 and related accrued
interest amounting to US$2,432,993 was classified as current liabilities as the five-year tax assessment period will expire on May 31, 2018. US$151,520 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 2015 to 2017. 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 2015 to 2017 are open to examination by the PRC tax authorities.
Note 15 – 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, extended to the
Company RMB350 million (equivalent to US$53.6 million) to support the construction of the Sichuan plant, which has been received in full in the form of
government repayment of bank loans on behalf of the Company.
In addition, the Company has received RMB309.2 million (equivalent to US$47.3 million) from Shunqing Government and RMB6.4 million (equivalent to
US$1.0 million) from Ministry of Finance of the People's Republic of China to support the construction and RMB2.2 million (equivalent to US$0.3 million)
special funds of ministerial key research projects from Ministry of Science and Technology of PRC as of December 31, 2017.
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
condensed consolidated balance sheets, and to be recognized as other income in the condensed consolidated statements of comprehensive income over the
periods and in the proportions in which depreciation expense on the long-term assets is recognized.
F-28
The Sichuan factory has been operational since July 2016. A cumulative RMB39.4 million (equivalent to US$6.0 million) government grants have been
amortized as other income proportionate to the depreciation of the related assets, of which RMB29.9 million (equivalent to US$4.6 million) was amortized in the
year ended December 31, 2017.
The Company also received RMB36.0 million (equivalent to US$5.5 million) from Shunqing Government with respect to interest subsidy for future bank loan. A
cumulative RMB16.4 million (equivalent to US$2.5 million) government grants have been amortized as other income in line with the amount of related loan
interest paid, of which RMB1.4 million (equivalent to US$0.2 million) was amortized in the year ended December 31, 2017.
Note 16 – Other non-current liabilities
Income tax payable-noncurrent (i)
Deferred income tax liabilities (note 14)
Total other non-current liabilities
2017
US$
98,630,817
9,267,501
107,898,318
2016
US$
31,602,314
10,818,305
42,420,619
(i) Income tax payable-noncurrent represents the repatriation tax, the accumulative balance of unrecognized tax benefits since 2013 and related accrued
interest. According to the Tax Act, the management estimated the amount of U.S. tax corporate income tax is US$70,965,148 based on the deemed
repatriation to the United States of accumulated earnings mandated by the U.S. tax reform, US$11,354,425 of which will be paid in 2018 and was classified as
current liabilities. As the five-year tax assessment period for unrecognized tax benefits occurred in 2012 will expire on May 31, 2018, the unrecognized tax
benefits occurred in 2012 and related accrued interest amounting to RMB19.2 million (equivalent to US$2,934,853) and RMB15.9 million (equivalent to
US$2,432,993), respectively, were classified as current liabilities.
Note 17 – Common Stock
Pursuant to the amended Article of Incorporation dated March 12, 2009, the Company's authorized share capital is 550,000,000 shares, consisting of
500,000,000 shares of common stock (US$0.0001 par value), and 50,000,000 shares of all classes of preferred stock (US$0.0001 par value).
Note 18 – 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.
F-29
Redeemable Series D convertible preferred stock
On August 15, 2011, China XD entered into a securities purchase agreement (the "Securities Purchase Agreement") with MSPEA Modified Plastics Holding
Limited, a Cayman Islands company and an affiliate of Morgan Stanley Private Equity Asia III Holdings (Cayman) Ltd, a Cayman Islands limited liability
company ("MSPEA"), XD Engineering Plastics and Mr. Han, pursuant to which MSPEA purchased 16,000,000 shares of the Company's Series D convertible
preferred stock with par value of US$0.0001 per share (the "Series D Preferred Stock"), for a total consideration of US$100 million or US$6.25 per share. On
September 28, 2011, China XD issued 16,000,000 shares of Series D Preferred Stock and received total gross proceeds of US$100 million in cash. Net
proceeds after issuance cost were approximately US$99.1 million.
The significant terms of Series D Preferred Stock are as follows:
(i) Conversion
The holders of the Series D Preferred Stock have the right to convert all or any portion of their holdings into common stock at a price of US$6.25 per share
from January 1, 2012 through February 4, 2019, subject to adjustments for stock splits, combinations, dividends or distributions of common stock, merger and
reorganization. In addition, if the Company achieves net income as adjusted to exclude (i) all extraordinary or non-recurring gains or losses for the relevant
period, (ii) all gains or losses derived from any business operation other than the principal business of the Company or otherwise derived outside the ordinary
course of business of the Company for the relevant period, and (iii) all gains or losses attributable to the Series D Preferred Stock ("Actual Profit"), at least
RMB360 million, RMB520 million and RMB800 million in 2011, 2012 and 2013, respectively, each outstanding Series D Preferred Stock will be converted into
common stock from September 28, 2014 upon the delivery of a written notice from the Company to the holders of Series D Preferred Stock. The Company
determined that there was no embedded beneficial conversion feature attributable to the Series D Preferred Stock at the commitment date since the initial
conversion price of the Series D Preferred Stock was greater than the price of China XD's common stock.
(ii) Voting
The holders of Series D Preferred Stock have the same voting rights as the common stockholders on an "if-converted" basis. In addition, if 1,600,000 shares or
more (adjusted for any dilutive corporate actions) of Series D Preferred Stock remain outstanding, holders of Series D Preferred Stock have veto rights over
certain material corporate actions of the Company.
(iii) Dividends
Each share of Series D Preferred Stock shall be entitled to dividend or other distribution simultaneously with any dividend or distribution on any shares of the
Company's common stock as if each share of Series D Preferred Stock has been converted to common stock.
(iv) Liquidation preference
In the event of the liquidation, dissolution or winding-up of the affairs of the Company, whether voluntary or involuntary (a "Liquidation"), the holders of Series
D Preferred Stock then outstanding shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders before any
payment shall be made to the holders of shares of common stock by reason of their ownership thereof, but after any payment shall be made to the holders of
any Series B preferred stock by reason of their ownership thereof, with respect to each share of Series D Preferred Stock, an amount equal to the greater of
(i) an amount per share that would yield a total internal rate of return of 15% on the Series D Original Issuance Price, taking into account all cash dividends
and/or distributions paid by the Company and received by the holder in respect of his or her share of Series D Preferred Stock (the IRR Price); and (ii) an
amount per share as would have been payable had all shares of Series D Preferred Stock been converted into the Company's common stock pursuant to a
voluntary conversion or a mandatory conversion immediately prior to such Liquidation (without taking into account any limitations or restrictions on the
convertibility of the shares of Series D Preferred Stock).
F-30
(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 Maturity Date. The
Mandatory Redemption Price per share was US$15.25 and US$13.26 as of December 31, 2017 and 2016, respectively.
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, 2017. 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.
F-31
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$1,501,000 based on the Company's common stock price on September 28, 2011, and the probability of the Company's future financial projection and the
expected volatility of the Company's common stock.
Note 19 – Stock based compensation
Stock options issued to employees, directors and consultants
On May 26, 2009, the Board of Directors approved the adoption of the 2009 Stock Incentive Plan (the "2009 Plan"), which provides for the granting of stock
options and other stock-based awards to key employees, directors and consultants of the Company. The aggregate number of common stock which may be
issued under the 2009 Plan may not exceed 7,800,000 shares.
Nonvested shares
A summary of the nonvested shares activity for the years ended December 31, 2017, 2016, and 2015 is as follows:
Outstanding as of December 31, 2014
Granted
Vested
Forfeited
Outstanding as of December 31, 2015
Granted
Vested
Forfeited
Outstanding as of December 31, 2016
Granted
Vested
Forfeited
Outstanding as of December 31, 2017
Expected to vest as of December 31, 2017
F-32
Number of
Nonvested
Shares
647,288
203,207
(171,488)
(64,280)
614,727
-
(161,257)
(51,260)
402,210
-
(216,190)
(24,910)
161,110
137,119
Weighted
Average
Grant date Fair
Value
US$
5.00
6.00
4.40
4.65
5.54
-
4.24
5.28
6.10
-
5.12
5.60
7.49
7.49
The total fair value of shares vested during the years ended December 31, 2017, 2016, and 2015 was and US$1,106,893, US$683,106 and US$754,547,
respectively.
The Company recognized US$553,512, US$686,491 and US$813,699 of compensation expense in general and administrative expenses relating to nonvested
shares for the years ended December 31, 2017, 2016 and 2015, respectively.
As of December 31, 2017, total unrecognized compensation cost relating to nonvested shares was US$200,243, which is to be recognized over a weighted
average period of 0.6 years.
Stock options
A summary of stock options activity for the years ended December 31, 2017, 2016, 2015 is as follows.
Outstanding as of December 31, 2015
Vested
Forfeited
Outstanding as of December 31, 2016
Vested
Forfeited
Outstanding as of December 31, 2017
Number of
Options
Outstanding
Weighted
Average
Exercise Price
US$
72,000
(27,000)
(45,000)
-
-
-
-
0.24
0.24
0.24
-
-
-
-
The Company recognized negative US$151,893 of share-based compensation expense in general and administration expenses relating to stock options for the
years ended December 31, 2016 and, US$230,463 of share-based compensation expense in general and administration expenses relating to stock options for the
years ended December 31, 2015.
Note 20 – Earnings per share
Basic and diluted earnings per share are calculated as follows:
Numerator:
Net income
Less:
Earnings allocated to participating Series D convertible preferred stock
Earnings allocated to participating nonvested shares
Net income for basic and diluted earnings per share
Denominator:
Denominator for basic earnings per share
Dilutive effect of outstanding share options
Denominator for diluted earnings per share
Earnings per common share:
Basic and diluted earnings per common share
F-33
2017
US$
Years Ended December 31,
2016
US$
2015
US$
31,621,734
101,612,750
83,732,279
(7,678,801)
(139,318)
23,803,615
(24,652,636)
(817,078)
76,143,036
(20,350,826)
(770,145)
62,611,308
49,598,609
-
49,598,609
49,418,188
1,009
49,419,197
49,225,566
3,894
49,229,460
0.48
1.54
1.27
The following table summarizes potentially dilutive securities excluded from the calculation of diluted earnings per share for the years ended December 31,
2017, 2016 and 2015, because their effects are anti-dilutive:
Numerator:
Shares issuable upon conversion of Series D convertible preferred stocks
Note 21 – Statutory reserves
2017
US$
Years Ended December 31,
2016
US$
2015
US$
16,000,000
16,000,000
16,000,000
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, 2017, 2016 and 2015, China XD's subsidiaries in the PRC made appropriations to the reserve fund of RMB61,532,122
(equivalent to US$9,110,606), RMB46,947,403 (equivalent to US$7,072,842), and RMB48,174,525 (equivalent to US$7,651,365), respectively. As of December
31, 2017, 2016 and 2015, the accumulated balance of the statutory surplus reserve was RMB248,484,805 (equivalent to US$38,758,986), RMB186,952,683
(equivalent to US$29,648,380), and RMB140,005,280 (equivalent to US$22,575,538), respectively.
Note 22 – Commitments and contingencies
(1) Lease commitments
Future minimum lease payments under non-cancellable operating leases agreements as of December 31, 2017 were as follows. The Company's leases do not
contain any contingent rent payments terms.
Years ending December 31,
2018
2019
2020
2021
2022
2023 and thereafter
US$
1,381,380
873,556
769,623
695,386
656,333
7,318,130
Rental expenses incurred for operating leases of plant and equipment and office spaces were US$2,431,139, US$2,317,321 and US$1,698,088 in 2017, 2016 and
2015, 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.
F-34
(2) Sichuan plant construction and equipment purchase
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, 2017, the Company has a remaining commitment of RMB55.7 million (equivalent to US$8.5 million) mainly for facility construction.
In September 2016, Sichuan Xinda entered into equipment purchase contracts with Hailezi for a consideration of RMB17.0 million (equivalent to US$2.6
million) to purchase storage facility and testing equipment. Afterward, Sichuan Xinda cancelled two contracts with Hailezi for a consideration of RMB1.6
million (equivalent to US$0.2 million). As of December 31, 2017, Sichuan Xinda prepaid RMB6.0 million (equivalent to US$0.9 million) and has a remaining
commitment of RMB9.4 million (equivalent to US$1.5 million).
On October 20, 2016, Sichuan Xinda entered into an equipment purchase agreement purchase contract with Peaceful for a total consideration of RMB89.8
million (equivalent to US$13.7 million) to purchase certain production and testing equipment. As of December 31, 2017, the Company has a commitment of
RMB55.9 million (equivalent to US$8.5 million).
On November 15, 2016, Sichuan Xinda entered into decoration contract with Beijin Construction to perform indoor and outdoor decoration work for a
consideration of RMB237.6 million (equivalent to US$36.4 million). On February 20, 2017, Sichuan Xinda entered into another decoration contract with Beijin
Construction to perform outdoor decoration work for a consideration of RMB2.9 million (equivalent to US$0.5 million). On June 10, 2017, Sichuan Xinda
entered into another decoration contract with Beijin Construction to perform ground decoration work for a consideration of RMB23.8 million (equivalent to
US$3.6 million). As of December 31, 2017, Sichuan Xinda prepaid RMB119.8 million (equivalent to US$18.3 million) of which RMB54.4 million (equivalent to
US$8.3 million) was transferred to construction in progress and has a remaining commitment of RMB144.5 million (equivalent to US$22.2 million).
In connection with the Nanchong Project mentioned in Note 7 (i), Sichuan Xinda entered into equipment purchase contracts with Hailezi for a consideration of
RMB2,242.8 million (equivalent to US$343.2 million) to purchase production equipment and testing equipment in March 2017. By the end of June 2017,
Sichuan Xinda expected to launch an integrated ERP system, which resulted in the equipment to be purchased under the original contracts with Hailezi not
meeting the production requirements. Thus the original contracts have been terminated with the amount of RMB2,222.9 million (equivalent to US$340.2 million),
and Hailezi agreed to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$260.9 million) by the end of March 2018, out of the total
prepayment made by Sichuan Xinda of RMB1,722.9 million (equivalent to US$263.7 million). As of December 31, 2017, Sichuan Xinda signed a supplementary
agreement with Hailezi, pursuant to the agreement, Sichuan Xinda agreed to pay RMB12.4 million (equivalent to USD1.9 million) to Hailezi for the
compensation of Hailezi due to the termination of the purchase contracts. As of December 31, 2017, Hailezi has refunded the prepayment in the amount of
RMB1,245.5 million (equivalent to US$190.6 million) and the remaining part of the prepayment has been reclassified as prepaid expenses and other current
assets, for details, please refer to Note 5. As of December 31, 2017, Sichuan Xinda prepaid RMB18.0 million (equivalent to US$2.7 million) and has a
remaining commitment of RMB1.9 million (equivalent to US$0.3 million).
(3) Heilongjiang plant construction and equipment purchase
In connection with the equipment purchase contracts with Hailezi signed On September 26, 2016 and February 28, 2017 mentioned in Note 7 (i), HLJ Xinda
Group has a remaining commitment of RMB31.1 million (equivalent to US$4.8 million) as of December 31, 2017.
In connection with the "HLJ Project" mentioned in Note 7 (i), pursuant to the three investment agreements, the project total capital expenditure will be
RMB4,015.0 million (equivalent to be US$614.5 million), among which the investment in fixed assets shall be no less than RMB3,295.0 million (equivalent to
US$504.3 million) in total. Pursuant to the contracts with Hailezi signed in November, 2017 mentioned in Note 7 (i), HLJ Xinda Group has a remaining
commitment of RMB187.9 million (equivalent to US$28.7 million) as of December 31, 2017.
F-35
(4) Dubai plant construction and equipment
On April 28, 2015, Dubai Xinda 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, 2017, the Company has a remaining commitment of AED2.1 million (equivalent to US$0.6
million).
(5) Xinda CI (Beijing) office building decoration
On March 30, 2017, Xinda CI (Beijing) entered into a decoration contract with Beijing Fangyuan Decoration Engineering Co., Ltd for a total consideration of
RMB5.8 million (equivalent to US$0.9 million) to decorate office building. As of December 31, 2017, the decoration work in the amount of RMB2.0 million
(equivalent to US$0.3 million) was recorded in construction in progress. As of December 31, 2017, the Company has a remaining commitment of RMB3.8
million (equivalent to US$0.6 million).
On June 9, 2017, Xinda CI (Beijing) entered into a decoration contract with Beijing Zhonghongwufang Stone Co., Ltd for a total consideration of RMB1.2
million (equivalent to US$0.2 million) to decorate office building. As of December 31, 2017, the decoration work in the amount of RMB0.6 million (equivalent to
US$0.1 million) was recorded in construction in progress. As of December 31, 2017, the Company has a remaining commitment of RMB0.6 million (equivalent
to US$0.1 million).
(6) Xinda Shanghai Research & Development office building
In connection with the building purchase contract mentioned in Note 7 (ii), HLJ Xinda Group has a remaining commitment of RMB108.3 million (equivalent to
US$16.6 million) as of December 31, 2017.
(7) Contingencies
The Company and certain of its officers were named as defendants in two putative securities class action lawsuits filed on July 15, 2014 and July 16, 2014 in
the United States District Court for the Southern District of New York. On March 23, 2016, the Court issued an Opinion and Order dismissing the Consolidated
Class Action Complaint without prejudice. On May 6, 2016, the lead plaintiffs moved the Court for leave to amend the Consolidated Class Action Complaint.
On June 24, 2016, the Company filed its opposition to the lead plaintiffs' motion. On August 8, 2016, in conjunction with filing the reply brief in support of their
motion, the lead plaintiffs moved to strike certain documents referred to in the Company's opposition. The Company filed its opposition to the lead plaintiffs'
motion to strike on September 16, 2016. On March 8, 2017, the Court entered an Order in the Company's favor denying the lead plaintiffs' motion for leave to
amend and denying the lead plaintiffs' motion to strike. The time for the lead plaintiffs to appeal the dismissal of their lawsuits has expired. In accordance with
ASC Topic 450, no loss contingency was accrued as of December 31, 2017 since the lawsuit has been dismissed.
Note 23 – Revenues
Revenues consist of the following:
Modified Polyamide 66 (PA66)
Modified Polyamide 6 (PA6)
Plastic Alloy
Modified Polypropylene (PP)
Modified Acrylonitrile butadiene styrene (ABS)
Polyoxymethylenes (POM)
Polyphenylene Oxide (PPO)
Polylactide (PLA)
Polyethylene (PE)
Raw materials
Others
Total Revenue
2017
US$
Years Ended December 31,
2016
US$
2015
US$
286,526,792
224,086,830
363,319,049
231,255,726
43,333,667
12,008,089
17,468,208
88,644,132
22,756,186
1,049,069
-
1,290,447,748
260,107,405
280,070,036
401,664,431
178,729,819
42,121,680
13,370,532
15,315,570
2,591,856
-
2,409,070
5,298,499
1,201,678,898
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
F-36
Note 24 – 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 2017 and 2016 (in millions, except gross
margin and per share amounts):
2017:
Revenues
Gross profit
Net income
Earnings per share
Basic
Diluted
2016:
Revenues
Gross profit
Net income
Earnings per share
Basic and diluted
Fourth Quarter Third Quarter
Second Quarter
First Quarter
$
$
$
$
$
427.6 $
91.5 $
(20.5) $
(0.31) $
(0.31) $
311.4 $
47.3 $
14.1 $
0.21 $
0.21 $
313.6 $
63.1 $
28.1 $
0.43 $
0.43 $
237.8
34.8
9.9
0.15
0.15
Fourth Quarter Third Quarter
Second Quarter
First Quarter
$
$
$
$
377.8 $
82.3 $
36.7 $
331.8 $
69.6 $
20.2 $
277.1 $
60.3 $
33.3 $
0.56 $
0.31 $
0.51 $
215.0
34.8
11.4
0.17
Note 25 – Geographic Information
The following summarizes the Company's revenues from the following geographic areas (based on the location of the operating units):
Revenues (in US$ millions)
PRC
Dubai, UAE
Total
2017
US$
Years Ended December 31,
2016
US$
2015
US$
1,207.9
82.5
1,290.4
1,091.5
110.2
1,201.7
927.6
71.6
999.2
The following summarizes the Company's Long-lived assets (including Property, plant and equipment, net, Land use rights, net, Long-term prepayments to
equipment and construction suppliers and Other non-current assets) from the following geographic areas (based on the location of the operating units):
Long-lived assets (in US$ millions)
PRC
Dubai, UAE
Total
Note 26 – Subsequent Events
2017
US$
Years Ended December 31,
2016
US$
2015
US$
694.9
376.2
1,071.1
483.7
369.9
853.6
544.6
253.8
798.4
On February 2, 2018, the Company's Board of Directors approved the grant of 560,000 non-vested shares to 2 consultants at no cost, which will vest on
February 2, 2018.
F-37
This equity transfer agreement (the "Agreement") was made and entered into on November 21, 2017 in Harbin City, Heilongjiang Province, the People's
Republic of China by and between:
Equity Transfer Agreement
Exhibit 10.31
Transferor (1): Wang Yongqiang
ID No.: 23010219780502481X
Transferor (2): Liu Qiang
ID No.: 230102196212164110
(Transferor (1) and Transferor (2) shall hereinafter be individually referred to as each "Transferor" and collectively as "Transferors").
Transferee: Heilongjiang Xinda Enterprise Group Co., Ltd.
Registered Address: No. 9, Dalian North Road, Harping Road, Harbin Economic Development Zone, Heilongjiang Province
Legal Representative: Dai Rujun
WHEREAS:
1. Harbin Xinda Hi-Tech Co., Ltd. is a legally incorporated and existing limited liability company (with Wang Yongqiang as its legal representative, hereinafter
referred to as "Hi-Tech Company");
2. Each Transferor is a registered shareholder of Hi-Tech Company, with Wang Yongqiang holding 91.25% and Liu Qiang holding 8.75% equity in Hi-Tech
Company and all corresponding rights and interests (hereinafter referred to as "Transferred Equity");
3. Subject to the terms and conditions of the Agreement, each Transferor intends to transfer in whole the equity in Hi-Tech Company and all corresponding
rights and interests held by it to Transferee.
NOW THEREFORE, upon friendly and equal negotiation, the parties reached the following agreement for mutual compliance.
Section 1 Sale and Purchase
1.1 According to the terms of the Agreement and subject to the conditions of the Agreement, each Transferor agrees to transfer Transferred Equity to
Transferee;
1.2 After the completion of the equity transfer hereunder, each Transferor will no longer hold any equity in Hi-Tech Company, and Heilongjiang Xinda
Enterprise Group Co., Ltd. will hold 100% equity in Hi-Tech Company.
1.3 Transferred Equity shall include all corresponding rights and interests, and shall be free and clear of any liens, pledges, other securities, options, claims and
any other third-party rights of any nature whatsoever.
1.4 The parties agree that Transferee shall pay Transferors equity transfer price totaling Chinese Yuan ONE HUNDRED AND FIVE MILLION ONLY
(RMB 105 million), and the parties acknowledge that the transfer price shall be the entire consideration to
be received by each Transferor for the entire Transferred Equity and all corresponding rights and interests.
1.5 Within 30 days from the signing date of the Agreement, Transferee shall make the down payment of equity transfer price, Chinese Yuan SEVENTY-
EIGHT MILLION ONLY (RMB 78 million), to the account of Hi-Tech Company;
1.6 Within 30 days after the completion of the industrial & commercial and related registration procedures in connection with the equity transfer, the down
payment of equity transfer price, Chinese Yuan SEVENTY-EIGHT MILLION ONLY (RMB 78 million), shall be made to Transferors;
1.7 Within 30 days after the completion of the handover, inspection & acceptance of financial affairs, assets, and all kinds of information, Transferee shall pay
the remaining equity transfer price, Chinese Yuan TWENTY-SEVEN MILLION ONLY (RMB 27 million), to Transferors.
Section 2 Representations and Warranties
2.1 Transferors' Representations and Warranties to Transferee:
2.1.1 Transferors are the only legal owners of the subject matter of the contract and are entitled to exercise the full right to dispose of the subject matter of the
contract.
2.1.2 At any time before the date of signing of the contract, Transferors has not sign any form of legal documents with any third party in connection with, or
take any disposal of the subject matter of the contract in any other way permitted by law, such disposal includes but is not limited to transfer, pledge, entrusted
management, and assignment of all or part of the rights ancillary to the subject matter of the contract.
2.1.3 At any time after the date of signing of the contract, Transferors warrant that they will not sign any form of legal documents with any third party in
connection with, or take any disposal of the subject matter of the contract in any other way permitted by law, such disposal includes but is not limited to
transfer, pledge, entrusted management, and assignment of all or part of the rights ancillary to the subject matter of the contract.
2.1.4 At any time before and after the date of signing of the contract, Transferors warrant that the subject matter of the contract conforms and will conform
with the transferrable conditions stipulated by law and is not or will not be subject to legal restrictions due to the reason of Transferors or any other third party,
thereby affecting the normal progress of the legal procedures in connection with the equity transfer. Such non-transferrableness or restriction shall include but
not be limited to a situation in which a court legally freeze or take other legal measures against the subject of this contract.
2.1.5 After the effectiveness of the contract, Transferors shall actively assist Transferee in going through all procedures in connection with the transfer of the
subject matter of the contract, including but not limited to amending the company's articles of association, reorganizing the board of directors, and submitting
relevant equity change documents to relevant authorities.
Transferors warrant that all the materials about Hi-Tech Company provided by them to Transferee, including but not limited to materials about financial
conditions, production and operation, industrial & commercial registration, assets, project development, etc., are true and legal.
2.1.6 Transferors warrant, as of the official transfer of the entire Transferred Equity by Transferors to Transferee, that all the government licenses, approvals,
and authorizations possessed by Hi-Tech Company necessary for its normal production and operation is and will remain in full force, and that nothing that might
invalidate such government licenses, approvals, and authorizations has occurred or will occur.
2.2 Transferee's Representations and Warranties to Transferors:
2.2.1 Transferee meets and will remain meeting the statutory conditions for accepting the transfer of the subject matter of the contract as of the equity change
registration, and the normal progress of the legal procedures in connection with the equity transfer will not be affected due to the disqualification of Transferee.
2.2.2 Transferee has sufficient financial capability to acquire the subject matter of the contract, and Transferee warrants that it is able to pay the transfer price
as agreed in this contract.
Section 3 Parties' Respective Rights and Obligations
3.1 From the effective date of this contract, each Transferor will no longer own its equity in Hi-Tech Company held by it, and in respect of such equity, each
Transferor will no longer enjoy any right or assume any obligation; Transferee will, according to the provisions of relevant laws and Hi-Tech Company's articles
of association, enjoy rights and assume obligations in proportion to the equity transferred to it.
3.2 After the signing of this contract, Transferors shall, as required by Transferee, assist Transferee in registering the equity change with relevant authorities in
a timely manner according to laws and regulations.
Section 4 Confidentiality
4.1 Transferors and Transferee shall keep confidential all information obtained by them in connection with this equity transfer contract, including but not limited
to information about operation, assets, and financial conditions, trade secrets and know-hows, and others of Transferors, Transferee and Hi-Tech Company,
and no party may make public or use such information.
4.2 In making public or publicizing this equity transfer, Transferors and Transferee shall use unified words determined upon consultation to ensure that the
goodwill of no party will be harmed; without the consent of the other parties, no party may publish any speech or writing related to this equity transfer.
Section 5 Effective Date of Contract
5.1 This contract shall become effective upon satisfaction of all of the following conditions:
5.1.1 After the execution by all parties, this contract shall form as of the date first written above.
Section 6 Force Majeure
6.1 "Force Majeure" in this contract shall refer to any event that is unforeseeable, unavoidable and insurmountable and whose impact cannot be eliminated
through reasonable efforts and expenses, including but not limited to earthquakes, typhoons, floods, fires, wars, or other events recognized in international
business practices.
6.2 If a party hereto is unable to perform in whole or in part its obligations hereunder due to Force Majeure, such party may suspend the performance of such
obligations as long as the Force Majeure event lasts. After the elimination of the impact of the Force Majeure event, if requested by the other party, the
affected party shall continue to perform its unperformed obligations. Nevertheless, a party that suffers from Force Majeure and therefore proposes to suspend
the performance of its obligations must, within 15 days after becoming aware of the Force Majeure event, notify the other party in writing, describing the
nature, location, scope, possible duration of the Force Majeure, and the impact of the Force Majeure on its performance of its contractual obligations; the party
giving such notice must use its best endeavors to mitigate the impact of Force Majeure event and possible losses arising therefrom.
6.3 If the parties dispute over the occurrence of a Force Majeure event or the impact of a Force Majeure event on the performance of the contract, the party
requesting suspension of the performance of its contractual obligations shall bear the burden of proof.
6.4 If a party fails to perform the contract due to Force Majeure, it shall be exempted from liabilities for such failure in part or in whole based on the impact of
Force Majeure. Nevertheless, if the Force Majeure occurs after the party's delay of performance, it shall not be exempted from liabilities.
Section 7 Liabilities for Breach
7.1 Any party breaching its representations and warranties herein and obligations hereunder shall bear liabilities for such breach, and shall compensate for all
economic losses suffered by the other party due to such breach (if any), including, but not limited to all appraisal fees, litigation costs, and attorneys fees paid by
the other party therefor.
Section 8 Miscellaneous
8.1 Modification to Contract
Any modification to this contract must be made in writing and signed by all parties. The modified part and the added content shall constitute an integral part of
this contract.
8.2 Severability
If any provisions of this contract are found to be invalid by a court or arbitration institution with jurisdiction, the validity of other provisions shall not be affected,
and other provisions shall remain valid.
8.3 Entire Agreement
This contract shall constitute all representations and agreements between the parties and supersede all oral or written representations, warranties,
understandings and agreements made by the parties in relation to the subject matter of this contract before the signing date of this contract. All parties agree
and acknowledge that no representation or covenant not expressly set out in this contract shall constitute a part of this contract and therefore serve as the basis
for determining the parties' respective rights and obligations or interpreting the terms and conditions of this contract.
8.4 Notice
Notices hereunder shall be made in writing and delivered by mail, fax or other electronic means of communication. Such notices shall be deemed to be served
upon when arriving at the address of the recipient. If such notices are sent by mail, the date of service shall be the date of receipt indicated on the return
receipt; and if such notices are sent by fax, such notices shall be deemed to be served upon after the receipt of the confirmation message from the fax
machine.
8.5 Dispute Resolution
The parties shall first resolve through negotiation any dispute arising from or related to this contract. If such negotiation fails, the parties agree to submit such
dispute to an arbitration institution with jurisdiction.
Signed by Transferor (1):
Signed by Transferor (2):
Sealed by Heilongjiang Xinda Enterprise Group Co., Ltd.
Signed by its Legal Representative (Authorized Representative):
At Pingfang District, Harbin City, Heilongjiang Province
On November 21, 2017
Exhibit 21.1
Company Name:
China XD Plastic Company Limited
Favor Sea Limited
Xinda Holding (HK) Company Limited
Xinda (HK) Trading Company Limited
Al Composites Materials FZE
Heilongjiang Xinda Enterprise Group Company Limited
Heilongjiang Xinda Composite Materials Company Limited
Sichuan Xinda Enterprise Group Company Limited
Xinda CI (Beijng) Enterprise Management Company Limited
Harbin Meiyuan Enterprise Management Service Company Limited
Harbin Xinda Plastic New Materials Company Limited
Chongqing Wanshengxiang Macromolecule Materials Company Limited
Xinda Deluxe Faith Limited
Heilongjiang Xinda Enterprise Group Shanghai New Materials Sales Company Limited
Heilongjiang Xinda Enterprise Group (Shanghai) New Materials Research and Development
Company Limited
Heilongjiang Xinda Enterprise Group (Daqing) New Materials Industry and Trade Company
Limited
Sichuan Xinda Composite Materials Company Limited
1
2
3
4
5
6
7
8
9
10
11
12
14
15
16
17
18
Jurisdiction
Nevada, United States of America
British Virgin Islands
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
Hong Kong
People's Republic of China
People's Republic of China
People's Republic of China
People's Republic of China
* This list of subsidiaries is as of December 31, 2017.
This list of subsidiaries corrected the names of certain entities in prior years due to translation from Chinese to English.
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
China XD Plastics Company Limited:
We consent to the incorporation by reference in the registration statements (No. 333-167423 and No. 333-164027) on Form S-3/A of China XD Plastics
Company Limited of our reports dated March 15, 2018, with respect to the consolidated balance sheets of China XD Plastics Company Limited as of
December 31, 2017 and 2016, 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, 2017, and the effectiveness of internal control over financial reporting as of December 31, 2017, which reports appear in
the December 31, 2017 annual report on Form 10-K of China XD Plastics Company Limited.
Our report dated March 15, 2018, on the effectiveness of internal control over financial reporting as of December 31, 2017, expresses our opinion that China
XD Plastics Company Limited did not maintain effective internal control over financial reporting as of December 31, 2017 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 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.
/s/ KPMG Huazhen LLP
Beijing, China
March 15, 2018
Exhibit 31.1
I, Jie Han, the Chief Executive Officer of the registrant, certify that:
CERTIFICATION
(1)
I have reviewed this Annual Report on Form 10-K of China XD Plastics Company Limited, for the fiscal year ended December 31, 2017.
(2) 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;
(3) 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;
(4)
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.
b.
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
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, 2018
/s/ Jie Han
Name: Jie Han
Title: Chief Executive Officer
(Principal Executive Officer)
I, Taylor Zhang, the Chief Financial Officer of the registrant, certify that:
CERTIFICATION
Exhibit 31.2
(1)
I have reviewed this Annual Report on Form 10-K of China XD Plastics Company Limited, for the fiiscal year ended December 31, 2017.
(2) 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;
(3) 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;
(4)
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.
b.
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
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, 2018
/s/ Taylor Zhang
Name: Taylor Zhang
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED
PURSUANT TO SECTION 906 OF THE
SARBANES - OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of China XD Plastics Company Limited (the "Company”), on Form 10-K for the fiscal ended December 31, 2017
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 to my knowledge:
(1) 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
(2) 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: Jie Han
Title: Chief Executive Officer
(Principal Executive Officer)
March 15, 2018
/s/ Taylor Zhang
Name: Taylor Zhang
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)
March 15, 2018