cxdc_10k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended DECEMBER 31, 2009
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or
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from _______________ to
_____________
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Commission
File No. 333-134073
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CHINA
XD PLASTICS COMPANY LIMITED
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(Exact
name of registrant as specified issuer in its charter)
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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 Qinling Road, Yingbin Road Centralized Industrial Park, Harbin
Development Zone, Heilongjiang, P.R. China
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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: 86-451-84346600
Securities
registered under Section 12(b) of the Act: None
Securities
registered under Section 12(g) of the Act: Common Stock, par value
$0.0001
Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act of 1934. Yes
oNo
x
Indicate
by checkmark whether the registrant is not required to file reports pursuant to
Section 13 or 15 (d) of the Exchange Act. Yes
oNo x
Indicate
by checkmark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o No
x
Indicate
by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
o
Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated
filer o |
Accelerated
filer o |
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Non-accelerated
filer o
(do
not check if a smaller reporting company)
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Smaller reporting
company x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
o No
x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates as of June 30, 2009 is approximately $19,871,383.
As of
April 8, 2010, there were 44,007,589 issued and outstanding shares of the
issuer’s common stock.
Explanatory
Note
This
Annual Report on Form 10-K contains a restatement of our Consolidated Balance
Sheet as of December 31, 2008 and our Consolidated Statements of Income and
Other Comprehensive Income, Stockholders’ Equity and Cash Flows for the year
ended December 31, 2008, and Selected Consolidated Financial Data as of and for
each of the three quarters in the year ended December 31, 2009.
During
the routine course of internal review and internal audit, we have identified and
determined a non-cash error regarding the accounting for recognition of stock
options granted to our Chairman and CEO, Mr. Jie Han (the “Options”), pursuant
to the requirements of Financial Accounting Standards Board Accounting Standards
Codification (“ASC”) Topic 718. As previously disclosed, our Chairman and CEO,
Mr. Jie Han entered into an option agreement with Ellie Qiuyao Piao (“Ms.
Piao”), the sole shareholder of XD Engineering Plastics Company Limited (“XD
Engineering”), which was the principal shareholder of our subsidiary Favor Sea
Limited (“Favor Sea BVI”) before the reverse merger on May 16, 2008. Pursuant to
the option agreement, the Options were granted to Mr. Han by Ms. Piao. The
agreement provides that Mr. Han may purchase from Ms. Piao for a nominal price
all of the outstanding equity in XD Engineering if, on a consolidated basis, the
consolidated revenue of Favor Sea BVI, which indirectly owns our operating
subsidiaries Harbin Xinda Macromolecule Material Co., Ltd. and Harbin Xinda
Macromolecule Material Research Institute achieves certain revenue thresholds.
Mr. Han may purchase 25% of the total outstanding equity in XD Engineering if
Favor Sea BVI’s consolidated revenue during the first three quarters of 2008
exceeds $40 million. He may purchase 14% of the total outstanding equity in XD
Engineering if Favor Sea BVI’s consolidated revenue during the first three
quarters of 2009 exceeds $70 million. He may purchase 61% of the total
outstanding equity in XD Engineering if Favor Sea BVI’s consolidated revenue
during the first three quarters of 2010 exceeds $110 million. The purpose of the
Options is to enable Mr. Han to re-acquire ultimately the legal ownership of
China XD Plastics Company Limited in compliance with the laws and regulations of
the People’s Republic of China.
In
accordance with ASC Topic 718, the Options should have been accounted for in the
Company’s consolidated financial statements as share-based payments awarded to
an employee by a related party as compensation for services
rendered.
Our
consolidated retained earnings as of December 31, 2008 and June 30, 2009
incorporate a non-cash charge of approximately $5.5 million and $8.6 million,
respectively, accounted for the above mentioned option grant arrangement. The
stock-based compensation expenses of $5.5 million and $3.1 million,
respectively, have been recorded to general and administrative expenses in the
Consolidated Statements of Income and Other Comprehensive Income for the year
ended December 31, 2008 and second quarter in the year ended December 31,
2009.
All
financial information contained in this Annual Report on Form 10-K gives effect
to the restatements of our Consolidated Financial Statements as described above.
We have not amended, and we do not intend to amend, our previously filed Annual
Reports on Form 10-K for the fiscal year of 2008 or Quarterly Reports on Form
10-Q for each of fiscal quarters of 2009. Financial information included in
reports that we previously filed or furnished for the periods from December 31,
2008 through September 30, 2009 should not be relied upon and are superseded by
the information in this Annual Report on Form 10-K.
CHINA
XD PLASTICS COMPANY LIMITED
FORM
10-K ANNUAL REPORT
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009
Table
of Contents
PART
I
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Item
1
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Business
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2 |
Item
1A
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Risk
Factors
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7 |
Item
1B
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Unresolved
Staff Comments
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14 |
Item
2
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Properties
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14 |
Item
3
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Legal
Proceedings
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15 |
Item
4
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Submission
of Matters to a Vote of Security Holders
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15 |
PART
II
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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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15 |
Item
6
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Selected
Financial Data
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15 |
Item
7
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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16 |
Item
7A
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Quantitative
and Qualitative Disclosures About Market Risk
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19 |
Item
8
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Financial
Statements and Supplementary Data
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19 |
Item
9
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Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure
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19 |
Item
9A
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Controls
and Procedures
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20 |
Item
9B
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Other
Information
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21 |
PART
III
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Item
10
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Directors,
Executive Officers and Corporate Governance
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22 |
Item
11
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Executive
Compensation
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26 |
Item
12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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27 |
Item
13
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Certain
Relationships and Related Transactions and Director
Independence
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28 |
Item
14
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Principal
Accountant Fees and Services
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29 |
PART IV
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Item
15
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Exhibits,
Financial Statement Schedules
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29 |
Financial
Statements
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Index
of Financial Statements |
F-1 |
Reports
of Independent Registered Public Accounting Firm
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F-2
to F-3 |
Consolidated
Balance Sheets |
F-4 |
Consolidated
Statements of Income and Other Comprehensive Income
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F-5 |
Consolidated
Statements of Changes in Stockholders’ Equity
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F-6 |
Consolidated
Statements of Cash Flows
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F-7 |
Notes
to Consolidated Financial Statements
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F-8
to F-43 |
As used
herein, “China XD,” “we,” “us,” “our” and the “Company” refers to China XD
Plastics Company Limited.
PART
I
China XD
Plastics Company Limited (“China XD Plastics”), formerly known as NB Telecom,
Inc (“NB Telecom”). was originally incorporated as NB Payphones Ltd. under the
laws of the state of Pennsylvania on November 16, 1999. On December 27, 2005, we
migrated our state of organization to the state of Nevada and effective March
23, 2006, our name changed to NB Telecom.
On
December 24, 2008, NB Telecom acquired all of the outstanding capital stock of
Favor Sea Limited (“Favor Sea BVI”), a British Virgin Islands corporation, whose
assets, held through its subsidiaries, are 100% of the registered capital of
Harbin Xinda Macromolecule Material Co., Ltd. (“Harbin Xinda”), a limited
liability company established under the laws of the People’s Republic of China
(“China” or “PRC”) and Harbin Xinda’s wholly-owned subsidiary, Harbin Xinda
Macromolecule Material Research Institute (the “Research Institute”). Harbin
Xinda is a manufacturer and developer of modified plastics. Harbin Xinda is a
high-tech company that was founded in September 2004 under the laws of the PRC
with registered capital of 20 million RMB (USD$2,416,451). Harbin Xinda’s
executive offices and manufacturing facilities are located at No. 9 Qinling
Road, Yingbin Road Centralized Industrial Park and No. 9 Dalian North Road,
Haping Road Centralized Industrial Park, Harbin Development Zone, Heilongjiang
Province, in northeast China. Harbin Xinda engages in the development,
manufacture, and distribution of modified plastic, primarily for use in
automobiles. The technology that has enabled Harbin Xinda to become China’s
leading producer of automotive modified plastics derives from our wholly-owned
research laboratory, the Research Institute, a subsidiary established in 2007.
The Research Institute has developed into a leader in research and development
for China’s macromolecular industry. The Research Institute is outfitted with
more than 80 sets of testing, analytical and production equipment used to
analyze the physical and mechanical properties of the heat resistances,
durability, stability, and environmental performance exhibited by modified
plastics.
In
connection with the acquisition, the Company entered into an Agreement and Plan
of Merger (the “Agreement”) by and among the NB Telecom, Favor Sea BVI, and the
shareholders of Favor Sea BVI including the principal shareholder, XD
Engineering Plastics Company Limited (“XD Engineering”), a British Virgin
Islands corporation. The Company acquired all of the outstanding capital stock
of Favor Sea BVI. In connection with the acquisition, and in exchange for the
outstanding stock of Favor Sea BVI, the shareholders of Favor Sea BVI received
50,367,778 shares of the common stock of the Company and 1,000,000 shares of
convertible Series A preferred stock of the Company, and XD
Engineering individually received 1,000,000 shares of Series B preferred
stock of the Company (the “Merger”). Subsequent to the Merger and as a direct
consequence, the name of the Company was changed to “China XD Plastics Company
Limited” pursuant to Chapter 92A the Revised Nevada Statutes in connection with
the Merger. The 50,367,778 shares of common stock were converted into 405,802
shares post a reverse stock split of 124.1 for 1 pursuant to Nevada Revised
Statutes Section 78.207 for both the total number of authorized shares of common
stock and the total number of issued and outstanding shares of common stock. The
1,000,000 shares of convertible Series A preferred stock of the Company are
convertible into approximately 1:38.2 into 38,194,072 shares of the common stock
of the Company. Assuming the conversion of the Series A preferred stock of the
Company, the shareholders of Favor Sea BVI will own approximately 99% of the
Common Stock of the Company.
Modified
plastic is produced by changing the physical and/or chemical characteristics of
ordinary resin materials. In order for plastics to be used in the automobile
environment, they must satisfy certain physical criteria in terms of
electro-magnetic characteristics, reaction to light and heat, durability, flame
resistance, and mechanical functionality. Harbin Xinda’s unique formulas and
processing techniques enable us to produce low-cost high-quality modified
plastic materials, which have been accepted by many of the major automobile
manufacturers in China. In addition, we also provide specially engineered
plastics and environment-friendly plastics for use in the assembly of equipment
for oilfields, mining, ship power, power station equipment, and other
industries.
Harbin
Xinda’s primary market is the rapidly expanding Chinese automotive industry. In
2009, 13.6 million automobiles were sold in China, which increased by 44.7% from
the previous year. It is estimated that the Chinese auto market will grow by 15%
annually in the coming years. Each automobile requires 100 kg to 150 kg of
modified plastic, which means that by 2010 the demand for modified plastic in
the Chinese automobile industry will be approximately 1.6 million tons annually.
Harbin Xinda’s existing facility has an annual production capacity of 100,000
tons.
Our
specialized plastics are utilized in the exterior and interior trim and in the
functional components of more than 30 automobile brands manufactured in China,
including Audi, Red Flag, Volkswagen and Mazda. At present, 145 of 263 Harbin
Xinda’s automotive-specific modified plastic products have been certified for
use by one or more of the automobile manufacturers in China. The automotive
applications for our plastics include exteriors (automobile bumpers, rear- and
side- view mirrors, license plate), interiors (door panels, dashboard, steering
wheel, glove compartment and safety belt components), and functional components
(air conditioner casing, heating and ventilation casing, engine covers, and air
ducts).
2
Our
products are organized into seven categories, based on their physical
characteristics:
Modified
Polypropylene:
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COMPNIPER:
a form of modified polypropylene that exhibits high fluidity and impact
resistance. These products are primarily used for the interior automobile
parts, such as the inner panels, instrument panels, and box lids. 45 of
these products have been certified for use in the Chinese auto
industry.
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COMPWIPER:
a form of modified polypropylene that exhibits low-temperature-resistance
and impact resistance. These products are primarily used for external
automobile parts, such as the front and back bumpers and mudguards. 25 of
these products have been certified for use in the Chinese auto
industry.
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COMPGOPER:
a form of modified polypropylene that exhibits high-temperature-resistance
and resistance to static. These products are used primarily for automobile
functional components, such as the unit heater shells and air conditioner
shells. 38 of these products have been certified for use in the Chinese
auto industry.
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Modified
ABS:
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MOALLOLY:
a form of modified ABS (acrylonitrile butadiene styreme) plastic that
exhibits high gloss, high rigidity, and size stability. These products are
primarily used for automobile functional components, such as the heat
dissipating grid and wheel covers. 7 of these products have been certified
for use in the Chinese auto industry.
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Modified
Nylon:
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POLGPAMR:
a form of modified nylon that exhibits high wear and heat resistance.
These products are primarily used for automotive parts requiring high
flame and heat resistance. 10 of these products have been certified for
use in the Chinese auto industry.
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Engineering
Plastic:
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MOAMIOLY:
a wear-resistant form of engineering plastic. These products are primarily
used for the engine hood, intake manifold, and bearings. 9 of these
products have been certified for use in the Chinese auto
industry.
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Alloy
Plastic:
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BRBSPCL:
a form of alloy plastic. These products are used primarily for the
rearview mirror, grille, automotive electronics and other components. The
products can also be used in computers, plasma TVs, mobile phones and
other electronic and electrical consumer products. 6 of these products
have been certified for use in the Chinese auto industry.
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Environment-friendly
Modified Plastic:
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POLGBSMR:
an environment-friendly form of modified plastic, is used in automobiles
with environmental standard requirements. 5 of these products have been
certified for use in the Chinese auto industry.
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Modified
Plastic for Special Engineering:
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•
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PEEK:
a special engineering form of modified plastic that can be used in
communication and transportation, electronic and electric appliance,
machinery, medical equipment and analytical equipment. Harbin Xinda is
developing products in this field based on years of research
findings. However, none of these products have been certified for use in
the auto industry.
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Raw
Materials
The
principal raw materials used for the production of the Company’s products are
plastic resins such as polypropylene, ABS and nylon. Nearly 50% of these raw
materials come from overseas petrochemical enterprises, and 50% from domestic
petrochemical enterprises. All of our contracts for raw materials are one-year
renewable contracts.
3
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Polypropylene
is a chemical compound manufactured from petroleum.
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•
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Acrylonitrile
Butadiene Styrene (ABS) is a common thermoplastic used to make light,
rigid, molded products such as automotive body parts and wheel
covers.
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•
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Nylon
is a thermoplastic silky material.
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Currently
we have adequate access to these raw materials by dealing with major suppliers
in the industry. Harbin Xinda has one-year renewable contracts with its major
suppliers. Because the raw materials are mostly petroleum products, the rise of
oil price will directly affect the cost for the raw materials. However, in that
event, we should be able to pass the cost to our customers by raising the price
for our products.
Because
raw materials constitute a substantial part of the cost of our products, we seek
to reduce the cost of raw materials by dealing with two major suppliers: Dalian
Free Trade Zone Mankeri International Trade Co., Ltd. (“Mankeri”), and Dalian
Lanhai International Trade Co., Ltd (“Dalian Lanhai”). During the year ended on
December 31, 2009, Harbin Xinda purchased approximately 48.4% of its raw
materials from Mankeri and 49.7% from Dalian Lanhai. In 2008 we purchased 65.6%
of our raw materials from Mankeri, and 29.5% from Dalian Lanhai . By dealing
with these major suppliers, Harbin Xinda obtains reduced prices for raw
materials, and thus reduces the cost of our products. If we were unable to
purchase from Mankeri or Dalian Lanhai, we would still have adequate sources of
raw materials from other petrochemical dealers at similar cost.
Intellectual
Property
Our
Research Institute, Xinda Macromolecule Material Research Institute, was
organized to provide us with ongoing additions to our technology, which
represents the key to our competitive success. Our goal is to utilize
state-of-the-art methods and equipment to produce plastics of the highest
quality that are cost-efficient for our customers. Toward this end, we have
staffed the Research Institute with 77 researcher employees, over 90% of whom
have advanced degrees or specialized undergraduate training.
To
supplement the efforts of our Research Institute, we have developed cooperative
research programs with a number of the leading technology centers in China,
including the Changchun Institute of Applied Chemistry of the Chinese Academy of
Science, the Beijing Chemical Engineering Institute, the Harbin Institute of
Technology, the Northeast Forestry University, Jilin University, and Changchu
University of Technology. Besides providing specialized research and development
skills, these relationships help us to formulate cutting edge research programs
aimed at addressing developing issues in plastics engineering.
All our
significant research and development activities are overseen by
the members of our Scientific Advisory Board, which we have assembled from among
the leaders in China’s chemical engineering industry. Currently, the members of
the Scientific Advisory Board are:
•
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Wu
Zhongwen: Director of the Research Institute of Special Plastics
Engineering of Jilin University.
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•
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Zheng
Kai: Secretary General of China’s Plastics Engineering Industry
Association.
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•
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Zhang
Huixuan: Vice Principal of Changchun University of
Technology.
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•
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Li
Bin: Dean of the Science Department at Eastern Forest Industry
University.
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Xing
Yuqing: Director of the Teaching and Research Section of the Chemical
Engineering Department at Harbin Institute of Technology.
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Jiang
Zhenhua: Director of the Engineering Research Center of the Special
Plastics Engineering Education Department of Jilin
University.
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4
Patents
As a
result of our collection of academic and technological expertise, we have a
portfolio of 11 patents for which we have applications pending in China which
are set forth in the following table.
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Application
Date and Status
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1.
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Measures
for efficient recycling and circulating usage of waste and old
plastics
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200510010540.9
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November
15, 2005, pending
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2.
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Special
engineering plastics dedicated to military industry
products
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200510010543.2
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November
15, 2005, pending
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3.
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Special
materials for wall tubes of polyethylene winding structure of tube inbuilt
technology without opening tank lid
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200510010541.3
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November
15, 2005, pending
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4.
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Stuffing
master batch material dedicated to polypropylene resin
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200510010542.8
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November
15, 2005, pending
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5.
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Special
materials for air inflow manifold of automobile engine
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200710072563.1
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July
25, 2007, pending
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6.
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High-luster
low shrinkage ratio nano polypropylene modified compound and its
manufacturing methods
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200510010539.6
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November
15, 2005, pending
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7.
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Strengthened
toughened aging resistant polypropylene/nano calcium carbonate compound
material and its manufacturing methods
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200510010538.1
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November
15, 2005, pending
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8.
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Green
inflaming-retardant ABS alloy
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200610009836.3
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March
21, 2006, pending
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9.
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Compound
nano special materials dedicated to automobile bumper
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200510010066.x
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June
6, 2005, pending
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10.
11.
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High-performance
special polypropylene materials dedicated to automobile
Carbon
fibre reinforced nylon composites for centralizer in the application of
oil field
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200610009837.8
200910071782.7
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March
21, 2006, pending
April
15, 2009, pending
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Trademark
We own
the trademarks for our graphic logo and Chinese characters of “Xinda”, which we use in
packaging our products and marketing ourselves.
Marketing
Currently
Harbin Xinda’s sales network mainly covers the northeastern region of China. In
2009 and 2008, approximately 80% and 91% of our sales were derived from the
northeastern market, with continuing expansion into the northern and eastern
regions of China.
Harbin
Xinda sells directly to its customers or indirectly through its distributors and
provides full after-sale services to all customers. These customers are usually
the major automobile parts manufacturers who relies on our product
certifications granted by major automobile manufacturers.
5
We enter
into Sales Agency Agreements with local agents in areas where large automobile
manufacturers are located. The sales agents are responsible for developing the
markets for our products and collecting payments from our customers. In
distributing our products during the agency period, the agents are required to
use Harbin Xinda’s product certificate, brand and package standards set by us.
They must also reimburse us the amount of payment that the customers fail to
make within our collection period. After the termination of the agency
relationship, the customers developed by the agents are proprietary to Harbin
Xinda.
Sales
to one major distributor accounted for approximately 83% and 81% of the
Company’s sales for the years ended December 31, 2009 and 2008,
respectively.
During
the past three years, the Company has sold most of its products in the three
northeastern provinces of China: Heilongjiang, Jilin, and Liaoning. In addition,
the Company has supplied to customers in Northern part of China, including
Beijing, Tianjin, and Hebei province in 2009. We expect to develop more
customers in the cities and provinces located in the Northern and Eastern part
of China, such as Shanghai and Zhejiang Province.
No single
customer accounted for more than 10% of our sales during the years ended on
December 31, 2009 or 2008.
Competition
Currently
Harbin Xinda’s primary Chinese competitor in the automobile industry is a large
industrial company named Guangzhou Kingfa Science & Technology Co., Ltd.
(“Guangzhou Kingfa”). Guangzhou Kingfa entered the market in 2006 and its
facilities have a manufacturing capacity of 100,000 tons. Guangzhou Kingfa has
much larger financial resources than Harbin Xinda. Currently, however, it has
fewer certified products and sells less modified plastic to the automobile
industry than Harbin Xinda.
The
Chinese auto market is dominated, however, by modified plastic manufactured
overseas or in factories controlled by foreign companies. Almost 60% of the
modified plastic used in Chinese automobiles is manufactured by non-Chinese
fabricators, primarily manufacturers from Germany, the Netherlands and Japan.
Although Harbin Xinda and its Chinese competitors compare very favorably with
these foreign competitors in terms of price, service and delivery times, the
lack of production capacity in the Chinese modified plastics industry has
allowed the foreign competition to remain dominant in that
industry.
Employees
Harbin
Xinda’s operations are organized into seven operational departments such as
technologies, sales, supply, R&D and finance. There are currently 396
employees, including 153 in manufacturing, 77 in research and development, 47 in
management, 17 in financial department, 30 in sales, purchasing and marketing
and 72 in other departments. 87 out of the 396 employees are temporary hires as
reserve for full-time positions.
6
You should carefully consider the
risks described below before buying our common stock. If any of the risks
described below were realized, that event could cause the trading price of our
common stock to decline, and you could lose all or part of your
investment.
Risks
related to doing business in China
Our
business operations are conducted entirely in China. Because China’s economy and
its laws, regulations and policies are different from those typically found in
the west and are continually changing, we will face risks including those
summarized below.
China is a
developing nation governed by a one-party government and may be more susceptible
to political, economic, and social upheaval than other
nations.
China is
a developing country governed by a one-party government. China is also a country
with an extremely large population, widening income gaps between rich and poor
and between urban and rural residents, minority ethnic and religious
populations, and growing access to information about the different social,
economic, and political systems to be found in other countries. China has also
experienced extremely rapid economic growth over the last decade, and its legal
and regulatory systems have changed rapidly to accommodate this growth. These
conditions make China unique and may make it susceptible to major structural
changes. Such changes could include a reversal of China’s movement to encourage
private economic activity, labor disruptions or other organized protests,
nationalization of private businesses, internal conflicts between the police or
military and the citizenry, and international political or military conflict. If
any of these events were to occur, it could shut down China’s economy and cause
us to temporarily or permanently cease operations.
The
PRC’s laws, regulations and policies, and changes to them, may limit our ability
to operate profitably or prevent us from operating at all.
Our
stores and distribution centers, as well as our suppliers and the agricultural
producers on whom they depend, are located in China. The PRC government has
exercised and continues to exercise substantial control over virtually every
sector of the Chinese economy, including the production, distribution and sale
of our merchandise. In particular, we are subject to regulation by local and
national branches of the Ministries of Commerce and Transportation, as well as
the General Administration of Quality Supervision, the State Administration of
Foreign Exchange, and other regulatory bodies. In order to operate under PRC
law, we require valid licenses, certificates and permits, which must be renewed
from time to time. If we were to fail to obtain the necessary renewals for any
reason, including sudden or unexplained changes in local regulatory practice, we
could be required to shut down all or part of our operations temporarily or
permanently.
Our
ability to operate in China may be harmed by changes in its laws and
regulations, including those relating to agriculture, taxation, land use rights
and other matters. Such changes could be made at the national or local level and
in the form of: farm subsidies; corporate tax rates; employee benefits;
leaseholder or land-use rights; enforceability of contracts; intellectual
property; or retail pricing. The effects of such changes on our business cannot
be predicted but could be significant.
All
of our assets are located in China. So any dividends or proceeds from
liquidation are subject to the approval of the relevant Chinese government
agencies.
Our
assets are located inside China. Under the laws governing FIEs in China,
dividend distribution and liquidation are allowed but subject to special
procedures under the relevant laws and rules. Any dividend payment will be
subject to the decision of the board of directors and subject to foreign
exchange rules governing such repatriation. Any liquidation is subject to both
the relevant government agency’s approval and supervision as well the foreign
exchange control. This may generate additional risk for our investors in case of
dividend payment or liquidation.
Because
our funds are held in banks which do not provide insurance, the failure of any
bank in which we deposit our funds could affect our ability to continue in
business.
Banks and
other financial institutions in the PRC do not provide insurance for funds held
on deposit. As a result, in the event of a bank failure, we may not have access
to funds on deposit. Depending upon the amount of money we maintain in a bank
that fails, our inability to have access to our cash could impair our
operations, and, if we are not able to access funds to pay our suppliers,
employees and other creditors, we may be unable to continue in
business.
7
Anti-inflation
measures may be ineffective or harm our ability to do business in
China.
In recent
years, the PRC government has instituted anti-inflationary measures to curb the
risk of an overheated economy characterized by debilitating inflation. These
measures have included devaluations of the renminbi, restrictions on the
availability of domestic credit, and limited re-centralization of the approval
process for some international transactions. These austerity measures may not
succeed in slowing down the economy’s excessive expansion or control inflation,
or they may slow the economy below a healthy growth rate and lead to economic
stagnation or recession; in the worst-case scenario, the measures could slow the
economy without curbing inflation. The PRC government could adopt additional
measures to further combat inflation, including the establishment of price
freezes or moratoriums certain projects or transactions. Such measures could
harm the economy generally and hurt our business by limiting the income of our
customers available to purchase our merchandise, by forcing us to lower our
profit margins, and by limiting our ability to obtain credit or other financing
to pursue our expansion plans or maintain our business.
Governmental
control of currency conversions may affect the value of your
investment.
All of
our revenue is earned in renminbi, and any future restrictions on currency
conversions may limit our ability to use revenue generated in renminbi to make
dividend or other payments in U.S. dollars. Although the PRC government
introduced regulations in 1996 to allow greater convertibility of the renminbi
for current account transactions, significant restrictions still remain,
including primarily the restriction that foreign-invested enterprises like us
may buy, sell or remit foreign currencies only after providing valid commercial
documents at a PRC banks specifically authorized to conduct foreign-exchange
business.
In
addition, conversion of renminbi for capital account items, including direct
investment and loans, is subject to governmental approval in the PRC, and
companies are required to open and maintain separate foreign-exchange accounts
for capital account items. There is no guarantee that PRC regulatory authorities
will not impose additional restrictions on the convertibility of the renminbi.
Such restrictions could prevent us from distributing dividends and thereby
reduce the value of our stock.
The
fluctuation of the exchange rate of the renminbi against the dollar could reduce
the value of your investment.
The value
of our common stock will be affected by the foreign exchange rate between U.S.
dollars and renminbi. For example, to the extent that we need to convert U.S.
dollars we receive from an offering of our securities into renminbi for our
operations, appreciation of the renminbi against the U.S. Dollar could reduce
the value in renminbi of our funds. Conversely, if we decide to convert our
renminbi into U.S. dollars for the purpose of declaring dividends on our common
stock or for other business purposes and the U.S. dollar appreciates against the
renminbi, the U.S. dollar equivalent of our earnings from The Company, our
subsidiary in China, would be reduced. In addition, the depreciation of
significant U.S. Dollar-denominated assets could result in a charge to our
income statement and a reduction in the value of these assets.
On July
21, 2005, the PRC government changed its decade-old policy of pegging the value
of the renminbi to the U.S. Dollar. Under the new policy, the renminbi is
permitted to fluctuate within a narrow and managed band against a basket of
certain foreign currencies. This change in policy has resulted in an
appreciation of the renminbi against the U.S. dollar of approximately 18% from
July 21, 2005 to December 31, 2009. While the international reaction to the
renminbi revaluation has generally been positive, there remains significant
international pressure on the PRC government to adopt an even more flexible
currency policy, which could result in a further and more significant
appreciation of the renminbi against the U.S. Dollar.
We
receive all of our revenues in renminbi. The PRC government imposes controls on
the convertibility of renminbi into foreign currencies and, in certain cases,
the remittance of currency out of the China. Shortages in the availability of
foreign currency may restrict our ability to remit sufficient foreign currency
to pay dividends, or otherwise satisfy foreign currency denominated obligations.
Under existing PRC foreign exchange regulations, payments of current account
items, including profit distributions, interest payments and expenditures from
the transaction, can be made in foreign currencies without prior approval from
the PRC State Administration of Foreign Exchange (“SAFE”) by complying with
certain procedural requirements. However, approval from appropriate governmental
authorities is required where renminbi are to be converted into foreign currency
and remitted out of the PRC to pay capital expenses, such as the repayment of
bank loans denominated in foreign currencies.
The PRC
government could also restrict access in the future to foreign currencies for
current account transactions. If the foreign exchange control system prevents us
from obtaining sufficient foreign currency to satisfy our currency demands, we
may not be able to pay certain expenses as they become due.
8
Recently-modified
SAFE regulations may restrict our ability to remit profits out of China as
dividends.
SAFE
Regulations regarding offshore financing activities by PRC residents have
recently undergone a number of changes which may increase the administrative
burdens we face. The failure of our stockholders who are PRC residents to make
any required applications and filings pursuant to these regulations may prevent
us from being able to distribute profits and could expose us and our
PRC-resident stockholders to liability under PRC law.
SAFE
issued a public notice (the “October Notice”), effective as of November 1, 2005,
and implementation rules in May 2007, which require registration with SAFE by
the PRC-resident stockholders of any foreign holding company of a PRC entity.
These regulations apply to our stockholders who are PRC residents. In the
absence of such registration, the PRC entity cannot remit any of its profits out
of the PRC as dividends or otherwise.
In the
event that our PRC-resident stockholders have not followed the procedures
required under the October Notice and its implementation rules, we could lose
the ability to remit monies outside of the PRC and would therefore be unable to
pay dividends or make other distributions, and we could face liability for
evasion of foreign-exchange regulations. Such consequences could affect our good
standing under PRC regulations and our ability to operate in the PRC, and could
therefore diminish the value of your investment.
China’s
legal and judicial system may not adequately protect our business and operations
and the rights of foreign investors.
China’s
legal and judicial system may negatively impact foreign investors. In 1982, the
National People’s Congress amended the Constitution of China to authorize
foreign investment and guarantee the “lawful rights and interests” of foreign
investors in the China. However, the China’s system of laws is not yet
comprehensive. The legal and judicial systems in the China are still
rudimentary, and enforcement of existing laws is inconsistent. Many judges in
China lack the depth of legal training and experience that would be expected of
a judge in a more developed country. Because the China judiciary is relatively
inexperienced in enforcing the laws that do exist, anticipation of judicial
decision-making is more uncertain than would be expected in a more developed
country. It may be impossible to obtain swift and equitable enforcement of laws
that do exist, or to obtain enforcement of the judgment of one court by a court
of another jurisdiction. The China’s legal system is based on civil law, or
written statutes; a decision by one judge does not set a legal precedent that
must be followed by judges in other cases. In addition, the interpretation of
Chinese laws may vary to reflect domestic political changes.
As a
matter of substantive law, the foreign-invested enterprise laws provide
significant protection from government interference. In addition, these laws
guarantee the full enjoyment of the benefits of corporate articles and contracts
to foreign-invested enterprise participants. These laws, however, do impose
standards concerning corporate formation and governance, which are qualitatively
different from the general corporation laws of the United States. Similarly, the
PRC accounting laws mandate accounting practices that are not consistent with
U.S. generally accepted accounting principles. PRC accounting laws require that
an annual “statutory audit” be performed in accordance with PRC accounting
standards and that the books of account of foreign-invested enterprises are
maintained in accordance with Chinese accounting laws. Article 14 of the PRC
Wholly Foreign-Owned Enterprise Law requires a wholly foreign-owned enterprise
to submit certain periodic fiscal reports and statements to designated financial
and tax authorities, at the risk of business license revocation. Our subsidiary,
Harbin Xinda Macromolecule Material Co, Ltd., is a wholly foreign-owned
enterprise and is subject to these regulations.
As a
matter of enforcement, although the enforcement of substantive rights may appear
less clear than in the U.S., foreign-invested enterprises and wholly
foreign-owned enterprises are PRC-registered companies, which enjoy the same
status as other PRC-registered companies in business-to-business dispute
resolution. Because the Articles of Association of the Company do not specify a
method for the resolution of business disputes, the Company and other parties
involved in any business dispute are free to proceed either in the Chinese
courts or, if they are in agreement, through arbitration. Under PRC law, any
award rendered by an arbitration tribunal is enforceable in accordance with the
United Nations Convention on the Recognition and Enforcement of Foreign Arbitral
Awards. Therefore, PRC laws relating to business-to-business dispute resolution
should not work to the disadvantage of foreign-invested enterprises such as the
Company.
However,
the PRC laws and regulations governing our current business operations are
sometimes vague and uncertain. There are substantial uncertainties regarding the
interpretation and application of PRC laws and regulations, including but not
limited to the laws and regulations governing our business and the enforcement
and performance of our arrangements with suppliers in the event of the
imposition of statutory liens, death, bankruptcy and criminal proceedings. We
and any future subsidiaries are considered foreign persons or foreign-invested
enterprises under PRC laws, and as a result, we are required to comply with PRC
laws and regulations. These laws and regulations are sometimes vague and may be
subject to future changes, and their official interpretation and enforcement may
involve substantial uncertainty. The effectiveness of newly enacted laws,
regulations or amendments may be delayed, resulting in detrimental reliance by
foreign investors. New laws and regulations that affect existing and proposed
future businesses may also be applied retroactively. We cannot predict what
effect the interpretation of existing or new PRC laws or regulations may have on
our business.
9
In
addition, some of our present and future executive officers and directors, most
notably Mr. Jie Han, may be residents of the PRC and not of the United States,
and substantially all the assets of these persons are located outside the United
States. As a result, it could be difficult for investors to effect service of
process in the United States, or to enforce a judgment obtained in the United
States against us or any of these persons.
Risks
related to our business
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
We have a
limited operating history. Accordingly, you should consider our future prospects
in light of the risks and uncertainties experienced by early-stage companies in
evolving markets such as China. Some of these risks and uncertainties relate to
our ability to:
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•
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offer
new products to attract and retain a larger customer
base;
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increase
awareness of our brand and continue to develop customer
loyalty;
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respond
to competitive market conditions;
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•
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respond
to changes in our regulatory environment;
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•
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manage
risks associated with intellectual property rights;
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•
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maintain
effective control of our costs and expenses;
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•
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raise
sufficient capital to sustain and expand our business;
and
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•
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attract,
retain and motivate qualified
personnel
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Because
we are a relatively new company, we may not be experienced enough to address all
the risks in our business or in our expansion. If we are unsuccessful in
addressing any of these risks and uncertainties, our business may be materially
and adversely affected.
We
expect to incur costs related to our planned expansion and growth into new
plants and ventures which may not prove to be profitable. Moreover, any delays
in our expansion plans could cause our profits to decline and jeopardize our
business.
We
anticipate that our proposed expansion of our plants may include the
construction of new or additional facilities. Our cost estimates and projected
completion dates for construction of new production facilities may change
significantly as the projects progress. In addition, our projects will entail
significant construction risks, including shortages of materials or skilled
labor, unforeseen environmental or engineering problems, weather interferences
and unanticipated cost increases, any of which could have a material adverse
effect on the projects and could delay their scheduled openings. A delay in
scheduled openings will delay our receipt of increased sales revenues, which,
when coupled with the increased costs and expenses of our expansion, could cause
a decline in our profits.
Our plans
to finance, develop, and expand our facilities will be subject to the many risks
inherent in the rapid expansion of a high growth business enterprise, including
unanticipated design, construction, regulatory and operating problems, and the
significant risks commonly associated with implementing a marketing strategy in
changing and expanding markets. These projects may not become operational within
their estimated time frames and budgets as projected at the time the Company
enters into a particular agreement, or at all. In addition, the Company may
develop projects as joint ventures in an effort to reduce its financial
commitment to individual projects. The significant expenditures required to
expand our production plants may not ultimately result in increased
profits.
10
Our
business and operations are growing rapidly. If we fail to effectively manage
our operation, our business and operating results could be harmed.
To date
we have experienced, and continue to experience, rapid growth in our operations.
This has placed, and will continue to place, significant demands on our
management, and on our operational and financial infrastructure. If we do not
effectively manage our operations, the quality of our products and services will
suffer, which would negatively affect our operating results. If the necessary
funding can be obtained, we will be able to improve our operational, financial
and management controls and our reporting systems and procedures. The complexity
of this undertaking means that we are likely to face many challenges, some of
which are not yet foreseeable. Problems may occur with our raw material
acquisition, with the roll-out of efficient manufacturing processes, and with
our ability to sell our products to our customers. If we are not able to obtain
the necessary funding and operate efficiently, our business plan may fall short
of its goals, and our ability to manage our growth could be hurt.
We
operate in a highly competitive marketplace, which could adversely affect our
sales and financial condition.
We
compete on the basis of quality, price, product availability and security of
supply, product development and customer service. Some competitors are larger
than us in certain markets and may have greater financial resources that allow
them to be in a better position to withstand changes in the industry. Our
competitors may introduce new products based on more competitive alternative
technologies that may be causing us to lose customers which would result in a
decline in our sales volume and earnings. Our customers demand high quality and
low cost products and services. The cost and availability of energy and
strategic raw materials may continue to deteriorate domestically while improving
in the international market, thus advantaging our foreign competition. Any such
change in the global market could adversely impact the demand for our products.
Competition could cause us to lose market share and certain lines of business,
or increase expenditures or reduce pricing, each of which would have an adverse
effect on our results of operations, cash flows and financial
condition.
An inability to
protect our intellectual property rights could reduce the value of our products,
services and brand.
Our
unique technologies and techniques are important assets for us. We have applied
to the Chinese government for intellectual property right protection for some of
the technologies that we own. However, this legal effort may sometimes not be
sufficient or effective, due to the lack of effective legal enforcement in
China. Any significant impairment of our intellectual property rights could harm
our business or our ability to compete. In addition, since protection of our
intellectual property rights is costly and time consuming, any unauthorized use
of our to-be-patented technologies could increase our cost of business and
eventually harm our operating results. Moreover, since we only registered
intellectual property rights for our technologies in China, our technologies may
not be well protected in other countries in which our products may be sold in
the future.
An
increase in raw material prices could increase Harbin Xinda’s costs and decrease
its profits.
Changes
in the cost of raw materials could significantly affect Harbin Xinda’s business.
Since cost for raw materials constitute a substantial part of our product price,
increase in the cost of raw materials will decrease our profit margin. Although
we may offset such deduction of our profit by increasing the price for our
products, unforeseeable events in the market may occur to prevent the
effectiveness of this method. We also rely on two major suppliers to provide
such raw materials. Failure to maintain business relationship with these two
major suppliers may make the raw materials inaccessible, and thus hurt our
operation result.
Our
performance and planned growth depend on raw material supply and related
costs.
We
rely on Mr. Jie Han, Our Chairman and Chief Executive Officer, for the
management of our business, and the loss of his services could significantly
harm our business and prospects.
We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Jie Han, our Chairman
and Chief Executive Officer and President, for the direction of our business.
The loss of the services of Mr. Han for any reason could have a material adverse
effect on our business and prospects. We cannot assure you that the services of
Mr. Han will continue to be available to us, or that we will be able to find a
suitable replacement for Mr. Han. We can not guarantee Mr. Han’s continuing to
manage the Company. We do not have key man insurance on Mr. Han, and if he were
to die and we were unable to replace him for a prolonged period of time, we
could be unable to carry out our long-term business plan, and our future
prospects for growth, and our business, could be harmed.
11
Difficulties
with hiring, employee training and other labor issues could disrupt our
operations.
We may
not be able to successfully hire and train new team members or integrate those
team members into the programs and policies of the Company. Any such
difficulties would reduce our operating efficiency and increase our costs of
operations.
Increased
environmental regulation in China could increase our costs of
operation.
Certain
processes utilized in the production of modified plastics result in toxic
by-products. To date, the Chinese government has imposed only limited regulation
on the production of these by-products, and enforcement of the regulations has
been sparse. Recently, however, there is a substantial increase in focus on the
Chinese environment, which has inspired considerable new regulation. Because
Harbin Xinda plans to export plastics to the U.S. and Europe in coming years,
Harbin Xinda has developed sufficient safeguards in its manufacturing processes
to assure compliance with the environmental regulations imposed by European and
U.S regulators. This compliance regimen brings us into compliance with all
Chinese environmental regulations. Additional regulation, however, could
increase our cost of doing business, which would impair our
profitability.
We
may have difficulty establishing adequate management and financial controls in
China.
The
People’s Republic of China has only recently begun to adopt the management and
financial reporting concepts and practices that investors in the United States
are familiar with. We may have difficulty in hiring and retaining employees in
China who have the experience necessary to implement the kind of management and
financial controls that are expected of a United States public company. If we
cannot establish such controls, we may experience difficulty in collecting
financial data and preparing financial statements, books of account and
corporate records and instituting business practices that meet U.S.
standards.
We
may incur significant costs to ensure compliance with U.S. corporate governance
and accounting requirements.
We may
incur significant costs associated with our public company reporting
requirements, costs associated with newly applicable corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002, or
Sarbanes-Oxley, and other rules implemented by the Securities and Exchange
Commission. We expect all of these applicable rules and regulations to increase
our legal and financial compliance costs and to make some activities more
time-consuming and costly. We also expect that these applicable rules and
regulations may make it more difficult and more expensive for us to obtain
director and officer liability insurance and we may be required to accept
reduced policy limits and coverage or incur substantially higher costs to obtain
the same or similar coverage. As a result, it may be more difficult for us to
attract and retain qualified individuals to serve on our board of directors, on
committees of our board of directors or as executive officers.
As a
public company, we are required to comply with rules and regulations of the SEC,
including expanded disclosure, accelerated reporting requirements and more
complex accounting rules. This will continue to require additional cost
management resources. We will need to continue to implement additional finance
and accounting systems, procedures and controls as we grow to satisfy these
reporting requirements. In addition, we may need to hire additional legal and
accounting staff with appropriate experience and technical knowledge, and we
cannot assure you that if additional staffing is necessary that we will be able
to do so in a timely fashion. If we are unable to complete the required annual
assessment as to the adequacy of our internal control over financial reporting
or if our independent registered public accounting firm is unable to provide us
with an unqualified report as to the effectiveness of our internal controls over
financial reporting in the future, we could incur significant costs to become
compliant.
We
rely on highly skilled personnel and, if we are unable to retain or motivate key
personnel or hire qualified personnel, we may not be able to grow
effectively.
Our
performance largely depends on the talents and efforts of highly skilled
individuals. Our future success depends on our continuing ability to identify,
hire, develop, motivate and retain highly skilled personnel for all areas of our
organization. Our continued ability to compete effectively depends on our
ability to attract new technology developers and to retain and motivate our
existing contractors.
We
have limited business insurance coverage.
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products, and do not, to our
knowledge, offer business liability insurance. As a result, we do not have any
business liability insurance coverage for our operations. Moreover, while
business disruption insurance is available, we have determined that the risks of
disruption and cost of the insurance are such that we do not require it at this
time. Any business disruption, litigation or natural disaster might result in
substantial costs and diversion of resources.
12
Risks
related to an investment in our common stock
Our
Chief Executive Officer has a large degree of control on us through his position
and stock ownership and his interests may differ from other
stockholders.
Our Chief
Executive Officer, Mr. Jie Han, has options on shares of XD Engineering, which
is a major shareholder of China XD Plastics. As a result, Mr. Han will be able
to influence the outcome of stockholder votes on various matters, including the
election of directors and extraordinary corporate transactions such as business
combinations. Mr. Han’s interests may differ from that of other
stockholders.
Risks related to Series B Preferred
Stock.
There are
now 1,000,000 Series B Preferred Stock issued to China XD Plastics with 40% of
the total voting power of the Company’s common stock put together and other
consent rights on mergers and acquisitions, significant acquisition or
disposition of assets and change of control, among others. This gives China XD
Plastics significant voting power. Such voting power may enable China XD
Plastics to block actions that may benefit the common stockholders thus reduce
the value of their holdings.
We
do not intend to pay cash dividends to common stockholders in the foreseeable
future.
We
currently intend to retain all future earnings for use in the operation and
expansion of our business. We do not intend to pay any cash dividends in the
foreseeable future but will review this policy as circumstances dictate. Should
we decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiaries based in the PRC. Our operating
subsidiaries, from time to time, may be subject to restrictions on its ability
to make distributions to us, including restrictions on the conversion of local
currency into U.S. dollars or other hard currency and other regulatory
restrictions. See “Risks related to doing business in the People’s Republic of
China” above.
Our
common stock may be subject to the Penny Stock Regulations.
Our
common stock is, and may be subject to the SEC’s “penny stock” rules to the
extent that the price falls below $5.00 per share. Those rules, which require
delivery of a schedule explaining the penny stock market and the associated
risks before any sale, may further limit your ability to sell your
shares.
The SEC
has adopted regulations which generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share. Our common stock,
when and if a trading market develops, may fall within the definition of penny
stock and subject to rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000, or annual incomes exceeding $200,000 or $300,000, together with
their spouse).
For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser’s prior written consent to the transaction. Additionally, for any
transaction, other than exempt transactions, involving a penny stock, the rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the Commission relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer’s presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the “penny stock” rules may restrict the ability of broker-dealers
to sell our common stock and may affect the ability of investors to sell their
common stock in the secondary market.
Our
common stock is illiquid and subject to price volatility unrelated to our
operations.
The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in the same industry,
trading volume in our common stock, changes in general conditions in the economy
and the financial markets or other developments affecting our competitors or us.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our common stock.
13
A large
number of shares of common stock will be issuable for future sale which will
dilute the ownership percentage of our current holders of common stock. The
availability for public resale of those shares may depress our stock
price.
Also as a
result, there will be a significant number of new shares of common stock on the
market in addition to the current public float. Sales of substantial amounts of
common stock, or the perception that such sales could occur, and the existence
of warrants to purchase shares of common stock at prices that may be below the
then current market price of the common stock, could adversely affect the market
price of our common stock and could impair our ability to raise capital through
the sale of our equity securities.
Enforcement
against us or our directors and officers may be difficult.
Because
our principal assets are located outside of the U.S. and some or all our
directors and officers, both present and future, reside outside of the U.S., it
may be difficult for you to enforce your rights based on U.S. federal securities
laws against us and our officers and some directors or to enforce a U.S. court
judgment against us or them in the PRC.
In
addition, our operating company is located in the PRC and substantially all of
its assets are located outside of the U.S. It may therefore be difficult for
investors in the U.S. to enforce their legal rights based on the civil liability
provisions of the U.S. Federal securities laws against us in the courts of
either the U.S. or the PRC and, even if civil judgments are obtained in U.S.
courts, to enforce such judgments in PRC courts. Further, it is unclear if
extradition treaties now in effect between the U.S. and the PRC would permit
effective enforcement against us or our officers and directors of criminal
penalties under the U.S. Federal securities laws or otherwise.
Item
1B.
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Unresolved
Staff Comments
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Not
applicable.
Physical
Plant and Production
Our
executive offices and production facilities are located in the Harbin
Development Zone in the City of Harbin, which is the provincial capital of
Heilongjiang Province in northeast China. Our owned facility has a total usable
area of 7,359 square meters (79,212 square feet). The facility includes six
buildings with one office building attached by one workshop, one workshop, one
storage room, one transformer station, and two guard rooms. All the company’s
properties are insured by China Pacific Property Insurances Co.,
Ltd.
The land
on which our owned facility is located measures 14,715 square meters (158,391
square feet). The land use right was issued to Harbin Xinda by the City of
Harbin. The right will expire in 2053. We also have a long-term lease of the
production facilities with Harbin Xinda High-Tech Co., Ltd. (“Xinda High-Tech”),
a related party. The land on which our leased facility is located measures
16,537 square meters (178,009 square feet). The facility we rent includes three
buildings with two office buildings attached by one workshop respectively, two
workshops and one guard room. Compliance with Chinese environmental regulations
currently cost us 30,000 RMB (USD$4,392) annually. However during 2008 we
engaged in a ground remediation project to comply with new regulations. The
remediation project was already completed and we do not expect any additional
cost related to environmental regulation in 2010.
The
process of manufacturing modified plastic consists of modifying a standard
plastic (polypropylene, ABS, PA6, PA66, etc.) by adding various agents and
additives that will alter the physical and/or functional characteristics of the
plastic. Catalysts are added that facilitate the desired chemical reactions, all
of which occurs in a specially designed equipment. The resulting plastics are
then extracted from the equipment by an extraction technique that is proprietary
to Harbin Xinda. Further processing may involve additional blending, extrusion,
cooling and cutting, homogenizing and packing, as needed to meet the customer’s
requirements.
In
addition to its unique extraction technology, Harbin Xinda has developed its own
techniques and equipment for many of the steps in the production process. Among
the aspects of production for which Harbin Xinda has proprietary technology are
product formulae, a technique for combining extruder screws, and certain
stuffing techniques.
With these unique formulas and techniques, our products can satisfy often
clients’ standard requirements at a lower cost than competitive
products.
Our
facilities have been certified under the following international qualifications
criteria: ISO9001: 2000 quality management system certification and ISO/TS16949:
2002 international auto parts industry quality systems certification. The
government of China has designated Harbin Xinda as a National Torch Project and
a National Spark Plan Project, and has given Harbin Xinda the “Most Valuable
High Tech in China” award. Harbin Xinda is an executive member of the Council of
the Chinese Automobile Parts Association, a member of the Chinese Modified
Plastics Professional Committee, and a member of the Chinese Plastics
Engineering Committee.
14
Item
3.
|
Legal
Proceedings
|
None.
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
PART
II
Item
5.
|
Market
For Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
Prior to
November 27, 2009, our common stock was quoted on the Over-the-Counter Bulletin
Board (“OTCBB”) under the symbol “CXDC.” On November 27, 2009, we terminated our
listing on OTCBB and listed our common stock on NASDAQ Global Market also under
the symbol “CXDC.” The following table sets forth, for the indicated periods,
the high and low sales prices for our common stock, as reported on NASDAQ, and
prior to November 27, 2009, as reported on the OTCBB. The quotations represent
inter-dealer prices without retail markup, markdown or commission, and may not
necessarily represent actual transactions.
|
|
Year
Ended December 31, 2009
|
|
|
Year
Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
6.00 |
|
|
$ |
0.03 |
|
|
$ |
0.05 |
|
|
$ |
0.06 |
|
Second
Quarter
|
|
$ |
4.25 |
|
|
$ |
1.30 |
|
|
$ |
0.02 |
|
|
$ |
0.05 |
|
Third
Quarter
|
|
$ |
6.90 |
|
|
$ |
2.00 |
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
Forth
Quarter
|
|
$ |
11.25 |
|
|
$ |
5.20 |
|
|
$ |
0.01 |
|
|
$ |
0.01 |
|
On April
8, 2010, the closing price for our common stock, as reported by the Nasdaq, was
$6.38 per share and there were approximately 397 stockholders of
record.
Interwest
Transfer Company Inc. is the registrar and transfer agent for our common shares.
Its address is 1981 Murray Holladay Road, Suite 100, Salt Lake City,
UT 84117 USA, telephone: (801)272-9294.
Dividend
Policy
We have
not paid any cash dividends since our inception and do not anticipate paying any
cash dividends on our common stock in the foreseeable future. We expect to
retain our earnings, if any, to provide funds for the expansion of our business.
Future dividend policy will be determined periodically by the Board of Directors
based upon conditions then existing, including our earnings and financial
condition, capital requirements and other relevant factors.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
Company adopted the 2009 Stock Incentive Plan (the “2009 Plan”) on May 26, 2009,
which reserved 7,800,000 shares of common stock for issuance under the 2009
Plan. The 2009 Plan allows the Company to issue awards of incentive
non-qualified stock options and stock bonuses to directors, officers, employees
and consultants of the Company, which may be subject to
restrictions.
Recent
Sales of Unregistered Securities
Other
than as disclosed in our Current Report on Form 8-K dated December 3, 2009, no
securities were sold by the Company during the fiscal year ended December 31,
2009 that were not registered under the Securities Act.
Item
6.
|
Selected
Financial Data
|
Not
applicable.
15
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
We make
forward-looking statements in this report, in other materials we file with the
Securities and Exchange Commission (the “SEC”) or otherwise release to the
public, and on our website. In addition, our senior management might make
forward-looking statements orally to analysts, investors, the media and others.
Statements concerning our future operations, prospects, strategies, financial
condition, future economic performance (including growth and earnings) and
demand for our products and services, and other statements of our plans,
beliefs, or expectations, including the statements contained in this Item 7,
“Management’s Discussion and Analysis or Plan of Operation,” regarding our
future plans, strategies and expectations are forward-looking statements. In
some cases these statements are identifiable through the use of words such as
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,”
“target,” “can,” “could,” “may,” “should,” “will,” “would” and similar
expressions. We intend such forward-looking statements to be covered by the safe
harbor provisions contained in Section 27A of the Securities Act of 1933, as
amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). You are cautioned not to place undue
reliance on these forward-looking statements because these forward-looking
statements we make are not guarantees of future performance and are subject to
various assumptions, risks, and other factors that could cause actual results to
differ materially from those suggested by these forward-looking statements.
Thus, our ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on our operations and future prospects include, but are not limited to,
changes in: economic conditions generally and the automotive modified
plastics
market specifically, legislative or regulatory changes that affect our business,
including changes in regulation, the availability of working capital, the
introduction of competing products, and other risk factors described herein.
These risks and uncertainties, together with the other risks described from
time-to-time in reports and documents that we filed with the SEC should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Indeed, it is likely that some of our
assumptions will prove to be incorrect. Our actual results and financial
position will vary from those projected or implied in the forward-looking
statements and the variances may be material. We expressly disclaim any
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise, except as required by
law.
General
We were
originally incorporated as NB Payphones Ltd. under the laws of the state of
Pennsylvania on November 16, 1999. On December 27, 2005, we migrated our state
of organization to the state of Nevada and effective March 23, 2006, our name
changed to NB Telecom, Inc.
On
December 24, 2008, NB Telecom acquired all of the outstanding capital stock of
Favor Sea BVI, a British Virgin Islands corporation, through China XD Plastics,
a Nevada corporation wholly owned by the Company. Favor Sea BVI is a holding
company whose only asset, held through a subsidiary, is 100% of the registered
capital of Harbin Xinda.
Harbin
Xinda is a manufacturer and developer of modified plastics. We believe that
Harbin Xinda is one of the primary modified plastics manufacturers for
automotive applications in the PRC, developing and producing made-to-order
modified plastics and providing after-sales services to such automotive brands
as Audi, Red Flag, VW Golf, and Mazda6.
16
Results
of Operations
The
following table sets forth information from our statements of operations for the
years ended December 31, 2009 and 2008, in dollars:
|
|
|
|
|
|
|
|
The
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
|
|
|
(Restated)
|
|
Net
sales
|
|
$ |
135,745,329 |
|
|
$ |
75,765,428 |
|
Cost
of sales
|
|
$ |
105,160,568 |
|
|
$ |
58,431,799 |
|
Gross
profit
|
|
$ |
30,584,761 |
|
|
$ |
17,333,629 |
|
Operating
expenses
|
|
$ |
12,950,793 |
|
|
$ |
8,323,199 |
|
Operating
income
|
|
$ |
17,633,968 |
|
|
$ |
9,010,430 |
|
Other
income
|
|
$ |
107,999 |
|
|
$ |
28,283 |
|
Interest
expense, Net
|
|
$ |
(1,418,395 |
) |
|
$ |
(687,659 |
) |
Net
income
|
|
$ |
4,023,266 |
|
|
$ |
8,213,583 |
|
Comprehensive
income
|
|
$ |
4,018,965 |
|
|
$ |
9,121,652 |
|
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net
sales
During
the year ended December 31, 2009, we had net sales of $135,745,329, as compared
with net sales of $75,765,428 during the year ended December 31,
2008, an increase of $59,979,901 or 79.2% due to our increased and expanded
sales both in volume and of new variety of products to our existing and new
customers.
Cost
of sales & gross margin
During
the year ended December 31, 2009, we had cost of sales of $105,160,568, as
compared with cost of sales of $58,431,799 during the year ended December 31,
2008, an increase of approximately $46,728,769 or 80.0%, reflecting the increase
in net sales. The gross profit rose to $30,584,761 in 2009, or a 76.4% increase
during the year ended December 31, 2009 compared with $17,333,629 during the
year ended December 31, 2008. Our gross margin decreased slightly from 22.9%
during the year ended December 31, 2008 to 22.5% during the year ended December
31, 2009. The decrease was mainly attributed to the slight increase of raw
material price and the slight increase of percentage of lower margin products in
response to increasing demand of modified plastics used by economy vehicle
models in China. Such increase in demand was spurred by the sales tax cuts and
government subsidies for economy vehicle models.
17
Operating
Expenses
Our
operating expenses were $12,950,793 during the year ended December 31, 2009,
compared with $8,323,199 (restated) during the year ended December 31, 2008, an
increase of $4,627,594 or approximately 55.6%. The increase in operating
expenses was principally due to the increase in stock-based compensation
expense, incentive option amortization expense, depreciation expenses and
payroll expenses. Selling expenses increased slightly from $322,650 during the
year ended December 31, 2008 to $400,731 during the year ended December 31, 2009
as we increased our efforts to obtain more customers. General and administrative
expenses increased from $7,221,555 (restated) during the year ended December 31,
2008 to $11,220,406 for the year ended December 31, 2009, reflecting the
increase in stock-based compensation expense. Research and development expenses
increased from $778,994 during the year ended December 31, 2008 to $1,329,656
during the year ended December 31, 2009 reflecting our increased efforts in new
product development. As a result, our operating income increased to $17,633,968
during the year ended December 31, 2009 from $9,010,430 (restated) during the
year ended December 31, 2008.
Interest
Expense, Net
Interest
expense increased $730,736 from $687,659 during the year ended December 31, 2008
to $1,418,395 for the year ended December 31, 2009. The increase in interest
expense resulted from the increase in our loans during 2009, as we borrowed to
fund the rapid growth in our sales.
Changes
in Fair Value of Warrants and Derivative Liabilities
During
the year ended December 31, 2009, we had a non-cash charge of $12,221,972, which
resulted from the changes in the fair value of the warrants and embedded
conversion feature of the convertible preferred stock issued to investors in
December 2009.
Net
Income
As a
result of the factors described above, we had net income of $4,023,266 during
the year ended December 31, 2009, compared with $8,213,583 (restated) during the
year ended December 31, 2008.
Comprehensive
Income
As a
result of a currency translation adjustment, our comprehensive income was
$4,018,965 during the year ended December 31, 2009, compared with $9,121,652
(restated) during the year ended December 31, 2008.
Liquidity
and Capital Resources
As of
December 31, 2009, we had $6,850,784 in cash and cash equivalents, compared to
only $3,869,035 as of December 31, 2008. There was a net increase in cash and
cash equivalent of $2,981,749 for the year ended December 31, 2009. The net
increase in cash and cash equivalents for the year was mainly due to cash
generated from operations, more specifically net income offset by increase in
purchase of property, plant and equipment and repayments of bank acceptance note
payable and related party loans.
Operations
For the
year ended December 31, 2009, cash provided by operations was $17,137,502 as
opposed to $4,874,185 used in operating activities for the year ended December
31, 2008. Increase in our cash liquidity is mainly due to the increase in
accounts payable and other payables, decrease in accounts receivable and
increase in non-cash expenses such as changes in fair value of warrants and
embedded derivatives, depreciation and amortization expense and stock-based
compensation expense.
Investments
Cash used
in investing activities was $13,782,468 for the year ended December 31, 2009 as
compared to $11,926,327 for the year ended December 31, 2008. We have invested
heavily in purchases of new production equipment, which accounted for the
majority of the cash used in investing activities in 2009.
18
Financing
For the
year ended December 31, 2009, net cash used in financing activities was $378,480
as compared to $20,509,249 provided for the same period in 2008. Decrease in
cash provided by financing activities is due to the net effect of proceeds
received from the issuance of Series C convertible redeemable preferred stock
offset by the repayment of bank acceptance notes payable and related party
loans.
The
primary sources of cash in 2009 were from operating activities. For the year
ended December 31, 2009, cash provided by operations was
$17,137,502.
Based on
past performance and current expectations, we believe our cash and cash
equivalents and cash generated from operations will satisfy our working capital
needs, capital expenditures and other liquidity requirements associated with our
operations for at least the next 12 months.
The
majority of the Company’s revenue and expenses were denominated primarily in
Renminbi (“RMB”), the currency of the People’s Republic of China. There is no
assurance that exchange rates between the RMB and the U.S. Dollar will remain
stable. The Company does not engage in currency hedging. Inflation has not had a
material impact on the Company’s business.
Off-Balance
Sheet Arrangements
Neither
us, nor any of our subsidiaries has any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on their financial
condition or results of operations.
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Not
applicable.
Item
8.
|
Financial
Statements and Supplementary Data
|
The
Consolidated Financial Statements of the Company and its subsidiaries as of
December 31, 2009 and 2008, including the notes thereto, together with the
report of Moore Stephens Hong Kong and Bagell Josephs Levine & Company, LLC
(“BJL”) are presented beginning on page F-1 of this report.
Item
9.
|
Changes
In and Disagreements With Accountants On Accounting and Financial
Disclosure
|
On
November 2, 2009, the Company changed its principal independent accountants. On
such date, BJL was dismissed from serving as the Company’s principal independent
accountants and the Company retained Moore Stephens Hong Kong (“MSHK”) as its
principal independent accountants. The decision to change accountants was
approved by the Company’s Board of Directors.
The Dismissal of Bagell
Joseph Levine & Company, LLC
BJL was
the independent registered public accounting firm for the Company from December
31, 2008 to November 2, 2009. None of BJL’s reports on the Company’s financial
statements from December 31, 2008 to November 2, 2009, (a) contained an adverse
opinion or disclaimer of opinion, (b) was modified as to uncertainty other than
mentioned below, audit scope, or accounting principles, or (c) contained any
disagreements on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements, if
not resolved to the satisfaction of BJL, would have caused it to make reference
to the subject matter of the disagreements in connection with its reports. None
of the reportable events set forth in Item 304(a)(1)(ii) of Regulation S-K
occurred during the period in which BJL served as the Company’s principal
independent accountants.
In
accordance with Item 304(a)(3), the Company has provided BJL with a copy of this
disclosure as previously made on the Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 6, 2009 and has requested that
BJL furnish it with a letter addressed to the Securities and Exchange Commission
stating whether it agrees with the above statements, and if not, stating the
respects in which it does not agree. A copy of the letter from BJL addressed to
the Securities and Exchange Commission dated November 4, 2009 was filed as an
exhibit to the Current Report on Form 8-K on November 6, 2009.
The Engagement of Moore
Stephens Hong Kong
During
the fiscal years ended December 31, 2008 and 2007 and through November 2, 2009,
the Company did not consult with MSHK on (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that may be rendered on the Company’s financial statements, and
MSHK did not provide either in a written report or oral advice to the Company
that was an important factor considered by the Company in reaching a decision as
to any accounting, auditing, or financial reporting issue; or (ii) the subject
of any disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the
related instructions, or a reportable event within the meaning set forth in Item
304 (a)(1)(v) of Regulation S-K.
19
Item 9A. Controls and
Procedures
(a) Evaluation of Disclosure Controls
and Procedures
The
Company’s management has evaluated, under the supervision and with the
participation of the Company’s Chief Executive Officer and Chief Financial
Officer, the effectiveness of the design and operations of the Company’s
disclosure controls and procedures (as defined in Securities Exchange Act Rule
13a-15(e)), as of the end of the period covered by this annual report. Based on
that evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer have concluded that the evaluation of the effectiveness of our
disclosure controls and procedures was completed; our disclosure controls and
procedures were not effective.
(b) Management’s Annual Report on
Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining an adequate
system of internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Further, because of changes in conditions,
effectiveness of internal control over financial reporting may vary over
time.
A
significant deficiency is a control deficiency, or combination of control
deficiencies, that adversely affects the company’s ability to initiate,
authorize, record, process, or report external financial data reliably in
accordance with generally accepted accounting principles such that there is more
than a remote likelihood that a misstatement of the company’s annual or interim
financial statements that is more than inconsequential will not be prevented or
detected. An internal control material weakness is a significant deficiency, or
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.
We have
evaluated the effectiveness of our internal control over financial reporting as
of December 31, 2009. This evaluation was performed using the Internal Control –
Evaluation Framework developed by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”). Based on such evaluation, management
identified deficiencies that were determined to be a material
weakness.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. Because of the
material weakness described below, management concluded that our internal
control over financial reporting was not effective as of December 31,
2009.
The
specific material weakness and significant deficiency identified by the
Company’s management as of December 31, 2009 is described as
follows:
Material Weakness
Inadequate
US GAAP expertise — The current staff in the accounting department are
inexperienced in US GAAP and they were primarily engaged in ensuring compliance
with PRC accounting and reporting requirements for our operating subsidiaries
are not required to meet or apply US GAAP requirements. They need substantial
training to meet the higher demands of a US public company. The accounting
skills and understanding necessary to fulfill the requirements of US GAAP-based
reporting, including the preparation of financial statements and consolidation,
are inadequate. Such inexperience with US GAAP has caused us to restate our
consolidated financial statement for the year ended December 31, 2008, with
respect to the accounting treatment of certain options under ASC Topic 718 which
should have been accounted for in the Company’s consolidated financial
statements as share-based payments awarded to an employee by a related party as
compensation for services rendered.
20
The
Company did not have sufficient and skilled accounting personnel with an
appropriate level of technical accounting knowledge and experience in the
application of US GAAP commensurate with the Company’s financial reporting
requirements, which resulted in a number of internal control deficiencies that
were identified as being significant. The Company’s management believes that the
number and nature of these significant deficiencies, when aggregated, was
determined to be a material weakness.
Significant
Deficiency
The
Company lacks qualified resources to perform the internal audit functions
properly. In addition, the scope and effectiveness of the Company’s internal
audit function are yet to be developed. We are committed to establishing the
internal audit functions but due to limited qualified resources in the region,
we were not able to hire sufficient internal audit resources before the end of
2009. However, internally we have started the process to recruit more senior
qualified people in order to improve our internal control procedures.
Externally, we also seek a qualified consultant to assist the Company in
improving the Company’s internal control system based on COSO Framework. We also
will increase our efforts to hire the qualified resources.
Remediation
Initiative
In 2009,
the Company engaged Ernst & Young (China) Advisory Limited, Beijing Branch
Office to assist in improving the Company’s internal control system based
on the COSO Framework. Internally, the Company has recruited more senior
qualified people in order to improve the internal control procedures. The
Company believes that it will be able to be in SOX compliance in
2010.
On May 1,
2009, the Board of Directors appointed Mr. Taylor Zhang as the Chief Financial
Officer of the Company. Mr. Zhang has over seven years
of experience in finance and operations in a broad range of
industries. Immediately prior to joining China XD Plastics, Mr. Zhang
served as CFO of Advanced Battery Technologies, Inc (Nasdaq: ABAT). From
2007 to 2008, he served as Executive Vice President of Finance of China
Natural Gas, Inc. (Nasdaq: CHNG). From 2005 to 2007, Mr. Zhang worked as
a research analyst in New York Private Equity. From 2000 to 2002 he
was employed as Finance Manager by Datong Thermal Power Limited. He holds a
MBA from University of Florida and a Bachelor’s Degree in mechanical and
electronic engineering from Beijing Technology and Business University. In
addition, the Company hired Ms. Xuan (Donna) Zhou, a CPA licensed in both New
York and Virginia, as finance manager in July 2009 in its US
office.
Conclusion
Despite
the material weakness and deficiencies reported above, the Company’s management
believes that its consolidated financial statements included in this report
fairly present, in all material respects, the Company’s financial condition,
results of operations and cash flows for the years presented and that this
report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements misleading, in light of the
circumstances under which such statements were made during the years covered by
this report.
(c) Changes in Internal Control over
Financial Reporting
Except as
described above, there were no other changes in its internal controls over
financial reporting in connection with its fourth quarter evaluation that would
materially affect, or are reasonably likely to materially affect, its internal
control over financial reporting.
Item
9B.
|
Other
Information
|
None.
21
PART
III
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
Directors
and Executive Officers
Each
director is elected for until the next annual meeting of shareholders and their
successor is elected and qualified.
The
following is a list of the names and ages of our directors and executive
officers:
|
|
|
|
Positions
with the Company
|
Jie
Han
|
|
44 |
|
Chairman
of the Board of Directors and Chief Executive Officer
|
Taylor
Zhang
|
|
31 |
|
Chief
Financial Officer and Director
|
Qingwei
Ma
|
|
35 |
|
Chief
Operating Officer and Director
|
Junjie
Ma
|
|
34 |
|
Chief
Technology Officer
|
Yong
Jin
|
|
74 |
|
Director
|
Lawrence
W. Leighton
|
|
75 |
|
Director
|
Cosimo
J. Patti
|
|
59 |
|
Director
|
Linyuan
Zhai
|
|
60 |
|
Director
|
All
directors hold office until the next annual meeting of our shareholders and
until their successors have been elected and qualified. Officers serve at the
pleasure of the Board of Directors.
Jie Han. Mr. Han co-founded
Harbin Xinda in 2004, and has been employed by Harbin Xinda since that time. In
January 2008 Mr. Han was appointed Chairman and Chief Executive Officer of
Harbin Xinda. Prior to organizing Xinda High-Tech, which was founded in 2003,
Mr. Han had been associated with the Harbin Xinda Nylon Factory, which he
founded in 1985. With 24 years of experiences in the industry, Mr. Jie Han is an
expert in the management and financial works dealing with the manufacture and
distribution of modified plastic products. Mr. Han currently serves as an
executive director of China Plastic Processing Industry Association and is also
a director of the Heilongjiang Industry and Commerce Association. In addition,
Mr. Han serves as a deputy to the Harbin Municipal People’s
Congress.
Taylor Zhang. Mr.
Zhang has over seven years of experience in finance and operation
in a broad range of industries. Immediately prior to joining China XD Plastics,
Mr. Zhang served as CFO of Advanced Battery Technologies, Inc (Nasdaq:
ABAT). From 2007 to 2008, he served as Executive Vice President of Finance
of China Natural Gas, Inc. (Nasdaq: CHNG). From 2005 to 2007, Mr. Zhang worked
as a research analyst in New York Private Equity. From 2000 to 2002 he
was employed as Finance Manager by Datong Thermal Power Limited. He holds a
MBA from University of Florida and a Bachelor’s Degree in mechanical and
electronic engineering from Beijing Technology and Business
University.
Qingwei Ma. Mr. Ma has been
employed as General Manager of Harbin Xinda since it was founded in 2004. In
2008 he was promoted to Chief Operating Officer and appointed Director to the
Board in 2008. Prior to joining Harbin Xinda, Mr. Ma was employed for six years
by Harbin Xinda Nylon Factory as Manager of Quality Assurance, then as Manager
of Research and Development, and finally as Production Manager. In 1997 Mr. Ma
was awarded a bachelor’s degree by the Northern China Technology University,
where he specialized in the chemical engineering of high polymers. Mr. Ma has 11
years of experiences in the industry. He also published two articles in China’s
key journals in the areas of modified plastic industry. In 2001 Mr. Ma was
selected as “Harbin Quality Work Advanced Enterprise and Advanced Worker”; in
2004 he was awarded the Heilongjiang First Professional Manager Qualification
Certificate. One of his inventions, “compound nano modified materials dedicated
to the automobile bumper” won the “Science and Technology Progress Awards”
issued by Harbin Municipality.
Junjie Ma. Mr. Ma graduated
from Beijing University of Science and Technology, majored in Polymer materials
and engineering. He was appointed acting Chief Technology Officer of China XD
Plastics in 2009 and Director of the Board in 2008. He resigned as Director
of the Board in 2009. He was a technician of Harbin Longjiang Electrical Plant
from 1997 to 2004 and was a supervisor and manager of Harbin Xinda Macromolecule
Material Inc. from 2004 to 2007. Since 2008, he was elected to be Head of
Research Institute of Harbin Xinda Macromolecule Material Co., Ltd. Mr. Junjie
Ma is a polymer materials engineers and has developed more than 120 plastic
additives, modified plastics for automobiles and engineering plastics among
which 50 products have been approved by auto enterprises. A number of products
have been awarded as the National Torch Program projects, Spark Projects and
Harbin City Important New Products project.
22
Yong Jin. Mr Jin, a professor
at Tsinghua University and an academician of the Chinese Academy of Engineering,
is an executive member of Chemical Industry and Engineering Society of China and
Chinese society of particuology, vice chairman of China Institute of Ecological
Economy, director of Industrial Ecology Economy and Technology Committee,
Council Convenor of the Chemical discipline in the State Council Academic
Degrees Committee, professional advisers for Beijing Municipal Government,
Lectureship Award recipient in fluidization by American Institute of Chemical
Engineers (AIChE), the world's leading organization for chemical engineering
professionals, with more than 40,000 members from 93 countries, consultant for
the Germany magazine "Chemical engineering & technology". Mr. Jin has
published and presented more than 350 papers in important journals and
conferences domestically and internationally, 138 of which were included in
Science. Mr. Jin also has more than 30 patent applications.
Lawrence W. Leighton. Mr.
Leighton has had an extensive 40-year international investment banking
career. Mr. Leighton received his BSE degree in engineering from Princeton
University and an MBA degree from Harvard Business School. His previous
positions include Co-Head of the Corporate Finance
Department at Clark, Dodge & Co., Limited Partner of Bear Stern,
Managing Director of JPMorgan Chase Bank and CEO of the U.S. investment bank of
Credit Agricole, the major French Bank. Mr. Leighton has been an
Independent Director of China Natural Gas, Inc. (NASDAQ: CHNG) since August
2008.
Cosimo J. Patti. Mr. Patti’s
previous positions include roles as Senior Director of Strategy Management,
Director of Business Strategy, and Senior Vice President of Lehman Brothers. He
is an Arbitrator of SEC and National Association of Securities. Mr. Patti has
been an Independent Director of American Oriental Bioengineering Inc. (NYSE:
AOB) since 2004. Mr. Patti has been an Independent Director of American Oriental
Bioengineering, Inc and Advanced Battery Technologies, Inc.
Linyuan Zhai. Mr. Zhai worked for
China FAW Group Corporation for 37 years with abundant experience in terms of
technology, production, and business management. He is a Senior Expert in the
auto industry. Mr. Zhai served as general manager of automobile manufacturing,
successfully led Four Ring Company, a subsidiary of FAW group, to go public in
China. He is one of the pioneers and outstanding contributors of FAW group’s
success.
Meetings
of the Board of Directors
The Board
of Directors held ten meetings during fiscal year 2009, one of which were
regularly scheduled meetings and two of which were special meetings. The Board
also acted seven times by unanimous written consent. Each of the foregoing
directors attended at least 75% of the aggregate number of meetings of our Board
of Directors and the committees on which each director served during fiscal year
2009 and was eligible to attend.
Board
Leadership Structure
The Board
of Directors believes that Mr. Han’s service as both Chairman of the Board and
Chief Executive Officer is in the best interest of the Company and its
stockholders. Mr. Han possesses detailed and in-depth knowledge of the issues,
opportunities and challenges facing the Company and its business and is thus
best positioned to develop agendas that ensure that the Board’s time and
attention are focused on the most critical matters. His combined role enables
decisive leadership, ensures clear accountability, and enhances the Company’s
ability to communicate its message and strategy clearly and consistently to the
Company’s shareholders, employees, customers and suppliers.
Family
Relationships
There are
no family relationships between or among any of our current directors, executive
officers or persons nominated or charged by the Company to become directors or
executive officers. There are no family relationships among our officers and
directors and the officers and directors of our direct and indirect
subsidiaries.
Involvement
in Certain Legal Proceedings
None of
our directors or executive officers has, during the past ten years:
(a)
|
Had
any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time of
the bankruptcy or within two years prior to that
time;
|
(b)
|
Been
convicted in a criminal proceeding or subject to a pending criminal
proceeding;
|
(c)
|
Been
subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction or any
federal or state authority, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of business,
securities, futures, commodities or banking activities;
and
|
(d)
|
Been
found by a court of competent jurisdiction (in a civil action), the
Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated a federal or state securities or commodities
law, and the judgment has not been reversed, suspended, or
vacated.
|
23
Committees
of the Board of Directors
Our board
of directors formed its committees and adopted its corporate governance charters
and policies at the May 26, 2009 meeting. At this meeting, the board adopted
Corporate Governance Guidelines and formed three committees, the Audit,
Nominating and Compensation Committees. Charters were approved for each of the
committees.
The Board
of Directors has the following standing committees: (1) Audit Committee, (2)
Nominating Committee and (3) Compensation Committee. The Board of Directors has
adopted a written charter for each of these committees, copies of which can be
found on our website at www.chinaxd.net in the Investor Relations section of our
website. All members of the committees appointed by the Board of Directors are
non-employee directors and are independent directors within the meaning set
forth in the NASDAQ rules, as currently in effect.
The
following chart details the current membership of each committee:
|
|
|
|
|
|
|
|
|
|
Lawrence
Leighton
|
|
C |
|
|
M |
|
|
M |
|
Cosimo
Patti
|
|
M |
|
|
M |
|
|
C |
|
Linyuan
Zhai
|
|
M |
|
|
C |
|
|
M |
|
Yong
Jin
|
|
|
|
|
M |
|
|
|
|
M=Member
|
|
|
|
|
|
|
|
|
|
C=Chair
|
|
|
|
|
|
|
|
|
|
Audit
Committee.
On May
26, 2009, the Board of Directors appointed an Audit Committee chaired by Mr.
Leighton with Mr. Patti and Mr. Zhai as committee members. On July 27, 2009, the
Board adopted a charter which provides that the Audit Committee, (i) oversees
our accounting, financial reporting and audit processes; (ii) appoints,
determines the compensation of, and oversees, the independent auditors; (iii)
pre-approves audit and non-audit services provided by the independent auditors;
(iv) reviews the results and scope of audit and other services provided by the
independent auditors; (v) reviews the accounting principles and practices and
procedures used in preparing our financial statements; and (vi) reviews our
internal controls, a copy of which is available on our website at www.chinaxd.net in
the Investor Relations section.
The Audit
Committee works closely with management and our independent auditors. The Audit
Committee also meets with our independent auditors without members of management
present, on a regular basis, following completion of our auditors’ annual audit
and prior to our earnings announcements, to review the results of their work.
The Audit Committee also meets with our independent auditors to approve the
annual scope and fees for the audit services to be performed.
Each of
the Audit Committee members is an independent director within the meaning set
forth in the rules of the SEC, as currently in effect. In addition, the Board of
Directors has determined that Mr. Leighton is an “audit committee financial
expert” as defined by SEC rules.
The Audit
Committee held two meetings during fiscal year 2009. Each director who is a
member of the Audit Committee attended at least 75% of the aggregate number of
meetings of the Audit Committee during fiscal year 2009.
AUDIT
COMMITTEE REPORT
The
following is the report of the Audit Committee of the Board of Directors. The
Audit Committee has reviewed and discussed our audited financial statements for
the fiscal year ended December 31, 2009 with our management. In addition, the
Audit Committee has discussed with Moore Stephens Hong Kong, our independent
auditors, the matters required to be discussed by Statement on Auditing
Standards No. 61, as amended (Communications with Audit Committee). The Audit
Committee also has received the written disclosures and the letter from Moore
Stephens Hong Kong as required by the Public Company Accounting Oversight Board
Rule 3526 “Communications with Audit Committees Concerning Independence” and the
Audit Committee has discussed the independence of Moore Stephens Hong Kong with
that firm.
Based on
the Audit Committee’s review of the matters noted above and its discussions with
our independent auditors and our management, the Audit Committee recommended to
the Board of Directors that the financial statements be included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2009.
Respectfully
submitted by:
Lawrence
Leighton (Chair)
Cosimo
Patti
Linyuan
Zhai
24
Nominating
Committee
On May
26, 2009, the Board of Directors appointed a Nominating Committee chaired by Mr.
Zhai with Mr. Patti and Mr. Jin as committee members. On July 27, 2009, the
Board adopted a charter which provides that the Nominating Committee (i)
assisting the Board by identifying individuals qualified to become Board members
and recommending to the Board director candidates to stand for election at the
next annual meeting of stockholders; (ii) making recommendations to the Board as
to the independence of each director; (iii) monitoring significant developments
in the law and practice of corporate governance and of the duties and
responsibilities of directors of public companies; (iv) leading the Board in any
annual performance self-evaluation, including establishing criteria to be used
in connection with such evaluation; and (v) developing and recommending items
for Boar; meeting agendas.
Each
current member of the Governance, Compensation and Nominating Committee is an
independent director within the meaning set forth in the rules of the Nasdaq
Stock Market, as currently in effect.
The
Nominating Committee considers properly submitted stockholder recommendations
for candidates for membership on the Board of Directors as described below under
“Identification and Evaluation of Nominees for Directors.” In evaluating such
recommendations, the Nominating Committee seeks to achieve a balance of
knowledge, experience and capability on the Board of Directors and to address
the membership criteria set forth under “Director Qualifications.” Any
stockholder recommendations proposed for consideration by the Nominating
Committee should include the candidate’s name and qualifications for membership
on the Board of Directors and should be addressed to the attention of our
Corporate Secretary — re: stockholder director recommendation.
Director
Qualifications. The Nominating Committee does not have any
specific, minimum qualifications that must be met by a Nominating
Committee-recommended nominee, but uses a variety of criteria to evaluate the
qualifications and skills necessary for members of our Board of Directors. Under
these criteria, members of the Board of Directors should have the highest
professional and personal ethics and values. A director should have broad
experience at the policy-making level in business, government, education,
technology or public interest. A director should be committed to enhancing
stockholder value and should have sufficient time to carry out their duties, and
to provide insight and practical wisdom based on their past experience. A
director’s service on other boards of public companies should be limited to a
number that permits them, given their individual circumstances, to perform their
director duties responsibly. Each director must represent the interests of the
Company’s stockholders.
Identification and
Evaluation of Nominees for Directors. The Governance,
Compensation and Nominating Committee utilizes a variety of methods for
identifying and evaluating nominees for director. The Governance, Compensation
and Nominating Committee regularly assesses the appropriate size of the Board of
Directors, and whether any vacancies on the Board of Directors are expected due
to retirement or otherwise. In the event that vacancies are anticipated, or
otherwise arise, the Governance, Compensation and Nominating Committee considers
various potential candidates for director. Candidates may come to the attention
of the Governance, Compensation and Nominating Committee through current members
of the Board of Directors, professional search firms, stockholders or other
persons. These candidates are evaluated at regular or special meetings of the
Nominating Committee, and may be considered at any point during the year. The
Nominating Committee considers properly submitted stockholder recommendations
for candidates for the Board of Directors. In evaluating such recommendations,
the Nominating Committee uses the qualifications standards discussed above and
seeks to achieve a balance of knowledge, experience and capability on the Board
of Directors.
A copy of
the Committee’s written charter is available in the Investor Relations section
of our website at www.chinaxd.net.
The
Nominating Committee held two meetings during fiscal year 2009. Each director
who is a member of the Nominating Committee attended at least 75% of the
aggregate number of meetings of the Committee during fiscal year
2008.
25
Compensation
Committee
On May
26, 2009, the Board of Directors appointed a Compensation Committee chaired by
Mr. Patti with Mr. Leighton and Mr. Zhai as committee members. On July 27, 2009,
the Board adopted a charter which provides that the Compensation Committee shall
discharge the Board's responsibilities relating to compensation of the Company’s
executive officers. The Committee has overall responsibility for approving and
evaluating the executive officer compensation plans, policies and programs of
the Company. A copy of the charter is available on our website at www.chinaxd.net in
the Investor Relations section.
The
Compensation Committee held two meetings during fiscal year 2009. Each director
who is a member of the Compensation Committee attended at least 75% of the
aggregate number of meetings of the Committee during fiscal year
2009.
Code
of Ethics
On July
27, 2009 we adopted a Code of Business Conduct, and an Insider Trading policy.
Copies of these policies are available on our corporate web site at www.chinaxd.net. We
will disclose amendments to, or waivers from, our policies on our corporate web
site at www.chinaxd.net.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our executive
officers and directors and persons who own more than 10% of a registered class
of our equity securities to file with the Securities and Exchange Commission
initial statements of beneficial ownership, reports of changes in ownership and
annual reports concerning their ownership of our common stock and other equity
securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and
greater than 10% shareholders are required by the Securities and Exchange
Commission regulations to furnish our Company with copies of all Section 16(a)
reports they file. One late Form 3 was filed by each of Messrs. Jie Han, Junjie
Ma, Qingwei Ma, Meijuan He, Taylor Zhang, Patti Cosmo and a 10% stockholder, XD
Engineering Plastics Company Limited. Other than as set forth above, we believe
that, during fiscal 2009, our directors, executive officers and 10% stockholders
complied with all Section 16(a) filing requirements. In making this statement,
we have relied upon examination of the copies of Forms 3, 4 and 5, and
amendments thereto, provided to the Company and the written representations of
its directors and executive officers.
Item
11.
|
Executive
Compensation
|
The
following table is a summary of the compensation paid to our executive officers
for the two years ended December 31, 2009 and 2008.
SUMMARY
COMPENSATION TABLE
Name
and Principal Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
Incentive Plan Compensation
($)
|
|
|
Change
in Pension Value and Nonqualified Deferred Compensation
Earnings
($)
|
|
|
All
Other Compensation
($)
|
|
|
|
|
Jie
Han,
CEO
|
|
2009
|
|
|
17,567 |
|
|
|
- |
|
|
|
- |
|
|
|
3,065,388 |
(2) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,082,955 |
|
|
|
2008
|
|
|
103,632 |
|
|
|
- |
|
|
|
- |
|
|
|
5,473,907
|
(2) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,577,539 |
|
Taylor
Zhang, CFO (1)
|
|
2009
|
|
|
72,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,000 |
|
|
|
2008
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
(1)
|
Mr.
Zhang was appointed as our CFO on May 1,
2009.
|
|
The options were issued
pursuant to an Incentive Option Agreement dated May 16, 2008 between Ms.
Piao and Mr. Han whereby Ms. Piao granted Mr. Han 40,000 options to
purchase all the shares of XD Engineering, the controlling
shareholder of the Company, subject to the Company achieving certain
financial performance targets, which the Company believes should be
accounted for as share-based compensation awarded to an employee by a
related party as compensation for services rendered in accordance to ASC
Topic 718.
|
26
The
following is a summary of all options, unvested stock and equity incentive plans
for our Executive Officers for the year ended December 31, 2009.
Outstanding
Equity Awards at Fiscal Year-End
|
|
|
|
|
|
|
|
|
Name
of securities underlying unexercised options
(#)
exercisable
|
|
|
Number
of securities underlying unexercised options
(#)
unexercisable
|
|
|
Equity
incentive plan awards:
Number
of securities underlying unexercised unearned options
(#)
|
|
|
Option
exercise price
($)
|
|
|
|
|
|
Number
of shares or units of stock that have not vested
(#)
|
|
|
Market
value of shares or units of stock that have not vested
(#)
|
|
|
Equity
incentive plan awards:
Number
of unearned shares, units or other rights that have not
vested
(#)
|
|
|
Equity
incentive plan awards: Market or payout value of unearned shares, units or
other rights that have not vested
($)
|
|
Jie
Han, CEO
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Taylor
Zhang, CFO
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
The above table does not include the options granted pursuant to
an Incentive Option Agreement dated May 16, 2008, whereby Ms. Piao granted
40,000 options to Mr. Jie Han to purchase all the shares of XD Engineering, the
controlling shareholder of the Company.
The
following is a summary of the compensation paid to our non-employee Directors
for the year ended December 31, 2009. Our employee directors do not receive
compensation for their services to the Company as directors.
DIERCTOR
COMPENSATION
|
|
Fees
earned or paid in cash
($)
|
|
|
|
|
|
|
|
|
Non-equity
incentive plan compensation
($)
|
|
|
Nonqualified
deferred compensation earnings
($)
|
|
|
All
other compensation
($)
|
|
|
|
|
Lawrence
Leighton
|
|
24,000 |
|
|
51,269 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
75,269 |
|
Cosimo
Patti
|
|
24,000 |
|
|
51,269 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
75,269 |
|
Yong
Jin
|
|
3,513 |
|
|
7,502 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
11,015 |
|
Linyuan
Zhai
|
|
3,513 |
|
|
7,502 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
11,015 |
|
Employment
Agreements
All of
our officers and directors serve on an at-will basis.
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The
following table lists, as of April 8, 2010, the number of shares of common stock
beneficially owned by (i) each person or entity known to the Company to be the
beneficial owner of more than 5% of the outstanding common stock; (ii) each
officer and director of the Company; and (iii) all officers and directors as a
group. Information relating to beneficial ownership of common stock by our
principal stockholders and management is based upon information furnished by
each person using “beneficial ownership” concepts under the rules of the
Securities and Exchange Commission. Under these rules, a person is deemed to be
a beneficial owner of a security if that person has or shares voting power,
which includes the power to vote or direct the voting of the security, or
investment power, which includes the power to vote or direct the voting of the
security. The person is also deemed to be a beneficial owner of any security of
which that person has a right to acquire beneficial ownership within 60 days.
Under the Securities and Exchange Commission rules, more than one person may be
deemed to be a beneficial owner of the same securities, and a person may be
deemed to be a beneficial owner of securities as to which he or she may not have
any pecuniary beneficial interest. Except as noted below, each person has sole
voting and investment power.
The
Certificate of Change to effectuating the 124.1 for 1 reverse split of the
issued and outstanding shares of common stock, while correspondingly reducing
the Company’s authorized capital, was filed with the Secretary of State of
Nevada on January 6, 2009. As of such date, the Company had 110,000,000 shares
of stock authorized, of which 100,000,000 shares of common stock were
authorized, issued and outstanding and 10,000,000 shares of preferred stock were
authorized, of which 1,000,000 shares of Series A Preferred Stock were issued
and outstanding and 1,000,000 shares of Series B Preferred Stock were issued and
outstanding.
27
As of
December 31, 2009, there are 15,188 shares of Series C preferred stock,
1,437,957 shares of warrants convertible into 3,301,739 and 1,437,957 shares of
the Company’s common stock, respectively.
Name
and Address of
Beneficial
Owner(1)
|
|
Amount
and Nature
of
Beneficial
Ownership(2)
|
|
|
Jie
Han
|
|
|
8,127,533
|
|
|
18.47%
|
Qingwei
Ma
|
|
|
-
|
|
|
*
|
Junjie
Ma
|
|
|
-
|
|
|
-
|
Taylor
Zhang
|
|
|
-
|
|
|
*
|
Cosimo
J. Patti
|
|
|
8,734
|
|
|
*
|
Lawrence
W. Leighton
|
|
|
8,734
|
|
|
*
|
Linyuan
Zhai
|
|
|
1,278
|
|
|
*
|
Yong
Jin
|
|
|
1,278
|
|
|
*
|
All
officers and directors
|
|
|
|
|
|
|
as
a group (1 person)
|
|
|
8,147,557
|
|
|
18.51%
|
XD.
Engineering Plastics Company Limited
|
|
|
|
|
|
|
P.O.
Box 957, Offshore Incorporations Centre
|
|
|
|
|
|
|
Road
Town, Tortola, British Virgin Islands
|
|
|
25,382,598
|
(4)
|
|
57.68%
|
*Less
than 1%
|
|
(1)
|
Except
as otherwise noted, each shareholder’s address is No. 9 Qinling Road,
Yingbin Road Centralized Industrial Park, Harbin Development Zone,
Heilongjiang, China 150078.
|
|
|
(2)
|
Except
as otherwise noted, all shares are owned of record and
beneficially.
|
|
|
(3)
|
Percentage
of beneficial ownership is based upon 44,007,589 shares of Common Stock
outstanding as of April 8, 2010.
|
|
|
(4)
|
Includes
1,000,000 shares of Series B Preferred Stock which has voting power
equivalent to 40% of the total voting power of the
Company.
|
|
|
|
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Related
Party Transactions
Prior to
the reverse merger, Ms. Piao owned 100% of Favor Sea (BVI) indirectly via XD
Engineering, the former sole shareholder of Favor Sea (BVI). Xinda
High-Tech and Heilongjiang Xinda Hyundai Engineering Plastics Co., Ltd. are
affiliate companies owned by the spouse of Mr. Han, who was the major
shareholder of Harbin Xinda before the ownership was transferred to HK
Engineering Plastics.
On
September 20, 2008, Harbin Xinda (“Buyer”) signed an agreement (“Agreement”)
with Xinda High-Tech (“Seller”) to acquire all of the assets of Xinda High-Tech,
including plant and buildings, land use rights, machinery and equipment for a
total amount of RMB240,000,000 (approximately $35,136,006 at date of signing).
Harbin Xinda was required to make two installment payments of the full purchase
price of RMB50,000,000 by the end of December 31, 2008 and the remaining balance
of RMB190,000,000 by the end of September 30, 2009 if all assets purchased are
transferred to the Company. On May 1, 2009, Harbin Xinda and Xinda
High-Tech agreed to rescind the Agreement.
Prior to
signing of the above-mentioned Agreement, the Company rented the buildings and
equipment of Xinda High-Tech for the purpose of its production expansion. The
lease term was from May 1, 2008 to April 30, 2011. The lease payment was for a
total of RMB2,000,000 per year. The lease contract was cancelled when Harbin
Xinda and Xinda High-Tech rescinded the Agreement on May 1, 2009 and at the same
time, Harbin Xinda and Xinda High-Tech re-signed a new lease agreement for the
office and factory space at No. 9 Dalian North Road, Haping Road Centralized
District, Harbin Development Zone, Harbin, Heilongjiang, China. The leased space
is 23,893.53 square meters and the term of the lease is from May 1, 2009 to
April 30, 2012. The lease payment remains at RMB2,000,000 per year. In the years
ended December 31, 2009 and 2008, the Company recorded and paid $292,954 and
$119,945, respectively for the rent expenses.
28
Item
14.
|
Principal
Accountant Fees and Services
|
For the
fiscal years ended December 31, 2009 and December 31, 2008, Moore Stephens Hong
Kong and Bagell Josephs, Levine & Company, LLC, respectively, have billed us
the following fees for services rendered in connection with the audit and other
services in respect to these years:
|
|
2009
|
|
|
2008
|
|
Audit
Fees (1)
|
|
$ |
109,819 |
|
|
$ |
95,000 |
|
Audit-Related
Fees
|
|
|
- |
|
|
|
- |
|
Total
Audit and Audit-Related Fees
|
|
|
109,819 |
|
|
|
95,000 |
|
Tax
Fees (2)
|
|
|
- |
|
|
|
- |
|
All
Other Fees (3)
|
|
|
7,500 |
|
|
|
2,500 |
|
|
|
|
|
|
|
|
|
|
Total
for independent public audit firms
|
|
$ |
117,319 |
|
|
$ |
97,500 |
|
(1)
Services rendered for the audit of our annual financial statements included in
our report on Form 10-K and the reviews of the financial statements included in
our reports on Form 10-Q filed with the SEC.
(2)
Services in connection with the preparation of tax returns and the provision of
tax advice.
(3)
Services related to other miscellaneous securities filings
All
(100%) of the fees described above were approved by our Board of
Directors.
Item
15.
|
Exhibits,
Financial Statement Schedules
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Certificate
of Incorporation
|
|
(1)
|
|
|
|
|
|
3.2
|
|
Amended
and Restated Certificate of Incorporation
|
|
(1)
|
|
|
|
|
|
3.3
|
|
By-laws
|
|
(1)
|
|
|
|
|
|
3.4
|
|
Certificate
of Designation for Series C Convertible Preferred Stock
|
|
|
|
|
|
|
|
4.0
|
|
Stock
Certificate
|
|
(1)
|
|
|
|
|
|
4.1
|
|
2009
Stock Option Plan
|
|
(5)
|
|
|
|
|
|
4.2
|
|
Form
of Series A Warrant
|
|
(7)
|
|
|
|
|
|
4.3
|
|
Form
of Series B Warrant
|
|
(7)
|
|
|
|
|
|
10.1
|
|
Agreement
and Plan of Merger dated December 24, 2008 among the Company and the
shareholders of Favor Sea Limited
|
|
(2)
|
|
|
|
|
|
10.2
|
|
Designation
Certificate of Series A Preferred Stock
|
|
(2)
|
|
|
|
|
|
10.3
|
|
Designation
Certificate of Series B Preferred Stock
|
|
(2)
|
|
|
|
|
|
10.4
|
|
Asset
Purchase Agreement dated September 20, 2008 between Harbin Xinda
Macromolecule Material Co., Ltd. and Harbin Xinda High-Tech Co.,
Ltd.
|
|
(2)
|
|
|
|
|
|
10.5
|
|
First
Amendment to the Asset Purchase Agreement dated September 20,
2008
|
|
(3)
|
|
|
|
|
|
10.6
|
|
Termination
Agreement by and between Harbin Xinda Macromolecule Material Co., Ltd. and
Xinda High-Tech Co., Ltd. dated as of May 1, 2009
|
|
(4)
|
|
|
|
|
|
10.7
|
|
Lease
Agreement dated May 1, 2009
|
|
(4)
|
|
|
|
|
|
10.8
|
|
Securities
Purchase Agreement dated November 27, 2009
|
|
(7)
|
|
|
|
|
|
10.9
|
|
Registration
Rights Agreement dated November 27, 2009
|
|
(7)
|
|
|
|
|
|
10.10
|
|
Form
of Lock-Up Agreement
|
|
(7)
|
29
|
|
|
|
|
16.1
|
|
Letter,
dated December 31, 2008, from Robison, Hill & Co. to the Securities
and Exchange Commission
|
|
(2)
|
|
|
|
|
|
16.2
|
|
Letter,
dated November 4, 2009 from Bagell Josephs Levine & Company,
LLC, to the Securities and Exchange Commission
|
|
(6)
|
|
|
|
|
|
21.1
|
|
Subsidiaries
of Registrant
|
|
*
|
|
|
|
|
|
23.1
|
|
Consent
of Bagell Josephs, Levine & Company, LLC, Independent
Auditors
|
|
(7)
|
|
|
|
|
|
23.2
|
|
Consent
of Bagell Josephs, Levine & Company, LLC, Independent
Auditors
|
|
(8)
|
|
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer Required Under Section 302 of
Sarbanes-Oxley Act of 2002
|
|
*
|
|
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer Required Under Section 302 of
Sarbanes-Oxley Act of 2002
|
|
*
|
|
|
|
|
|
32.1
|
|
Certification
of Principal Executive Officer and Principal Financial Officer Required
Under Section 906 of Sarbanes-Oxley Act of 2002
|
|
*
|
|
|
|
|
|
32.2
|
|
Certification
of Principal Financial Officer and Principal Financial Officer Required
Under Section 906 of Sarbanes-Oxley Act of 2002
|
|
*
|
|
|
|
*
|
Filed
herewith.
|
|
|
+
|
Management
contract or compensatory plan or arrangement.
|
|
|
(1)
|
Filed
as an exhibit to the Company’s registration statement on Form SB-2, as
filed with the Securities and Exchange Commission on May 12, 2006, and
incorporated herein by this reference.
|
|
|
(2)
|
Filed
as an exhibit to the Company’s current report on Form 8-K, as filed with
the Securities and Exchange Commission on December 31, 2008, and
incorporated herein by this reference.
|
|
|
(3)
|
Filed
as an exhibit to the Company’s current report on Form 8-K, as filed with
the Securities and Exchange Commission on February 27, 2009, and
incorporated herein by this reference.
|
|
|
(4)
|
Filed
as an exhibit to the Company’s current report on Form 8-K, as filed with
the Securities and Exchange Commission on May 1, 2009, and incorporated
herein by this reference.
|
|
|
(5)
|
Filed
as an exhibit to the Company’s registration statement on Form S-8, as
filed with the Securities and Exchange Commission on May 29, 2009, and
incorporated herein by this reference.
|
|
|
(6)
|
Filed
as an exhibit to the Company’s current report on Form 8-K, as filed with
the Securities and Exchange Commission on November 6, 2009, and
incorporated herein by this reference.
|
|
|
(7)
|
Filed
as an exhibit to the Company’s current report on Form 8-K, as filed with
the Securities and Exchange Commission on November 30, 2009, and
incorporated herein by this reference.
|
|
|
(8)
|
Filed
as an exhibit to the Company’s registration statement on Form S-3, as
filed with the Securities and Exchange Commission on December 24, 2009,
and incorporated herein by this
reference.
|
30
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date:
April 14, 2010
|
|
|
|
|
China
XD Plastics Company Limited
|
|
|
|
/s/
Jie Han
|
|
Jie
Han
|
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
|
POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Jie Han, and each of them, his true and lawful
attorneys-in-fact, each with full power of substitution, for him in any and all
capacities, to sign any amendments to this report on Form 10-K and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or their substitute or substitutes may do or
cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
Title
|
|
Date
|
/s/
Jie Han
|
|
Chairman/Chief
Executive Officer
|
|
April
14, 2010
|
Jie
Han
|
|
(Principal
Executive Officer and Director)
|
|
|
|
|
|
|
|
/s/
Taylor Zhang
|
|
Chief
Financial Officer
|
|
April
14, 2010
|
Taylor
Zhang
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Qingwei Ma
|
|
Director
|
|
April
14, 2010
|
Qingwei
Ma
|
|
|
|
|
|
|
|
|
|
/s/
Lawrence Leighton
|
|
Director
|
|
April
14, 2010
|
Lawrence
Leighton
|
|
|
|
|
|
|
|
|
|
/s/
Cosimo Patti
|
|
Director
|
|
April
14, 2010
|
Cosimo
Patti
|
|
|
|
|
|
|
|
|
|
/s/
Yong Jin
|
|
Director
|
|
April
14, 2010
|
Yong
Jin
|
|
|
|
|
|
|
|
|
|
/s/
Linyuan Zhai
|
|
Director
|
|
April
14, 2010
|
Linyuan
Zhai
|
|
|
|
|
|
|
|
|
|
31
Financial
Statements
|
|
Index
of Financial Statements |
F-1 |
Reports
of Independent Registered Public Accounting Firm
|
F-2
to F-3 |
Consolidated
Balance Sheets |
F-4 |
Consolidated
Statements of Income and Other Comprehensive Income
|
F-5 |
Consolidated
Statements of Changes in Stockholders’ Equity
|
F-6 |
Consolidated
Statements of Cash Flows
|
F-7 |
Notes
to Consolidated Financial Statements
|
F-8
to F-43 |
F-1
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders of
China XD
Plastic Company Limited
We have
audited the accompanying consolidated balance sheet of China XD Plastics Company
Limited and subsidiaries (the "Company") as of December 31, 2009, and the
related consolidated statements of income and other comprehensive income,
changes in stockholders' equity and cash flows for the year then ended, as well
as the effect of the adjustment for the correction of the error described in
Note 3 as of and for the year ended December 31, 2008. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. We were not engaged to audit, review, or apply
any procedures to the consolidated financial statements of the Company for the
year ended December 31, 2008 other than with respect to the aforementioned
adjustment and, accordingly, we do not express an opinion or any other form of
assurance on the consolidated financial statements for the year ended December
31, 2008, taken as a whole.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2009, and the results of its operations and its cash flows for the year then
ended, as well as the effect of the adjustment for the correction of the error
described in Note 3 as of and for the year ended December 31, 2008, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Moore Stephens
Certified
Public Accountants
Hong
Kong
April 14,
2010
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders of
China XD
Plastics Company Ltd
(Formerly
NB Telecom, Inc)
We have
audited the accompanying consolidated balance sheets of China XD Plastics
Company Ltd (formerly NB Telecom, Inc) as of December 31, 2008 and 2007 and the
related consolidated statements of income and other comprehensive income,
changes in stockholders’ equity, and cash flows for the years ended December 31,
2008 and 2007. China XD Plastics Company Ltd’s management is responsible for
these consolidated financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with standards established by the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China XD Plastics Company
Ltd as of December 31, 2008 and 2007 and the results of its operations, changes
in stockholders’ equity, and cash flows for the years ended December 31, 2008
and 2007 in conformity with accounting principles generally accepted in the
United States of America.
|
|
/s/ Bagell
Josephs, Levine & Company, LLC
|
|
|
|
Bagell
Josephs, Levine & Company, LLC
|
Marlton,
New Jersey
|
March
9, 2009
|
This
report is a copy of the previously issued report.
The
predecessor auditor has not reissued this report.
F-3
CHINA
XD PLASTICS COMPANY LIMITED
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
|
(Restated
- note 3)
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
$ |
6,850,784 |
|
|
$ |
3,869,035 |
|
Restricted cash
|
|
4 |
|
|
|
- |
|
|
|
3,664,346 |
|
Notes receivable
|
|
|
|
|
|
407,487 |
|
|
|
303,437 |
|
Accounts receivable - net of allowance for doubtful receivables
of
|
|
|
|
|
|
|
|
|
|
|
|
$166,095
and $99,669, respectively
|
|
5 |
|
|
|
8,558,172 |
|
|
|
11,234,507 |
|
Prepaid expenses and other receivables
|
|
|
|
|
|
253,172 |
|
|
|
21,917 |
|
Inventories
|
|
6 |
|
|
|
18,371,485 |
|
|
|
12,438,782 |
|
Advances to employees
|
|
7 |
|
|
|
512,745 |
|
|
|
92,329 |
|
Advances to suppliers
|
|
2 |
|
|
|
20,245,861 |
|
|
|
13,131,074 |
|
Taxes receivable |
|
|
|
|
|
406,755 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
55,606,461 |
|
|
|
44,755,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
8 |
|
|
|
31,083,389 |
|
|
|
19,332,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Deferred charges
|
|
9 |
|
|
|
- |
|
|
|
378,073 |
|
Intangible assets, net
|
|
10 |
|
|
|
241,945 |
|
|
|
247,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
|
|
|
241,945 |
|
|
|
625,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
$ |
86,931,795 |
|
|
$ |
64,713,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Short term loans
|
|
12 |
|
|
$ |
21,678,565 |
|
|
$ |
20,520,337 |
|
Bank acceptance notes payable
|
|
13 |
|
|
|
- |
|
|
|
8,061,561 |
|
Accounts payable
|
|
|
|
|
|
1,258,459 |
|
|
|
113,232 |
|
Other payables
|
|
|
|
|
|
714,504 |
|
|
|
106,232 |
|
Accrued expenses
|
|
|
|
|
|
648,358 |
|
|
|
820,625 |
|
Taxes payable
|
|
|
|
|
|
4,134 |
|
|
|
17,777 |
|
Due to related parties
|
|
11 |
|
|
|
148,397 |
|
|
|
7,542,950 |
|
Deferred revenue
|
|
|
|
|
|
300,296 |
|
|
|
3,469,796 |
|
Dividends payable
|
|
|
|
|
|
77,396 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
24,830,109 |
|
|
|
40,652,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion feature liabilities
|
|
15 |
|
|
|
18,798,059 |
|
|
|
- |
|
Common stock warrant purchase liabilities
|
|
15 |
|
|
|
7,892,513 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other liabilities
|
|
|
|
|
|
26,690,572 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities |
|
|
|
|
$ |
51,520,681 |
|
|
$ |
40,652,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
C convertible redeemable preferred stock 15,188 and -0-
|
|
|
|
|
|
|
|
|
|
|
|
shares
issued and outstanding as of December 31, 2009 and 2008,
respectively
|
|
15 |
|
|
|
13,891,477 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock, $0.0001 par value, 50,000,000 and 10,000,000 shares authorized
as
of December 31, 2009 and 2008, respectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock, - 0 - and 1,000,000 shares issued and outstanding
as
of December 31, 2009 and 2008, respectively
|
|
17 |
|
|
|
- |
|
|
|
100 |
|
|
|
|
|
|
|
Series
B Preferred Stock, 1,000,000 shares issued and outstanding as of
December
31, 2009 and 2008, respectively
|
|
17 |
|
|
|
100 |
|
|
|
100 |
|
|
|
|
|
|
|
Common
Stock, $0.0001 par value, 500,000,000 and 100,000,000 shares
authorized,
40,867,050 and
805,802 shares issued and outstanding as of December 31, 2009 and 2008,
respectively
|
|
17 |
|
|
|
4,087 |
|
|
|
81 |
|
Additional
paid-in-capital
|
|
|
|
|
|
15,360,949 |
|
|
|
7,956,693 |
|
Retained
earnings
|
|
|
|
|
|
2,160,621 |
|
|
|
14,577,235 |
|
Statutory
surplus reserve fund
|
|
21 |
|
|
|
2,471,007 |
|
|
|
- |
|
Accumulated
other comprehensive income
|
|
|
|
|
|
1,522,873 |
|
|
|
1,527,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
|
|
|
21,519,637 |
|
|
|
24,061,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
|
|
|
$ |
86,931,795 |
|
|
$ |
64,713,893 |
|
The
accompanying notes are an integral part of these consolidated financial
statements
F-4
CHINA XD PLASTICS COMPANY
LIMITED
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
(Restated
- note 3)
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
$ |
135,745,329 |
|
|
$ |
75,765,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
|
|
|
(105,160,568 |
) |
|
|
(58,431,799 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
|
|
|
30,584,761 |
|
|
|
17,333,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
2 |
|
|
|
1,329,656 |
|
|
|
778,994 |
|
Selling
expenses
|
|
|
|
|
|
|
400,731 |
|
|
|
322,650 |
|
General
and administrative expenses
|
|
|
|
|
|
|
11,220,406 |
|
|
|
7,221,555 |
|
Total
operating expenses
|
|
|
|
|
|
|
12,950,793 |
|
|
|
8,323,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
|
17,633,968 |
|
|
|
9,010,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expenses)
|
|
|
|
|
|
|
(1,418,395 |
) |
|
|
(687,659 |
) |
Other
income
|
|
|
|
|
|
|
107,999 |
|
|
|
28,283 |
|
Other
expense
|
|
|
|
|
|
|
(11,085 |
) |
|
|
(102,139 |
) |
Changes
in fair value of warrants and embedded derivatives
|
|
|
15 |
|
|
|
(12,221,972 |
) |
|
|
- |
|
Total
other expense
|
|
|
|
|
|
|
(13,543,453 |
) |
|
|
(761,515 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
|
|
|
4,090,515 |
|
|
|
8,248,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
14 |
|
|
|
(67,249 |
) |
|
|
(35,332 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
$ |
4,023,266 |
|
|
$ |
8,213,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
(4,301 |
) |
|
|
908,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
$ |
4,018,965 |
|
|
$ |
9,121,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
19 |
|
|
$ |
4,023,266 |
|
|
$ |
8,213,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
to Series C preferred stockholders
|
|
|
19 |
|
|
|
(77,396 |
) |
|
|
- |
|
Deemed
Series C preferred stock dividends
|
|
|
19 |
|
|
|
(13,891,477 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common shareholders
|
|
|
19 |
|
|
$ |
(9,945,607 |
) |
|
|
8,213,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19 |
|
|
$ |
(0.36 |
) |
|
$ |
19.81 |
|
Diluted
|
|
|
19 |
|
|
$ |
(0.36 |
) |
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common share outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19 |
|
|
|
27,789,044 |
|
|
|
414,569 |
|
Diluted
|
|
|
19 |
|
|
|
27,789,044 |
|
|
|
38,608,641 |
|
The
accompanying notes are an integral part of these consolidated financial
statements
F-5
CHINA
XD PLASTICS COMPANY LIMITED
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commen
Stock, Par value $ 0.0001
|
|
|
Preferred
Stock A, Par value $ 0.0001
|
|
|
Preferred
Stock B, Par value $ 0.0001
|
|
|
Additional
|
|
|
Statutory
Surplus
|
|
|
Retained
|
|
|
Accumulated
Other |
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in-Capital
|
|
|
Reserve
Fund
|
|
|
Earnings
|
|
|
Comprehensive
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
December
31, 2007
|
|
|
405,802 |
|
|
$ |
41 |
|
|
|
1,000,000 |
|
|
$ |
100 |
|
|
|
1,000,000 |
|
|
$ |
100 |
|
|
$ |
2,482,826 |
|
|
$ |
- |
|
|
$ |
6,363,652 |
|
|
$ |
619,105 |
|
|
$ |
9,465,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in connection with reverse merger
|
|
|
400,000 |
|
|
|
40 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(40 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options issued to a director (note 3)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,473,907 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
5,473,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year (restated - note 3)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,213,583 |
|
|
|
- |
|
|
|
8,213,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
908,069 |
|
|
$ |
908,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
December
31, 2008 (restated - note 3)
|
|
|
805,802 |
|
|
$ |
81 |
|
|
|
1,000,000 |
|
|
$ |
100 |
|
|
|
1,000,000 |
|
|
$ |
100 |
|
|
$ |
7,956,693 |
|
|
$ |
- |
|
|
$ |
14,577,235 |
|
|
$ |
1,527,174 |
|
|
$ |
24,061,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued from series A preferred stock conversion
|
|
|
38,194,072 |
|
|
|
3,819 |
|
|
|
(1,000,000 |
) |
|
$ |
(100 |
) |
|
|
- |
|
|
|
- |
|
|
|
(3,719 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options issued to a director (note 3)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,065,388 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
3,065,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in connection with stock compensation
|
|
|
1,790,000 |
|
|
|
179 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,217,321 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
4,217,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued to directors
|
|
|
20,024 |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
79,012 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
79,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
issued for services
|
|
|
57,152 |
|
|
|
6 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
46,254 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
46,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,023,266 |
|
|
|
- |
|
|
$ |
4,023,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends payable ($180 per series C preferred share)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(77,396 |
) |
|
|
- |
|
|
$ |
(77,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed
Series C preferred stock dividends
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(13,891,477 |
) |
|
|
- |
|
|
$ |
(13,891,477 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appropriation
of statutory surplus reserve fund
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,471,007 |
|
|
|
(2,471,007 |
) |
|
|
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,301 |
) |
|
$ |
(4,301 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
December
31, 2009
|
|
|
40,867,050 |
|
|
$ |
4,087 |
|
|
|
- |
|
|
|
- |
|
|
$ |
1,000,000 |
|
|
$ |
100 |
|
|
$ |
15,360,949 |
|
|
$ |
2,471,007 |
|
|
$ |
2,160,621 |
|
|
$ |
1,522,873 |
|
|
$ |
21,519,637 |
|
The
accompanying notes are an integral part of these consolidated financial
statements
F-6
CHINA
XD PLASTICS COMPANY LIMITED
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(Restated
- note 3)
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
4,023,266 |
|
|
$ |
8,213,583 |
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
& amortization
|
|
|
2,009,533 |
|
|
|
967,105 |
|
Stock-based
compensation expense
|
|
|
7,985,285 |
|
|
|
5,473,907 |
|
Allowance
for doubtful receivables
|
|
|
66,426 |
|
|
|
6,450 |
|
Changes
in fair value of warrants and embedded derivatives
|
|
|
12,221,972 |
|
|
|
- |
|
Loss
on disposals of property, plant and equipment
|
|
|
9,413 |
|
|
|
- |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
decrease in -
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
3,659,730 |
|
|
|
2,101,449 |
|
Notes
receivables
|
|
|
(104,188 |
) |
|
|
(293,656 |
) |
Accounts
receivable
|
|
|
2,601,377 |
|
|
|
(5,684,397 |
) |
Prepaid
expenses and other receivables
|
|
|
(231,652 |
) |
|
|
22,462 |
|
Inventories
|
|
|
(5,937,387 |
) |
|
|
(6,347,868 |
) |
Advance
to employees
|
|
|
(420,249 |
) |
|
|
37,740 |
|
Advances
to suppliers
|
|
|
(7,119,221 |
) |
|
|
(11,061,383 |
) |
Taxes
receivable
|
|
|
(406,512 |
) |
|
|
- |
|
Deferred
charge
|
|
|
377,595 |
|
|
|
(371,266 |
) |
Increase
(decrease) in -
|
|
|
|
|
|
|
|
|
Accounts
payable and other payables
|
|
|
1,752,596 |
|
|
|
(497,713 |
) |
Accrued
expenses |
|
|
(171,552 |
) |
|
|
759,716 |
|
Taxes
payable
|
|
|
(13,621 |
) |
|
|
(1,509,948 |
) |
Deferred
revenue
|
|
|
(3,165,309 |
) |
|
|
3,309,634 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
17,137,502 |
|
|
|
(4,874,185 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(13,798,468 |
) |
|
|
(12,037,135 |
) |
Proceeds
from sales of property, plant and equipment
|
|
|
16,000 |
|
|
|
- |
|
Collection
on due from related party
|
|
|
- |
|
|
|
110,808 |
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(13,782,468 |
) |
|
|
(11,926,327 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds
from short term loans
|
|
|
1,171,113 |
|
|
|
18,711,534 |
|
Proceeds
from bank acceptance notes
|
|
|
- |
|
|
|
20,582,687 |
|
Repayment
of bank acceptance notes payable
|
|
|
(8,051,406 |
) |
|
|
(26,196,147 |
) |
Proceeds
from issuance of series C preferred stock
|
|
|
13,891,477 |
|
|
|
- |
|
Repayment
to related party loans
|
|
|
(7,596,292 |
) |
|
|
- |
|
Proceeds
from related party loans
|
|
|
206,628 |
|
|
|
7,411,175 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
(378,480 |
) |
|
|
20,509,249 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
5,195 |
|
|
|
72,843 |
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
2,981,749 |
|
|
|
3,781,580 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
3,869,035 |
|
|
|
87,455 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of year
|
|
$ |
6,850,784 |
|
|
$ |
3,869,035 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
1,402,661 |
|
|
$ |
700,260 |
|
Income
taxes paid
|
|
$ |
61,943 |
|
|
$ |
13,282 |
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
$ |
4,296,514 |
|
|
$ |
- |
|
Placement
agent warrants
|
|
$ |
577,123 |
|
|
$ |
- |
|
Warrants
issued for consulting service
|
|
$ |
46,260 |
|
|
$ |
- |
|
Stock
options granted to a director
|
|
$ |
3,065,388 |
|
|
$ |
5,473,907 |
|
The
accompanying notes are an integral part of these consolidated financial
statements
F-7
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
1. ORGANIZATION AND BASIS OF PRESENTATION
China XD
Plastics Company Limited (“China XD Plastics”), formerly known as NB Telecom,
Inc. (“NB Telecom”), was originally incorporated as NB Payphones Ltd. under the
laws of the state of Pennsylvania on November 16, 1999. On December 27, 2005, we
migrated our state of organization to the state of Nevada and effective March
23, 2006, the name was changed to NB Telecom.
On
December 24, 2008, NB Telecom acquired all of the outstanding capital stock of
Favor Sea Limited (“Favor Sea (BVI)”), a British Virgin Islands corporation,
whose assets, held through its subsidiaries, are 100% of the registered capital
of Harbin Xinda Macromolecule Material Co., Ltd. (“Harbin Xinda”), a limited
liability company established under the laws of the People’s Republic of China
(“China” or “PRC”) and Harbin Xinda’s wholly-owned subsidiary, Harbin Xinda
Macromolecule Material Research Institute (the “Research Institute”). Harbin
Xinda is engaged in the development, manufacture and marketing of modified
plastics, primarily for use in the automotive industry. Harbin Xinda’s offices
and manufacturing facilities are located in China.
·
|
In
connection with the acquisition, the following transactions took
place:
|
China XD
Plastics issued 10 shares of the common stock which constituted no more than 10%
ownership interest in China XD Plastics and 1,000,000 shares of convertible
Series A preferred stock of China XD Plastics to the shareholders of Favor Sea
(BVI), and also 1,000,000 shares of Series B preferred stock to XD Engineering
Plastics Company Limited (“XD Engineering”), a British Virgin Islands
corporation, the principal shareholder of Favor Sea (BVI), in exchange for all
of the outstanding stock of Favor Sea (BVI) (the “Share Exchange” or “Merger”).
The 10 shares of the common stock were converted into approximately 50,367,778
shares of the common stock of NB Telecom prior to and approximately 405,802 post
a reverse stock split of 124.1 for 1 pursuant to Nevada Revised Statutes Section
78.207 for both the total number of authorized shares of common stock and the
total number of issued and outstanding shares of common stock (“Reverse Split”),
and the 1,000,000 shares of convertible Series A preferred stock of NB Telecom
shall convert approximately at a rate of 1:38.2 into 38,194,072 shares of the
common stock of NB Telecom after the completion of the Merger so that eventually
the shareholders of Favor Sea (BVI) own approximately 99% of the common stock of
NB Telecom.
·
|
The
record date for the Reverse Split was set for December 31, 2008. The
record holders of NB Telecom’s common stock on the date of December 31,
2008 should be subject to a 124.1:1 reverse split with fractional shares
to be rounded up to one hundred round lot, with the round-up shares to be
deducted from certain designated shareholders by NB
Telecom.
|
F-8
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
1. ORGANIZATION AND BASIS OF PRESENTATION (Continued)
·
|
In
connection with the acquisition of Favor Sea (BVI), former officers and
directors of NB Telecom resigned and executive officers of Favor Sea (BVI)
were appointed as China XD Plastic’s new officers and
directors.
|
·
|
As
part of the Merger, the name of the company was changed from NB Telecom to
China XD Plastics.
|
As a
result of these transactions, the shareholders of Favor Sea (BVI) owned majority
of the equity in China XD Plastics.
The
acquisition was accounted for as a reverse merger under the purchase method of
accounting since there had been a change of control. Accordingly, Favor Sea
(BVI) and its subsidiaries are treated as the continuing entities for accounting
purposes.
Favor Sea
(BVI) was incorporated under the laws of the British Virgin Islands on May 2,
2008.
On August
11, 2008, Favor Sea (BVI) acquired a 100% interest in Hong Kong Engineering
Plastics Company Limited (“HK Engineering Plastics”), a limited liability
company incorporated under the laws of the Hong Kong Special Administrative
Region on May 27, 2008.
Favor Sea
(US) Inc. (“Favor Sea (US)”), wholly owned by Favor Sea (BVI), was incorporated
in the state of New York in the U.S. on December 15, 2008.
HK
Engineering Plastics, in turn, owns 100% interest of Harbin Xinda, a company
established in the PRC on September 23, 2004.
China XD
Plastics, through its indirectly owned subsidiary, Harbin Xinda is primarily
engaged in the business of research and development, manufacture, and
distribution of modified and engineering plastic pellets used in automotive
parts through its manufacturing facility and its wholly owned research
laboratory, the Research Institute, a separate entity established in the PRC on
November 9, 2007.
Note
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements for the years ended December 31, 2009 and 2008
include the accounts of China XD Plastics, Favor Sea (BVI), Favor Sea (US), HK
Engineering Plastics, Harbin Xinda and the Research Institute, collectively
referred to as the “Company”. The Company’s consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
in the United States of America (“US GAAP”). All significant
inter-company balances and transactions are eliminated in
consolidation.
F-9
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Use
of Estimates
In
preparing the financial statements in conformity with US GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting periods. Significant estimates,
required by management, include share-based compensation and fair value of
derivatives. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. As of December 31, 2009 and 2008, the Company did not
have any cash equivalents.
Accounts Receivable
Accounts
receivable consist primarily of receivables resulting from sales of products,
and are stated at net realizable value.
Allowance
for Doubtful Receivables
The
Company recognizes an allowance for doubtful receivables to ensure accounts and
other receivables are not overstated due to
uncollectability. Allowance for doubtful receivables is maintained
for all customers based on a variety of factors, including the length of time
the receivables are past due, significant one-time events and historical
experience. An additional allowance for individual accounts is
recorded when the Company becomes aware of a customer’s or other debtor’s
inability to meet its financial obligation, such as in the case of bankruptcy
filings or deterioration in the customer’s or other debtor’s operating results
or financial position. If circumstances related to customers or debtors change,
estimates of the recoverability of receivables would be further adjusted (See
Note 5).
Inventories
Inventories
comprise raw materials, packing materials, work in progress and finished goods.
Inventories are valued at the lower of cost or market with cost determined by
the weighted average method. Management periodically compares the cost of
inventories with the market value and an allowance is made to write down the
inventories to their respective market values, if lower than cost. No allowance
for inventories was considered necessary for the years ended December 31, 2009
and 2008.
F-10
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost. The cost of an asset comprises its
purchase price and any directly attributable costs of bringing the asset to its
present working condition and locations for its intended use. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
related assets.
Management
estimates that property, plant and equipment have a 5% residual
value. The estimated useful lives are as follows:
|
Plant and
buildings |
39
years |
|
Machinery, equipment
and automobiles |
5-10
years |
Expenditure
for maintenance and repairs is charged to expense as incurred. Additions,
renewals and betterments are capitalized.
The gain
or loss on disposal of property, plant and equipment is the difference between
the net sales proceeds and the carrying amount of the relevant assets, and, if
any, is recognized in the statement of income and other comprehensive
income.
Advances
to Suppliers
Advances
to suppliers represent payments made and recorded in advance for goods and
services. The Company makes advance payments to raw materials suppliers. In
order to maintain a long-term relationship with the suppliers, the Company
frequently makes advance payments from one and a half month to
three months ahead. The advances to suppliers were $20,245,861 and
$13,131,074 as of December 31, 2009 and 2008, respectively.
Impairment
of Long-lived Assets
Long-lived
assets, which include property, plant and equipment and intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the assets. If the carrying amounts
of assets exceed their estimated undiscounted future cash flows, an impairment
charge is recognized by the amount by which the carrying amounts of the assets
exceed the fair value of the assets. Fair value is generally
determined using the asset’s expected future discounted cash flows or market
value, if readily determinable. No impairment loss was recorded for the years
ended December 31, 2009 and 2008, respectively.
F-11
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Intangible
Asset
Intangible
asset consists of land use right which is stated at cost less amortization.
Amortization is computed using the straight-line method, based on the period
over which the right is granted by the relevant authorities in Heilongjiang
Province, PRC.
Stock
Based Compensation
The
Company accounts for stock-based compensation arrangements using the fair value
method in accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 123 (revised 2004) “Share-Based Payment”, which is now codified as Financial
Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 718
“Compensation-Stock Compensation”. FASB ASC 718 requires that the fair value of
share awards issued, modified, repurchased or cancelled after implementation,
under share-based payment arrangements, is measured as of the date the award is
issued, modified, repurchased or cancelled. The resulting cost is then
recognized in the statement of income and comprehensive income over the service
period.
The
Company estimates fair value of restricted stock based on the number of shares
granted and the quoted price of the Company’s common stock on the date of
grant.
The fair
value of stock options and warrants is estimated using the Black-Scholes
option-pricing model. The Company’s expected volatility assumption is based on
similar public entities for which share and option price information was
available, and considered the historical volatilities of those public entities’
share prices in calculating the expected volatility appropriate to the Company.
The risk-free interest rate for the expected term of the option is based on the
U.S. Treasury yield curve in effect at the time of grant.
The
Company measures compensation expense for its non-employee stock-based
compensation under FASB Emerging Issues Task Force (EITF) Issue No. 96-18,
“Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services”, which is now
codified as FASB ASC 718.
The fair
value of the stock issued is used to measure the transaction, as this is more
reliable than the fair value of the services received. Fair value is measured as
the value of the Company’s common stock on the date that the commitment for
performance by the counterparty has been reached or the counterparty’s
performance is complete. The fair value of the equity instrument is charged
directly to compensation expense.
F-12
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Stock
Based Compensation (Continued)
Stock
compensation expense recognized is based on awards expected to vest, and there
were no estimated forfeitures as the current options outstanding were only
issued to founders and senior executives of the Company, which have very low
turnover. FASB ASC 718 requires forfeitures to be estimated at the time of grant
and revised in subsequent periods, if necessary, if actual forfeitures differ
from those estimates.
Derivative
Financial Instruments
Derivative
financial instruments are accounted for under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”, which is now codified as FASB
ASC 815 “Derivatives and Hedging”. Under FASB ASC 815, all derivative
instruments are recorded on the balance sheet as assets or liabilities and
measured at fair value. Changes in the fair value of derivative
instruments are recorded in current earnings.
Income
Taxes
The
Company accounts for income taxes under SFAS No.109 "Accounting for Income
Taxes", which is now codified as FASB ASC 740 "Income Taxes". Under
FASB ASC 740, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
FASB ASC 740, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
The
Company reviewed the differences between the tax bases under PRC tax laws and
financial reporting under US GAAP, and no material differences were
found.
FASB ASC
740 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements and it prescribes a recognition threshold and
measurement attributable for the financial statements recognition and
measurement of a tax position taken or expected to be taken in a tax return.
FASB ASC 740 also provides guidance on derecognizing, classification, interest
and penalties, accounting in interim periods, disclosures and
transitions. Interest and penalties from tax assessments, if any, are
included in general and administrative expenses in the consolidated statements
of operations.
The
Company recognizes that virtually all tax positions in the PRC are not free of
some degree of uncertainty due to tax law and policy changes by the PRC
government. However, the Company cannot reasonably quantify political risk
factors and thus must depend on guidance issued by current PRC government
officials.
F-13
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Income
Taxes (Continued)
Based on
all known facts and circumstances and current tax law, the Company believes that
the total amount of unrecognized tax benefits as of December 31, 2009 is not
material to its results of operations, financial condition or cash flows. The
Company also believes that the total amount of unrecognized tax benefits as of
December 31, 2009, if recognized, would not have a material effect on its
effective tax rate. The Company further believes that there are no tax positions
for which it is reasonably possible, based on current Chinese tax law and
policy, that the unrecognized tax benefits will significantly increase or
decrease over the next 12 months producing, individually or in the aggregate, a
material effect on the Company’s results of operations, financial condition or
cash flows.
Under
current PRC tax laws, 10% withholding tax is imposed in respect to distributions
paid to foreign owners. As the subsidiaries in the PRC have no
intention to pay dividends in the foreseeable future, no withholding tax on
undistributed earnings has been accrued as of December 31, 2009.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with Staff Accounting
Bulletin No. 101, as revised by No.104, issued by the United States Securities
and Exchange Commission, or U.S SEC, which is now codified as FASB ASC
605. In accordance with FASB ASC 605, revenues are recognized when
the four following criteria are met: (i) persuasive evidence of an
arrangement exists, (ii) the delivery is completed, (iii) the fees are
fixed or determinable, and (iv) collectability is reasonably
assured.
Revenue
from sales of products is recognized when the title is passed to customers upon
delivery and when collectability is reasonably assured. The Company does not
provide its customers with the right of return (except for
quality). All sales are based on firm customer orders with fixed
terms and conditions, which generally cannot be modified.
Research
and Development Expenses
Research
and development expenses are costs associated with developing the Company’s
intellectual property. Research and development costs are expensed as incurred.
The costs of equipment that are acquired or constructed for research and
development activities and have alternative future uses are classified as plant
and equipment and depreciated over their estimated useful lives. The research
and development expenses for the years ended December 31, 2009 and 2008 were
$1,329,656 and $778,994, respectively.
F-14
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Fair
Value of Financial Instruments
SFAS No.
107, “Disclosures about Fair Values of Financial Instruments” which is now
codified as FASB ASC 825 “Financial Instruments”, requires disclosing fair value
to the extent practicable for financial instruments that are recognized or
unrecognized in the balance sheet. The fair value of the financial
instruments disclosed herein is not necessarily representative of the amount
that could be realized or settled, nor does the fair value amount consider the
tax consequences of realization or settlement.
The
carrying amounts of certain financial instruments, including cash and cash
equivalents, accounts receivable, notes and other receivables, accounts payable,
accrued expenses, notes payable and other payables approximate fair value due to
the short-term nature of these items. The carrying amounts of
short-term loans from bank approximate the fair value based on the Company's
expected borrowing rate for debt with similar remaining maturities and
comparable risk.
Earnings
(Loss) per Share
The
Company computes earnings (loss) per share (“EPS’) in accordance with SFAS No.
128, “Earnings per Share” and SEC Staff Accounting Bulletin No. 98 (“SAB
98”), which is now codified as FASB ASC 260. FASB ASC 260 requires
companies with complex capital structures to present basic and diluted
EPS. Basic EPS is measured as net income divided by the weighted average
common shares outstanding for the year.
Diluted
EPS is similar to basic EPS but presents the dilutive effect on a per share
basis of potential common shares (e.g., convertible securities, options and
warrants) as if they had been converted at the beginning of the periods
presented, or issuance date, if later. Potential common shares that have
an anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS.
Comprehensive
Income (Loss)
Comprehensive
income (loss) is comprised of net income (loss) and other comprehensive income
(loss). Other comprehensive income (loss) includes unrealized gains
or losses resulting from currency translations of foreign
subsidiaries.
F-15
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentration of credit risk
consist primarily of cash and accounts receivable. The Company does not require
collateral or other security to support these receivables. The
Company conducts periodic reviews of its customers' financial condition and
customer payment practices to minimize collection risk on accounts
receivable. As of December 31, 2009 and 2008, the Company had credit
risk exposure of uninsured cash in banks of approximately $6,850,784 and
$7,533,381, respectively.
Risks
and Uncertainties
The
Company’s operations in the PRC are subject to special consideration and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, political,
economic and legal environment and foreign currency exchange. The Company’s
results may be adversely affected by changes in the political and social
conditions in the PRC, and by changes in governmental policies with respect to
laws and regulations, anti-inflationary measures, currency conversion,
remittances abroad, and rates and methods of taxation, among other
things.
Foreign
Currency Translation
The
functional currency of the Company is Renminbi, and its reporting currency is
U.S. dollars. In accordance with SFAS No. 52, “Foreign Currency
Translation” which is now codified as FASB ASC 830 “Foreign Currency
Matters”. The
Company’s balance sheet accounts are translated into U.S. dollars at the
year-end exchange rates and all revenue and expenses are translated into U.S.
dollars at the average exchange rates prevailing during the periods in which
these items arise. Translation gains and losses are deferred and
accumulated as a component of other comprehensive income in stockholders’
equity. Transaction gains and losses that arise from exchange rate fluctuations
from transactions denominated in a currency other than the functional currency
are included in the consolidated statement of income as incurred.
The PRC
government imposes significant exchange restrictions on fund transfers out of
the PRC that are not related to business operations. These restrictions have not
had a material impact on the Company because it has not engaged in any
significant transactions that are subject to the restrictions.
Segment
Reporting
The
Company has only one business segment. All customers are located in
the PRC. The majority of assets are located in the PRC. No
segment reporting disclosure has been made.
F-16
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Profit
Appropriation
In
accordance with PRC regulations, the PRC subsidiaries are required to make
appropriations to the statutory surplus reserve fund, based on after-tax net
income determined in accordance with PRC GAAP. Appropriation to the statutory
surplus reserve fund should be at least 10% of the after-tax net income
determined in accordance with PRC GAAP until the reserve is equal to 50% of the
entity’s registered capital. Statutory surplus reserve fund is
non-distributable other than in liquidation.
Recent
Accounting Pronouncements
In
April 2008, the FASB issued ASC 350-30-35-1. FASB ASC
350-30-35-1 amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized
intangible asset under FASB ASC 350-30-35-1, Goodwill and Other Intangible
Assets. FASB ASC 350-30-35-1 is intended to improve the consistency between the
useful life of an intangible asset and the period of expected cash flows used to
measure the fair value of the asset under other applicable accounting
literature. FASB ASC 350-30-35-1 is effective for fiscal years beginning after
December 15, 2008. Early adoption is prohibited. The adoption of FASB ASC
350-30-35-1 had no material effect on the Company’s financial
statements.
In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating
Securities”. This FSP gives guidance on the computation of earnings
per share and the impact of share-based instruments that contain certain
non-forfeitable rights to dividends or dividend equivalents. The FSP is
effective for fiscal years beginning after December 31, 2008 and is now codified
as FASB ASC 718 “Compensation-Stock Compensation” effective for interim and
annual periods ending after September 15, 2009. The adoption of FASB ASC 718 did
not have a material impact on the Company’s financial position, results of
operations and cash flows.
In April
2009, the FASB issued three related staff positions to clarify the application
of FASB ASC 820 to fair value measurements in the current economic
environment, modify the recognition of other-than-temporary impairments of debt
securities, and require companies to disclose the fair value of financial
instruments in interim periods. The final staff positions are effective for
interim and annual periods ending after March 15, 2009. The adoption had no
material effect on the Company’s financial statements.
In April
2009, the FASB issued FASB ASC 820. FASB ASC 820 clarifies when
markets are illiquid or that market pricing may not actually reflect the “real”
value of an asset. If a market is determined to be inactive and
market price is reflective of a distressed price then an alternative method
of pricing can be used, such as a present value technique to estimate fair
value. FASB ASC 820 identifies factors to be considered when
determining whether or not a market is inactive. FASB ASC 820 would
be effective for interim and annual periods ending after June 15, 2009,
with early adoption permitted for periods ending after June 15, 2009 and shall
be applied prospectively. The adoption of FASB ASC 820 had no material
effect on the Company’s financial statements.
F-17
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Recent
Accounting Pronouncements (Continued)
In May
2009, the FASB issued FSP SFAS 165 “Subsequent Events”. The objective of this
statement is to establish general standards of accounting for and disclosures of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. SFAS 165 is effective for the interim
and annual periods ending after June 15, 2009, which is now codified as FASB ASC
855 “Subsequent Events”. The adoption of FASB ASC 855 did not have a material
impact on the Company’s financial position, results of operations and cash
flows. Effective February 24, 2010, the Company adopted Accounting Standards
Update (“ASU”) No. 2010-09, “Subsequent Events (Topic 855): Amendments to
Certain Recognition and Disclosure Requirements”, which removes the requirement
to disclose the date through which subsequent events have been evaluated. The
adoption of the ASU did not have a material impact on the Company’s financial
position, results of operations and cash flows.
In
June 2009, the FASB issued FASB ASC 105, which establishes the FASB
Accounting Standards Codification as the source of authoritative accounting
principles recognized by the FASB to be applied in the preparation of financial
statements in conformity with generally accepted accounting principles. FASB ASC
105 explicitly recognizes rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP
for SEC registrants. FASB ASC 105 is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. The
Codification is effective for the Company for the year ended December 31,
2009. Adoption of FASB ASC 105 did not have a material impact on the
Company’s consolidated financial statements.
In
June 2009, the FASB issued FASB ASC 860, which eliminates the concept of a
qualifying special-purpose entity, creates more stringent conditions for
reporting a transfer of a portion of a financial asset as a sale, clarifies
other sale-accounting criteria, and changes the initial measurement of a
transferor’s interest in transferred financial assets. FASB ASC 860 will be
effective for transfers of financial assets in fiscal years beginning after
November 15, 2009, and in interim periods within those fiscal years with
earlier adoption prohibited. FASB ASC 860 is not expected to have a material
effect on the Company’s financial condition or results of
operations.
In
June 2009, the FASB issued ASC 810, which addressed the elimination of the
concept of a qualifying special purpose entity. FASB ASC 810 also replaces the
quantitative-based risks and rewards calculation for determining which
enterprise has a controlling financial interest in a variable interest entity
with an approach focused on identifying which enterprise has the power to direct
the activities of a variable interest entity and the obligation to absorb losses
of the entity or the right to receive benefits from the entity. Additionally,
FASB ASC 810 provides more timely and useful information about an enterprise’s
involvement with a variable interest entity. FASB ASC 810 shall be
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. FASB ASC 810 is not expected
to have a material effect on the Company’s financial condition or results of
operations.
F-18
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Recent
Accounting Pronouncements (Continued)
In August
2009, the FASB issued Accounting Standards Update No. 2009-02 (“ASU 2009-03”),
SEC update – Amendments to various topics containing SEC Staff Accounting
Bulletins to update cross-references to Codification test. ASU 2009-03 did not
have a material effect on the Company’s financial condition or results of
operations.
In August
2009, the FASB issued Accounting Standard Update No.2009-05 (“ASU 2009-05”),
FASB ASC 820 “Measuring Liabilities at Fair Value”. ASU 2009-5 applies to all
entities that measure liabilities at fair value within scope of FASB ASC 820.
ASU 2009-05 provides clarification that in circumstances in which a quoted price
in an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more valuation
techniques.
The
amendments in ASU 2009-05 also clarify that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability. It also clarifies that both a quoted
price in an active market for the identical liability at the measurement date
and the quoted price for the identical liability when traded as an asset in an
active market when no adjustments to the quoted price of the asset are required
are Level 1 fair value measurements. The guidance provided in ASU 2009-05 is
effective for the first reporting period beginning after issuance. The adoption
of ASU 2009-5 is not expected to have a material effect on the Company’s
financial condition or results of operations.
In
September 2009, the FASB issued Accounting Standards Update
No. 2009-07 (“ASU 2009-07”), “Accounting for Various Topics”. ASU 2009-07
represents technical corrections to various topics containing SEC guidance based
on external comments received. The adoption of this guidance did not have a
material effect on the Company’s financial condition or results of
operations.
In
September 2009, the FASB issued Accounting Standards Update
No. 2009-12 (“ASU 2009-12”), “Fair Value Measurements and Disclosures
(Topic 820), Investments in Certain Entities that Calculate Net Asset Value per
Share (or Its Equivalent)”. ASU 2009-12 provides amendments to Subtopic 820-10,
“Fair Value Measurements and Disclosures — Overall”, for the fair value
measurement of investments in certain entities that calculate net asset value
per share. This ASU also requires disclosures by major category of investment
about the attributes of investments within the scope of the amendments in this
Update. The amendments in this Update are effective for interim and
annual periods after December 15, 2009. The adoption of this guidance is
not expected to have a material effect on the Company’s financial condition or
results of operations.
F-19
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
3. RESTATEMENT TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 2008
The
Company has restated the consolidated financial statements for the year ended
December 31, 2008 as a result of a non-cash error regarding the accounting for
stock options granted to a director, Mr. Jie Han (“Mr. Han”) (the “Options”)
pursuant to the requirements of ASC Topic 718.
Pursuant
to an incentive option agreement dated May 16, 2008, Ms. Qiuyao Piao (“Ms.
Piao”) granted 40,000 Options to Mr. Han to purchase shares of XD Engineering
Plastics Company Limited (“XD Engineering”) at a nominal price if certain
performance targets are met. Ms. Piao is the sole shareholder of XD
Engineering, which is the Company’s controlling shareholder. Mr. Han may
purchase 25% of the total outstanding equity in XD Engineering if the Company’s
consolidated revenue during the first three quarters of 2008 exceeds
$40,000,000. He may purchase 14% of the total outstanding equity in XD
Engineering if the Company’s consolidated revenue during the first three
quarters of 2009 exceeds $70,000,000. Finally, he may purchase 61% of the total
outstanding equity in XD Engineering if the Company’s revenue during the first
three quarters of 2010 exceeds $110,000,000.
In
accordance with ASC Topic 718,
the Options should have been accounted for in the Company’s consolidated
financial statements as share-based payments awarded to an employee by a related
party as compensation for services rendered.
The
Company’s restated its consolidated financial statements for the year ended
December 31, 2008 to incorporate the additional stock-based compensation expense
in respect of the options granted to Mr. Han of $5,473,907. The
impact on previously reported net income for the year ended December 31, 2008 is
presented below.
|
|
Net
income for
the
year ended
December
31, 2008
|
|
|
Retained
earnings
as
of
January
1, 2009
|
|
As previously
reported |
|
|
13,687,490 |
|
|
|
20,051,142 |
|
Adjustment for
stock-based compensation |
|
|
(5,473,907 |
) |
|
|
(5,473,907 |
) |
As
adjusted |
|
|
8,213,583 |
|
|
|
14,577,235 |
|
F-20
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
3. RESTATEMENT TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 2008 (Continued)
The
following table reconciles the previously filed consolidated statement of income
to the restated consolidated statement of income for the year ended December 31,
2008 specified below.
|
|
As
previously
reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
General
and administrative expenses
|
|
|
1,747,648 |
|
|
|
5,473,907 |
|
|
|
7,221,555 |
|
Total
operating expenses
|
|
|
2,849,292 |
|
|
|
5,473,907 |
|
|
|
8,323,199 |
|
Operating
income
|
|
|
14,484,337 |
|
|
|
(5,473,907 |
) |
|
|
9,010,430 |
|
Income
before income taxes
|
|
|
13,722,822 |
|
|
|
(5,473,907 |
) |
|
|
8,248,915 |
|
Net
income
|
|
|
13,687,490 |
|
|
|
(5,473,907 |
) |
|
|
8,213,583 |
|
Comprehensive
income
|
|
|
14,595,559 |
|
|
|
(5,473,907 |
) |
|
|
9,121,652 |
|
Earnings
per share-basic:
|
|
|
33.02 |
|
|
|
(13.21 |
) |
|
|
19.81 |
|
Earnings
per share-diluted:
|
|
|
0.35 |
|
|
|
(0.14 |
) |
|
|
0.21 |
|
Weighted
average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
414,569 |
|
|
|
- |
|
|
|
414,569 |
|
Diluted:
|
|
|
38,608,641 |
|
|
|
- |
|
|
|
38,608,641 |
|
The
following table reconciles the previously filed consolidated balance sheet to
the restated consolidated balance sheet as of December 31, 2008 specified
below.
|
|
As
previously
reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Additional
paid-in-capital
|
|
|
2,482,786 |
|
|
|
5,473,907 |
|
|
|
7,956,693 |
|
Retained
earnings
|
|
|
20,051,142 |
|
|
|
(5,473,907 |
) |
|
|
14,577,235 |
|
The
following table reconciles the previously filed consolidated statement of cash
flows to the restated consolidated statement of cash flows for the year ended
December 31, 2008 specified below.
|
|
As
previously
reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Net
income
|
|
|
13,687,490 |
|
|
|
(5,473,907 |
) |
|
|
8,213,583 |
|
Stock-based
compensation expense
|
|
|
- |
|
|
|
5,473,907 |
|
|
|
5,473,907 |
|
F-21
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
3. RESTATEMENT TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 2008 (Continued)
The
following tables reconcile the previously filed quarterly results to the
restated quarterly results for the three months ended March 31, 2009 specified
below.
|
|
As
previously
reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Additional
paid-in-capital
|
|
|
2,482,786 |
|
|
|
5,473,907 |
|
|
|
7,956,693 |
|
Retained
earnings
|
|
|
24,067,785 |
|
|
|
(5,473,907 |
) |
|
|
18,593,878 |
|
The
following tables reconcile the previously filed quarterly results to the
restated quarterly results for the six months ended June 30, 2009 specified
below.
|
|
As
previously
reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
General
and administrative expenses
|
|
|
2,161,053 |
|
|
|
3,065,388 |
|
|
|
5,226,441 |
|
Total
operating expenses
|
|
|
2,765,269 |
|
|
|
3,065,388 |
|
|
|
5,830,657 |
|
Operating
income
|
|
|
9,659,556 |
|
|
|
(3,065,388 |
) |
|
|
6,594,168 |
|
Income
before income taxes
|
|
|
9,019,494 |
|
|
|
(3,065,388 |
) |
|
|
5,954,106 |
|
Net
income
|
|
|
9,013,033 |
|
|
|
(3,065,388 |
) |
|
|
5,947,645 |
|
Comprehensive
income
|
|
|
8,985,637 |
|
|
|
(3,065,388 |
) |
|
|
5,920,249 |
|
Earnings
per share-basic:
|
|
|
0.56 |
|
|
|
(0.19 |
) |
|
|
0.37 |
|
Earnings
per share-diluted:
|
|
|
0.23 |
|
|
|
(0.08 |
) |
|
|
0.15 |
|
Weighted
average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
16,070,273 |
|
|
|
- |
|
|
|
16,070,273 |
|
Diluted:
|
|
|
39,298,420 |
|
|
|
- |
|
|
|
39,298,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in-capital
|
|
|
2,912,981 |
|
|
|
8,539,295 |
|
|
|
11,452,276 |
|
Retained
earnings
|
|
|
29,064,174 |
|
|
|
(8,539,295 |
) |
|
|
20,524,879 |
|
F-22
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
3. RESTATEMENT TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 2008 (Continued)
The
following tables reconcile the previously filed quarterly results to the
restated quarterly results for the nine months ended September 30, 2009
specified below.
|
|
As
previously
reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
General
and administrative expenses
|
|
|
5,768,050 |
|
|
|
3,065,388 |
|
|
|
8,833,438 |
|
Total
operating expenses
|
|
|
6,860,563 |
|
|
|
3,065,388 |
|
|
|
9,925,951 |
|
Operating
income
|
|
|
13,981,484 |
|
|
|
(3,065,388 |
) |
|
|
10,916,096 |
|
Income
before income taxes
|
|
|
13,000,313 |
|
|
|
(3,065,388 |
) |
|
|
9,934,925 |
|
Net
income
|
|
|
12,969,672 |
|
|
|
(3,065,388 |
) |
|
|
9,904,284 |
|
Comprehensive
income
|
|
|
12,923,066 |
|
|
|
(3,065,388 |
) |
|
|
9,857,678 |
|
Earnings
per share-basic:
|
|
|
0.54 |
|
|
|
(0.12 |
) |
|
|
0.42 |
|
Earnings
per share-diluted:
|
|
|
0.33 |
|
|
|
(0.08 |
) |
|
|
0.25 |
|
Weighted
average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
23,797,701 |
|
|
|
- |
|
|
|
23,797,701 |
|
Diluted:
|
|
|
39,206,884 |
|
|
|
- |
|
|
|
39,206,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in-capital
|
|
|
5,670,316 |
|
|
|
8,539,295 |
|
|
|
14,209,611 |
|
Retained
earnings
|
|
|
33,020,813 |
|
|
|
(8,539,295 |
) |
|
|
24,481,518 |
|
Note
4. RESTRICTED CASH
For the
years ended December 31, 2009 and 2008, the Company had restricted cash of nil
and $3,664,346, respectively. The Company’s lenders require the Company to
maintain with the lending banks a cash balance of a minimum of 40% -50% of the
balance of the bank acceptance notes payable (See Note 13) as collateral for the
Company’s obligations to the lenders. The Company maintained a cash
balance of $3,224,624 for bank acceptance notes with the lending banks.
The Company repaid the entirety of the bank acceptance notes payable in
September 2009. The Company also pledged cash of $439,722 for a short term
loan (See Note 12). The short-term loan was repaid in April
2009.
Note 5. ACCOUNTS
RECEIVABLE
Accounts
receivable consists of trade receivables resulting from sales of products during
the normal course of business. Accounts receivable as of December 31, 2009 and
2008 amounted to $8,558,172 and $11,234,507, respectively.
The
Company collaborates directly with its end users on new product development,
product certifications and post-sales support. Sales contracts are usually
signed directly between the Company and its end users. Due to the nature of this
industry, the Company also regularly uses distributors to sell its products to
various end users. This arrangement can greatly assist to ensure timely
collections of its accounts receivable and reduce its selling and administrative
costs. The Company believes that all of the accounts receivable
outstanding from these distributors are collectible (See Note 18).
F-23
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 5. ACCOUNTS RECEIVABLE
(Continued)
The
changes in allowance for doubtful receivables are summarized as
follows:
|
|
As
of
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
|
99,669 |
|
|
|
93,219 |
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
66,426 |
|
|
|
6,450 |
|
|
|
|
|
|
|
|
|
|
Balance,
end of year
|
|
|
166,095 |
|
|
|
99,669 |
|
The
allowance for doubtful receivables was recorded in general and administrative
expenses.
Note. 6 INVENTORIES
Inventories
consist of the following:
|
|
As
of |
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
5,760,957 |
|
|
|
708,768 |
|
Work-in-progress
|
|
|
12,030,860 |
|
|
|
213,362 |
|
Finished
goods
|
|
|
570,701 |
|
|
|
11,511,308 |
|
Packing
supplies
|
|
|
8,967 |
|
|
|
5,344 |
|
Total
|
|
|
18,371,485 |
|
|
|
12,438,782 |
|
No
allowance for inventories was made for the years ended December 31, 2009 and
2008.
Note
7. ADVANCES TO EMPLOYEES
Advances
to employees represent cash advances to employees to purchase raw materials or
equipment and other supplies for normal business purposes. The balance also
included the proceeds receivable from employees in regard to company automobiles
sold to them during the year (See Note 9). Advances to employees as of December
31, 2009 and 2008 amounted to $512,745 and $92,329, respectively.
F-24
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
8. PROPERTY, PLANT AND EQUIPMENT, NET
The
details of property, plant and equipment are as follows:
|
|
As
of |
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Machinery
& equipment
|
|
|
30,455,968 |
|
|
|
17,007,972 |
|
Automobiles
|
|
|
402,690 |
|
|
|
142,674 |
|
Plant
& buildings
|
|
|
3,863,746 |
|
|
|
2,373,619 |
|
Total
|
|
|
34,722,404 |
|
|
|
19,524,265 |
|
Less:
accumulated depreciation
|
|
|
(3,667,959 |
) |
|
|
(1,684,241 |
) |
|
|
|
|
|
|
|
|
|
Construction
in progress
|
|
|
28,944 |
|
|
|
1,492,688 |
|
Total
|
|
|
31,083,389 |
|
|
|
19,332,712 |
|
Depreciation
expense for the years ended December 31, 2009 and 2008 was $2,003,964 and
$961,627, respectively. Certain property, plant and equipment have
been pledged for short term loans (See Note 12).
Note
9. DEFERRED CHARGES
Deferred
charges related to automobiles purchased by the Company for senior management
members. The beneficiaries signed employment contracts with the Company and they
are obliged to work for the Company for a service period of 7 to 10 years. Once
they serve the full contract term, the vehicles are for them to keep. If they
leave before the service contracts expire, they are required to reimburse the
full price of the vehicle at the time of the purchase. The Company amortizes the
payment of the automobile expenses based on the services performed by those
employees. During the year, the Company sold all automobiles to the employees at
cost (See Note 7).
Note
10. INTANGIBLE ASSET
Intangible
asset consists of land use right only. All land in the PRC is government owned
and cannot be sold to any individual or company. Instead, the government grants
the user a land use right (“the Right”) to use the land.
The
Company has the right to use the land for 50 years and amortizes the Right on a
straight-line basis over the remaining useful life of 48 years from 2007 to
2055. The land use right was originally acquired in May 2005 for the amount of
$226,281.
F-25
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
10. INTANGIBLE ASSET (Continued)
Net
intangible asset as of December 31, 2009 and 2008 was as follows:
|
|
As
of |
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Land
use right
|
|
|
267,486 |
|
|
|
267,663 |
|
Less:
accumulated amortization
|
|
|
(25,541 |
) |
|
|
( 9,982 |
) |
Total
|
|
|
241,945 |
|
|
|
247,681 |
|
Amortization
expense for the years ended December 31, 2009 and 2008 amounted to $5,569 and
$5,478, respectively. Amortization expenses for the next five years
amount to approximately $5,500 each year. The land use right has been pledged
for short term loans (See Note 12).
Note
11. RELATED PARTY TRANSACTIONS
Amounts
due to directors/affiliates are as follows:
|
|
As
of |
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Harbin
Xinda High-Tech Co., Ltd.
(“Xinda
High-tech)
|
|
|
148,397 |
|
|
|
6,975,196 |
|
Ms.
Piao
|
|
|
- |
|
|
|
214,951
|
|
Mr.
Ma Qingwei
|
|
|
- |
|
|
|
20,520 |
|
Mr.
Han
|
|
|
- |
|
|
|
332,283 |
|
Total
|
|
|
148,397 |
|
|
|
7,542,950 |
|
The
Company also has sales and purchases to and from its affiliated companies. The
details are as follows:
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Xinda
High-Tech
|
|
|
- |
|
|
|
869,491 |
|
Heilongjiang
Xinda Hyundai Engineering
Plastics
Co., Ltd
|
|
|
- |
|
|
|
223,455
|
|
Sales to Xinda High-Tech
|
|
|
- |
|
|
|
60,008 |
|
F-26
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
11. RELATED PARTY TRANSACTIONS (Continued)
Prior to
the reverse merger, Ms. Piao owned 100% of Favor Sea (BVI) indirectly via XD
Engineering, the former sole shareholder of Favor Sea (BVI). Xinda
Hi-Tech and Heilongjiang Xinda Hyundai Engineering Plastics Co., Ltd. are
affiliate companies owned by the spouse of Mr. Han, who was the major
shareholder of Harbin Xinda before the ownership was transferred to HK
Engineering Plastics.
On
September 20, 2008, Harbin Xinda (“Buyer”) signed an agreement (“Agreement”)
with Xinda High-Tech (“Seller”) to acquire all of the assets of Xinda High-Tech,
including plant and buildings, land use rights, machinery and equipment for a
total amount of RMB240,000,000 (approximately $35,136,006 at date of signing).
Harbin Xinda was required to make two installment payments of the full purchase
price of RMB50,000,000 by the end of December 31, 2008 and the remaining balance
of RMB190,000,000 by the end of September 30, 2009 if all assets purchased are
transferred to the Company. On May 1, 2009, Harbin Xinda and Xinda
High-Tech agreed to rescind the Agreement.
Prior to
signing of the above-mentioned Agreement, the Company rented the buildings and
equipment of Xinda High-Tech for the purpose of its production expansion. The
lease term was from May 1, 2008 to April 30, 2011. The lease payment was for a
total of RMB2,000,000 per year. The lease contract was cancelled when Harbin
Xinda and Xinda High-Tech rescinded the Agreement on May 1, 2009 and at the same
time, Harbin Xinda and Xinda High-Tech re-signed a new lease agreement for the
office and factory space at No. 9 Dalian North Road, Haping Road Centralized
District, Harbin Development Zone, Harbin, Heilongjiang, China. The leased space
is 23,893.53 square meters and the term of the lease is from May 1, 2009 to
April 30, 2012. The lease payment remains at RMB2,000,000 per year. In the years
ended December 31, 2009 and 2008, the Company recorded and paid $292,954 and
$119,945, respectively for the rent expenses.
F-27
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
12. SHORT TERM LOANS
The
short-term loans include the following:
|
|
As
of |
|
|
December
31, 2009
|
|
December
31, 2008
|
|
|
US$
|
|
US$
|
a)
Loan
payable to Bank of Communications one
year term from December 8, 2009 to December 8, 2010 bears interest of 10%
above the prime rate* set by Central Bank of China
|
|
4,394,304
|
|
-
|
|
|
|
|
|
b) Loan
payable to Bank of Communications one
year term from December 26, 2008 to December 21, 2009 bears interest of
10% above the prime rate* set by Central Bank of China
|
|
-
|
|
4,397,215
|
|
|
|
|
|
c) Loan
payable to Bank of Communications one
year term from December 8, 2009 to December 8, 2010 bears interest of 10%
above the prime rate* set by Central Bank of China
|
|
1,464,768
|
|
-
|
|
|
|
|
|
d) Loan
payable to Harbin Bank one
year term from February 24, 2009 to February 23, 2010 bears a fixed
interest rate of 7.124% per year
|
|
4,394,304
|
|
-
|
|
|
|
|
|
e)
Loan
payable to Harbin Bank one
year term from April 3, 2009 to April 2, 2010 bears a fixed interest rate
of 7.124% per year
|
|
10,692,805
|
|
-
|
|
|
|
|
|
f)
Loan
payable to Harbin Bank three
months term from December 25, 2009 to March 24, 2010 bears a fixed
interest rate of 6.504% per year
|
|
732,384 |
|
4,397,215 |
|
|
|
|
|
g)
Loan payable to Harbin Bank one
year term from February 25, 2008 to February 21, 2009 bears a fixed
interest rate of 10.152% per year
|
|
- |
|
4,397,215 |
|
|
|
|
|
h) Loan
payable to Anhui Yiyang Metal Materials Co., Ltd one year term from
November 1, 2008 to October 31, 2009 with interest to be accrued starting
from January 1, 2009 at 30% above the prime rate set by Central Bank of
China
|
|
-
|
|
5,862,954
|
|
|
|
|
|
i) Loan
payable to Harbin Bank five
months term from December 2, 2008 to April 28, 2009 bears a fixed interest
rate of 6.752% per year
|
|
-
|
|
4,397,215
|
|
|
|
|
|
j)
Loan
payable to Harbin Bank one
year term from December 9, 2008 to December 8, 2009 bears a fixed interest
rate of 7.507% per year
|
|
- |
|
1,465,738 |
|
|
|
|
|
Total
|
|
21,678,565
|
|
20,520,337
|
* The prime rate set by Central Bank of China as of December 31,
2009 was 5.31%.
F-28
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
12. SHORT TERM LOANS (Continued)
The
one-year short term loan of $4,394,304 between Harbin Xinda and Bank of
Communications for the period of December 8, 2009 to December 8, 2010 is
guaranteed by Mr. Han and his wife and secured by Xinda High-Tech’s pledge of
its land use right and buildings and Harbin Xinda’s land use right, buildings
and machinery as collateral to secure the loan.
The
one-year short term loan of $1,464,768 between Harbin Xinda and Bank of
Communications for the period of December 8, 2009 to December 8, 2010 is secured
by Harbin Xinda pledging its machinery as collateral to secure the loan and
guaranteed by Mr. Han and his wife.
The
one-year short term loan of $4,394,304 between Harbin Xinda and Harbin Bank for
the period of February 24, 2009 to February 23, 2010 was guaranteed by Mr. Han
and his wife and Xinda High-Tech. Harbin Xinda and Xinda High-Tech pledged its
equipment and machinery as collateral to secure the loan.
The
one-year short term loan of $10,692,805 between Harbin Xinda and Harbin Bank for
the period of April 3, 2009 to April 2, 2010 was secured by land use right and
buildings of Yuxiang Real Estate Development controlled by Xinda High-Tech, a
corporate guarantee from Xinda High-Tech and guaranteed by Mr. Han and his
wife.
The three
months short term loan of $732,384 between Harbin Xinda and Harbin Bank for the
period of December 25, 2009 to March 24, 2010 was indirectly guaranteed by Xinda
High-Tech.
Interest
expense for the Company’s short term loans totaled $1,402,661 and $700,260 for
the years ended December 31, 2009 and 2008, respectively.
The
Company provided certain assets as collateral for the short-term bank loans,
which were as follows:
Net
book value
|
|
December
31, 2009
US$
|
|
|
December
31, 2008
US$
|
|
Land
use right
|
|
|
241,945 |
|
|
|
247,517 |
|
Machinery
and equipment
|
|
|
16,450,374 |
|
|
|
8,541,317 |
|
Plant
and buildings
|
|
|
2,073,514 |
|
|
|
2,131,294 |
|
Cash
|
|
|
- |
|
|
|
439,722 |
|
Accounts
receivable |
|
|
- |
|
|
|
6,397,655 |
|
|
|
|
18,765,833 |
|
|
|
17,757,505 |
|
Note
13. BANK ACCEPTANCE NOTES PAYABLE
The
Company had bank acceptance notes payable in the amount of nil and $8,061,561 as
of December 31, 2009 and 2008 respectively. The notes were guaranteed to be paid
by the banks and usually for a short-term period of three (3) to six (6) months.
The Company is required to maintain cash deposits at a minimum 40%-50% of the
total balance of the notes payable with the banks, in order to ensure future
credit availability. The Company repaid the entirety of the bank
acceptance notes payable in September 2009.
F-29
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 14. INCOME TAXES
(a)
Corporation Income Tax (“CIT”)
No
provision for income tax for China XD Plastics and Favor Sea (US) has been made
as they incurred losses for the years ended December 31, 2009 and
2008.
HK
Engineering Plastics’ income is subject to taxation in Hong Kong at
16.5%. No provision for Hong Kong income tax has been made as HK
Engineering Plastics has had no assessable profit since its
incorporation.
Favor Sea
(BVI) is not subject to income tax in any tax jurisdiction.
The
subsidiaries operating in the PRC are subject to income taxes as described
below:-
Prior to
January 1, 2008, Foreign Investment Enterprises were subject to the Foreign
Enterprise Investment Income Tax (“FEIT”). Under that law, Foreign Investment
Enterprises were generally subject to an income tax rate of 33% on all income,
including foreign income. Qualified Foreign Investment Enterprises would receive
a reduced national tax rate of 24% or 15%. Qualifying Foreign Investment
Enterprises in the manufacturing sector were exempted from the FEIT for two
years starting in the first year they became profitable, and received a 50%
reduction in the FEIT for the subsequent three years, or a “two plus
three” tax
holiday. As such Harbin Xinda was exempt from paying the FEIT for 2007 and
2006.
Under the
Enterprise Income Tax (“EIT,”) a uniform tax rate of 25% is applicable to both
domestic and Foreign Investment Enterprises starting from January 1, 2008. For
existing Foreign Investment Enterprises, the increased tax rate will be phased
in. In addition to the rate increase, a majority of the favorable tax treatments
currently enjoyed by Foreign Investment Entities are abolished, including the
two plus three tax holiday, tax rate reductions relating to businesses located
in specified regions of the country and income tax refunds for re-investments in
China. Under the new law, Harbin Xinda is subject to the new tax rates and will
lose the “two
plus three”
tax holiday that Harbin Xinda would have been entitled to under the old
law. However, as a recipient of the High-Technology Enterprise
Certificate from the Chinese government, Harbin Xinda is entitled to a rebate of
a portion of the EIT. This rebate will reduce Harbin Xinda’s effective EIT tax
rate to 15% from January 1, 2008 to December 31, 2010.
Income
for the Research Institute is exempt from income tax under the current tax laws
in the PRC.
F-30
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 14. INCOME TAXES
(Continued)
Corporation
Income Tax (“CIT”) (Continued)
The
following table reconciles the statutory rates to the Company’s effective tax
rate for the years ended December 31, 2009 and 2008:
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
|
|
|
|
As
restated
|
|
US
statutory rates
|
|
|
34.00% |
|
|
|
34.00% |
|
Effect
of tax rates in different jurisdiction
|
|
|
(27.56% |
) |
|
|
7.94% |
|
Effect
of non-deductible expenses
|
|
|
118.42% |
|
|
|
- |
|
Changes
in valuation allowance
|
|
|
26.2% |
|
|
|
- |
|
Effect
of tax exemption of PRC subsidiaries
|
|
|
(149.40% |
) |
|
|
(41.51% |
) |
Effective
income tax rate |
|
|
1.64% |
|
|
|
0.43% |
|
As of
December 31, 2009, China XD Plastics and Favor Sea (US) had accumulated net
operating loss carryforwards for United States federal tax purposes of
approximately $658,006, that are available to offset future taxable income.
Realization of the net operating loss carryforwards is dependent upon
future profitable operations. In addition, the carryforwards may be
limited upon a change of control in accordance with Internal Revenue Code
Section 382, as amended. Accordingly, management has recorded a valuation
allowance to reduce deferred tax assets associated with the net operating loss
carryforwards to zero at December 31, 2009. The net operating loss
carryforwards expire in years 2027 through 2029.
As of
December 31, 2009, deferred tax assets consist of:-
|
|
December
31, 2009
|
|
|
|
US$
|
|
|
|
|
|
Net
operating loss carry forwards
|
|
|
223,722 |
|
Vested
stock compensation
|
|
|
885,360 |
|
Less:
valuation allowance
|
|
|
(1,109,082 |
) |
Net |
|
|
- |
|
(b)
Value Added Tax (“VAT”)
Enterprises
or individuals who sell commodities, engage in repairs and maintenance or import
or export goods in the PRC are subject to a value added tax in accordance with
the PRC laws. The value added tax standard rate is 17% of the gross sales price.
A credit is available whereby VAT paid on the purchases of semi-finished
products or raw materials used in the production of the Company’s finished
products can be used to offset the VAT due on the sales of the finished
products.
F-31
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
15. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK
On
December 1, 2009 (the “Closing Date”), China XD Plastics entered into a
securities purchase agreement (the “Purchase Agreement”), with several
investors, including institutional, accredited and non-US person and entities
(the “Investors”), pursuant to which China XD Plastics sold units, comprised of
6% Series C convertible redeemable preferred stock, par value $0.0001 per share
(the “Series C preferred stock”), and two of warrants, for a purchase
price of $4.60 per unit (the “December 2009 Financing”). The Company
sold 15,188 units in the aggregate, which included (i) 15,188 shares of Series C
preferred stock, (ii) Series A warrants to purchase 1,320,696 shares of
common stock at an exercise price of $5.50 per share with a five-year term, and
(iii) Series B warrants to purchase 1,178,722 shares of common stock at an
exercise price of $0.0001 with a five-year term. Net proceeds were
approximately $13,891,477, net of issuance costs of approximately $719,400 in
cash and warrants to placement agent valued at $577,123. Rodman
Renshaw acted as placement agent and received (i) a placement fee in the amount
equal to 5% of the gross proceeds and (ii) warrants to purchase up to 117,261
shares of common stock at an exercise price of $5.50, with a five-year term
(“Placement Agent Warrants” and together with the Series A warrants and Series B
warrants, the “Warrants” or “Investor Warrants”).
Key terms
of the Series C preferred stock sold by the Company in December 2009 financing
are summarized as follows:
Dividends
Dividends
on the Series C preferred stock shall accrue and be cumulative from and after
the issuance date. For each outstanding share of Series C preferred
stock, dividends are payable at the per annum rate of 6% of the liquidation
preference amount of the Series C preferred stock. Dividends are
payable quarterly on the business day following the last business day of each
December, June, and September of each year (each, a “Dividend Payment
Date”), and continuing until such stock is fully converted or
redeemed.
Voting
Rights
The
Series C preferred stock holders are entitled to vote separately as a class on
matters affecting the Series C preferred stock and with regard to certain
corporate matters set forth in the Series C Certificate of Designation, so long
as any shares of the Series C preferred stock remain outstanding. Holders of the
Series C preferred stock are not, however, entitled to vote on general matters
along with holders of common stock.
F-32
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
15. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK (Continued)
Liquidation
Preference
In the
event of the liquidation event, the holders of the Series C preferred stock then
outstanding shall be entitled to receive in cash out of the assets of the
Company available for distribution to its stockholders, an amount equal to
$1,000 per share of the Series C preferred stock, plus any accrued but unpaid
dividends thereon, whether or not declared, together with any other dividends
declared but unpaid thereon, as of the date of liquidation before any payment
shall be made or any assets distributed to the holders of the common stock or
any other junior stock. If upon the occurrence of liquidation, the assets thus
distributed among the holders of the Series C preferred stock shall be
insufficient to permit the payment to such holders of the full Series C
preferred stock amount, then the entire assets of the Company legally available
for distribution shall be distributed ratably among the holders of the Series C
preferred stock.
Conversion
Rights
At any
time on or after the date of the initial issuance of the Series C preferred
stock, the holder of any such shares of Series C preferred stock may, at such
holder’s option, convert any whole number of preferred shares, plus the amount
of any accrued but unpaid dividends per preferred share then remaining, into
fully paid and nonassessable shares of common stock at the initial conversion
price of $4.60 per share. The initial conversion price may be adjusted for stock
splits and combinations, dividend and distributions, reclassification, exchange
or substitution, reorganization, merger, consolidation or sales of assets as
stimulated in the Certification of Designations.
ii)
Mandatory Redemption
If any
preferred shares remain outstanding on the maturity date on December 1, 2012,
the Company shall redeem such preferred shares in cash in an amount equal to the
outstanding conversion amount for each such preferred share.
Conversion
Restriction
Holders
of the Series C preferred stock may not convert the preferred stock to common
stock if the conversion would result in the holder beneficially owning more than
4.99% of the Company’s outstanding shares of common stock. That limitation may
be waived by a holder of the Series C preferred stock and an increase or
decrease in the maximum percentage to any other percentage not in excess of
9.99% may be specified in such notice by sending a written notice to the Company
on not less than 61 days prior to the date that they would like to waive the
limitation.
F-33
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
15. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK (Continued)
Registration Rights
Agreement
In
connection with the financing, the Company entered into a registration rights
agreement (the “RRA”) with the investors in which the Company agreed to file a
registration statement (the “Registration Statement”) with the SEC to register
the shares of common stock underlying the Series C preferred stock and the
Warrants, thirty (30) days after the closing of the financing. The
Company has agreed to use its best efforts to have the Registration Statement
declared effective within 60 calendar days after filing, or 180 calendar days
after filing in the event Cutback Shares are required and the Additional
Registration Statement is required to cover Additional Registrable
Securities.
The
Company is required to keep the Registration Statement continuously effective
under the Securities Act until such date as is the earlier of the date when all
of the securities covered by that Registration Statement have been sold or the
date on which such securities may be sold without any restriction pursuant to
Rule 144 (the “Financing Effectiveness Period”). The Company will pay
liquidated damages of 2% of each holder’s initial investment in the Units sold
in the Financing, payable in cash, if the Registration Statement is not filed or
declared effective within the foregoing time periods or ceases to be effective
prior to the expiration of the Financing Effectiveness Period. In the
event the Company fails to make Registration Delay Payments in a timely manner,
such Registration Delay Payments shall bear interest at the rate of one and
one-half percent (1.5%) per month (prorated for partial months) until paid in
full. However, no liquidated damages shall be paid with respect to any
securities being registered that the Company are not permitted to include in the
Financing Registration Statement due to the SEC’s application of Rule
415.
The
Company evaluated the contingent obligation related to the RRA liquidated
damages in accordance with Financial Accounting Standards Board Staff Position
No. EITF 00-19-2 “Accounting for Registration Payment Arrangements” which is now
codified as FASB ASC 825-20, which requires the contingent obligation to make
future payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision
of a financial instrument or other agreement, to be separately recognized and
measured in accordance with SFAS No. 5, “Accounting for Contingencies”, which is
now codified as FASB ASC 450. The Company concluded that such
obligation was not probable to incur based on the best information and facts
available as of December 31, 2009. Therefore, no contingent
obligation related to the RRA liquidated damages was recognized as of December
31, 2009.
The
Company’s registration statement filed with the SEC in connection with the
issuance of Series C preferred stock was declared effective on February 19,
2010.
F-34
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
15. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK (Continued)
Accounting for the Series C
preferred stock
The
Series C preferred stock is mandatorily redeemable on December 1, 2012, at a
conversion amount equal to the stated value plus the additional
amount. The additional amount is a formula based on the 6% dividend
rate and the time that the preferred stock is outstanding. The Company used the
guidance of FASB ASC 480-10-S99, “Distinguishing Liabilities from Equity” which
states that equity instruments with redemption features that are not solely
within the control of the issuer to be classified temporary
equity. The Company’s Series C preferred stock is contingently
redeemable as it is convertible until the end of the third
anniversary.
Embedded Conversion
Feature
FASB ASC
815 indicates that an embedded conversion features should be considered to be a
derivative if the following criteria are met:
i) The
economic characteristics and risks differ between the host and embedded
conversion feature. This condition, relative to our Series C preferred stock, is
met because the preferred stock has a mandatory redemption feature at the
discretion of the holders instead of the Company. Hence, the conversion feature
is not clearly and closely related to the economic characteristics of the host
contract. The embedded derivative (that is, the conversion option) must be
separated from its host contract and accounted for as a derivative liability
provided that the conversion option would, as a freestanding instrument, be a
derivative instrument.
ii) The
contract that includes the host and the conversion feature is not re-measured at
fair value. This condition is met because the contract (Series C preferred
stock) is not to be re-measured at fair value.
iii) A
separate instrument with the same terms as the embedded conversion feature would
be derivative as per paragraphs 6 of FASB ASC 815. Our review of paragraph 6
revealed that the embedded conversion feature without a host would be considered
a derivative because the embedded conversion feature (1) has underlying and
notional amounts (2) requires no initial net investments and (3) permits
net settlement.
Based on
the above considerations, the embedded conversion features related to our Series
C preferred stock is a derivative that must be bifurcated from the host
instrument and accounted for at fair value with changes in fair value recorded
in earnings.
The
Company calculated the fair value of the embedded conversion feature at December
1, 2009 to be $16,812,682 using the Black-Scholes option pricing model using the
following assumptions:
·
|
risk
free rate of return of 1.14%
|
·
|
expected
term of 3 years
|
F-35
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
15. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK (Continued)
As of
December 31, 2009, the total fair value of the embedded conversion feature was
$18,798,059; therefore, the change of the total fair value of the embedded
conversion feature of $1,985,377 was recorded in earnings for the year ended
December 31, 2009.
Accounting for
Warrants
The
Warrants have an initial exercise price which is subject to adjustments in
certain circumstances for stock splits, combinations, dividends and
distributions, reclassification, exchange or substitution, reorganization,
merger, consolidation or sales of assets, issuance of additional shares of
common stock or equivalents. The Warrants may not be exercised if it
would result in the holder beneficially owning more than 4.99% of the Company’s
outstanding common shares.
The
Company analyzed the Warrants in accordance with SFAS No. 133, which is now
codified as FASB ASC 815, to determine whether the Warrants meet the definition
of a derivative and, if so, whether the Warrants meet the scope exception of
FASB ASC 815, which is that contracts issued or held by the reporting entity
that are both (1) indexed to its own stock and (2) classified in stockholders’
equity shall not be considered to be derivative instruments for purposes of FASB
ASC 815.
The
Company also considered the provisions of EITF Issue No. 07-5, “Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”
which is now codified as FASB ASC 815-40, which applies to any freestanding
financial instruments or embedded features that have the characteristics of a
derivative, as defined by FASB ASC 815 and to any freestanding financial
instruments that are potentially settled in an entity’s own common
stock.
As a
result of its interpretation of FASB ASC 815-40, the Company concluded that the
Warrants issued in the December 2009 financing should be treated as a derivative
liability because the Warrants are entitled to a price adjustment provision to
allow the exercise price to be reduced in the event the Company issues or sells
any additional shares of common stock at a price per share less than the
then-applicable exercise price or without consideration, which is typically
referred to as a “Down-round protection” or “anti-dilution”
provision. According to FASB ASC 815-40, the “Down-round protection”
provision is not considered to be an input to the fair value of a
fixed-for-fixed option on equity shares which leads the Warrants to fail to be
qualified as indexed to the Company’s own stock and then to fail to meet the
scope exceptions of FASB ASC 815. Therefore, the Company accounted for the
Warrants as derivative liabilities under FASB ASC 815. Pursuant to
FASB ASC 815, derivatives are measured at fair value and re-measured at fair
value with changes in fair value recorded in earnings at each reporting
period.
F-36
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
15. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK (Continued)
Series A
warrants
The
Company estimated the fair value of the Series A warrants using the Black
Scholes option-pricing model and available information that management deems
most relevant.
The
Company calculated the fair value of the Series A warrants at December 1, 2009
(date of grant) to be $6,500,059 using the Black-Scholes option-pricing model
using the following assumptions:
·
|
risk
free rate of return of 2.03%
|
·
|
expected
term of 5 years
|
The
volatility of 152.03% was determined by taking the Company’s stock price from
February 13, 2009 through November 13, 2009. The Company believes
that the stock price immediately after the reverse merger to February 12, 2009
remained constant. Moreover, the stock price was extremely volatile from
November 14, 2009 to December 1, 2009, when it began trading on
NASDAQ.
The
re-measured fair value of the Series A warrants as of December 31, 2009 was
approximately $7,248,903. The change in fair value of the Warrants of
$748,844 was recorded in earnings for the year ended December 31,
2009.
Series B
warrants
The
Series B warrants will not be valued at the date of the agreement because the
price is not known until the Price Reset Date.
Placement Agent
Warrants
In
accordance with Staff Accounting Bulletin Topic 5.A: “Miscellaneous
Accounting-Expenses of Offering” which is now codified as FASB ASC
340-10-S99-1”, “specific incremental costs directly attributable to a proposed
or actual offering of securities may properly be deferred and charged against
the gross proceeds of the offering.” In accordance with the SEC
Accounting and Reporting Manual, “costs of issuing equity securities are charged
directly to equity as deduction of the fair value assigned to shares
issued.” Accordingly, the Company concluded that the Placement Agent
Warrants are directly attributable to the December 2009 financing. If
the Company had not issued the Placement Agent Warrants, the Company would have
had to pay the same amount of cash as the fair value. Therefore, the
Company deducted the total fair value of the Placement Agent Warrants as of the
commitment date, which was approximately $577,123, against the gross
proceeds.
F-37
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
15. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK (Continued)
Placement Agent Warrants
(Continued)
Since the
Placement Agent Warrants contain the same terms as the Investor Warrants, the
Placement Agent Warrants are also entitled to the benefits of the “down-round
protection” provisions, which means that the Placement Agent Warrants will also
need to be accounted for as a derivative under FASB ASC 815 with changes in fair
value recorded in earnings at each reporting period. As of December
31, 2009, the total fair value of the Placement Agent Warrants was $643,610;
therefore, the change of the total fair value of the Placement Agent Warrants of
$66,487 was recorded in earnings for the year ended December 31,
2009.
The
registered holders of the Investor and Placement Agent Warrants are entitled to
purchase from the Company at any time or times on or after the date immediately
after the six month anniversary until the sixty month anniversary after the
issuance date.
Allocation of
proceeds
The fair
value of the embedded conversion feature and warrants of $23,312,741 was
recorded as follows:-
i) the
Company recorded a deemed preferred stock dividend of $13,891,477;
and
ii) the
excess of the fair values of the embedded conversion feature and warrants over
the net proceeds received of $9,421,264 was charged to changes in fair value of
warrants and embedded derivatives in the statement of income.
Note
16. STOCK-BASED COMPENSATION
The
Company adopted the 2009 Stock Incentive Plan (the “2009 Plan”) on May 26, 2009,
which reserved 7,800,000 shares of common stock for issuance. The 2009 Plan
allows the Company to issue awards of incentive non-qualified stock options and
stock bonuses to directors, officers, employees and consultants of the Company,
which may be subject to restrictions. The Company applied FASB ASC 718 and
related interpretations in accounting for the 2009 Plan. Compensation for
services that a corporation receives under FASB ASC 718 through share-based
compensation plans should be measured by the quoted market price of the stock at
the grant date less the amount, if any, that the individual is required to
pay.
Stock
compensation expense recognized is based on awards expected to vest. The fair
value of the stock compensation is amortized over the respective vesting period
based on the terms of the employment or service agreements under which the stock
was awarded. The fair value of the stock-based compensation expense amortized
for the year ended December 31, 2009 and 2008 was $7,408,162 and $5,473,907,
respectively.
F-38
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
16. STOCK-BASED COMPENSATION (Continued)
A summary
of the restricted stock unit activity is as follows:
|
|
Restricted
Stock
Units
|
|
|
Weighted-
Average Grant
Date
Price per
Share
|
|
|
Aggregated
Fair Market
Value
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$
|
|
Balance
at January 1 2008 and December 31, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
1,810,024
|
|
|
|
3.03
|
|
|
|
5,487,541
|
|
Vested
|
|
|
(868,000
|
)
|
|
|
3.00
|
|
|
|
2,604,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009 (granted but not yet vested)
|
|
|
942,024
|
|
|
|
3.06
|
|
|
|
2,883,541
|
|
A summary
of share-based awards available for grant is as follows:
|
|
Restricted
Stock
Units
|
|
Balance
at January 1, 2008 and December 31, 2008
|
|
|
-
|
|
Shares
reserved
|
|
|
7,800,000
|
|
Granted
|
|
|
1,810,024
|
|
Balance
at December 31, 2009 (available for grant)
|
|
|
5,989,976
|
|
Note 17. STOCKHOLDERS’
EQUITY
(a)
Common Stock
Issuance of Common
Stock
Prior to
the reverse merger, China XD Plastics had 49,632,222 shares of common stock
issued and outstanding at $.0001 per share. In connection with the reverse
merger consummated on December 24, 2008, all of these outstanding shares were
subject to a 124.1 for 1 reverse split for all record holders of China XD
Plastics’ common stock on the date of December 31, 2008. The number of the post
reverse-split of the original common stock outstanding was rounded up to 400,000
shares.
In
consideration for the Merger, China XD Plastics issued 10 shares of the
common stock and 1,000,000 shares of convertible Series A preferred stock to the
shareholders of Favor Sea (BVI), and also 1,000,000 shares of Series B preferred
stock to XD Engineering, the principal shareholder of Favor Sea (BVI). The 10
shares of the common stock issued to shareholders of Favor Sea BVI were
converted into approximately 50,367,778 shares of the common stock of China XD
Plastics prior to and approximately 405,802 post a reverse stock split of 124.1
for 1. The equity account of Favor Sea (BVI), prior to the merger date, has been
retroactively restated so that the ending outstanding share balance as of the
merger date is equal to the number of post reverse-split shares received in the
merger.
F-39
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 17. STOCKHOLDERS’ EQUITY
(Continued)
As a part
of the Merger Agreement effected on December 24, 2008, 1,000,000 shares of
Series A preferred stock were automatically converted into 38,194,072 shares of
common stock on April 20, 2009 after China XD Plastics’ effective filing to
increase its authorized shares.
On June
5, 2009, China XD Plastics issued 1,790,000 common shares to some employees
and consultants as stock compensation in connection with the services rendered
or to be rendered by in 2009. Among these shares, 868,000 vested during the year
and 922,000 will vest in 2010.
On
September 2, 2009, the Company issued 20,024 common stocks to four independent
directors in connection with the service agreements between China XD Plastics
and the directors. These shares will vest in 2010.
On
November 16, 2009, a consultant exercised its warrants into 57,152 shares of
common stocks (See (b) below).
As of
December 31, 2009, there are 40,867,050 shares of common stock issued and
outstanding. There are also 1,000,000 shares of Series B Preferred Stock issued
and outstanding, and all of the issued and outstanding shares of Series B
Preferred Stock have voting power equal to 40% of the total voting power of all
of the issued and outstanding shares of the common stock.
On
December 1, 2009 (the “Closing Date”), the Company entered into a securities
purchase agreement (the “Purchase Agreement”), with several investors, including
institutional, accredited and non-US person and entities (the “Investors”) (See
Note 15).
(b)
Warrants
On
December 30, 2008, the Company issued warrants (“consultant warrants”) to purchase
66,667 shares of common stock to a consultant for certain services provided. The
consultant warrants were exercisable at $1.50 per share from January 1, 2009
through December 30, 2010. A total amount of $46,260 was recognized
as an expense on the date the warrants were issued using the Black-Scholes
option pricing model.
On
November 16, 2009, the consultant exercised all of the consultant warrants under
the cashless method into 57,152 shares of common stock.
Note 18. SIGNIFICANT
CONCENTRATION
Two (2)
major vendors provided approximately 99% of the Company’s purchases of raw
materials for the year ended December 31, 2009, with each vendor individually
accounting for approximately 50% and 49%, respectively. Two (2) vendors provided
approximately 96% of the Company’s purchase of raw materials for the year ended
December 31, 2008, with each vendor individually accounting for approximately
66% and 30%, respectively.
F-40
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 18. SIGNIFICANT CONCENTRATION
(Continued)
The
advance to one of the vendors was $19,629,245 and $12,060,537 as of December 31,
2009 and 2008, respectively.
Sales
to one major distributor accounted for approximately 83% and 81% of the
Company’s sales for the years ended December 31, 2009 and 2008,
respectively.
Note
19. EARNINGS PER SHARE
Earnings
per share for the years ended December 31, 2009 and 2008 is determined by
dividing net income for the periods by the weighted average number of both basic
and diluted shares of common stock and common stock equivalents outstanding. The
following is an analysis of the differences between basic and diluted earnings
per common share in accordance with FASB ASC 260.
The
following table is a reconciliation of the net income and the weighted average
shares used in the computation of basic and diluted earnings per share for the
years presented:
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
|
US$
|
|
|
US$
|
|
Income
available to common stockholders
|
|
|
|
|
Restated
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
4,023,266 |
|
|
|
8,213,583 |
|
Less:
dividends to Series C preferred stockholder
|
|
|
(77,396 |
) |
|
|
- |
|
Deemed
Series C preferred stock dividends
|
|
|
(13,891,477 |
) |
|
|
- |
|
Adjusted
income (loss) attributable to common stockholders
|
|
|
(9,945,607 |
) |
|
|
8,213,583 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – Basic
|
|
|
27,789,044 |
|
|
|
414,569 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – Basic
|
|
|
27,789,044 |
|
|
|
414,569 |
|
Effect
of diluted securities – Series A
preferred stock |
|
|
- |
|
|
|
38,194,072 |
|
Weighted
average shares outstanding – Diluted
|
|
|
27,789,044 |
|
|
|
38,608,641 |
|
Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
|
(0.36 |
) |
|
|
19.81 |
|
Diluted
EPS
|
|
|
(0.36 |
) |
|
|
0.21 |
|
F-41
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
20. COMMITMENTS AND CONTINGENCIES
As of
December 31, 2009, the Company leased buildings and facilities in Harbin and the
lease will expire on April 30, 2012. Rental expenses for the years ended
December 31, 2009 and December 31, 2008 amounted to $292,954 and $119,945,
respectively. The rental expenses are included in general and administrative
expenses.
As of
December 31, 2009, the Company rented office and quarter in the U.S. and the
leases will expire on November 30, 2010 and March 2, 2010, respectively. Rental
expenses for the years ended December 31, 2009 and December 31, 2008 amounted to
$72,779 and nil, respectively.
The
future minimum lease payments under the above mentioned leases as of December
31, 2009 are as follows:
December
31, 2009
|
|
|
US$
|
|
|
2010
|
|
|
364,044 |
|
2011
|
|
|
292,954 |
|
2012
|
|
|
98,139 |
|
Total
|
|
|
755,137 |
|
As of
December 31, 2009, HK Engineering Plastics had a commitment in respect of
capital contribution to Harbin Xinda of approximately $16,000,000
(RMB109,190,000), which has to be repaid by December 3, 2011.
Note
21. STATUTORY SURPLUS RESERVE FUND
Under PRC
regulations, all subsidiaries in the PRC may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC
GAAP. In addition, these subsidiaries are required to set aside at
least 10% of their after-tax net profits each year, if any, to fund the
statutory reserves until the balance of the reserves reaches 50% of their
registered capital. The statutory reserves are not distributable in
the form of cash dividends to the Company and can be used to make up cumulative
prior year losses. The PRC subsidiaries began the appropriation in
2009. Appropriation to statutory surplus reserve fund in 2009
amounted to $2,471,007.
Note
22. FAIR VALUE MEASUREMENT
FASB ASC
820 “Fair Value Measurements and Disclosures” introduces a framework for
measuring fair value and expands required disclosure about fair value
measurements of assets and liabilities. FASB ASC 820 defines fair
value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. FASB ASC 820 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair
value.
F-42
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note
22. FAIR VALUE MEASUREMENT (Continued)
There are
three levels of inputs that may be used to measure fair value:
|
Level 1
- |
Quoted prices in
active markets for identical assets or
liabilities. |
|
Level 2 - |
Observable
inputs other than Level 1 prices such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or
liabilities.
|
|
Level 3
- |
Unobservable inputs
that are supported by little or no market activity and that are
significant to the fair value of the assets or
liabilities. |
Assets
and liabilities measured at fair value on a recurring basis are summarized
below:
|
|
|
|
|
|
|
|
Fair
Value Measurement as of December 31, 2009
|
|
Description
|
|
Total |
|
|
Level
1 |
|
Level
2
|
|
|
Level
3 |
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$ |
|
Common
stock warrant purchase liabilities
|
|
7,892,513
|
|
|
-
|
|
|
7,892,513
18,798,059
|
|
|
- |
|
Embedded
conversion feature liabilities
|
|
18,798,059
|
|
|
-
|
|
|
|
|
- |
|
Total
|
|
26,690,572 |
|
|
-
|
|
26,690,572
|
|
|
- |
|
Note
23. SUBSEQUENT EVENTS
Cash
Dividend to Holders of Series C Preferred Stock
Pursuant
to the terms in the Certificate of Designation of Series C preferred stock, the
Company records a cash dividend of $18 per common share payable upon conversion
of Series C preferred stock by its holder anytime after the issuance date. As of
April 5, 2010, 14,436 out of total issued and outstanding 15,188 shares of
Series C preferred stock have been converted into 3,138,261 common shares and
the Company has made cash dividend payment of $1,621,433 to the holders who
converted their preferred shares.
F-43