The
accompanying notes are an integral part of these condensed consolidated
financial statements
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 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 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.
|
5
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
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 three months ended March 31, 2010 and
2009 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.
6
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
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 March 31, 2010 and December 31, 2009, 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 4).
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 three months ended March 31,
2010 and 2009.
7
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
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 months to three months
ahead. The advances to suppliers were $20,308,122 and $20,245,861 as of March
31, 2010 and December 31, 2009, 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 three
months ended March 31, 2010 and 2009, respectively.
8
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
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.
9
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
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.
10
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
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 March 31, 2010 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
March 31, 2010, 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 March 31, 2010.
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 three months ended March 31, 2010 and 2009 were
$1,505,172 and $289,155, respectively.
11
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
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.
12
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
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 March 31, 2010 and December 31, 2009, the Company
had credit risk exposure of uninsured cash in banks of approximately $13,918,309
and $6,850,784, 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.
13
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
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
January 2010, the FASB issued Accounting Standard Update No.2010-06 (“ASU
2010-06”), “Improving Disclosures about Fair Value Measurements”, which amends
ASC 820 to add new requirements for disclosures related to amounts transferred
into and out of Level 1 and 2 fair value measurements as well as separate
disclosures of purchases, sales, issuances, and settlements related to amounts
reported as Level 3 fair value measurements. ASU 2010-06 also clarifies existing
fair value disclosure requirements related to the level of disaggregation and
the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements. This guidance is effective
for this quarter, except for the separate disclosures of purchases, sales,
issuances, and settlements related to amounts reported as Level 3 fair value
measurements, which is effective for fiscal years beginning after
December 15, 2010.
The
adoption of this guidance did not have a material impact on its results of
operations or cash flows.
Note
3. RESTRICTED CASH
As of
March 31, 2010 and December 31, 2009, the Company had restricted cash of
$8,790,075 and nil. The Company’s lenders require the Company to maintain with
the lending banks a cash balance of a minimum of 50% of the balance of the bank
acceptance notes payable (See Note 11) as collateral for the Company’s
obligations to the lenders. The Company maintained a cash balance of
$8,790,075 for bank acceptance notes with the lending banks.
Note 4. ACCOUNTS
RECEIVABLE
Accounts
receivable consists of trade receivables resulting from sales of products during
the normal course of business. Accounts receivable as of March 31, 2010 and
December 31 2009 amounted to $14,218,223 and $8,558,172,
respectively.
The
Company collaborates directly with its end users on new product development,
product certifications and post-sales support. Sales contracts are usually
signed directly between the Company and its end users. Due to the nature of this
industry, the Company also regularly uses distributors to sell its products to
various end users. This arrangement can greatly assist to ensure timely
collections of its accounts receivable and reduce its selling and administrative
costs. The Company believes that all of the accounts receivable
outstanding from these distributors are collectible (See Note 16).
14
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note 4. ACCOUNTS RECEIVABLE
(Continued)
The
changes in allowance for doubtful receivables are summarized as
follows:
|
|
As
of
|
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
|
166,095 |
|
|
|
99,669 |
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
28 |
|
|
|
66,426 |
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
|
166,123 |
|
|
|
166,095 |
|
The
allowance for doubtful receivables was recorded in general and administrative
expenses.
Note 5. INVENTORIES
Inventories
consist of the following:
|
|
As
of |
|
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
7,846,216 |
|
|
|
5,760,957 |
|
Work-in-progress
|
|
|
578,724 |
|
|
|
12,030,860 |
|
Finished
goods
|
|
|
13,273,665 |
|
|
|
570,701 |
|
Packing
supplies
|
|
|
14,552 |
|
|
|
8,967 |
|
Total
|
|
|
21,713,157 |
|
|
|
18,371,485 |
|
No
allowance for inventories was made for the three months ended March 31, 2010 and
2009.
Note
6. 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 in 2009. Advances to employees as of March 31, 2010 and December
31, 2009 amounted to $541,558 and $512,745, respectively.
15
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note
7. PROPERTY, PLANT AND EQUIPMENT, NET
The
details of property, plant and equipment are as follows:
|
|
As
of |
|
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
|
30,444,269 |
|
|
|
30,455,968 |
|
Automobiles
|
|
|
401,796 |
|
|
|
402,690 |
|
Plant
and buildings
|
|
|
3,893,340 |
|
|
|
3,863,746 |
|
Total
|
|
|
34,739,405 |
|
|
|
34,722,404 |
|
Less:
accumulated depreciation
|
|
|
(4,485,791 |
) |
|
|
(3,667,959 |
) |
|
|
|
|
|
|
|
|
|
Construction
in progress
|
|
|
- |
|
|
|
28,944 |
|
Total
|
|
|
30,253,614 |
|
|
|
31,083,389 |
|
Depreciation
expense for the three months ended March 31, 2010 and 2009 was $828,769 and
$444,499, respectively. Certain property, plant and equipment have been pledged
for short term loans (See Note 10).
Note
8. 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
$226,281.
Net
intangible asset as of March 31, 2010 and December 31, 2009 was as
follows:
|
|
As
of |
|
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Land
use right
|
|
|
267,531 |
|
|
|
267,486 |
|
Less:
accumulated amortization
|
|
|
(26,939 |
) |
|
|
(25,541 |
) |
Total
|
|
|
240,592 |
|
|
|
241,945 |
|
Amortization
expense for the three months ended March 31, 2010 and 2009 amounted to $1,393
and $1,391, respectively. Amortization expenses for the next five
years amount to approximately $5,500 each year. The land use right has been
pledged for short term loans (See Note 10).
16
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note
9. RELATED PARTY TRANSACTIONS
Amounts
due to affiliates are as follows:
|
|
As
of |
|
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Harbin
Xinda High-Tech Co., Ltd.
(“Xinda
High-tech)
|
|
|
- |
|
|
|
148,397 |
|
Ms.
Piao
|
|
|
100,394 |
|
|
|
- |
|
Total
|
|
|
100,394 |
|
|
|
148,397 |
|
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 is an affiliated company owned by the spouse of Mr. Han, who was the
major shareholder of Harbin Xinda before the ownership was transferred to HK
Engineering Plastics (See Note 10).
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 three
months ended March 31, 2010 and 2009, the Company recorded $73,234 and $73,139,
respectively, for the rent expenses (See Note 18).
17
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note
10. SHORT TERM LOANS
The
short-term loans include the following:
|
|
As
of |
|
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
|
US$
|
|
|
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
|
|
|
4,395,038
|
|
|
|
4,394,304
|
|
|
|
|
|
|
|
|
|
|
b) 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
|
|
|
1,465,012
|
|
|
|
1,464,768
|
|
|
|
|
|
|
|
|
|
|
c) 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
|
|
|
|
|
|
|
|
|
|
|
d) 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
|
|
|
|
|
|
|
|
|
|
|
e) Loan
payable to Harbin Bank
three
months term from March 30, 2010 to June 30, 2010 bears a fixed interest
rate of 5.265% per year
|
|
|
732,506
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
g) Loan
payable to Longjiang Bank
one
year term from February 22, 2010 to February 21, 2011 bears a fixed
interest rate of 5.441% per year
|
|
|
4,395,038
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
h) Loan
payable to Longjiang Bank
one
year term from February 22, 2010 to February 21, 2011 bears a fixed
interest rate of 5.441% per year
|
|
|
4,395,038
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
i) Loan
payable to Longjiang Bank
three
months term from March 15, 2010 to June 14, 2010 bears a fixed interest
rate of 4.970% per year
|
|
|
5,860,050
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
21,242,682 |
|
|
|
21,678,565 |
|
* The
prime rate set by Central Bank of China as of March 31, 2010 was
5.31%.
18
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note
10. SHORT TERM LOANS (Continued)
The
one-year short term loan of $4,395,038 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 (See Note 9).
The
one-year short term loan of $1,465,012 between Harbin Xinda and Bank of
Communications for the period of December 8, 2009 to December 8, 2010 is secured
by Harbin Xinda pledging certain of its machineries as collateral to secure the
loan and guaranteed by Mr. Han and his wife.
The two
one-year short term loans of $4,395,038 each, between Harbin Xinda and Longjiang
Bank for the period of February 22, 2010 to February 21, 2011 are secured by
Harbin Xinda pledging certain of its machineries as collateral to secure the
loans.
The three
months short term loan of $5,860,050 between Harbin Xinda and Longjiang Bank for
the period of March 15, 2010 to June 14, 2010 is guaranteed by Xinda High-Tech
(See Note 9).
The three
months short term loan of $732,506 between Harbin Xinda and Harbin Bank for the
period of March 30, 2010 to June 30, 2010 is guaranteed by Xinda High-Tech (See
Note 9).
Interest
expense for the Company’s short term loans totaled $387,372 and $356,188 for the
three months ended March 31, 2010 and 2009, respectively.
Note
11. BANK ACCEPTANCE NOTES PAYABLE
The
Company had bank acceptance notes payable in the amount of $5,860,050 and nil as
of March 31, 2010 and December 31, 2009, 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 of
50% of the total balance of the notes payable with the banks, in order to ensure
future credit availability.
19
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note 12. 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 three months ended March 31, 2010 and
2009.
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.
20
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note 12. INCOME TAXES
(Continued)
Corporation
Income Tax (“CIT”) (Continued)
The
following table reconciles the statutory rates to the Company’s effective tax
rate for the three months ended March 31, 2010 and 2009:
|
|
March
31, 2010
|
|
|
March
31, 2009
|
|
|
|
|
|
|
|
|
US
statutory rates
|
|
|
34.00% |
|
|
|
34.00% |
|
Effect
of tax rates in different jurisdiction
|
|
|
(6.18% |
) |
|
|
(9.00% |
) |
Effect
of non-deductible expenses
|
|
|
(11.53% |
) |
|
|
- |
|
Changes
in valuation allowance
|
|
|
0.99% |
|
|
|
- |
|
Effect
of tax exemption of PRC subsidiaries
|
|
|
(17.11% |
) |
|
|
(24.94% |
) |
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
0.17% |
|
|
|
0.06% |
|
As of
March 31, 2010, China XD Plastics and Favor Sea (US) had accumulated net
operating loss carryforwards for United States federal tax purposes of
approximately $1,239,116, that are available to offset future taxable
income. Realization of the net operating loss carryforwards is
dependent upon future profitable operations. In addition, the
carryforwards may be limited upon a change of control in accordance with
Internal Revenue Code Section 382, as amended. Accordingly,
management has recorded a valuation allowance to reduce deferred tax assets
associated with the net operating loss carryforwards to zero at March 31,
2010. The net operating loss carryforwards expire in years 2027
through 2030.
As of
March 31, 2010, deferred tax assets consist of:
|
|
March
31, 2010
|
|
|
|
US$
|
|
|
|
|
|
Net
operating loss carry forwards
|
|
|
1,239,116 |
|
Less:
valuation allowance
|
|
|
(1,239,116 |
) |
|
|
|
|
|
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.
21
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note
13. 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.
Preferred stock holders are entitled to convert any unpaid dividends per
preferred stock then remaining, into fully paid and nonassessable shares of
common stock at a mutually agreed conversion rate.
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.
22
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note
13. 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
i)
Voluntary Conversion
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.
23
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note
13. 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.
24
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note
13. 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 feature 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.
During
the three months ended March 31, 2010, 14,436 out of total 15,188 shares of
Series C preferred stock were converted into 3,138,261 shares of common stocks.
The conversion of Series C preferred stock resulted in a fair value gain of
$3,194,337 recorded in earnings and a credit of $14,672,957 to additional
paid-in capital during the three months ended March 31, 2010.
The
Company calculated the fair value of the embedded conversion feature at March
31, 2010 to be $712,915 using the Black-Scholes option pricing model using the
following assumptions:
25
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note
13. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK (Continued)
·
|
risk
free rate of return of 1.60%
|
·
|
expected
term of 2.67 years
|
The fair
value gain of the embedded conversion feature of $217,850 was recorded in
earnings.
The
movements of embedded conversion feature are summarized as
follows:-
|
|
US$
|
|
Issuance
of preferred stock on December 1, 2009
|
|
|
16,812,682 |
|
|
|
|
|
|
Adjustment
to fair value change
|
|
|
1,985,377 |
|
|
|
|
|
|
Balance
as of December 31, 2009 and January 1, 2010
|
|
|
18,798,059 |
|
|
|
|
|
|
Conversion
of preferred stock to common shares
|
|
|
(14,672,957 |
) |
|
|
|
|
|
Adjustment
to fair value change upon conversion
|
|
|
( 3,194,337 |
) |
|
|
|
|
|
Balance
as of March 31, 2010
|
|
|
712,915 |
|
|
|
|
|
|
26
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note
13. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK (Continued)
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.
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 March 31, 2010 to
be $5,678,837, compared to the fair value of $7,248,903 as of December 31, 2009,
using the Black-Scholes option-pricing model with the following
assumptions:
·
|
risk
free rate of return of 2.55%
|
·
|
expected
term of 4.67 years
|
27
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note
13. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK (Continued)
The
volatility of 156.16% was determined by taking the Company’s stock price from
February 13, 2009 through November 13, 2009 and December 2, 2009 through March
31, 2010. 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
change in fair value of the Warrants of $1,570,066 was recorded in earnings for
the three months ended March 31, 2010.
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.
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 March 31,
2010, the total fair value of the Placement Agent Warrants was $504,209,
compared to the fair value of $643,610 as of December 31, 2009; therefore, the
change of the total fair value of the Placement Agent Warrants of $139,401 was
recorded in earnings for the three months ended March 31, 2010.
The
registered holders of the Investor and Placement Agent Warrants are entitled to
purchase common shares from the Company at any time or times on or after the
date immediately after the six month anniversary until the sixty month
anniversary after the issuance date.
28
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note
13. SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK (Continued)
The
movement of common stock warrant purchase liabilities is summarized as
follows:-
|
|
Series
A
warrants
|
|
|
Placement
Agent
warrants
|
|
|
Total
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Issuance
of common stock warrants on December
1, 2009
|
|
|
6,500,059 |
|
|
|
577,123 |
|
|
|
7,077,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to fair value change
|
|
|
748,844 |
|
|
|
66,487 |
|
|
|
815,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2009 and January 1, 2010
|
|
|
7,248,903 |
|
|
|
643,610 |
|
|
|
7,892,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to fair value change
|
|
|
(1,570,066 |
) |
|
|
(139,401 |
) |
|
|
(1,709,467 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of March 31, 2010
|
|
|
5,678,837 |
|
|
|
504,209 |
|
|
|
6,183,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of proceeds on
December 31, 2009
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
14. 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 three months ended March 31, 2010 and 2009 was $745,394 and nil,
respectively.
29
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note
14. 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, 2010 and December 31, 2009
|
|
|
942,024
|
|
|
|
3.06
|
|
|
|
2,883,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(20,024)
|
|
|
|
5.87
|
|
|
|
117,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2010 (granted but not yet vested)
|
|
|
922,000
|
|
|
|
3.00
|
|
|
|
2,766,000
|
|
As of
March 31, 2010, 5,989,976 (December 31, 2009: 5,989,976) share-based awards were
available for grant.
Note 15. 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.
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.
30
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note 15. STOCKHOLDERS’ EQUITY
(Continued)
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 shares.
During
February and March of 2010, 14,436 shares series C preferred stock were
converted into 3,138,261 common shares.
As of
March 31, 2010, there are 44,007,589 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.
Note 16. SIGNIFICANT
CONCENTRATION
Two (2)
major vendors provided approximately 99% of the Company’s purchases of raw
materials for the three months ended March 31, 2010, with each vendor
individually accounting for approximately 52% and 47%, respectively. Two (2)
vendors provided approximately 97% of the Company’s purchase of raw materials
for the three months ended March 31, 2009, with each vendor individually
accounting for approximately 53% and 44%, respectively.
The
advance to one of the vendors was $16,497,096 and $19,629,245 as of March 31,
2010 and December 31, 2009, respectively.
Sales to
three major distributors accounted for approximately 90% of the Company’s sales
for the three months ended March 31, 2010, with each distributor individually
accounting for 65%, 13% and 12%, respectively.
Sales to
one major distributor accounted for approximately 97% of the Company’s sales for
the three months ended March 31, 2009.
Note
17. EARNINGS PER SHARE
Earnings
per share for the three months ended March 31, 2010 and 2009 is determined by
dividing net income for the periods by the weighted average number of both basic
and diluted shares of common stock and common stock equivalents outstanding. The
following is an analysis of the differences between basic and diluted earnings
per common share in accordance with FASB ASC 260.
31
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note
17. EARNINGS PER SHARE (Continued)
The
following table is a reconciliation of the net income and the weighted average
shares used in the computation of basic and diluted earnings per share for the
periods presented:
|
|
March
31, 2010
|
|
|
March
31, 2009
|
|
|
|
US$
|
|
|
US$
|
|
Income
available to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
13,082,356 |
|
|
|
4,016,644 |
|
Less:
dividends to Series C preferred stockholder
|
|
|
( 2,560,916 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Adjusted
income attributable to common stockholders
|
|
|
10,521,440 |
|
|
|
4,016,644 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – Basic
|
|
|
41,178,249 |
|
|
|
805,802 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – Basic
|
|
|
41,178,249 |
|
|
|
805,802 |
|
Effect
of diluted securities – Series A preferred stock
|
|
|
- |
|
|
|
38,194,072 |
|
Effect
of diluted securities – Series C preferred stock
|
|
|
47,565 |
|
|
|
|
|
Effect
of diluted securities – Warrants
|
|
|
386,260 |
|
|
|
- |
|
Weighted
average shares outstanding – Diluted
|
|
|
41,612,074 |
|
|
|
38,999,874 |
|
Earnings
per share
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
|
0.26 |
|
|
|
4.98 |
|
Diluted
EPS
|
|
|
0.25 |
|
|
|
0.10 |
|
32
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note
18. COMMITMENTS AND CONTINGENCIES
As of
March 31, 2009, the Company leased buildings and facilities in Harbin and the
lease will expire on April 30, 2012. Rental expenses for the three months ended
March 31, 2010 and March 31, 2009 amounted to $73,234 and $73,139, respectively.
The rental expenses are included in general and administrative expenses (See
Note 9).
As of
March 31, 2009, the Company rented an office and a staff quarter in the U.S.
where the office lease will expire on November 30, 2010 and the staff quarter
lease expired on March 2, 2010. Rental expenses for the three months ended March
31, 2010 and March 31, 2009 amounted to $28,983 and $53,000,
respectively.
The
future minimum lease payments under the above mentioned leases as of March 31,
2010 are as follows:
Year
ending December 31, |
|
|
US$ |
|
2010 |
|
|
266,909 |
|
2011
|
|
|
293,003 |
|
2012
|
|
|
97,668 |
|
Total
|
|
|
657,580 |
|
As of
March 31, 2010, 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.
As of
March 31, 2010, the Company had a capital commitment in respect of machinery of
$205,000 (RMB1,400,000).
Note
19. FAIR VALUE MEASUREMENT
FASB ASC
820 “Fair Value Measurements and Disclosures” introduces a framework for
measuring fair value and expands required disclosure about fair value
measurements of assets and liabilities. FASB ASC 820 defines fair
value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. FASB ASC 820 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair
value.
There are
three levels of inputs that may be used to measure fair value:
|
Quoted prices in active
markets for identical assets or
liabilities.
|
|
Observable inputs other than
Level 1 prices such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
Unobservable inputs that are
supported by little or no market activity and that are significant to the
fair value of the assets or
liabilities.
|
33
CHINA
XD PLASTICS COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note
19. FAIR VALUE MEASUREMENT (Continued)
Assets
and liabilities measured at fair value on a recurring basis are summarized
below:
|
|
Fair
Value Measurement as of March 31, 2010
|
|
Description
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
|
US$ |
|
Common
stock warrant purchase liabilities
|
|
|
6,183,046 |
|
|
|
- |
|
|
|
6,183,046 |
|
|
|
- |
|
Embedded
conversion feature liabilities
|
|
|
712,915 |
|
|
|
- |
|
|
|
712,915 |
|
|
|
- |
|
Total
|
|
|
6,895,961 |
|
|
|
- |
|
|
|
6,895,961 |
|
|
|
- |
|
Note
20. SUBSEQUENT EVENTS
Stock
Dividend to Holders of Series C Preferred Stock
As of May
7, 2010, 750 out of total issued and outstanding 752 shares of Series C
preferred stock have been converted into 163,043 common shares by three holders
and they elected to receive their dividend payments in the form of restricted
common stock aggregating 24,545 shares, in connection with their conversion of
all their series C preferred shares pursuant to the provisions in the
Certification of Designation of Series C Preferred Stock.
On April
14, 2010, China XD Plastics through its subsidiary Harbin Xinda entered into a
District Entry Agreement (the “DE Agreement”) and a Memorandum (the “Memo”) with
Harbin Economic and Technological Development Zone Administration (the
“Administration”).
Pursuant
to the DE Agreement, Harbin Xinda agreed to relocate all its manufacturing
facilities of the Qinling Road Factory and change its business address and
tax registration to Ha Ping Road Centralized Industrial Park where Dalian Road
Factory is located. Following the relocation of such manufacturing facilities,
and upon the completion of the business address change and tax registration
with the Development Zone of the new location, the Administration will pay a
total of approximately $3 million (RMB 20 million) to Harbin Xinda as business
relocation subsidies. According to the payment terms of the DE Agreement,
approximately $1.5 million (RMB 10 million) will be paid within seven days of
the completion of Harbin Xinda’s business address change and tax
registration and the remaining approximately $1.5 million (RMB 10 million) will
be paid in the corresponding period the following month.
The
relocation will occur in phases over three months during which Harbin Xinda will
relocate all its production lines in Qinling Road Factory to Ha Ping Road
Centralized Industrial Park during its regular maintenance period, typically the
last five days of each month. Harbin XInda does not expect the relocation to
interrupt its production.