UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2017
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _______________ to _____________
Commission File No. 001-34546
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CHINA XD PLASTICS COMPANY LIMITED
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(Exact name of registrant as specified in its charter)
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Nevada
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04-3836208
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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No. 9 Dalian North Road, Haping Road Centralized Industrial Park,
Harbin Development Zone,
Heilongjiang Province, P. R. China
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150060
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(Address of principal executive offices)
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(Zip Code)
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Registrant's telephone number, including area code: (86) 451-8434-6600
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, $0.0001
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NASDAQ Global Market
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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 ☒
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
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 ☒ 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 ☒ 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.
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Large accelerated filer ☐
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Accelerated filer ☒
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Non-accelerated filer ☐
(Do not check if a smaller reporting company)
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Smaller reporting company ☐
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
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
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PART I
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2
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Item 1
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Business
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2
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Item 1A
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Risk Factors
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48
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Item 1B
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Unresolved Staff Comments
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62
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Item 2
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Properties
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62
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Item 3
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Legal Proceedings
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64
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Item 4
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Mine Safety Disclosures
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64
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PART II
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65
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Item 5
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Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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65
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Item 6
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Selected Financial Data
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67
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Item 7
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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68
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Item 7A
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Quantitative and Qualitative Disclosures About Market Risk
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87
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Item 8
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Financial Statements and Supplementary Data
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87
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Item 9
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Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
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87
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Item 9A
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Controls and Procedures
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88
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Item 9B
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Other Information
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90
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PART III
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91
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Item 10
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Directors, Executive Officers and Corporate Governance
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91
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Item 11
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Executive Compensation
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99
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Item 12
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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112
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Item 13
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Certain Relationships and Related Transactions and Director Independence
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114
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Item 14
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Principal Accountant Fees and Services
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115
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PART IV
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116
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Item 15
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Exhibits, Financial Statement Schedules
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116
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Financial Statements
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Index to Consolidated Financial Statements
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F-1
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Report of Independent Registered Public Accounting Firm
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F-2
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Consolidated Balance Sheets
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F-3
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Consolidated Statements of Comprehensive Income
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F-4
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Consolidated Statements of Changes in Equity
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F-5
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Consolidated Statements of Cash Flows
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F-6
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Notes to the Consolidated Financial Statements
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F-7
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1
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
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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.
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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.
12
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:
|
Product Group
|
|
Number of Products Certified
|
|
Characteristics
|
Automotive or Other Application
|
|
|
Modified Polyamide 66 (PA66)
|
|
|
50
|
|
Abrasive resistance, self-lubrication, high strength, high temperature resistance, and flame resistance
|
Roof handles, door knobs, transmission connection plates, fan shrouds, glovebox assembles, engine hoods, stents baffle blocks, trajectory, fasteners, etc.
|
|
|
|
|
|
|
|
|
|
Modified Polyamide 6 (PA6)
|
|
|
40
|
|
High temperature resistance, weather resistance, high strength
|
Inner door knobs, door knobs, hand shanks, transmission connection plates, visor bases, etc.
|
|
|
|
|
|
|
|
|
|
Plastic Alloy
|
|
|
163
|
|
High impact resistance, high temperature resistance, flame resistance, platable
|
Instrument panels, instrument frames, shields, automotive center stacks, speaker covers, grids, fog light shells, battery bases, seat armrests, luggage holders, etc.
|
|
|
|
|
|
|
|
|
|
Modified Polypropylene (PP)
|
|
|
165
|
|
Non-toxic, odorless, low density, insulated, and low moisture uptake
|
Instrument panels, inner panels, columns, bumpers, air conditioner shells, door knobs, mudguards, etc.
|
|
|
|
|
|
|
|
|
|
Modified Acrylonitrile butadiene styrene (ABS)
|
|
|
23
|
|
High rigidity, low density, rigidity toughness balance, slow burn, and corrosion resistance
|
Heat dissipating grids, steering wheel shells, cup holders, seal banks, instrument panels, inner door knobs, wheel covers, etc.
|
|
|
|
|
|
|
|
|
|
Polyoxymethylenes (POM)
|
|
|
1
|
|
High strength, low moisture uptake, size stability, high glass, high temperature resistance, fatigue resistance
|
Heater fans, signal lamps switches, gas reseior covers, door knobs, hand shanks, fuel pumps, dynamic valves, accelerator pedals, rampetior elements, etc.
|
|
|
|
|
|
|
|
|
|
Polyphenylene Oxide (PPO)
|
|
|
1
|
|
High rigidity, flame retardant, abrasive resistance, pollution resistance, high temperature resistance
|
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.
|
|
|
|
|
|
|
|
|
|
Modified Polyphenylene Sulfide (PPS)
|
|
|
1
|
|
High temperature resistance, corrosion resistance, radiation resistance, flame resistance, size stability
|
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.
|
|
|
|
|
|
|
|
|
|
Modified Polylactic Acid (PLA)
|
|
|
-
|
|
Reproducible, good biological compatibility and totally degraded
|
Glove box handle, seat cover, rearview mirror shell, etc.
|
|
|
|
|
|
|
|
|
|
Modified Polyimide (PI)
|
|
|
-
|
|
Flame resistance, high strength, high temperature resistance, corrosion resistance
|
Compressor blade, piston ring, sealing washer, bushing, gear, brake block, etc.
|
|
|
|
|
|
|
|
|
|
PEEK*
|
|
|
N/A
|
|
Excellent mechanical and chemical resistance and temperature tolerance
|
Used in communications and transport electronics and electrical appliances, machinery, medical and analytical equipment
|
|
|
|
|
|
|
|
|
|
Polyethylene
|
|
|
-
|
|
Resistance to shock, low temperature resistance, excellent electrical insulation, corosion resistance
|
Agricultural film, screw cap, water pipe, gear, food packa
|
|
Total
|
|
|
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
|
Patent Name
|
Application No
|
Date
|
Status
|
|
1
|
A preparation method of polylactic acid used in auto dashboard
|
201110035716.10
|
February 11, 2011
|
Authorized
|
|
2
|
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
|
|
|
|
|
|
|
|
3
|
Supercritical fluid rapid diffusion synthesis of nano calcium carbonate enhanced microcrystalline polypropylene composites
|
200910073402.30
|
December 11, 2009
|
Authorized
|
|
|
|
|
|
|
|
4
|
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
|
|
|
|
|
|
|
|
5
|
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
|
|
|
|
|
|
|
|
6
|
A preparation method of polypropylene resin foam particles with supercritical CO2 act
|
201110230302.40
|
August 12,2011
|
Authorized
|
|
|
|
|
|
|
|
7
|
A high-powered aircraft tail composite material and its preparation process
|
201110196209.60
|
July 13, 2011
|
Authorized
|
|
|
|
|
|
|
|
8
|
A method for automotive interior low odor, low VOC, high performance polypropylene composites
|
201010258937.00
|
August 20, 2010
|
Authorized
|
|
|
|
|
|
|
|
9
|
A high-strength carbon fiber reinforced polyetheretherketone composite material and its preparation method
|
201210114931.50
|
April 20, 2012
|
Authorized
|
|
|
|
|
|
|
|
10
|
High performance halogen-free flame-retardant PC / ABS composite material and its preparation method
|
201210201826.50
|
June 19, 2012
|
Authorized
|
|
|
|
|
|
|
|
11
|
Graphene / polymer conductive composites
|
201210411231.20
|
October 25, 2012
|
Authorized
|
|
|
|
|
|
|
|
12
|
A high temperature conductive PPO/PA6 alloy material and its preparation method
|
201210241856.90
|
July 13, 2012
|
Authorized
|
|
|
|
|
|
|
|
13
|
High-performance, green flame retardant reinforced PA66 composites technology
|
201210260160.00
|
July 26, 2012
|
Authorized
|
|
|
|
|
|
|
|
14
|
An antistatic LSOH flame retardant PC / ABS alloy material and its preparation method
|
201210296750.90
|
August 20, 2012
|
Authorized
|
|
|
|
|
|
|
|
15
|
A free primer and sprayed directly on the bumper composites
|
201210306240.50
|
August 27, 2012
|
Authorized
|
|
|
|
|
|
|
|
16
|
A long glass fiber reinforced polypropylene material and its preparation method
|
201210362626.80
|
September 26, 2012
|
Authorized
|
18
|
|
|
|
|
|
|
17
|
A modified Kevlar fiber reinforced PA66 material and its preparation method
|
201210369747.50
|
September 29, 2012
|
Authorized
|
|
|
|
|
|
|
|
18
|
A high toughness wear-resistant fiberglass /PA6 composites for rail transit fasteners
|
201210396122.80
|
October 18, 2012
|
Authorized
|
|
|
|
|
|
|
|
19
|
A glass fiber reinforced poly (ethylene terephthalate) / polycarbonate alloy
|
201210403197.40
|
October 22, 2012
|
Authorized
|
|
|
|
|
|
|
|
20
|
A production method of antimicrobial, hydrophilic polypropylene particle
|
201210411680.70
|
October 25, 2012
|
Authorized
|
|
|
|
|
|
|
|
21
|
A glass fiber, SiO2 enhanced toughening polyphenylene sulfide material and its preparation method
|
201210439116.60
|
November 7, 2012
|
Authorized
|
|
|
|
|
|
|
|
22
|
A high mobility of polyvinyl alcohol / lignin WPC
|
201310203047.30
|
May 28, 2013
|
Authorized
|
|
|
|
|
|
|
|
23
|
A applied to electrostatic spraying PPO/PA6 alloy material and its preparation method
|
201310367459.00
|
August 22, 2013
|
Authorized
|
|
|
|
|
|
|
|
24
|
Preparation method of impact-resistant strain of modified polylactic acid material
|
201310468059.90
|
October 10, 2013
|
Authorized
|
|
|
|
|
|
|
|
25
|
A free spray paint bumper with modified material and preparation method
|
201310468057.X
|
October 10, 2013
|
Authorized
|
|
|
|
|
|
|
|
26
|
A stereoscopic word based on 3D printing
|
201520229477.70
|
April 16, 2015
|
Authorized
|
|
|
|
|
|
|
|
27
|
A medical chest straps based on 3D printing technology and its preparation method
|
201510290769.60
|
June 1, 2015
|
Authorized
|
|
|
|
|
|
|
|
28
|
A 3D printing withABS composite material and its preparation method
|
201610073934.70
|
February 3, 2016
|
Authorized
|
|
|
|
|
|
|
|
29
|
A kind of starch based biodegradable plastics and its preparation method
|
201610078670.40
|
February 5, 2016
|
Authorized
|
|
|
|
|
|
|
|
30
|
A high heat-resistant PC / ASA alloy material and its preparation method
|
201010508149.20
|
October 15, 2010
|
Authorized
|
|
|
|
|
|
|
|
31
|
An extrusion grade sisal fiber reinforced polypropylene composite material and its preparation process
|
201210357867.30
|
September 25, 2012
|
Authorized
|
|
|
|
|
|
|
|
32
|
A preparation method of the thermoplastic elastomers PP with high mobility and high resistance of deformation
|
201110035725.00
|
February 11, 2011
|
Pending
|
|
|
|
|
|
|
|
33
|
A special material of cooling grille with high heat resistance and high weather resistance
|
201110094466.90
|
April 15, 2011
|
Pending
|
|
|
|
|
|
|
|
34
|
A preparation method of easily dispersed and easily processimg polyprolene composite material
|
201110158511.20
|
June 14, 2011
|
Pending
|
19
|
|
|
|
|
|
|
35
|
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
|
|
|
|
|
|
|
|
36
|
A preparation method of polylactic acid used composite material modified by hydroxyapatite with supercritical water act
|
201110268687.30
|
September 13, 2011
|
Pending
|
|
|
|
|
|
|
|
37
|
Apreparation process of ABS alloy with high impact performance and high heat resistance
|
201110122586.50
|
May 12, 2011
|
Pending
|
|
|
|
|
|
|
|
38
|
A preperation process of high weathering colour ASA resin
|
201110347336.10
|
February 11, 2011
|
Pending
|
|
|
|
|
|
|
|
39
|
A high impact PA6 composite material with core-shell toughening and its preparation method
|
201110196226.X
|
July 13, 2011
|
Pending
|
|
|
|
|
|
|
|
40
|
A preparation method of polymer composites with high toughness
|
201110035736.90
|
February 11, 2011
|
Pending
|
|
|
|
|
|
|
|
41
|
A polypropylene composite material used in battery tank of new source of energy automobile and its preperation method
|
201110347320.00
|
November 7, 2011
|
Pending
|
|
|
|
|
|
|
|
42
|
A high toughness of polycarbonate blends material and its preparation method
|
201110319832.60
|
December 20, 2011
|
Pending
|
|
|
|
|
|
|
|
43
|
A preparation method of glass fiber reinforced polyether ether ketone with high strength and high heat resestance
|
201110399890.40
|
December 5, 2011
|
Pending
|
|
|
|
|
|
|
|
44
|
A preparation process of the premixed screening system
|
201110158488.70
|
June 14, 2011
|
Pending
|
|
|
|
|
|
|
|
45
|
A molding method suitable PEEK
|
201010173663.50
|
May 17, 2010
|
Pending
|
|
|
|
|
|
|
|
46
|
An anti-aging, anti-yellowing, low odor polypropylene composite material and its preparation method
|
201010508177.40
|
October 15, 2010
|
Pending
|
|
|
|
|
|
|
|
47
|
A preparation process of centralized control method used in plastic production line
|
201110122566.80
|
May 12, 2011
|
Pending
|
|
|
|
|
|
|
|
48
|
A preparation methed of the plastic production line with high performance and high honogeneity
|
201110233488.90
|
August 16, 2011
|
Pending
|
|
|
|
|
|
|
|
49
|
A rapid detection method of the impact propertie of midfide plastics used in automobile specially
|
201110158528.80
|
June 14, 2011
|
Pending
|
|
|
|
|
|
|
|
50
|
A alloy material of high-impact, high-brightness ASA
|
201010543439.00
|
November 15, 2010
|
Pending
|
|
|
|
|
|
|
|
51
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A high notched impact PA / ASA alloy material and its preparation method
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201010230061.90
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July 19, 2010
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Pending
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52
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A preparation method of SiO2/CaCO3 nano-composite particles modified polypropylene
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201010282042.00
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September 15, 2010
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Pending
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53
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Nano-ZnO filled with modified PEEK film and its preparation method
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201010258955.90
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August 20, 2010
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Pending
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54
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A method for automotive interior matte, anti-scratch modified polypropylene composites
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201010230064.20
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July 19, 2010
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Pending
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20
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55
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A microporous zeolite materials modified PEEK and its preparation method
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201010282022.30
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September 15,2010
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Pending
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56
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A lower mold shrinkage ratio method of calcium carbonate / polypropylene nanocomposites
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201010230088.80
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July 19, 2010
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Pending
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57
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A high toughnees,low warpage and low mold temperature PET/PA6 alloy reinfoced by glass fiber and preperation method
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201110347339.50
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Nobember 7, 2011
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Pending
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58
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A high impact and high flow PC / ASA alloy material and its preparation method
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201010258950.60
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August 20, 2010
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Pending
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59
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A high heat-resistant and high wear-resistant PEEX composite material and its preperation process
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201110347338.00
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Janauary 10, 2011
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Pending
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60
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A preparation method for heat-resistant and easy processing of natural fiber reinforced polylactic acid composites
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201210147444.90
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May 14, 2012
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Pending
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61
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A preparation method of high encapsulation efficiency and stable release polylactic lysozyme drug microsphere
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201210295154.90
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August 20, 2012
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Pending
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62
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A preparation methods of ultra-hydrophobic microporous polymer film
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201210358122.90
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September 25, 2012
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Pending
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63
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A mechanical strength polypropylene power lithium battery separator and its preparation method
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201210472283.00
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November 21, 2012
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Pending
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64
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A multilayer hot pressing method for preparating hydroxyapatite / polylactide composite
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201210474211.X
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November 21, 2012
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Pending
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65
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A high-impact, green flame retardant PC / ABS alloy material and its preparation process
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201210122281.90
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April 25, 2012
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Pending
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66
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A Supercritical carbon dioxide reactor pressure method for preparating polypropylene foamed material
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201210298694.20
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August 22, 2012
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Pending
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67
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An antimicrobial, dust suppression, halogen-free flame retardant ABS and its preparation process
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201210305824.00
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August 27, 2012
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Pending
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68
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A flame-retardant glass fiber reinforced PA66 and its preparation method
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201210370558.X
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September 29, 2012
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Pending
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69
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The chest protected belts
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201220526299.00
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October 15, 2012
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Pending
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70
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A non-asbestos and non-metal materials brake pads composite material and its preparation method
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201210395921.30
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October 18, 2012
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Pending
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71
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A wear-resistant, anti-static, flame retardant ultra-high molecular weight polyethylene composite material
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201210402814.90
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October 22, 2012
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Pending
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21
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72
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A high impact, high heat-resistant PC / PBT alloy material and its preparation process
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201210403095.20
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October 22, 2012
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Pending
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73
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A continuous aramid fiber reinforced POM materials and preparation methods
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201210411967.X
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October 25, 2012
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Pending
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74
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An alcohol solution PA66 material special for intake manifold and its preparation method
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201210442251.60
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November 8, 2011
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Pending
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75
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An environmentally friendly self- aromatic polypropylene material and its preparation process
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201210457403.X
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November 15, 2012
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Pending
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76
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Preparation of a glass fiber reinforced nylon 66 / nylon 6 Composites
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201310185041.80
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May 20, 2013
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Pending
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77
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An environmentally friendly foam polypropylene material and preparation method
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201310185228.80
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May 20, 2013
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Pending
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78
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An ramie fiber reinforced polypropylene composite material and its preparation process
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201310185514.40
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May 20, 2013
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Pending
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79
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One kind of resistance to warpage reinforced polyamide 6 material and preparation method
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201310250426.80
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June 24, 2013
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Pending
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80
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Preparing a polyamide material reinforced with continuous glass fibers
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201310250967.00
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June 24, 2013
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Pending
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81
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A low-cost method for preparing hydrophobic material of polypropylene
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201310250185.70
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June 24, 2013
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Pending
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82
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A polypropylene self-luminous material and preparation method
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201310250047.90
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June 24, 2013
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Pending
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83
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A preparation method of reinforced, flame-retardant ABS material
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201310367420.90
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August 22, 2013
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Pending
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84
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One kind of aramid pulp-reinforced PA66 composite material and preparation method
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201310367404.X
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August 22, 2013
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Pending
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85
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Preparation of a high-performance fiber-reinforced polyphenylene sulfide composites
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201310372289.50
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August 24, 2013
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Pending
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86
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One kind of anti-alcohol solution, low warpage reinforced nylon66 composite material and preparation method
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201310372282.30
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August 24, 2013
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Pending
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87
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A high-gloss, free paint, scratch-resistant alloy material and preparation method
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201310372789.90
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August 26, 2013
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Pending
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88
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A preparation process of heat-stable flame retardant reinforced nylon composite material
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201310413691.30
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September 12, 2013
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Pending
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89
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An anti-oxidation, high flow, flame retardant ABS and preparation process
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201310413270.00
|
September 12, 2013
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Pending
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90
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An antistatic, low smoke, flame retardant PC / ABS alloy materials and preparing process
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201310414847.X
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September 13, 2013
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Pending
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22
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|
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91
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An flax noil fiber reinforced polypropylene composite material and its preparation process
|
201310413287.60
|
September 12, 2013
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Pending
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92
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A Preparation of appling to charging pile casing PC / ABS alloy compound
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201310414007.30
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September 12, 2013
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Pending
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93
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A no-spray, high durability, scratch-resistant, flame retardant ABS Preparation and Process
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201310414024.70
|
September 12, 2013
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Pending
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94
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A direct line of long glass fiber reinforced thermoplastic composite material and its preparation method
|
201310471859.60
|
October 12, 2013
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Pending
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95
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A method for preparing an enhanced flame retardant rigid polyurethane composites
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201310467797.10
|
October 12, 2013
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Pending
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96
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A MARINE with wear-resistant ultra high molecular weight polyethylene composites
|
201310468060.10
|
October 10, 2013
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Pending
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97
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A method for preparing low temperature resistance, scratch-resistant zipper jacket compound for cars
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201310468076.20
|
October 10, 2013
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Pending
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98
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An environmentally friendly fire-retardant, high-performance EVA composite material and preparation method
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201310467812.20
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October 10, 2013
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Pending
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99
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A polypropylene foam material and preparation method
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201310559024.60
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November 13, 2013
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Pending
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100
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One kind of aramid fiber / polyimide composite material and preparation method
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201310559294.70
|
November 13, 2013
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Pending
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101
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An alloy NiMoB modified talc enhanced Bumper material and its preparation method
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201310559588.X
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November 13, 2013
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Pending
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102
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Method for preparing porous polymer composite superhydrophobic films
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201310559589.40
|
November 13, 2013
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Pending
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103
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A silicone toughening polyphenylene sulfide material and its preparation method
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201310560625.90
|
November 13, 2013
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Pending
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104
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A toughening wear-resistant alloy material and preparation method
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201310556261.70
|
November 12, 2013
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Pending
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105
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A high resistance temperature reinforced polyamide 6 material and preparation method
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201310556569.10
|
November 12, 2013
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Pending
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106
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Preparation of an aircraft engine surrounding high temperature polyimide composites
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201310555389.10
|
November 12, 2013
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Pending
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107
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Preparation of a high strength of continuous glass fiber reinforced nylon 6 material
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201310555451.70
|
November 12, 2013
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Pending
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108
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A highly weather-resistant polypropylene self-luminous material and preparation method
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201310555483.70
|
November 12, 2013
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Pending
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23
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|
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109
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A high toughness, wear-resistant rail fasteners with glass / nylon 6 Composites
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201310646768.10
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December 6, 2013
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Pending
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110
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A high-gloss, avoid spraying PTT / PMMA rearview mirror Compound and its production process
|
201310652729.20
|
December 6, 2013
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Pending
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111
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A keyboard and mouse with anti-bacterial perspiration modified plastics and its preparation method
|
201310676101.60
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December 13, 2013
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Pending
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112
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A high-strength lightweight hollow glass microspheres toughening PP material and preparation method
|
201310721731.00
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December 25, 2013
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Pending
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113
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a method for producing a heatproof polyimide composite used for aircraft engine periphery
|
201410144739.X
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April 12, 2014
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Pending
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114
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a method for producing a heatproof polyimide composite
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201410205669.40
|
May 16, 2014
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Pending
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|
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115
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An advantage of specially coupling treated carbon fibers reinforced PEEK
|
201410262651.80
|
June 13, 2014
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Pending
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|
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116
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A high dimensional stability、excellent abrasion resistance PEEK valve composite
|
201410262638.20
|
June 13, 2014
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Pending
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117
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The preparation method of a high-strength PEEK composites
|
201410262746.X
|
June 13, 2014
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Pending
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118
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A Method for preparing high performance PEEK/long glass fiber composites
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201410263606.40
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June 16, 2014
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Pending
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119
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a method for producing a polyimide composite
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201410326840.70
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July 10,2014
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Pending
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120
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Preparation of Carbon Fiber Reinforced PI Composite Material
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201410326641.60
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July 10,2014
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Pending
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|
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121
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Preparation of a high tensile strength of PEEK composites
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201410326616.80
|
July 10,2014
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Pending
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|
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122
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The prepatation of a high-strength ,high-temperature polyimide composites
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201410413832.60
|
August 21, 2014
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Pending
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123
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A high-heat-resistant,excellent in abrasion resistance sheet composite PEEK valve
|
201410413379.90
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August 21, 2014
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Pending
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124
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Preparation of PI composite material by coupling agent treated glass fiber
|
201410481809.00
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September 22, 2014
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Pending
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125
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A kind of 3D printing poly lactic acid/leather powder composite materials and its preparation method
|
201410690528.60
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November 27, 2014
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Pending
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126
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A kind of biodegradable polymer-docetaxel bonding medicine and its preparation method
|
201410690529.00
|
November 27, 2014
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Pending
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24
|
|
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127
|
A prepatation method of polyimide composite material
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201410691532.40
|
November 27, 2014
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Pending
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128
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A prepatation method of high toughness biodegradable polylactic acid foam plastics
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201410691587.50
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November 27, 2014
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Pending
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129
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A preparation of antibacterial polylactic acid fiber
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201410691901.X
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November 27, 2014
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Pending
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130
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A kind of poly lactic acid preparation method of lactide ring-opening polymerization
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201410697015.80
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November 28, 2014
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131
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A modification of PLA material and its preparation method
|
201410697822.X
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November 28, 2014
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Pending
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132
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A method of preparing high strenght PLA composites
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201410697790.30
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November 28, 2014
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Pending
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133
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A kind of twin screw reactive extrusion method ring opening polymerization preparation of PLA
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201410697838.00
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November 28, 2014
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Pending
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134
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A method of preparing high toughness PLA composites
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201410697801.80
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November 28, 2014
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Pending
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135
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A kind of organic molecule catalytic method for preparation of poly lactic acid
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201410703493.50
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November 30, 2014
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Pending
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136
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A surface treatment of carbon fiber reinforced thermoplastic polyimide composites
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201410703815.60
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November 30, 2014
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137
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A carbon fiber-reinforced thermoplastic polyimide composites
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201410703816.00
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November 30, 2014
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Pending
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138
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A prepatation method of high performance PEEK/carbon fiber composite material
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201410747379.20
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December 10, 2014
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Pending
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139
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A prepatation method of PEEK composite material
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201410746978.20
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December 10, 2014
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Pending
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140
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A ternary no return toughening copolymer of polylactic acid composite material and its preparation method
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201410747386.20
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December 10, 2014
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Pending
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141
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Sensor with high-performance fiber-reinforced PPS composites
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201410747061.40
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December 10, 2014
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Pending
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142
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Glass fiber modified wearable Polyimide
|
201410747053.X
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December 10, 2014
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Pending
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143
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An advantage of specially prepared by coupling treatment sio2 reinforced PEEK
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201410747062.90
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December 10, 2014
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144
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A high-mobility PVA/wood flour composite biomass
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201410747054.40
|
December 10, 2014
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Pending
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25
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145
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One kind of thermal evaporation method graphene Gec
|
201410746877.50
|
December 10, 2014
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Pending
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146
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A highly heat-resistant polylactic acid/Wood Flour Composites
|
201410747097.20
|
December 10, 2014
|
Pending
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147
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Preparation of an enhanced flame retardant polyurethane composites
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201410747055.90
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December 10, 2014
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Pending
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158
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A process for producing fiber reinforced PA6 dedicated 3D printing materials processing using a special method
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201410747082.60
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December 10, 2014
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149
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A preparation method of low warpage ABS special 3D printing materials
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201410746979.70
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December 10, 2014
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150
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A preparation method of impact-resistant strain of modified polylactic acid materials
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201410747377.30
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December 10, 2014
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151
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A preparation method of chemical vapor deposition method graphene films
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201410747180.X
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December 10, 2014
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152
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A process for producing acrylic polyurethane high-solids coatings
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201410747079.40
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December 10, 2014
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153
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The use of core-shell particles toughening PC and PBT resin
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201410747406.60
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December 10, 2014
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154
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A high strength,high modulus of PEEK composite material and preparation method
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201410747376.90
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December 10, 2014
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155
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A modified high-performance carbon fiber composite materials
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201410747395.10
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December 10, 2014
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156
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A kind of microfluids device prepared by the technology of 3D-printing
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201410747264.30
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December 10, 2014
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157
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A high-retardant polyvinyl alcohol/Wood Flour Composites biomass
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201410746938.80
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December 10, 2014
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158
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A method of processing aids (ACR) improved PVC materials
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201410746804.60
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December 10, 2014
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159
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A preparation method of polylactic acid film
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201410746939.20
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December 10, 2014
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160
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A compressor valve plate with a modified material and the method
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201410733902.60
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December 8, 2014
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161
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An automobile air conditioner drive gear with the modified materials and the method
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A kind of twin screw reactive extrusion method ring opening polymerization preparation of PLA
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A kind of injection molding with straw powder/PP composite wood plastic material
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275
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276
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201610117084.60
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277
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A kind of automobile sheet witn the 3D printing technology
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278
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279
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A kind of environmental protection engineering plastics for automobile
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280
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A kind of preparation of the 3D printing technology based on medical lesions
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281
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201610117079.50
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282
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A kind of PBS/carbon material composite wire used for 3D printing and its preparation method
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283
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284
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Method for preparing poly lactic acid foaming material by supercritical carbon dioxide autoclave pressure method
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285
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286
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287
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A kind of Environment friendly type poly lactic acid film and the preparation method thereof
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288
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289
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291
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292
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293
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294
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A kind of Glass fiber reinforced 3D printing plate
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295
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296
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297
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299
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302
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304
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Thermally conductive PBT composite material with shielding function and its preparation method
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305
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A kind of degradable shape memory lumen inner bracket and the preparation method thereof
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A kind of anti bending PEEK composite material
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A kind of flexible material suitable for 3D printing chest and abdomen fixing band and the preparation method thereof
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315
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A method for preparing medical lactide
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316
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A kind of functional type polyethylene film material and preparation method thereof
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320
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323
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A PBT/PC insulating thermal conductive composite materials
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328
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A kind of super toughness plank with environmental protection engineering plastic
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A kind of biomass polyethylene film and its preparation method
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A 3D printing wood plastic composite material
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A PLA material for 3D printing and its preparation
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A SLS3D printing PA-12/GB composite material
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A kind of thermal insulation flame retardant performance enhancing PBT plastics and its preparation method
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A kind of thermoplastic starch/PLA foam and its production method
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A kind of impact resistance PEEK composites
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A permanent plastic tubing special material and its preparation method
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352
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A newtype of PLA membrane material and its preparation method
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A preparation method of PLA by the lactide
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A long glass fiber reinforced nylon material preparation and mechanical properties of research
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355
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A multi-segmented polyurethane shape memory polymer material and its preparation method
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356
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A polymer gene drug carrier and its preparation method
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A modified poly lactic and preparation method thereof
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Preparation of continuous glass fiber reinforced nylon composite materials
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The invention relates to an environment - friendly film adsorption traditional tableware process and its preparation method
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A Method of Preparation of PC/ABS for 3D Printing
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A Methodfor preparing PP/SEBS for Rapid prototyping
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A Method of Preparation of High-rigidity Engineering Plastics for Pipe
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A Method for Preparing Environmental Engineering Plastics for High-strength Pipe
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Environmental protection engineering plastic for weather resistant automobile
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An eco-friendly tableware traditional film adsorption process for its preparation
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A kind of shape memory polyurethane polymer materials and its synthesis process
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A kind of containing folic acid targeted polymer drug carrier and its preparation method
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A low hardness composite material forRapid prototyping and the preparation method
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A hydrolysis modified poly lactic fiber and the preparation method
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A shock polylactic acid material preparation method
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Preparation of high content glass fiber reinforced nylon-66 composite materials
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A Method for Preparing Environmental Engineering Plastics for Weather resistance Pipe
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A Method of Preparation of Abrasion resistance Engineering Plastics for Pipe
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A kind of glass fiber reinforced PEEK/PES composite material
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A modified ABS Resin for 3D Printing and Preparation Method
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An environment - friendly Wood-plastic Composite for 3D printing
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A kind offiber reinforced composite materials for 3D printing
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Polypyrrolidone type of polymeric drug carrier micelles
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201611149041.20
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A kind of preparation method of rice husk powder / Talc Composite Reinforced starch based degradable plastics
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A kind of nylon reinforced 3D material special material and the preparation method thereof
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201610593945.80
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201610591739.30
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201610711148.50
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201610714901.60
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201610827269.60
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201610875348.40
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201610940275.20
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A high performance fiber modified polypropylene composite material and its preparation method
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A car interior with environmentally friendly scratch resistant polypropylene materials and preparation method
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A carbon fiberprepreg preleaching and preparation method
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A kind of glass fiber reinforced polypropylene base composite material preparation method
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Preparation of a glass fiber reinforced PA6/PA66Composites
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Preparation of one kind of ultra light and thin fiber reinforced skids
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201510949309.x
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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.
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Our Competitive Strengths
We believe that the following competitive strengths continue to enable us to compete effectively in the automotive modified plastics market in the PRC:
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Leading Market Position with High Barrier to Entry. We believe that we are one of the China's leading specialized manufacturers of modified plastic for automobile parts in terms of sales volume and production capacity, with a market share of approximately 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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
|
|
Common Stock
|
|||||||
|
|
High
|
Low
|
||||||
|
Fiscal Year Ending December 31, 2017
|
||||||||
|
First Quarter
|
5.03
|
3.95
|
||||||
|
Second Quarter
|
4.95
|
4.65
|
||||||
|
Third Quarter
|
4.80
|
4.50
|
||||||
|
Fourth Quarter
|
5.00
|
4.58
|
||||||
|
|
||||||||
|
Fiscal Year Ending December 31, 2016
|
||||||||
|
First Quarter
|
4.13
|
2.70
|
||||||
|
Second Quarter
|
3.86
|
2.82
|
||||||
|
Third Quarter
|
5.36
|
3.21
|
||||||
|
Fourth Quarter
|
4.70
|
3.85
|
||||||
Number of Holders
As of March 9, 2018, there were 456 record holders of our common stock.
Interwest Transfer Company Inc. is the registrar and transfer agent for our common stock. Its address is 1981 Murray Holladay Road, Suite 100, Salt Lake City, UT 84117 USA, telephone: (801) 272-9294.
Dividend Policy
We have not paid any cash dividends since our inception and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We expect to retain our earnings, if any, to provide funds for the expansion of our business. Future dividend policy will be determined periodically by the Board of Directors based upon conditions then existing, including our earnings and financial condition, capital requirements and other relevant factors.
Under current PRC regulations, wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, these foreign-invested enterprises are required to set aside certain amounts of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends. Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs.
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
|
|
12/31/2017
|
12/31/2016
|
12/31/2015
|
12/31/2014
|
12/31/2013
|
12/31/2012
|
||||||||||||||||||
|
China XD Plastics Co. Ltd.
|
$
|
120
|
$
|
105
|
$
|
116
|
$
|
142
|
$
|
138
|
$
|
100
|
||||||||||||
|
Nasdaq Composite Index
|
$
|
229
|
$
|
178
|
$
|
166
|
$
|
157
|
$
|
138
|
$
|
100
|
||||||||||||
|
Russell Small Cap Completeness Index
|
$
|
193
|
$
|
158
|
$
|
138
|
$
|
145
|
$
|
1137
|
$
|
100
|
||||||||||||
*$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).
|
|
||||||||||||||||||||
|
|
2017
|
2016
|
2015
|
2014
|
2013
|
|||||||||||||||
|
Revenues
|
$
|
1,290.4
|
$
|
1,201.7
|
$
|
999.2
|
$
|
1,110.6
|
$
|
1,050.8
|
||||||||||
|
Net income
|
$
|
31.6
|
$
|
101.6
|
$
|
83.7
|
$
|
120.7
|
$
|
133.8
|
||||||||||
|
Earnings per share
|
||||||||||||||||||||
|
- basic
|
$
|
0.48
|
$
|
1.54
|
$
|
1.27
|
$
|
1.85
|
$
|
2.08
|
||||||||||
|
- diluted
|
$
|
0.48
|
$
|
1.54
|
$
|
1.27
|
$
|
1.85
|
$
|
2.08
|
||||||||||
|
Shares used in computing earnings per share
|
||||||||||||||||||||
|
- basic
|
49,598,609
|
49,418,188
|
49,225,566
|
48,833,434
|
47,794,028
|
|||||||||||||||
|
- diluted
|
49,598,609
|
49,419,197
|
49,229,460
|
48,833,434
|
47,794,028
|
|||||||||||||||
|
Total cash, cash equivalents, restricted cash and time deposits
|
608.1
|
456.4
|
408.4
|
296.5
|
390.5
|
|||||||||||||||
|
Total Assets
|
2,544.1
|
2,126.5
|
1,752.0
|
1,299.7
|
1,075.9
|
|||||||||||||||
|
Long term bank loans
|
114.2
|
249.5
|
107.5
|
174.3
|
-
|
|||||||||||||||
|
Notes payable
|
-
|
-
|
145.6
|
148.6
|
-
|
|||||||||||||||
|
Total liabilities
|
1,733.7
|
1,394.7
|
1,076.4
|
676.8
|
566.0
|
|||||||||||||||
|
Redeemable Series D Convertible Preferred Stock
|
97.6
|
97.6
|
97.6
|
97.6
|
97.6
|
|||||||||||||||
|
Total Stockholder's equities
|
712.8
|
634.3
|
578.0
|
525.3
|
412.3
|
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
|
||||||||||||||||||||||||||||||
|
Change
|
Change
|
|||||||||||||||||||||||||||||||
|
Amount
|
%
|
%
|
Amount
|
%
|
%
|
Amount
|
%
|
|||||||||||||||||||||||||
|
Revenues
|
1,290.4
|
100
|
%
|
7.4
|
%
|
1,201.7
|
100
|
%
|
20.3
|
%
|
999.2
|
100
|
%
|
|||||||||||||||||||
|
Cost of revenues
|
(1,053.7
|
)
|
(81.7
|
)%
|
10.4
|
%
|
(954.7
|
)
|
(79.4
|
)%
|
16.7
|
%
|
(817.8
|
)
|
(81.8
|
)%
|
||||||||||||||||
|
Gross profit
|
236.7
|
18.3
|
%
|
(4.2
|
)%
|
247.0
|
20.6
|
%
|
36.2
|
%
|
181.4
|
18.2
|
%
|
|||||||||||||||||||
|
Total operating expenses
|
(78.5
|
)
|
(6.1
|
)%
|
(1.0
|
)%
|
(79.3
|
)
|
(6.6
|
)%
|
70.9
|
%
|
(46.4
|
)
|
(4.6
|
)%
|
||||||||||||||||
|
Operating income
|
158.2
|
12.2
|
%
|
(5.7
|
)%
|
167.7
|
14.0
|
%
|
24.2
|
%
|
135.0
|
13.6
|
%
|
|||||||||||||||||||
|
Income before income taxes
|
122.1
|
9.5
|
%
|
2.6
|
%
|
119.0
|
9.9
|
%
|
16.8
|
%
|
101.9
|
10.3
|
%
|
|||||||||||||||||||
|
Income tax expense
|
(90.5
|
)
|
(7.0
|
)%
|
420.1
|
%
|
(17.4
|
)
|
(1.4
|
)%
|
(4.4
|
)%
|
(18.2
|
)
|
(1.8
|
)%
|
||||||||||||||||
|
Net income
|
31.6
|
2.5
|
%
|
(68.9
|
)%
|
101.6
|
8.5
|
%
|
21.4
|
%
|
83.7
|
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)
|
Revenues
For the Years Ended December 31,
|
|||||||||||||||||||||||||||||||
|
2017
|
Change
|
2016
|
Change
|
2015
|
||||||||||||||||||||||||||||
|
Amount
|
%
|
%
|
Amount
|
%
|
%
|
Amount
|
%
|
|||||||||||||||||||||||||
|
Modified Polyamide 66 (PA66)
|
286.5
|
22.2
|
%
|
10.1
|
%
|
260.1
|
21.7
|
%
|
18.7
|
%
|
219.1
|
21.9
|
%
|
|||||||||||||||||||
|
Modified Polyamide 6 (PA6)
|
224.1
|
17.4
|
%
|
(20.0
|
)%
|
280.1
|
23.3
|
%
|
37.6
|
%
|
203.5
|
20.4
|
%
|
|||||||||||||||||||
|
Plastic Alloy
|
363.3
|
28.2
|
%
|
(9.6
|
)%
|
401.7
|
33.4
|
%
|
14.6
|
%
|
350.6
|
35.1
|
%
|
|||||||||||||||||||
|
Modified Polypropylene (PP)
|
231.3
|
17.9
|
%
|
29.4
|
%
|
178.7
|
14.9
|
%
|
8.4
|
%
|
164.8
|
16.5
|
%
|
|||||||||||||||||||
|
Modified Acrylonitrile butadiene styrene (ABS)
|
43.3
|
3.3
|
%
|
2.9
|
%
|
42.1
|
3.5
|
%
|
4.0
|
%
|
40.5
|
4.1
|
%
|
|||||||||||||||||||
|
Polyoxymethylenes (POM)
|
12.0
|
0.9
|
%
|
(10.4
|
)%
|
13.4
|
1.1
|
%
|
282.9
|
%
|
3.5
|
0.3
|
%
|
|||||||||||||||||||
|
Polyphenylene Oxide (PPO)
|
17.5
|
1.3
|
%
|
14.4
|
%
|
15.3
|
1.3
|
%
|
17.7
|
%
|
13.0
|
1.3
|
%
|
|||||||||||||||||||
|
Modified Polylactic Acid (PLA)
|
88.6
|
6.9
|
%
|
3,307.7
|
%
|
2.6
|
0.2
|
%
|
n/a
|
0.0
|
0.0
|
%
|
||||||||||||||||||||
|
Polyethylene (PE)
|
22.8
|
1.8
|
%
|
n/a
|
-
|
-
|
n/a
|
-
|
n/a
|
|||||||||||||||||||||||
|
Raw Materials
|
1.0
|
0.1
|
%
|
(58.3
|
)%
|
2.4
|
0.2
|
%
|
(29.4
|
)%
|
3.4
|
0.3
|
%
|
|||||||||||||||||||
|
Others
|
-
|
-
|
(100.0
|
)%
|
5.3
|
0.4
|
%
|
562.5
|
%
|
0.8
|
0.1
|
%
|
||||||||||||||||||||
|
Total Revenues
|
1,290.4
|
100.0
|
%
|
7.4
|
%
|
1,201.7
|
100.0
|
%
|
20.3
|
%
|
999.2
|
100.0
|
%
|
|||||||||||||||||||
The following table summarizes the breakdown of metric tons (MT) by product mix:
|
Sales Volume
For the Years Ended December 31,
|
||||||||||||||||||||||||||||||||
|
2017
|
Change
|
2016
|
Change
|
2015
|
||||||||||||||||||||||||||||
|
MT
|
%
|
%
|
MT
|
%
|
%
|
MT
|
%
|
|||||||||||||||||||||||||
|
Modified Polyamide 66 (PA66)
|
66,662
|
14.6
|
%
|
2.8
|
%
|
64,831
|
16.2
|
%
|
22.1
|
%
|
53,114
|
16.0
|
%
|
|||||||||||||||||||
|
Modified Polyamide 6 (PA6)
|
72,792
|
15.9
|
%
|
(12.5
|
)%
|
83,159
|
20.8
|
%
|
42.2
|
%
|
58,465
|
17.6
|
%
|
|||||||||||||||||||
|
Plastic Alloy
|
110,614
|
24.2
|
%
|
(10.1
|
)%
|
123,041
|
30.7
|
%
|
10.5
|
%
|
111,314
|
33.5
|
%
|
|||||||||||||||||||
|
Modified Polypropylene (PP)
|
152,630
|
33.4
|
%
|
48.6
|
%
|
102,745
|
25.7
|
%
|
16.1
|
%
|
88,508
|
26.6
|
%
|
|||||||||||||||||||
|
Modified Acrylonitrile butadiene styrene (ABS)
|
20,778
|
4.5
|
%
|
20.7
|
%
|
17,215
|
4.3
|
%
|
7.5
|
%
|
16,007
|
4.8
|
%
|
|||||||||||||||||||
|
Polyoxymethylenes (POM)
|
3,720
|
0.8
|
%
|
(15.0
|
)%
|
4,375
|
1.1
|
%
|
317.1
|
%
|
1,049
|
0.3
|
%
|
|||||||||||||||||||
|
Polyphenylene Oxide (PPO)
|
2,832
|
0.6
|
%
|
20.3
|
%
|
2,355
|
0.6
|
%
|
28.4
|
%
|
1,834
|
0.6
|
%
|
|||||||||||||||||||
|
Modified Polylactic Acid (PLA)
|
9,224
|
2.0
|
%
|
2,144.3
|
%
|
411
|
0.1
|
%
|
41000.0
|
%
|
1
|
0.0
|
%
|
|||||||||||||||||||
|
Polyethylene (PE)
|
18,133
|
4.0
|
%
|
n/a
|
-
|
-
|
n/a
|
-
|
-
|
|||||||||||||||||||||||
|
Raw materials
|
-
|
-
|
(100.0
|
)%
|
2,184
|
0.5
|
%
|
17.9
|
%
|
1,852
|
0.6
|
%
|
||||||||||||||||||||
|
Total Sales Volume
|
457,385
|
100.0
|
%
|
14.3
|
%
|
400,316
|
100.0
|
%
|
20.5
|
%
|
332,144
|
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)
|
For the Years Ended December 31,
|
|||||||||||||||
|
2017
|
Change
|
2016
|
Change
|
2015
|
||||||||||||
|
Gross Profit
|
$
|
236.7
|
(4.2
|
)%
|
$
|
247.0
|
36.2
|
%
|
$
|
181.4
|
||||||
|
Gross Margin
|
18.3
|
%
|
(2.3
|
)%
|
20.6
|
%
|
2.4
|
%
|
18.2
|
%
|
||||||
Fiscal 2017 Highlights
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)
|
For the Years Ended December 31,
|
|||||||||||||||||||
|
2017
|
Change
|
2016
|
Change
|
2015
|
||||||||||||||||
|
General and Administrative Expenses
|
$
|
38.5
|
28.3
|
%
|
$
|
30.0
|
26.1
|
%
|
$
|
23.8
|
||||||||||
|
as a percentage of revenues
|
3.0
|
%
|
0.5
|
%
|
2.5
|
%
|
0.1
|
%
|
2.4
|
%
|
||||||||||
Fiscal 2017 Highlights
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)
|
For the Years Ended December 31,
|
|||||||||||||||||||
|
2017
|
Change
|
2016
|
Change
|
2015
|
||||||||||||||||
|
Research and Development Expenses
|
$
|
36.8
|
(23.3
|
)%
|
$
|
48.0
|
127.5
|
%
|
$
|
21.1
|
||||||||||
|
as a percentage of revenues
|
2.9
|
%
|
(1.1
|
)%
|
4.0
|
%
|
1.9
|
%
|
2.1
|
%
|
||||||||||
Fiscal 2017 Highlights
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)
|
For the Years Ended December 31,
|
|||||||||||||||||||
|
2017
|
Change
|
2016
|
Change
|
2015
|
||||||||||||||||
|
Interest Income
|
$
|
5.3
|
(8.6)
|
%
|
$
|
5.8
|
(29.3)
|
%
|
$
|
8.2
|
||||||||||
|
Interest Expenses
|
(45.4
|
)
|
9.7
|
%
|
(41.4
|
)
|
(3.0)
|
%
|
(42.7
|
)
|
||||||||||
|
Net Interest Expenses
|
$
|
(40.1
|
)
|
12.6
|
%
|
$
|
(35.6
|
)
|
3.2
|
%
|
$
|
(34.5
|
)
|
|||||||
|
as a percentage of revenues
|
3.1
|
%
|
0.2
|
%
|
2.9
|
%
|
(0.6)
|
%
|
3.5
|
%
|
||||||||||
Fiscal 2017 Highlights
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)
|
For the Years Ended December 31,
|
|||||||||||||||||||
|
2017
|
Change
|
2016
|
Change
|
2015
|
||||||||||||||||
|
Foreign currency exchange gains (losses)
|
$
|
(6.5
|
)
|
(425.0
|
)%
|
$
|
2.0
|
190.9
|
%
|
$
|
(2.2
|
)
|
||||||||
|
as a percentage of revenues
|
0.5
|
%
|
0.3
|
%
|
0.2
|
%
|
0.0
|
%
|
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)
|
For the Years Ended December 31,
|
|||||||||||||||||||
|
2017
|
Change
|
2016
|
Change
|
2015
|
||||||||||||||||
|
Loss on Debt Extinguishment
|
$
|
-
|
(100.0)
|
%
|
$
|
19.0
|
n/a
|
-
|
||||||||||||
|
as a percentage of revenues
|
0.0
|
%
|
(1.6)
|
%
|
1.6
|
%
|
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)
|
For the Years Ended December 31,
|
|||||||||||||||||||
|
2017
|
Change
|
2016
|
Change
|
2015
|
||||||||||||||||
|
Income before Income Taxes
|
$
|
122.1
|
2.6
|
%
|
$
|
119.0
|
16.8
|
%
|
$
|
101.9
|
||||||||||
|
Income Tax Expense
|
(90.5
|
)
|
420.1
|
%
|
(17.4
|
)
|
(4.4
|
)%
|
(18.2
|
)
|
||||||||||
|
Effective income tax rate
|
74.1
|
%
|
59.5
|
%
|
14.6
|
%
|
(3.3
|
)%
|
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:
|
2017
|
2016
|
Change
|
||||||||||||||
|
(in millions, except percentage)
|
Amount
|
%
|
||||||||||||||
|
Cash and cash equivalents
|
190.4
|
168.1
|
22.3
|
13.3
|
%
|
|||||||||||
|
Restricted cash
|
129.7
|
103.5
|
26.2
|
25.3
|
%
|
|||||||||||
|
Time deposits
|
288.0
|
184.8
|
103.2
|
55.8
|
%
|
|||||||||||
|
Accounts receivable, net of allowance for doubtful accounts
|
298.9
|
410.0
|
(111.1
|
)
|
(27.1
|
)%
|
||||||||||
|
Inventories
|
421.7
|
280.9
|
140.8
|
50.1
|
%
|
|||||||||||
|
Prepaid expenses and other current assets
|
144.3
|
125.3
|
19.0
|
15.2
|
%
|
|||||||||||
|
Property, plant and equipment, net
|
835.6
|
806.4
|
29.2
|
3.6
|
%
|
|||||||||||
|
Land use rights, net
|
31.9
|
22.5
|
9.4
|
41.8
|
%
|
|||||||||||
|
Prepayments to equipment and construction suppliers
|
190.6
|
14.2
|
176.4
|
1,242.3
|
%
|
|||||||||||
|
Other non-current assets
|
12.9
|
10.5
|
2.4
|
22.9
|
%
|
|||||||||||
|
Total assets
|
2,544.1
|
2,126.5
|
417.6
|
19.6
|
%
|
|||||||||||
|
Short-term bank loans, including current portion of long-term bank loans
|
775.4
|
444.8
|
330.6
|
74.3
|
%
|
|||||||||||
|
Bills payable
|
252.8
|
148.4
|
104.4
|
70.4
|
%
|
|||||||||||
|
Accounts payable
|
228.0
|
320.0
|
(92.0
|
)
|
(28.8
|
)%
|
||||||||||
|
Income taxes payable, including noncurrent portion
|
108.4
|
26.7
|
81.7
|
306.0
|
%
|
|||||||||||
|
Accrued expenses and other current liabilities
|
138.6
|
119. 3
|
19.3
|
16.2
|
%
|
|||||||||||
|
Long-term bank loans, excluding current portion
|
114.2
|
249.5
|
(135.3
|
)
|
(54.2
|
)%
|
||||||||||
|
Deferred income
|
99.2
|
69.3
|
29.9
|
43.1
|
%
|
|||||||||||
|
Redeemable Series D convertible preferred stock
|
97.6
|
97.6
|
-
|
-
|
||||||||||||
|
Stockholders' equity
|
712.8
|
634.3
|
78.5
|
12.4
|
%
|
|||||||||||
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)
|
December 31, 2017
|
||||||||||||
|
Lines of Credit, Obtained
|
Remaining
Available
|
||||||||||||
|
Name of Financial Institution
|
Date of Approval
|
RMB
|
USD
|
USD
|
|||||||||
|
Bank of Longjiang, Heilongjiang
|
September 12, 2017
|
500.0
|
76.5
|
-
|
|||||||||
|
China Everbright Bank
|
July 19, 2017
|
100.0
|
15.3
|
15.3
|
|||||||||
|
China CITIC Bank
|
February 26 , 2017
|
100.0
|
15.3
|
15.3
|
|||||||||
|
Standard Chartered Bank
|
August 22, 2016
|
1,017.8
|
155.8
|
-
|
|||||||||
|
Bank of China
|
July 28, 2017
|
1,506.2
|
230.5
|
137.7
|
|||||||||
|
Industrial & Commercial Bank of China (ICBC)
|
September 18, 2017
|
1,300.0
|
199.0
|
92.8
|
|||||||||
|
Agriculture Bank of China
|
March 17, 2017
|
200.0
|
30.6
|
-
|
|||||||||
|
China Construction Bank
|
January 8, 2016
|
348.6
|
53.4
|
-
|
|||||||||
|
Kunlun Bank
|
August 23, 2017
|
20.0
|
3.1
|
-
|
|||||||||
|
Export-Import Bank of China
|
September 2, 2017
|
200.0
|
30.6
|
-
|
|||||||||
|
Bank of Communications
|
August 13, 2017
|
300.0
|
45.9
|
-
|
|||||||||
|
Postal Savings Bank of China
|
March 30, 2017
|
400.0
|
61.2
|
15.3
|
|||||||||
|
Sichuan Tianfu Bank
|
May 19, 2017
|
300.0
|
45.9
|
38.3
|
|||||||||
|
Daqing State owned assets management company
|
December 1, 2017
|
200.0
|
30.6
|
-
|
|||||||||
|
Nanchong Shuntou Development Group Ltc.
|
January 5, 2017
|
630.0
|
96.4
|
||||||||||
|
Subtotal (credit term<=1 year)
|
7,122.6
|
1,090.1
|
314.7
|
||||||||||
|
Bank of China
|
July 28, 2016
|
275.0
|
42.1
|
8.4
|
|||||||||
|
Bank of Longjiang, Heilongjiang
|
November 28, 2017
|
700.0
|
107.1
|
26.6
|
|||||||||
|
Subtotal (credit term>1 year)
|
975.0
|
149.2
|
35.0
|
||||||||||
|
Total
|
8,097.6
|
1,239.3
|
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:
|
Years Ended December 31,
|
||||||||||||
|
2017
|
2016
|
2015
|
||||||||||
|
(in millions, except percentage)
|
||||||||||||
|
Net cash provided by operating activities
|
82.7
|
84.5
|
227.4
|
|||||||||
|
Net cash used in investing activities
|
(255.3
|
)
|
(148.6
|
)
|
(280.3
|
)
|
||||||
|
Net cash provided by financing activities
|
183.6
|
121.8
|
131.7
|
|||||||||
|
Effect of foreign currency exchange rate changes on cash and cash equivalents
|
11.3
|
(9.5
|
)
|
(4.4
|
)
|
|||||||
|
Net increase (decrease) in cash and cash equivalents
|
22.3
|
48.2
|
74.4
|
|||||||||
FY 2017 Highlights
Operating Activities
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:
|
Year ended December 31, 2017
and 2016
|
Year ended December 31, 2015
|
||
|
Customer Payment Term
|
Payment in advance/up to 90 days
|
Payment in advance/up to 90 days
|
|
|
Purchase Credit Term
|
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
|
Total
|
Payment due
less than 1 year
|
1 – 3 years
|
3-5 years
|
More than 5
years
|
|||||||||||||||
|
Lease commitments
|
11,694,408
|
1,381,380
|
1,643,179
|
1,351,719
|
7,318,130
|
|||||||||||||||
|
Purchase of land use rights, plant equipment, and construction in progress (2) (3) (4) (5) (6)
|
92,354,153
|
89,054,444
|
3,299,709
|
-
|
-
|
|||||||||||||||
|
Long-term bank loans (1)
|
414,177,485
|
285,576,312
|
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.
87
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.
88
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:
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.
89
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.
90
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
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
|
Age
|
Title
|
Date of Initial Appointment
|
|||
|
Jie Han
|
52
|
Chief Executive Officer and Chairman of the Board of Directors
|
December 31, 2008
|
|||
|
Taylor Zhang
|
39
|
Chief Financial Officer and Director
|
May 14, 2009
|
|||
|
Qingwei Ma
|
43
|
Chief Operating Officer and Director
|
December 31, 2008
|
|||
|
Joseph Chow (1)(3)
|
54
|
Independent Director
|
November 16, 2017
|
|||
|
Feng Li (1)(2)(3)
|
55
|
Independent Director
|
November 14, 2012
|
|||
|
Linyuan Zhai (1)(2)(3)
|
68
|
Independent Director
|
May 14, 2009
|
|||
|
Homer Sun (2)(4)
|
46
|
Independent Director
|
January 1, 2012
|
|||
|
Jun Xu(4)
|
42
|
Independent Director
|
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.
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Committees of the Board of Directors
Our Board of Directors has an Audit Committee, a Nominating Committee, and a Compensation Committee. Our Board of Directors has determined that Lawrence W. Leighton, Feng Li, Linyuan Zhai and Homer Sun, the members of these committees, are "independent" under the current independence standards of NASDAQ Marketplace Rule 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:
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reviewing the Audit Committee's charter, annual report to stockholders and reports submitted to the SEC;
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appointing the Company's independent auditors, confirming and reviewing their independence, and approving their fees;
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reviewing the independent auditors' performance;
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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;
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following an audit, reviewing significant difficulties encountered during the audit; and
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reviewing significant disagreements among management and the independent auditors in the preparation of the Company's financial statements.
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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.
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ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The following is a discussion and analysis of our named executive officer compensation program for the year ended December 31, 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.
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We choose to pay each element of compensation in order to attract and retain necessary talent, reward annual performance (on an individual, business unit and enterprise-wide basis) and provide incentives for achieving long-term strategic goals as well as short-term objectives. The amount of each element of compensation is determined by our Compensation Committee in consultation with our CEO with respect to the other named executive officers, and, with respect to the CEO, by our Compensation Committee. Compensation decisions for all named executive officers take into account the following factors:
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Performance against corporate and individual objectives for the previous year;
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Value of skills and capabilities to support our long-term performance;
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Performance of general management responsibilities; and
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Contribution as a member of our executive management team.
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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.
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Administration of the Plan
The Board of Directors administers the Plan. However, any or all administrative functions otherwise exercisable by the Board of Directors may be delegated to a committee of the Board of Directors (the "Committee"). Members of the Committee serve for such period of time as the Board of Directors may determine and shall be subject to removal by the Board of Directors at any time. The Board of Directors may also at any time terminate the functions of the Committee and reassume all powers and authority previously delegated to the Committee. Subject to the terms of the Plan, the Board of Directors has the sole discretion to select the employees, independent contractors, and directors who will receive Awards, determine the terms and conditions of Awards, and to interpret the provisions of the Plan and outstanding Awards.
Options
The Board of Directors is able to grant nonqualified stock options and incentive stock options under the Plan. The Board of Directors determines the number of shares subject to each option. Incentive options may only be granted to employees. The aggregate fair market value of the shares of common stock for which one or more options granted to any employee under the Plan may for the first time become exercisable as incentive options during one calendar year may not exceed $100,000.
The Board of Directors determines the exercise price of options granted under the Plan, provided the exercise price (i) of incentive stock options must be at least equal to the fair market value of the common stock on the date of grant and (ii) of non-statutory stock options must be at least equal to 85% of the fair market value of the common stock on the date of grant. In addition, the exercise price of an incentive stock option granted to any participant who owns more than 10% of the total voting power of all classes of the Company's outstanding stock must be at least 110% of the fair market value of the common stock on the grant date.
The term of an option may not exceed ten years, except incentive stock options granted to an employee who is a 10% stockholder may not exceed five years.
Unless otherwise determined by the Board of Directors, after a termination of service with the Company, a participant will be able to exercise the vested portion of his or her option for (i) 90 days following his or her termination (or within such other period of time as may be specified by the Company, but in any event no later than the date of expiration of the option term) for reasons other than death, disability or misconduct, (ii) one year following his or her termination (or within such other period of time as may be specified by the Company, but in any event no later than the date of expiration of the option term) due to death or disability. Unless otherwise determined by the Board of Directors, if a participant ceases to be employed by the Company on the account of (i) termination by the Company for defined misconduct, any option held by the participant shall (A) terminate on the date on which the participant ceases to be employed by, or provide service to, the Company, or the date on which such option would otherwise expire, if earlier.
The administrator of the Plan shall have the discretion to grant options that are exercisable for unvested shares. Should the optionee's service cease while the shares issued upon the early exercise of the optionee's option are still unvested, the Company shall have the right to repurchase any or all of the unvested shares in accordance with the Plan.
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Stock Issuance
The Board of Directors may transfer shares of Company stock to a Plan participant pursuant to a stock issuance, either through the immediate purchase of such shares or as a bonus for services rendered the Company. Stock issuances will vest in accordance with the terms and conditions established by the Board of Directors in its sole discretion. The Board of Directors will determine the number of shares granted pursuant to an Award of stock. Vesting conditions on stock issuances granted to non-officer employees may not be more restrictive than 20% per year vesting, with the initial vesting to occur no later than one year after the shares are issued.
The Board of Directors shall fix the purchase price per share of stock issuance. Shares issued to 10% stockholders must not have a purchase price per share less than 100% of the fair market value per share of common stock on the date of issuance. Shares issued to other Plan participants shall not be less than 85% of the fair market value per share of common stock on the date of issuance.
The participant shall have full stockholder rights with respect to any shares of common stock issued to the participant under the Plan, whether or not the participant's interest in those shares is vested. Accordingly, the participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares.
Should the participant cease to remain in service while holding one or more unvested shares issued under the Plan or should the performance objectives not be attained with respect to one or more such unvested shares, then the Company has the right to repurchase the unvested shares at the lower of (a) the purchase price paid per share or by the participants (b) the fair market value per share on the date participant's service ceased or the performance objective was not attained. The terms upon which such repurchase right shall be exercisable shall be established by the Board of Directors and set forth in the document evidencing such repurchase right.
The Board of Directors may in its discretion waive the surrender and cancellation of one or more unvested shares (or other assets attributable thereto) which would otherwise occur upon the non-completion of the vesting schedule applicable to those shares. Such waiver shall result in the immediate vesting of the participant's interest in the shares of common stock as to which the waiver applies. Such waiver may be effectuated at any time, whether before or after the Participant's service ceases or he or she attains the applicable performance objectives.
Transferability of Awards
Except as described below, Stock Option Awards granted under the Plan are generally not transferable, and all rights with respect to a Stock Option Award granted to a participant generally will be available during a participant's lifetime only to the participant. A participant may not transfer those rights except by will or by the laws of descent and distribution. Participant may transfer non-statutory stock options to family members, or one or more trusts or other entities for the benefit of or owned by family members or to a transferee's former spouse, consistent with applicable securities laws, provided that the participant receives no consideration for the transfer of an option and the transferred option shall continue to be subject to the same terms and conditions as were applicable to the option immediately before the transfer.
The Company has the right of first refusal with respect to any proposed disposition by an optionee or a participant of any shares of common stock issued under the Plan. Such right of first refusal shall be exercisable and lapse in accordance with the terms established by the Board of Directors and set forth in the document evidencing such right.
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.
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Respectfully submitted,
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COMPENSATION COMMITTEE
|
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|
|
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Feng Li, Chairman
|
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Linyuan Zhai
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|
|
Homer Sun
Lawrence W. Leighton (until May 15, 2017)
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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
|
Name and Principal Position
|
Year
|
Salary ($)
|
Bonus ($)
|
Stock
Awards
($)
|
Option Awards
($)
|
Non-Equity Incentive Plan Compen-
sation
($)
|
Change in Pension Value and Nonqualified Deferred Compensation Earnings
($)
|
Change in Pension Value and Nonqualified Deferred Compensation Earnings
($)
|
All Other Compens-
ation
($)
|
Total
($)
|
||||||||||||||||||||||
|
Jie Han,
|
2017
|
533,025
|
385,555
|
-
|
- |
-
|
-
|
-
|
-
|
918,580
|
||||||||||||||||||||||
|
CEO
|
2016
|
451,964
|
439,478
|
-
|
- |
-
|
-
|
-
|
-
|
891,442
|
||||||||||||||||||||||
|
|
2015
|
487,913
|
-
|
-
|
- |
-
|
-
|
-
|
-
|
487,913
|
||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
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Qingwei Ma,
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2017
|
355,350
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-
|
-
|
- |
-
|
-
|
-
|
-
|
355,350
|
||||||||||||||||||||||
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COO
|
2016
|
296,127
|
303,720
|
-
|
- |
-
|
-
|
-
|
-
|
599,846
|
||||||||||||||||||||||
|
|
2015
|
268,858
|
-
|
122,844
|
- |
-
|
-
|
-
|
-
|
391,702
|
||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
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Taylor Zhang,
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2017
|
201,056
|
201,056
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-
|
- |
-
|
-
|
-
|
-
|
402,112
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||||||||||||||||||||||
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CFO
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2016
|
201,056
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201,056
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-
|
- |
-
|
-
|
-
|
-
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402,112
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||||||||||||||||||||||
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2015
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216,720
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-
|
122,844
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- |
-
|
-
|
-
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-
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339,564
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||||||||||||||||||||||
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|||||||||||||||||||||||||||||||
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Junjie Ma,
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2017
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142,140
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-
|
-
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- |
-
|
-
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-
|
-
|
142,140
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||||||||||||||||||||||
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CTO
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2016
|
115,703
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115,703
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-
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- |
-
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-
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-
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-
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231,405
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||||||||||||||||||||||
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2015
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128,948
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-
|
111,726
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- |
-
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-
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-
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-
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240,674
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||||||||||||||||||||||
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Rujun Dai
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2017
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399,769
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-
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-
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- |
-
|
-
|
-
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-
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399,769
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||||||||||||||||||||||
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General Manager of HLJ Xinda Group
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2016
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168,311
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177,170
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-
|
- |
-
|
-
|
-
|
-
|
345,481
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||||||||||||||||||||||
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2015
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55,464
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-
|
60,040
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- |
-
|
-
|
-
|
-
|
115,504
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||||||||||||||||||||||
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(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) |
All Other
Stocks Awards: Number of Shares of |
All Other
Option Awards: Number of Securities |
Exercise or
Base Price of Option |
Grant
Date Fair Value of Stock and Option Awards |
|||||||||||||||||||||||||||||||||||
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Name
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Approval
Date) (1)
|
Threshold
($) |
Target
($)
|
Maximum
($) |
Threshold
(#) |
Target
(#) |
Maximum
(#) |
Stock or
Units (#) |
Underlying
Options (#) |
Awards
($/Sh) |
Option
Awards |
||||||||||||||||||||||||||||||
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Jie Han, CEO
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-
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-
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-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
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Taylor Zhang, CFO and Secretary to the Board of Directors
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August 7, 2015
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-
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-
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-
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-
|
-
|
-
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20,440
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-
|
-
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122,844
|
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Qingwei Ma, COO
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August 7, 2015
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-
|
-
|
-
|
-
|
-
|
-
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20,440
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-
|
-
|
122,844
|
||||||||||||||||||||||||||||||
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Junjie Ma, CTO
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August 7, 2015
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-
|
-
|
-
|
-
|
-
|
-
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18,590
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-
|
-
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111,726
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||||||||||||||||||||||||||||||
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Rujun Dai
General manager of HLJ Xinda Group
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August 7, 2015
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-
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-
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-
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-
|
-
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-
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9,990
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-
|
-
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60,040
|
||||||||||||||||||||||||||||||
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(1)
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The "Grant Approval Date" is the date on which our Board of Directors approved the grant.
|
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(2)
|
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.
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(3)
|
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
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|
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Option Awards
|
|
|
Stock Awards
|
|
||||||||||||||||||||||
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Name
|
|
Number of securities underlying unexercised options (#) exercisable
|
|
|
Number of securities underlying unexercised options (#) unexercisable
|
|
|
Number of securities underlying unexercised options (#) unexercisable
|
|
|
Option exercise price ($)
|
|
|
Option expiration date
|
|
|
Number of shares or units of stock that have not vested (#)
|
|
|
Market value of stock or units of stock that have not vested ($)
|
|
|||||||
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Jie Han, CEO
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|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Taylor Zhang, CFO
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,440
|
|
|
|
128,844
|
|
|
Qingwei Ma, COO
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,440
|
|
|
|
128,844
|
|
|
Junjie Ma, CTO
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,590
|
|
|
|
111,726
|
|
|
Rujun Dai, General Manager of HLJ Xinda Group
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|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,990
|
|
|
|
60,040
|
|
Options Exercised and Stock Vested
The following table shows stock option exercises by the named executive officers during the last fiscal year, including the aggregate value realized upon exercise. This represents the excess of the fair market value, at the time of exercise, of the common stock acquired at exercise over the exercise price of the options. In addition, the table shows the number of shares of restricted stock held by the named executive officers that vested during the last fiscal year, including the aggregate value realized upon vesting.
Option Exercises and Stock Vested—Fiscal 2017
|
|
Option Awards
|
Stock Awards
|
||||||||||||||
|
Name
|
Number of
Shares
Acquired on
Exercise (#)
|
Value Realized
on Exercise ($)
|
Number of
Shares
Acquired on
Vesting (#)
|
Value Realized
on Vesting ($)
|
||||||||||||
|
Jie Han
|
-
|
-
|
-
|
-
|
||||||||||||
|
Qingwei Ma
|
-
|
-
|
-
|
-
|
||||||||||||
|
Taylor Zhang
|
-
|
-
|
-
|
-
|
||||||||||||
|
Junjie Ma
|
-
|
-
|
-
|
-
|
||||||||||||
|
Rujun Dai
|
-
|
-
|
-
|
-
|
||||||||||||
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
|
Name
|
Plan Name
|
Number of Years
Credited Service (#)
|
Present Value of
Accumulated Benefit ($)
|
Payments During
Fiscal 2017 ($)
|
||||||||||||
|
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$5,000 per month) and without stock award.
The following is a summary of the compensation paid to our non-employee directors for the year ended December 31, 2017. Our employee directors do not receive compensation for their services to the Company as directors.
DIRECTOR COMPENSATION
|
Name (1) (2)
|
Fees earned or paid in cash ($)
|
Stock awards ($)
|
Option awards ($)
|
Non-equity incentive plan compensation ($)
|
Nonqualified deferred compensation earnings ($)
|
All other compensation ($)
|
Total ($)
|
|||||||||||||||||||||
|
Lawrence Leighton (3)
|
22,420
|
-
|
-
|
-
|
-
|
-
|
22,420
|
|||||||||||||||||||||
|
Joseph Chow (3)
|
7,500
|
7,500
|
||||||||||||||||||||||||||
|
Feng Li
|
8,884
|
-
|
-
|
-
|
-
|
-
|
8,884
|
|||||||||||||||||||||
|
Linyuan Zhai
|
8,884
|
-
|
-
|
-
|
-
|
-
|
8,884
|
|||||||||||||||||||||
|
(1)
|
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.
|
|
(2)
|
Homer Sun and Jun Xu are not included in this table as they receive no compensation for serving on our Board.
|
|
(3)
|
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.
|
Plan category
|
Number of securities to be issued upon exercise of outstanding options and unvested shares
(a)
|
Weighted-average exercise price of outstanding options and unvested options
(b)
|
Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a))
(c)
|
|||||||||
|
|
||||||||||||
|
Equity compensation plan approved by security holders – 2009 Stock Option / Stock Issuance Plan
|
1,136,727
|
0.24
|
3,340,124
|
|||||||||
|
Total
|
1,136,727
|
0.24
|
3,340,124
|
|||||||||
|
(a)
|
All securities are unvested shares.
|
|
|
(b)
|
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
|
Title of Class
|
Amount and Nature of Beneficial Ownership
(1)
|
Percent of Class
(2)
|
||||||
|
Jie Han
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 938, New York, New York 10110)
|
Series B Preferred Stock
|
1,000,000
|
(3) |
100.0
|
%
|
||||
|
Jie Han
|
Common Stock
|
32,510,131
|
(3) |
65.4
|
%
|
||||
|
Qingwei Ma
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 938, New York, New York 10110)
|
Common Stock
|
91,660
|
*
|
||||||
|
Junjie Ma
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 938, New York, New York 10110)
|
Common Stock
|
78,180
|
*
|
||||||
|
Taylor Zhang
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 938, New York, New York 10110)
|
Common Stock
|
93,660
|
*
|
||||||
|
Joseph Chow
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 938, New York, New York 10110)
|
Common Stock
|
-
|
*
|
||||||
|
Linyuan Zhai
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 938, New York, New York 10110)
|
Common Stock
|
10,879
|
*
|
||||||
|
Feng Li
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 938, New York, New York 10110)
|
Common Stock
|
10,440
|
*
|
||||||
|
Rujun Dai
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 938, New York, New York 10110)
|
Common Stock
|
24,910
|
*
|
||||||
|
Kenan Gong
(address: c/o China XD Plastics Company Limited,
500 5th Avenue, Suite 938, New York, New York 10110)
|
Common Stock
|
37,520
|
*
|
||||||
|
XD. Engineering Plastics Company Limited
(address: Palm Grove House, P.O. Box 438, Road Town,
Tortola, British Virgin Islands)
|
Series B Preferred Stock
|
1,000,000
|
(3) |
100.0
|
%
|
||||
|
XD. Engineering Plastics Company Limited
|
Common Stock
|
24,382,598
|
(3) |
49.0
|
%
|
||||
|
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)
|
Series D Preferred Stock
|
16,000,000
|
(4) |
100.0
|
%
|
||||
|
Total Ownership of Common Stock by All Directors and Executive Officers as a Group
|
|
32,857,110
|
66.1
|
%
|
|||||
* Less than 1%
113
|
(1)
|
The amount of beneficial ownership includes the number of shares of common stock and/or Series B Preferred Stock and/or Series D Preferred Stock, plus, in the case of each of the executive officer and directors and all officers and directors as a group, all shares issuable upon the exercise of the options held by them, which were exercisable as of March 13, 2014 or within 60 days thereafter. Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended, and the rules promulgated by the SEC, every person who has or shares the power to vote or to dispose of shares of common stock are deemed to be the "beneficial owner" of all the shares of common stock over which any such sole or shared power exists.
|
|
(2)
|
Based upon 49,727,731 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.
|
|
(3)
|
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.
|
|
(4)
|
MSPEA Modified Plastics Holding Limited owns 16,000,000 shares of Series D Preferred Stock, representing 100% of our total outstanding Series D Preferred Stock.
|
Changes in Control
There were no arrangements, known to the Company, including any pledge by any person of securities of the Company the operation of which may at a subsequent date result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
Other than as described below, there have been no other transactions since January 1, 2013, or any currently proposed transaction, or series of similar transactions, to which the Company was or is to be a party, in which the amount involved exceeds $120,000 and in which any current or former director of officer of the Company, any 5% or greater shareholder of the Company or any member of the immediate family of any such persons had, or will have, a direct or indirect material interest other than as disclosed below.
During the years presented, the Company entered into related party transactions with (i) Xinda High-Tech, an entity controlled by the wife of Mr. Han, the chief executive officer and controlling stockholder of the Company, Ms. Limei Sun, and (ii) Mr. Han's son, Mr. Tiexin Han. In 2017, the wife of Mr. Han was no longer the director of Xinda High-Tech, therefore, Xinda High-Tech was no longer the related party of the Company.
The Company rents the following plant and office buildings in Harbin, Heilongjiang province from Xinda High-Tech.
|
Premise Leased
|
Area (M2)
|
Annual Rental Fee (US$)
|
Period of Lease
|
||||||
|
Office building
|
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
|
|
Area (M2)
|
|
|
Annual Rental Fee (US$)
|
|
Period of Lease
|
||
|
Facility
|
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.
|
|
2017
|
2016
|
||||||
|
Audit Fees
|
$
|
1,297,696
|
$
|
1,327,435
|
||||
|
Audit-Related Fees
|
-
|
-
|
||||||
|
Tax Fees
|
-
|
-
|
||||||
|
Total paid to independent public audit firms
|
$
|
1,297,696
|
$
|
1,327,435
|
||||
Audit Fees
Audit fees were paid for professional services rendered for the audit of our annual financial statements and the review of our quarterly financial statements and statutory audits. We paid or accrued expenses of US$1,297,696 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
EXHIBIT INDEX
|
Exhibit No.
|
Description of Exhibit
|
|
Incorporated by Reference Herein from the Following Filing
|
|
|
|||
117
118
119
| 10.31 | Filed herewith | ||
|
101.
|
Interactive Data Files
|
|
Filed herewith
|
* English translation
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
|
|
Title
|
Date
|
|
|
|
|
|
|
/s/ Jie Han
|
|
Chairman and Chief Executive Officer
|
March 15, 2018
|
|
Jie Han
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ Taylor Zhang
|
|
Chief Financial Officer
|
March 15, 2018
|
|
Taylor Zhang
|
|
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/ Qingwei Ma
|
|
Director
|
March 15 2018
|
|
Qingwei Ma
|
|
|
|
|
|
|
|
|
|
/s/ Joseph Chow
|
|
Director
|
March 15, 2018
|
|
Joseph Chow
|
|
|
|
|
|
|
|
|
|
/s/ Feng Li
|
|
Director
|
March 15, 2018
|
|
Feng Li
|
|
|
|
|
|
|
|
|
|
/s/ Linyuan Zhai
|
|
Director
|
March 15, 2018
|
|
Linyuan Zhai
|
|
|
|
|
|
|
|
|
|
/s/ Homer Sun
|
|
Director
|
March 15, 2018
|
|
Homer Sun
|
|
|
|
|
|
|
|
|
|
/s/ Jun Xu
|
|
Director
|
March 15, 2018
|
|
Jun Xu
|
|
|
|
121
FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
|
Page
|
||||
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
|||
|
Consolidated Financial Statements:
|
||||
|
Consolidated Balance Sheets as of December 31, 2017 and 2016
|
F-3
|
|||
|
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015
|
F-4
|
|||
|
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2017, 2016 and 2015
|
F-5
|
|||
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
|
F-6
|
|||
|
Notes to the Consolidated Financial Statements
|
F-7
|
|||
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
China XD Plastics Company Limited:
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
|
2016
|
|||||||
|
US$
|
US$
|
|||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
190,392,211
|
168,086,445
|
||||||
|
Restricted cash
|
129,699,454
|
103,489,402
|
||||||
|
Time deposits
|
288,023,017
|
184,806,112
|
||||||
|
Accounts receivable, net of allowance for doubtful accounts
|
298,868,984
|
410,049,559
|
||||||
|
Amounts due from a related party
|
-
|
229,624
|
||||||
|
Inventories
|
421,736,682
|
280,939,008
|
||||||
|
Prepaid expenses and other current assets
|
144,326,151
|
125,310,309
|
||||||
|
Total current assets
|
1,473,046,499
|
1,272,910,459
|
||||||
|
Property, plant and equipment, net
|
835,561,739
|
806,363,692
|
||||||
|
Land use rights, net
|
31,943,652
|
22,536,397
|
||||||
|
Long-term prepayments to equipment and construction suppliers
|
190,627,514
|
14,167,702
|
||||||
|
Other non-current assets
|
12,924,279
|
10,521,949
|
||||||
|
Total assets
|
2,544,103,683
|
2,126,500,199
|
||||||
|
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Short-term bank loans, including current portion of long-term bank loans
|
775,396,929
|
444,757,476
|
||||||
|
Bills payable
|
252,768,510
|
148,392,677
|
||||||
|
Accounts payable
|
227,993,140
|
320,013,040
|
||||||
|
Amounts due to a related party
|
-
|
11,548
|
||||||
|
Income taxes payable
|
17,710,217
|
897,625
|
||||||
|
Accrued expenses and other current liabilities
|
138,605,509
|
119,339,366
|
||||||
|
Total current liabilities
|
1,412,474,305
|
1,033,411,732
|
||||||
|
Long-term bank loans, excluding current portion
|
114,208,319
|
249,520,615
|
||||||
|
Deferred income
|
99,168,276
|
69,311,102
|
||||||
|
Other non-current liabilities
|
107,898,318
|
42,420,619
|
||||||
|
Total liabilities
|
1,733,749,218
|
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)
|
97,576,465
|
97,576,465
|
||||||
|
Stockholders' equity:
|
||||||||
|
Series B preferred stock
|
100
|
100
|
||||||
|
Common stock, US$0.0001 par value, 500,000,000 shares authorized, 49,748,731 shares and 49,532,541 shares issued, 49,727,731 shares and 49,511,541 shares outstanding as of December 31, 2017 and 2016, respectively
|
4,975
|
4,952
|
||||||
|
Treasury stock, 21,000 shares at cost
|
(92,694
|
)
|
(92,694
|
)
|
||||
|
Additional paid-in capital
|
83,159,893
|
82,606,404
|
||||||
|
Retained earnings
|
648,790,469
|
617,168,735
|
||||||
|
Accumulated other comprehensive loss
|
(19,084,743
|
)
|
(65,427,831
|
)
|
||||
|
Total stockholders' equity
|
712,778,000
|
634,259,666
|
||||||
|
Commitments and contingencies
|
||||||||
|
Total liabilities, redeemable convertible preferred stock and stockholders' equity
|
2,544,103,683
|
2,126,500,199
|
||||||
See accompanying notes to consolidated financial statements.
F-3
CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
Years Ended December 31,
|
||||||||||||
|
2017
|
2016
|
2015
|
||||||||||
|
US$
|
US$
|
US$
|
||||||||||
|
Revenues
|
1,290,447,748
|
1,201,678,898
|
999,192,894
|
|||||||||
|
Cost of revenues
|
(1,053,782,105
|
)
|
(954,723,617
|
)
|
(817,811,445
|
)
|
||||||
|
Gross profit
|
236,665,643
|
246,955,281
|
181,381,449
|
|||||||||
|
Selling expenses
|
(3,176,928
|
)
|
(1,356,843
|
)
|
(1,458,658
|
)
|
||||||
|
General and administrative expenses
|
(38,495,704
|
)
|
(29,952,304
|
)
|
(23,816,148
|
)
|
||||||
|
Research and development expenses
|
(36,838,261
|
)
|
(47,989,665
|
)
|
(21,061,345
|
)
|
||||||
|
Total operating expenses
|
(78,510 893
|
)
|
(79,298,812
|
)
|
(46,336,151
|
)
|
||||||
|
Operating income
|
158, 154,750
|
167,656,469
|
135,045,298
|
|||||||||
|
Interest income
|
5,290,705
|
5,847,274
|
8,221,532
|
|||||||||
|
Interest expense
|
(45,370,872
|
)
|
(41,370,432
|
)
|
(42,704,097
|
)
|
||||||
|
Foreign currency exchange gains (losses)
|
(6,498,908
|
)
|
1,951,732
|
(2,237,541
|
)
|
|||||||
|
Gains (losses) on foreign currency contracts
|
(1,048,599
|
)
|
-
|
653,569
|
||||||||
|
Loss on debt extinguishment
|
-
|
(18,963,834
|
)
|
-
|
||||||||
|
Government grant
|
11,619,037
|
3,914,360
|
2,991,493
|
|||||||||
|
Total non-operating expenses, net
|
(36,008,637
|
)
|
(48,620,900
|
)
|
(33,075,044
|
)
|
||||||
|
Income before income taxes
|
122,146,113
|
119,035,569
|
101,970,254
|
|||||||||
|
Income tax expense
|
(90,524,379
|
)
|
(17,422,819
|
)
|
(18,237,975
|
)
|
||||||
|
Net income
|
31,621,734
|
101,612,750
|
83,732,279
|
|||||||||
|
Earnings per common stock:
|
||||||||||||
|
Basic and diluted
|
0.48
|
1.54
|
1.27
|
|||||||||
|
Net Income
|
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
CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
Series B Preferred Stock
|
Common Stock
|
Additional
|
Accumulated Other
|
Total
|
||||||||||||||||||||||||||||||||
|
Number of
Shares
|
Amount
|
Number of
Shares
|
Amount
|
Treasury
Stock
|
Paid-in
Capital
|
Retained
Earnings
|
Comprehensive
Income (Loss)
|
Stockholders'
Equity
|
||||||||||||||||||||||||||||
|
US$
|
US$
|
US$
|
US$
|
US$
|
US$
|
US$
|
||||||||||||||||||||||||||||||
|
Balance at January 1, 2015
|
1,000,000
|
100
|
49,151,796
|
4,916
|
(92,694
|
)
|
80,875,787
|
431,823,706
|
12,775,801
|
525,387,616
|
||||||||||||||||||||||||||
|
Net income
|
-
|
-
|
-
|
-
|
-
|
-
|
83,732,279
|
-
|
83,732,279
|
|||||||||||||||||||||||||||
|
Other comprehensive loss - Foreign currency translation adjustment, net of nil income taxes
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(32,118,459
|
)
|
(32,118,459
|
)
|
|||||||||||||||||||||||||
|
Stock based compensation
|
-
|
-
|
-
|
-
|
-
|
1,044,162
|
-
|
1,044,162
|
||||||||||||||||||||||||||||
|
Vesting of unvested shares
|
-
|
-
|
171,488
|
17
|
-
|
(17
|
)
|
-
|
-
|
-
|
||||||||||||||||||||||||||
|
Balance as of December 31, 2015
|
1,000,000
|
100
|
49,323,284
|
4,933
|
(92,694
|
)
|
81,919,932
|
515,555,985
|
(19,342,658
|
)
|
578,045,598
|
|||||||||||||||||||||||||
|
Net income
|
-
|
-
|
-
|
-
|
-
|
-
|
101,612,750
|
-
|
101,612,750
|
|||||||||||||||||||||||||||
|
Other comprehensive loss - Foreign currency translation adjustment, net of nil income taxes
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(46,085,173
|
)
|
(46,085,173
|
)
|
|||||||||||||||||||||||||
|
Stock based compensation
|
-
|
-
|
-
|
-
|
-
|
686,491
|
-
|
686,491
|
||||||||||||||||||||||||||||
|
Vesting of unvested shares
|
-
|
-
|
188,257
|
19
|
-
|
(19
|
)
|
-
|
-
|
-
|
||||||||||||||||||||||||||
|
Balance as of December 31, 2016
|
1,000,000
|
100
|
49,511,541
|
4,952
|
(92,694
|
)
|
82,606,404
|
617,168,735
|
(65,427,831
|
)
|
634,259,666
|
|||||||||||||||||||||||||
|
Net income
|
-
|
-
|
-
|
-
|
-
|
31,621,734
|
-
|
31,621,734
|
||||||||||||||||||||||||||||
|
Other comprehensive income - Foreign currency translation adjustment, net of nil income taxes
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
46,343,088
|
46,343,088
|
|||||||||||||||||||||||||||
|
Stock based compensation
|
-
|
-
|
-
|
-
|
-
|
553,512
|
-
|
-
|
553,512
|
|||||||||||||||||||||||||||
|
Vesting of unvested shares
|
-
|
-
|
216,190
|
23
|
-
|
(23
|
)
|
-
|
-
|
-
|
||||||||||||||||||||||||||
|
Balance as of December 31, 2017
|
1,000,000
|
100
|
49,727,731
|
4,975
|
(92,694
|
)
|
83,159,893
|
648,790,469
|
(19,084,743
|
)
|
712,778,000
|
|||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
F-5
CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Years Ended December 31,
|
||||||||||||
|
2017
|
2016
|
2015
|
||||||||||
|
US$
|
US$
|
US$
|
||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income
|
31,621,734
|
101,612,750
|
83,732,279
|
|||||||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||||||
|
Net reversal for doubtful accounts
|
-
|
-
|
(69,281
|
)
|
||||||||
|
Depreciation and amortization
|
43,055,976
|
34,244,842
|
27,540,212
|
|||||||||
|
Stock-based compensation
|
553,512
|
686,491
|
1,044,162
|
|||||||||
|
Amortization of discount and issuance cost of the Notes
|
-
|
767,170
|
1,086,010
|
|||||||||
|
Amortization of issuance cost of the Syndicate loan facility
|
3,750,028
|
1,273,438
|
-
|
|||||||||
|
Change in fair value of foreign currency option contracts
|
1,048,599
|
-
|
-
|
|||||||||
|
Foreign currency exchange losses (gains)
|
6,038,799
|
(2,965,949
|
)
|
2,720,131
|
||||||||
|
Losses on disposals of property, plant and equipment
|
17,509
|
259,104
|
9,036
|
|||||||||
|
Deferred income tax benefit
|
(2,407,706
|
)
|
(2,292,830
|
)
|
(2,380,236
|
)
|
||||||
|
Loss on debt extinguishment
|
-
|
18,963,834
|
-
|
|||||||||
|
Restricted cash
|
(31,588,120
|
)
|
(27,269,199
|
)
|
(4,011,349
|
)
|
||||||
|
Accounts receivable
|
120,443,715
|
(190,860,210
|
)
|
(40,614,289
|
)
|
|||||||
|
Amounts due from a related party
|
243,779
|
-
|
(35,937
|
)
|
||||||||
|
Inventories
|
(120,026,438
|
)
|
(3,764,167
|
)
|
(58,103,919
|
)
|
||||||
|
Prepaid expenses and other current assets
|
(26,354,886
|
)
|
21,222,125
|
(4,542,796
|
)
|
|||||||
|
Value added tax in long-term prepayments to equipment suppliers
|
(23,267,330
|
)
|
(575,483
|
)
|
-
|
|||||||
|
Other non-current assets
|
45,674
|
1,386,939
|
(371,872
|
)
|
||||||||
|
Bills payable
|
92,130,473
|
122,226,675
|
(8,119,365
|
)
|
||||||||
|
Accounts payable
|
(108,053,082
|
)
|
82,085,904
|
116,133,982
|
||||||||
|
Amounts due to a related party
|
(12,155
|
) |
3,792
|
8,167
|
||||||||
|
Income taxes payable
|
16,581,508
|
(5,807,300
|
)
|
(3,889,710
|
)
|
|||||||
|
Accrued expenses and other current liabilities
|
18,609,923
|
(75,664,932
|
)
|
86,963,823
|
||||||||
|
Deferred income
|
(4,630,632
|
)
|
(304,465
|
)
|
3,371,249
|
|||||||
|
Other non-current liabilities
|
64,895,667
|
9,255,439
|
11,098,323
|
|||||||||
|
Net cash provided by operating activities
|
82,696,547
|
84,483,968
|
227,370,738
|
|||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Proceeds from maturity of time deposits
|
475,873,199
|
515,088,058
|
463,771,799
|
|||||||||
|
Purchase of time deposits
|
(564,710,760
|
)
|
(475,315,245
|
)
|
(474,254,312
|
)
|
||||||
|
Purchase of land use rights
|
(8,279,334
|
)
|
-
|
(13,931,804
|
)
|
|||||||
|
Purchases of and deposits for property, plant and equipment
|
(456,474,007
|
)
|
(210,840,098
|
)
|
(267,427,681
|
)
|
||||||
|
Refund of deposit from an equipment supplier
|
280,814,137
|
-
|
-
|
|||||||||
|
Deposits for acquisition of equity
|
(11,937,192
|
)
|
-
|
-
|
||||||||
|
Government grant related to the construction of Sichuan plant
|
29,382,885
|
22,478,569
|
11,499,000
|
|||||||||
|
Net cash used in investing activities
|
(255,331,072
|
)
|
(148,588,716
|
)
|
(280,342,998
|
)
|
||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Proceeds from bank borrowings
|
842,571,025
|
687,164,318
|
504,218,741
|
|||||||||
|
Repayment of bank borrowings
|
(682,921,893
|
)
|
(537,809,334
|
)
|
(339,528,477
|
)
|
||||||
|
Redemption of notes payable
|
-
|
(165,366,000
|
)
|
-
|
||||||||
|
Proceeds from Syndicate loan facility
|
-
|
180,000,000
|
-
|
|||||||||
|
Proceeds from early exercise of options
|
-
|
-
|
121,725
|
|||||||||
|
Release of restricted cash as collateral for bank borrowings
|
92,186,142
|
31,375,326
|
-
|
|||||||||
|
Placement of restricted cash as collateral for bank borrowings
|
(68,227,246
|
)
|
(66,757,459
|
)
|
(33,077,094
|
)
|
||||||
|
Payments of issuance cost of bank borrowings
|
-
|
(6,770,000
|
)
|
-
|
||||||||
|
Net cash provided by financing activities
|
183,608,028
|
121,836,851
|
131,734,895
|
|||||||||
|
Effect of foreign currency exchange rate changes on cash and cash equivalents
|
11,332,263
|
(9,574,143
|
)
|
(4,290,762
|
)
|
|||||||
|
Net increase in cash and cash equivalents
|
22,305,766
|
48,157,960
|
74,471,873
|
|||||||||
|
Cash and cash equivalents at beginning of year
|
168,086,445
|
119,928,485
|
45,456,612
|
|||||||||
|
Cash and cash equivalents at end of year
|
190,392,211
|
168,086,445
|
119,928,485
|
|||||||||
|
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
|
38,695,738
|
45,782,010
|
40,136,978
|
|||||||||
|
Income taxes paid
|
13,030,643
|
19,521,472
|
8,982,167
|
|||||||||
|
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
|
-
|
-
|
38,118,231
|
|||||||||
|
Government grant related to the construction of Sichuan plant in the form of restricted cash (note 2(e))
|
1,537,935
|
-
|
11,117,817
|
|||||||||
|
Accrual for purchase of equipment
|
5,144,134
|
94,031,275
|
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)
|
Years Ended December 31,
|
|||||||||||||||||||||||
|
2017
|
2016
|
2015
|
||||||||||||||||||||||
|
US$
|
%
|
US$
|
%
|
US$
|
%
|
|||||||||||||||||||
|
Distributor A, located in PRC
|
186.8
|
14.5
|
%
|
179.6
|
14.9
|
%
|
192.0
|
19.2
|
%
|
|||||||||||||||
|
Distributor B, located in PRC
|
136.5
|
10.6
|
%
|
149.4
|
12.4
|
%
|
155.3
|
15.5
|
%
|
|||||||||||||||
|
Distributor C, located in PRC
|
106.5
|
8.3
|
%
|
127.0
|
10.6
|
%
|
127.3
|
12.7
|
%
|
|||||||||||||||
|
Distributor D, located in PRC
|
88.3
|
6.8
|
%
|
114.5
|
9.5
|
%
|
106.5
|
10.7
|
%
|
|||||||||||||||
|
Distributor E, located in PRC
|
0.1
|
0.0
|
%
|
55.9
|
4.7
|
%
|
112.1
|
11.2
|
%
|
|||||||||||||||
|
Total
|
518.2
|
40.2
|
%
|
626.4
|
52.1
|
%
|
693.2
|
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:
|
December 31, 2017
|
December 31, 2016
|
|||||||
|
US$
|
US$
|
|||||||
|
RMB denominated bank deposits with:
|
||||||||
|
Financial Institutions in the PRC
|
605,125,974
|
464,427,328
|
||||||
|
Financial Institutions in Hong Kong Special Administrative Region ("Hong Kong SAR")
|
8280
|
7,946
|
||||||
|
U.S. dollar denominated bank deposits with:
|
||||||||
|
Financial Institution in the U.S.
|
121,756
|
20,192
|
||||||
|
Financial Institutions in the PRC
|
17,772
|
18,025
|
||||||
|
Financial Institution in Hong Kong SAR
|
1,895,508
|
1,629,199
|
||||||
|
Financial Institution in Macau Special Administrative Region ("Macau SAR")
|
55,206
|
1,810
|
||||||
|
Financial Institution in Dubai, UAE
|
879,012
|
139,201
|
||||||
|
HK dollar denominated bank deposits with:
|
||||||||
|
Financial institution in Hong Kong SAR
|
131
|
148
|
||||||
|
Dirham denominated bank deposits with:
|
||||||||
|
Financial institution in Dubai, UAE
|
11,043
|
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:
|
Estimated
Useful Life
|
|
|
Workshops and buildings
|
39 years
|
|
Machinery, equipment and furniture
|
5-10 years
|
|
Motor vehicles
|
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.
- Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
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:
|
December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
US$
|
US$
|
|||||||
|
Accounts receivable
|
298,909,440
|
410,087,666
|
||||||
|
Allowance for doubtful accounts
|
(40,456
|
)
|
(38,107
|
)
|
||||
|
Accounts receivable, net
|
298,868,984
|
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$63,301,966 respectively of accounts receivable are pledged for the short-term bank loans.
The following table provides an analysis of the aging of accounts receivable as of December 31, 2017 and 2016:
|
December 31, 2017
|
December 31, 2016
|
|||||||
|
US$
|
US$
|
|||||||
|
Aging:
|
||||||||
|
– current
|
259,870,056
|
373,108,359
|
||||||
|
– 1-3 months past due
|
8,299,000
|
36,941,200
|
||||||
|
– 4-6 months past due
|
30,699,928
|
-
|
||||||
|
– 7-12 months past due
|
-
|
-
|
||||||
|
– greater than one year past due
|
40,456
|
38,107
|
||||||
|
Total accounts receivable
|
298,909,440
|
410,087,666
|
||||||
F-15
The movements of the allowance for doubtful accounts are as follows:
|
Year ended December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
US$
|
US$
|
|||||||
|
Balance at the beginning of the year
|
(38,107
|
)
|
(40,631
|
)
|
||||
|
Effect of foreign currency exchange rate changes
|
(2,349
|
)
|
2,524
|
|||||
|
Balance at the end of the year
|
(40,456
|
)
|
(38,107
|
)
|
||||
Note 4 – Inventories
Inventories consist of the following:
|
December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
US$
|
US$
|
|||||||
|
Raw materials
|
405,731,330
|
270,605,823
|
||||||
|
Work in progress
|
18,876
|
157,953
|
||||||
|
Finished goods
|
15,986,476
|
10,175,232
|
||||||
|
Total inventories
|
421,736,682
|
280,939,008
|
||||||
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:
|
December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
US$
|
US$
|
|||||||
|
Receivables from Hailezi (i)
|
68,430,244
|
88,286,651
|
||||||
|
Receivables from Jiamu (ii)
|
-
|
20,628,987
|
||||||
|
Value added taxes receivables (iii)
|
6,840,774
|
4,814,920
|
||||||
|
Advances to suppliers (iv)
|
62,376,588
|
3,365,930
|
||||||
|
Interest receivable (v)
|
2,235,902
|
3,231,763
|
||||||
|
Others (vi)
|
4,442,643
|
4,982,058
|
||||||
|
Total prepaid expenses and other current assets
|
144,326,151
|
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$20.6 million) to purchase equipment from Harbin Jiamu Import and Export Co., Ltd. ("Jiamu"), in November 2016. As Harbin Jiamu Import and Export Co., Ltd. had cancelled its registration and transferred its business to Harbin Jiamu Science and Technology Co., Ltd., Harbin Jiamu Import and Export Co., Ltd. agreed to refund the prepayment. As of December 31, 2017, Harbin Jiamu Import and Export Co., Ltd. has refunded all the prepayment. The prepayments and refund were recognized in operating activities in the statements of cash flows.
The majority owner of Hailezi is also the majority owner of Harbin Jiamu Import and Export Co., Ltd and Harbin Jiamu Science and Technology Co., Ltd. (collectedly "Jiamu Group"), which is one of the major equipment distributors.
(iii) Value added taxes receivables mainly represent the input taxes on purchasing equipment by Sichuan Xinda, which are to be net off with output taxes. Value added taxes receivables were recognized in operating activities in condensed consolidated statements of cash flows.
(iv) Advances to suppliers are the advances to purchase raw materials as of December 31, 2017.
(v) Interest receivable mainly represents interest income accrued from time deposits and restricted cash.
(vi) Others mainly include prepaid miscellaneous service fee, staff advance and prepaid rental fee.
Note 6 – Property, plant and equipment, net
Property, plant and equipment consist of the following:
|
December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
US$
|
US$
|
|||||||
|
Machinery, equipment and furniture
|
413,551,963
|
391,149,907
|
||||||
|
Motor vehicles
|
2,838,540
|
2,640,477
|
||||||
|
Workshops and buildings
|
146,595,501
|
119,503,091
|
||||||
|
Construction in progress
|
439,116,574
|
409,257,584
|
||||||
|
Total property, plant and equipment
|
1,002,102,578
|
922,551,059
|
||||||
|
Less: accumulated depreciation
|
(166,540,839
|
)
|
(116,187,367
|
)
|
||||
|
Property, plant and equipment, net
|
835,561,739
|
806,363,692
|
||||||
The Company capitalized US$2,893,631, US$2,562,026, US$231,356 of interest costs as a component of the cost of construction in progress for the years ended December 31, 2017, 2016 and 2015 respectively.
Depreciation expense on property, plant and equipment was allocated to the following expense items:
|
Years Ended December 31,
|
||||||||||||
|
2017
|
2016
|
2015
|
||||||||||
|
US$
|
US$
|
US$
|
||||||||||
|
Cost of revenues
|
35,758,544
|
28,245,742
|
21,980,993
|
|||||||||
|
General and administrative expenses
|
2,723,839
|
1,808,284
|
1,531,389
|
|||||||||
|
Research and development expenses
|
4,047,893
|
3,720,126
|
3,615,758
|
|||||||||
|
Selling expenses
|
3,546
|
2,683
|
894
|
|||||||||
|
Total depreciation expense
|
42,533,822
|
33,776,835
|
27,129,034
|
|||||||||
F-17
Note 7 – Prepayments to equipment and construction suppliers
|
December 31, 2017
|
December 31, 2016
|
|||||||
|
US$
|
US$
|
|||||||
|
Hailezi (i)
|
157,358,774
|
-
|
||||||
|
Shanghai Green River (ii)
|
16,572,489
|
-
|
||||||
|
Beijin Construction (iii)
|
10,001,333
|
4,324,636
|
||||||
|
Sichuan Construction (iv)
|
6,177,647
|
907,024
|
||||||
|
Samim Group FZE (v)
|
-
|
5,308,737
|
||||||
|
Sports City (vi)
|
-
|
2,859,952
|
||||||
|
Others
|
517,271
|
767,353
|
||||||
|
Total Prepayments to equipment and construction suppliers
|
190,627,514
|
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$0.7 million, respectively, from the date of its inception to December 31, 2017 and were recognized in earnings because they did not qualify or was designated for hedge accounting.
Note 10 – Borrowings
The Company has credit facilities with several banks under which they draw short-term and long-term bank loans as described below.
(a) Current
|
December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
US$
|
US$
|
|||||||
|
Unsecured loans
|
363,319,152
|
273,147,455
|
||||||
|
Loans secured by accounts receivable
|
68,868,415
|
50,454,086
|
||||||
|
Loans secured by restricted cash
|
41,500,000
|
32,474,300
|
||||||
|
Loans secured by land use right
|
30,608,184
|
-
|
||||||
|
Current portion of long-term bank loans (note b)
|
271,101,178
|
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$6.7 million).
(b) Non-current
|
December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
US$
|
US$
|
|||||||
|
Secured loans
|
30,400,000
|
90,170,000
|
||||||
|
Unsecured loans
|
199,146,032
|
73,518,812
|
||||||
|
Syndicate loan facility
|
155,763,465
|
174,513,438
|
||||||
|
Less: current portion
|
(271,101,178
|
) |
(88,681,635
|
)
|
||||
|
Total long-term bank loans, excluding current portion
|
114,208,319
|
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$35.0 million) with remaining terms beyond 12 months.
Certain lines of credit contain financial covenants such as total stockholders' equity, debt asset ratio, contingent liability ratio and net profit. As of December 31, 2017, the Company has met these financial covenants.
F-22
Maturities on long-term bank loans (including current portion) are as follows:
|
December 31, 2017
|
||||
|
US$
|
||||
|
2018
|
271,101,178
|
|||
|
2019
|
24,486,547
|
|||
|
2020
|
25,251,753
|
|||
|
2021
|
21,425,729
|
|||
|
After 2021
|
43,044,290
|
|||
|
Total
|
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$18,963,834 loss on debt extinguishment.
Note 12 – Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consist of the following:
|
December 31, 2017
|
December 31, 2016
|
|||||||
|
US$
|
US$
|
|||||||
|
Payables for purchase of property, plant and equipment
|
98,791,115
|
98,472,641
|
||||||
|
Accrued freight expenses
|
10,491,635
|
7,972,067
|
||||||
|
Accrued interest expenses
|
3,997,036
|
885,290
|
||||||
|
Advance from customers (i)
|
8,843,649
|
93,066
|
||||||
|
Non income tax payables
|
4,002,092
|
4,499,161
|
||||||
|
Others (ii)
|
12,479,982
|
7,417,141
|
||||||
|
Total accrued expenses and other current liabilities
|
138,605,509
|
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:
|
Years Ended December 31,
|
||||||||||||
|
2017
|
2016
|
2015
|
||||||||||
|
US$
|
US$
|
US$
|
||||||||||
|
Costs and expenses resulting from transactions with related parties:
|
||||||||||||
|
Rental expenses for plant and office space
|
-
|
723,769
|
777,248
|
|||||||||
The related party balances are summarized as follows:
|
December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
US$
|
US$
|
|||||||
|
Amounts due from a related party:
|
||||||||
|
Prepaid rental expenses to Xinda High-Tech
|
-
|
229,624
|
||||||
|
2017
|
2016
|
|||||||
|
US$
|
US$
|
|||||||
|
Amounts due to a related party:
|
||||||||
|
Rental payable to Mr Han's son
|
-
|
11,548
|
||||||
The Company rents the following plant and office buildings in Harbin, Heilongjiang province from Xinda High-Tech:
|
Premise Leased
|
Area (M2)
|
Annual Rental Fee (US$)
|
Period of Lease
|
||||||
|
Office building
|
23,894
|
707,543
|
Between January 1, 2014 and December 31, 2018
|
||||||
The Company rents the following facilities in Harbin, Heilongjiang province from Mr. Han's son:
|
Premise Leased
|
Area (M2)
|
Annual Rental Fee (US$)
|
Period of Lease
|
||||||
|
Facility
|
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$172,774,247 as of December 31, 2017 and 2016, respectively. It is not practicable to estimate the amounts of unrecognized deferred income tax liabilities thereof.
F-25
The components of income (loss) before income taxes are as follows:
|
Years Ended December 31,
|
||||||||||||
|
2017
|
2016
|
2015
|
||||||||||
|
US$
|
US$
|
US$
|
||||||||||
|
US
|
(2,490,668
|
)
|
(3,221,934
|
)
|
(3,512,598
|
)
|
||||||
|
BVI
|
(394
|
)
|
(31,424,331
|
)
|
(18,685,588
|
)
|
||||||
|
Hong Kong SAR
|
(12,544,625
|
)
|
(5,447,344
|
)
|
(306,945
|
)
|
||||||
|
Dubai
|
33,354,059
|
54,947,200
|
34,554,739
|
|||||||||
|
PRC, excluding Hong Kong SAR
|
103,827,741
|
104,181,978
|
89,920,646
|
|||||||||
|
Total income before income taxes
|
122,146,113
|
119,035,569
|
101,970,254
|
|||||||||
The Company's income tax expense (benefit) recognized in the consolidated statements of comprehensive income consists of the following:
|
Years Ended December 31,
|
||||||||||||
|
2017
|
2016
|
2015
|
||||||||||
|
US$
|
US$
|
US$
|
||||||||||
|
Current income tax expense-PRC
|
21,966,937
|
19,715,649
|
20,618,211
|
|||||||||
|
Current income tax expense-US
|
70,965,148
|
-
|
-
|
|||||||||
|
Deferred income tax benefit-PRC
|
(2,407,706
|
)
|
(2,292,830
|
)
|
(2,380,236
|
)
|
||||||
|
Total income tax expense
|
90,524,379
|
17,422,819
|
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:
|
Years Ended December 31,
|
||||||||||||
|
2017
|
2016
|
2015
|
||||||||||
|
US$
|
US$
|
US$
|
||||||||||
|
PRC statutory income tax rate
|
25
|
%
|
25
|
%
|
25
|
%
|
||||||
|
Increase (decrease) in effective income tax rate resulting from:
|
||||||||||||
|
Tax rate differential on HK entities not subject to PRC income tax
|
0.9
|
%
|
0.4
|
%
|
-
|
|||||||
|
Tax rate differential on BVI entities not subject to PRC income tax
|
0.1
|
%
|
6.6
|
%
|
4.6
|
%
|
||||||
|
Tax rate differential on UAE entities not subject to PRC income tax
|
(6.9
|
)%
|
(11.5
|
)%
|
(8.5
|
)%
|
||||||
|
Non-deductible expenses
|
0.2
|
%
|
0.3
|
%
|
0.4
|
%
|
||||||
|
Preferential tax rate
|
(4.5
|
)%
|
(4.2
|
)%
|
(4.5
|
)%
|
||||||
|
Change in valuation allowance
|
3.1
|
%
|
2.3
|
%
|
1.2
|
%
|
||||||
|
R&D additional deduction
|
(3.9
|
)%
|
(5.1
|
)%
|
(2.6
|
)%
|
||||||
|
Repatriation tax
|
58.1
|
%
|
-
|
-
|
||||||||
|
Others
|
2.0
|
%
|
0.8
|
%
|
2.3
|
%
|
||||||
|
Effective income tax rate
|
74.1
|
%
|
14.6
|
%
|
17.9
|
%
|
||||||
F-26
The principal components of the Company's deferred income tax assets and deferred income tax liabilities are as follows:
|
December 31,
|
||||||||
|
2017
|
2016
|
|||||||
|
US$
|
US$
|
|||||||
|
Deferred income tax assets:
|
||||||||
|
Tax loss carry forwards
|
7,818,069
|
3,951,012
|
||||||
|
Foreign currency contracts
|
270,964
|
-
|
||||||
|
Less: valuation allowance
|
(7,818,069
|
)
|
(3,951,012
|
)
|
||||
|
Deferred income tax assets, net (included in other non-current assets)
|
270,964
|
-
|
||||||
|
Deferred income tax liabilities (included in other non-current liabilities):
|
||||||||
|
Property, plant and equipment
|
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$10,818,305 as of December 31, 2017 and 2016, respectively.
The movements of the valuation allowance are as follows:
|
Years Ended December 31,
|
||||||||||||
|
2017
|
2016
|
2015
|
||||||||||
|
US$
|
US$
|
US$
|
||||||||||
|
Balance at the beginning of the year
|
3,951,012
|
1,941,124
|
727,711
|
|||||||||
|
Expiration due to liquidation
|
(86,139
|
)
|
(661,144
|
)
|
(68,070
|
)
|
||||||
|
Additions of valuation allowance
|
3,960,392
|
2,801,055
|
1,333,527
|
|||||||||
|
Reduction of valuation allowance
|
(7,196
|
)
|
(130,023
|
)
|
(52,044
|
)
|
||||||
|
Balance at the end of the year
|
7,818,069
|
3,951,012
|
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$18,298,922 from subsidiaries in HK, which could be carried forward indefinitely to be offset against future profits. In view of the cumulative losses for the entities concerned, 100% valuation allowances were provided against their deferred income tax assets as of December 31, 2017, 2016 and 2015, which in the judgment of the management, are not more likely than not to be realized.
F-27
A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows:
|
Year ended December 31,
|
||||||||||||
|
2017
|
2016
|
2015
|
||||||||||
|
US$
|
US$
|
US$
|
||||||||||
|
Balance at beginning of year
|
25,929,112
|
21,660,307
|
14,609,258
|
|||||||||
|
Increase related to current year tax positions
|
8,267,958
|
4,268,805
|
7,051,049
|
|||||||||
|
Balance at end of year
|
34,197,070
|
25,929,112
|
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$0.2 million) was amortized in the year ended December 31, 2017.
Note 16 – Other non-current liabilities
|
2017
|
2016
|
|||||||
|
US$
|
US$
|
|||||||
|
Income tax payable-noncurrent (i)
|
98,630,817
|
31,602,314
|
||||||
|
Deferred income tax liabilities (note 14)
|
9,267,501
|
10,818,305
|
||||||
|
Total other non-current liabilities
|
107,898,318
|
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$1,501,000 based on the Company's common stock price on September 28, 2011, and the probability of the Company's future financial projection and the expected volatility of the Company's common stock.
Note 19 – Stock based compensation
Stock options issued to employees, directors and consultants
On May 26, 2009, the Board of Directors approved the adoption of the 2009 Stock Incentive Plan (the "2009 Plan"), which provides for the granting of stock options and other stock-based awards to key employees, directors and consultants of the Company. The aggregate number of common stock which may be issued under the 2009 Plan may not exceed 7,800,000 shares.
Nonvested shares
A summary of the nonvested shares activity for the years ended December 31, 2017, 2016, and 2015 is as follows:
|
Number of Nonvested
Shares
|
Weighted Average
Grant date Fair Value
|
|||||||
|
US$
|
||||||||
|
Outstanding as of December 31, 2014
|
647,288
|
5.00
|
||||||
|
Granted
|
203,207 | 6.00 | ||||||
|
Vested
|
(171,488
|
) | 4.40 | |||||
|
Forfeited
|
(64,280
|
) | 4.65 | |||||
|
Outstanding as of December 31, 2015
|
614,727
|
5.54
|
||||||
|
Granted
|
-
|
-
|
||||||
|
Vested
|
(161,257
|
)
|
4.24
|
|||||
|
Forfeited
|
(51,260
|
)
|
5.28
|
|||||
|
Outstanding as of December 31, 2016
|
402,210
|
6.10
|
||||||
|
Granted
|
-
|
-
|
||||||
|
Vested
|
(216,190
|
)
|
5.12
|
|||||
|
Forfeited
|
(24,910
|
)
|
5.60
|
|||||
|
Outstanding as of December 31, 2017
|
161,110
|
7.49
|
||||||
|
Expected to vest as of December 31, 2017
|
137,119
|
7.49
|
||||||
F-32
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$200,243, which is to be recognized over a weighted average period of 0.6 years.
Stock options
A summary of stock options activity for the years ended December 31, 2017, 2016, 2015 is as follows.
|
Number of
Options
Outstanding
|
Weighted Average
Exercise Price
US$
|
|||||||
|
Outstanding as of December 31, 2015
|
72,000
|
0.24
|
||||||
|
Vested
|
(27,000
|
)
|
0.24
|
|||||
|
Forfeited
|
(45,000
|
)
|
0.24
|
|||||
|
Outstanding as of December 31, 2016
|
-
|
-
|
||||||
|
Vested
|
-
|
-
|
||||||
|
Forfeited
|
-
|
-
|
||||||
|
Outstanding as of December 31, 2017
|
-
|
-
|
||||||
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$230,463 of share-based compensation expense in general and administration expenses relating to stock options for the years ended December 31, 2015.
Note 20 – Earnings per share
Basic and diluted earnings per share are calculated as follows:
|
Years Ended December 31,
|
||||||||||||
|
2017
|
2016
|
2015
|
||||||||||
|
US$
|
US$
|
US$
|
||||||||||
|
Numerator:
|
||||||||||||
|
Net income
|
31,621,734
|
101,612,750
|
83,732,279
|
|||||||||
|
Less:
|
||||||||||||
|
Earnings allocated to participating Series D convertible preferred stock
|
(7,678,801
|
)
|
(24,652,636
|
)
|
(20,350,826
|
)
|
||||||
|
Earnings allocated to participating nonvested shares
|
(139,318
|
)
|
(817,078
|
)
|
(770,145
|
)
|
||||||
|
Net income for basic and diluted earnings per share
|
23,803,615
|
76,143,036
|
62,611,308
|
|||||||||
|
Denominator:
|
||||||||||||
|
Denominator for basic earnings per share
|
49,598,609
|
49,418,188
|
49,225,566
|
|||||||||
|
Dilutive effect of outstanding share options
|
-
|
1,009
|
3,894
|
|||||||||
|
Denominator for diluted earnings per share
|
49,598,609
|
49,419,197
|
49,229,460
|
|||||||||
|
Earnings per common share:
|
||||||||||||
|
Basic and diluted earnings per common share
|
0.48
|
1.54
|
1.27
|
|||||||||
F-33
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:
|
Years Ended December 31,
|
||||||||||||
|
2017
|
2016
|
2015
|
||||||||||
|
US$
|
US$
|
US$
|
||||||||||
|
Numerator:
|
||||||||||||
|
Shares issuable upon conversion of Series D convertible preferred stocks
|
16,000,000
|
16,000,000
|
16,000,000
|
|||||||||
Note 21 – Statutory reserves
Under PRC rules and regulations, all subsidiaries of China XD in the PRC are required to appropriate 10% of their net income, as determined in accordance with PRC accounting rules and regulations, to a statutory surplus reserve until the reserve balance reaches 50% of their registered capital. The appropriation to this statutory surplus reserve must be made before distribution of dividends to China XD can be made. The statutory reserve is non-distributable, other than during liquidation, and can be used to fund previous years losses, if any, and may be converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently outstanding, provided that the remaining balance of the statutory reserve after such issue is not less than 25% of the registered capital.
For the years ended December 31, 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$22,575,538), respectively.
Note 22 – Commitments and contingencies
(1) Lease commitments
Future minimum lease payments under non-cancellable operating leases agreements as of December 31, 2017 were as follows. The Company's leases do not contain any contingent rent payments terms.
|
US$
|
||||
|
Years ending December 31,
|
||||
|
2018
|
1,381,380
|
|||
|
2019
|
873,556
|
|||
|
2020
|
769,623
|
|||
|
2021
|
695,386
|
|||
|
2022
|
656,333
|
|||
|
2023 and thereafter
|
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$16.6 million) as of December 31, 2017.
(7) Contingencies
The Company and certain of its officers were named as defendants in two putative securities class action lawsuits filed on July 15, 2014 and July 16, 2014 in the United States District Court for the Southern District of New York. On March 23, 2016, the Court issued an Opinion and Order dismissing the Consolidated Class Action Complaint without prejudice. On May 6, 2016, the lead plaintiffs moved the Court for leave to amend the Consolidated Class Action Complaint. On June 24, 2016, the Company filed its opposition to the lead plaintiffs' motion. On August 8, 2016, in conjunction with filing the reply brief in support of their motion, the lead plaintiffs moved to strike certain documents referred to in the Company's opposition. The Company filed its opposition to the lead plaintiffs' motion to strike on September 16, 2016. On March 8, 2017, the Court entered an Order in the Company's favor denying the lead plaintiffs' motion for leave to amend and denying the lead plaintiffs' motion to strike. The time for the lead plaintiffs to appeal the dismissal of their lawsuits has expired. In accordance with ASC Topic 450, no loss contingency was accrued as of December 31, 2017 since the lawsuit has been dismissed.
Note 23 – Revenues
Revenues consist of the following:
|
Years Ended December 31,
|
||||||||||||
|
2017
|
2016
|
2015
|
||||||||||
|
US$
|
US$
|
US$
|
||||||||||
|
Modified Polyamide 66 (PA66)
|
286,526,792
|
260,107,405
|
219,082,301
|
|||||||||
|
Modified Polyamide 6 (PA6)
|
224,086,830
|
280,070,036
|
203,485,029
|
|||||||||
|
Plastic Alloy
|
363,319,049
|
401,664,431
|
350,620,202
|
|||||||||
|
Modified Polypropylene (PP)
|
231,255,726
|
178,729,819
|
164,828,880
|
|||||||||
|
Modified Acrylonitrile butadiene styrene (ABS)
|
43,333,667
|
42,121,680
|
40,510,344
|
|||||||||
|
Polyoxymethylenes (POM)
|
12,008,089
|
13,370,532
|
3,481,072
|
|||||||||
|
Polyphenylene Oxide (PPO)
|
17,468,208
|
15,315,570
|
12,984,368
|
|||||||||
|
Polylactide (PLA)
|
88,644,132
|
2,591,856
|
5,661
|
|||||||||
|
Polyethylene (PE)
|
22,756,186
|
-
|
-
|
|||||||||
|
Raw materials
|
1,049,069
|
2,409,070
|
3,373,854
|
|||||||||
|
Others
|
-
|
5,298,499
|
821,183
|
|||||||||
|
Total Revenue
|
1,290,447,748
|
1,201,678,898
|
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):
|
Fourth Quarter
|
Third Quarter
|
Second Quarter
|
First Quarter
|
|||||||||||||
|
2017:
|
||||||||||||||||
|
Revenues
|
$
|
427.6
|
$
|
311.4
|
$
|
313.6
|
$
|
237.8
|
||||||||
|
Gross profit
|
$
|
91.5
|
$
|
47.3
|
$
|
63.1
|
$
|
34.8
|
||||||||
|
Net income
|
$
|
(20.5
|
)
|
$
|
14.1
|
$
|
28.1
|
$
|
9.9
|
|||||||
|
Earnings per share
|
||||||||||||||||
|
Basic
|
$
|
(0.31
|
)
|
$
|
0.21
|
$
|
0.43
|
$
|
0.15
|
|||||||
|
Diluted
|
$
|
(0.31
|
)
|
$
|
0.21
|
$
|
0.43
|
$
|
0.15
|
|||||||
|
Fourth Quarter
|
Third Quarter
|
Second Quarter
|
First Quarter
|
|||||||||||||
|
2016:
|
||||||||||||||||
|
Revenues
|
$
|
377.8
|
$
|
331.8
|
$
|
277.1
|
$
|
215.0
|
||||||||
|
Gross profit
|
$
|
82.3
|
$
|
69.6
|
$
|
60.3
|
$
|
34.8
|
||||||||
|
Net income
|
$
|
36.7
|
$
|
20.2
|
$
|
33.3
|
$
|
11.4
|
||||||||
|
Earnings per share
|
||||||||||||||||
|
Basic and diluted
|
$
|
0.56
|
$
|
0.31
|
$
|
0.51
|
$
|
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):
|
Years Ended December 31,
|
||||||||||||
|
2017
|
2016
|
2015
|
||||||||||
|
US$
|
US$
|
US$
|
||||||||||
|
Revenues (in US$ millions)
|
||||||||||||
|
PRC
|
1,207.9
|
1,091.5
|
927.6
|
|||||||||
|
Dubai, UAE
|
82.5
|
110.2
|
71.6
|
|||||||||
|
Total
|
1,290.4
|
1,201.7
|
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):
|
Years Ended December 31,
|
||||||||||||
|
2017
|
2016
|
2015
|
||||||||||
|
US$
|
US$
|
US$
|
||||||||||
|
Long-lived assets (in US$ millions)
|
||||||||||||
|
PRC
|
694.9
|
483.7
|
544.6
|
|||||||||
|
Dubai, UAE
|
376.2
|
369.9
|
253.8
|
|||||||||
|
Total
|
1,071.1
|
853.6
|
798.4
|
|||||||||
Note 26 – Subsequent Events
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