Cost of Sales and
Gross Margin
During the six
months ended June 30, 2009, we had cost of sales of $45,879,331, as compared
with cost of sales of $25,325,675 during the same period in 2008, an increase
of approximately $20,553,656, or 81%, reflecting the increase in net sales. The
gross profit rose to $12,424,825 for the six months ended June 30, 2009, or a
52.4% increase compared with $8,151,481 during the same period in 2008. Our
gross margin decreased slightly from 24.3% during the six months ended June 30,
2008 to 21.3% during the six months ended June 30, 2009. The decrease was
mainly attributed to 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.
Operating Expenses
Our operating
expenses were $2,765,269 during the six months ended June 30, 2009, compared
with $814,372 during the six months ended June 30, 2008, an increase of
$1,950,897 or approximately 240%. The increase in operating expenses was
principally due to the increased depreciation expenses and payroll expenses and
expenses incurred by our US office as well as stock based compensation
expenses. Selling expenses increased from $47,795 during the six months ended
June 30, 2008 to $106,243 during the same period in 2009 as we increased our
efforts to obtain more customers. General and administrative expenses increased
from $445,937 during the quarter ended June 30, 2008 to $2,161,053 during the
quarter ended June 30, 2009, reflecting the increased salary expense,
depreciation expense and other expenses pertinent to the reverse merger and
listing in the US as well as stock based compensation expenses. Research and
development expenses increased to $497,973 during the six months ended June 30,
2009 compared to $320,640 during the same period in 2008 reflecting our
increased efforts in new product development by adding more researchers and
increasing raw material usage. As a result, our operating expenses increased to
$2,765,269 during the quarter ended June 30, 2009 from $814,372 during the
quarter ended June 30, 2008.
Interest Expense
Interest
expense increased $529,452 from $163,267 during the six months ended June 30,
2008 to $692,719 for the six months ended June 30, 2009. The increase in
interest expense was resulted from the increase in our loans,
as we borrowed to fund the rapid growth in our sales.
Net Income
As a result of
the factors described above, we had net income of $9,013,033 during the six
months ended June 30, 2009, compared with $7,192,793 during the six months
ended June 30, 2008.
Comprehensive Income
As a result of
the factors described above and a currency translation adjustment, our
comprehensive income was $8,985,637 during the quarter ended June 30, 2009,
compared with $8,003,536 during the quarter ended June 30, 2008.
Liquidity and Capital Resources
As of June 30,
2009, we had $1,466,634 in cash and cash equivalents, compared to $1,451,600 on
June 30, 2008. There was a net increase in cash and cash equivalent of $15,034.
The net increase in cash and cash equivalents for the period was mainly due to
the cash generated from operation.
24
Operations
For the six
months ended June 30, 2009, cash provided by operations was $3,992,276,
compared to cash used by operations of $7,618,278 for the same period in 2008.
The primary reason for the change was due to the increase in net income and
decrease in accounts receivable and other receivables.
Investments
Cash used in
investing activities was $711,153 for the six months ended June 30, 2009 as
compared to $4,879,024 for the six months ended June 30, 2008. We have invested
heavily in purchases of new production equipments, which accounted for majority
of the cash used in investing activities in 2008 as compared to the same period
in 2009.
Financing
For the six
months ended June 30, 2009, net cash used in financing activities was
$5,678,139 as opposed to $13,671,615 provided by financing activities for the
same period in 2008. Increase in cash used in financing activities is due to
the repayment of short term bank loan and of a related party loan.
The primary
sources of cash in the six months ended June 30, 2009 were from operating
activities. For the six months ended June 30, 2009, we generated $3,992,276
from operating activities.
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 Companys revenues and expenses were denominated primarily in Renminbi
(RMB), the currency of the Peoples 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 Companys 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.
Critical Accounting Policies
Principles of
consolidation
The
consolidated financial statements of the Company include the accounts of the
Company, Favor Sea, HK Plastics Engineering, Harbin Xinda and the Research
Institute. All significant inter-company balances and transactions are
eliminated in consolidation.
25
Use of estimates
In preparing
the financial statements in conformity with accounting principles generally
accepted in the United States of America, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of inventories. Actual
results could differ from those estimates.
Cash and cash
equivalents
For purposes
of the statement of cash flow, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Accounts receivable
Accounts
receivables consist primarily of receivables resulting from sales of products,
and are stated at net realizable value. This value includes an appropriate
allowance for estimated uncollectible accounts. The allowance is calculated
based upon the evaluation and the level of past due accounts and the
relationship with and the economic status of the customers.
Inventory
Inventory is
composed of raw materials, packing materials, work in process and finished
goods. Inventory is valued at the lower of cost or market with cost determined
by the weighted average method. Management periodically compares the cost of
inventory with the market value and an allowance is made for writing down the
inventory to its market value, if lower than cost. No allowance for inventory
is considered necessary for the three months ended June 30, 2009 and 2008.
Property and
equipment
Property 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 following useful lives:
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Buildings
and improvements
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39 years
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Machinery,
equipment and automobiles
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5-10 years
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Expenditures
for maintenance and repairs are charged to expense as incurred. Additions,
renewals and betterments are capitalized.
Advance to suppliers
Advance to
suppliers represent the payments made and recorded in advance for goods and
services received. The Company makes advances to raw materials purchased from
certain agents. In
order to maintain a long-term relationship with the vendors, the Company
frequently needs to make advances from one and half month to three months ahead.
The advances to suppliers were $14,514,312 as of June 30, 2009.
26
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 amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the assets. Fair value is generally determined using the assets
expected future discounted cash flows or market value, if readily determinable.
No impairment loss is recorded for the six months ended June 30, 2009 and 2008.
Income taxes
The Company
accounts for income tax under the provisions of SFAS No.109 Accounting for
Income Taxes, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of the events that have
been included in the financial statements or tax returns. Deferred income taxes
are recognized for all significant temporary differences between tax and
financial statements bases of assets and liabilities. Valuation allowances are
established against net deferred tax assets when it is more likely than not
that some portion or all of the deferred tax asset will not be realized. There
are no deferred tax amounts recognized in the six months ended June 30, 2009
and 2008.
Revenue recognition
The Companys
revenue recognition policies are in compliance with Staff Accounting Bulletin
(SAB) 104. Sales revenue is recognized at the date of shipment to customers
when a formal arrangement exists, the price is fixed or determinable, the
delivery is completed, no other significant obligations of the Company exists
and collectability is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as
deferred revenue.
Research and
development expenses
Research and
development expenses are costs associated with developing the Companys
intellectual property. Research and development costs are expensed as incurred.
The costs of equipments 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 expense for the three months ended June 30, 2009 and 2008 was
$208,818 and $252,416, respectively.
Earnings per share
The Company
computes earnings per share (EPS) in accordance with Statement of Financial
Accounting Standards No. 128, Earnings per Share (SFAS No. 128), and SEC
Staff Accounting Bulletin No. 98 (SAB 98). SFAS No. 128 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 period. 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.
27
Concentration of
credit risk
Financial
instruments that potentially subject the Company to concentration of credit
risk consist primarily of accounts receivable and other receivables. The
Company does not require collateral or other security to support these
receivables. The Company conducts periodic reviews of its clients financial
condition and customer payment practices to minimize collection risk on
accounts receivable.
Risks and
uncertainties
The Companys
operations in the PRC are subject to special considerations and significant
risks not typically associated with companies in North America and Western
Europe. These include risks associated with, among others, the political,
economic and legal environment and foreign currency exchange. The Companys
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.
Fair value of
financial instruments
The carrying
amounts of certain financial instruments, including cash and cash equivalents,
accounts receivable, other receivables, accounts payable, accrued expenses,
taxes payable, notes payable and other loans payable 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 Companys expected
borrowing rate for debt with similar remaining maturities and comparable risk.
Foreign currency
translation
The Companys
functional currency is the Renminbi (RMB). For financial reporting purposes,
RMB has been translated into United States dollars (USD) as the reporting
currency. Assets and liabilities are translated at the exchange rate in effect
at the balance sheet date. Revenues and expenses are translated at the average
rate of exchange prevailing during the reporting period. Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders equity as Accumulated
other comprehensive income. Gains and losses resulting from foreign currency
translations are included in accumulated other comprehensive income. There is
no significant fluctuation in exchange rate for the conversion of RMB to USD
after the balance sheet date.
Recent accounting pronouncements
In June 2009,
the FASB issued SFAS 168, The FASB Accounting Standards Codification TM and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB
Statement No. 162. The FASB Accounting Standards Codification TM
(Codification) will become the source of authoritative U.S. generally
accepted accounting principles (GAAP) recognized by FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of SFAS 168, the Codification will
supersede all then-existing non-SEC accounting and reporting standards. All
other nongrandfathered non-SEC accounting literature not included in the
Codification will become nonauthoritative. SFAS 168 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. Adoption of SFAS 168 is not expected to have a material impact on the
Companys results of operations or financial position.
28
In June 2009,
the FASB issued SFAS 167, Amendments to FASB Interpretation No. 46(R), which
improves financial reporting by enterprises involved with variable interest
entities. SFAS 167 addresses (1) the effects on certain provisions of FASB
Interpretation No. 46 (revised December 2003), Consolidation of Variable
Interest Entities , as a result of the elimination of the qualifying
special-purpose entity concept in SFAS 166 and (2) concerns about the
application of certain key provisions of FIN 46(R), including those in which
the accounting and disclosures under the Interpretation do not always provide
timely and useful information about an enterprises involvement in a variable
interest entity. SFAS 167 shall be effective as of the beginning of each
reporting entitys first annual reporting period that begins after November 15,
2009, for interim periods within the first annual reporting period, and for
interim and annual reporting periods thereafter. Earlier application is
prohibited. Adoption of SFAS 167 is not expected to have a material impact on
the Companys results of operations or financial position.
In May 2009,
the FASB issued SFAS 165, Subsequent Events , which establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. An entity should apply the requirements of SFAS 165 to interim or
annual financial periods ending after June 15, 2009. Adoption of SFAS 165 did
not have a material impact on the Companys results of operations or financial
position.
On April 1,
2009, the FASB approved FSP FAS 141(R)-1,
Accounting
for Assets Acquired and Liabilities Assumed in a Business Combination That
Arise from Contingencies,
which amends Statement 141(R) and
eliminates the distinction between contractual and non-contractual
contingencies. Under FSP FAS 141(R), an acquirer is required to recognize at
fair value an asset acquired or liability assumed in a business combination that
arises from a contingency if the acquisition-date fair value of that asset or
liability can be determined during the measurement period. If the
acquisition-date fair value cannot be determined, the acquirer applies the
recognition criteria in SFAS No. 5,
Accounting
for Contingencies
and Interpretation 14, Reasonable Estimation of
the Amount of a Loss and interpretation of FASB Statement No. 5, to
determine whether the contingency should be recognized as of the acquisition
date or after it. We are currently evaluating the potential impact of adopting
this statement.
On April 9,
2009, the FASB also approved FSP FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial
Instruments
to require disclosures about fair value of financial instruments
in interim period financial statements of publicly traded companies and in
summarized financial information required by APB Opinion No. 28,
Interim Financial Reporting
. We are
required to adopt this FSP for our interim and annual reporting periods ending
after June 15, 2009. This FSP does not require disclosures for periods
presented for comparative purposes at initial adoption. This FSP requires
comparative disclosures only for periods ending after initial adoption. We are
currently evaluating the potential impact of adopting this statement.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk.
Not
applicable.
Item 4T. Controls and Procedures.
Evaluation of Disclosure Controls and
Procedures
The Companys
management has evaluated, under the supervision and with the participation of
the Companys Chief Executive Officer and Chief Financial Officer, the
effectiveness of the design and operations of the Companys 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 Companys 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.
29
Changes in Internal Control over Financial
Reporting
There was no
change in our internal control over financial reporting that occurred during
the three months ended June 30, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
As of the date
of this filing, there have been no material changes from the risk factors
disclosed in the Companys Annual Report on Form 10-K filed on March 23, 2009.
We operate in a changing environment that involves numerous known and unknown
risks and uncertainties that could materially affect our operations. The risks,
uncertainties and other factors set forth in our Annual Report on Form 10-K may
cause our actual results, performances and achievements to be materially
different from those expressed or implied by our forward-looking statements. If
any of these risks or events occurs, our business, financial condition or
results of operations may be adversely affected.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds.
Conversion of Series
A Convertible Preferred Stock
On April 20,
2009, 1,000,000 shares of Series A Convertible Preferred Stock of the Company
which constituted all of the outstanding shares of Series A Convertible
Preferred Stock of the Company were automatically converted into 38,194,072
shares of Companys common stock.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of
Security Holders.
None.
Item 5. Other Information.
None.
30
Item 6. Exhibits.
(a) Exhibits
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Exhibit Number
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Description of Exhibit
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31.1
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Certification
of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the
Securities and Exchange Act of 1934, as amended
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31.2
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Certification
of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities
and Exchange Act of 1934, as amended
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32.1
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Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Executive Officer)
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32.2
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Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Financial Officer)
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31
SIGNATURES
In accordance
with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
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China XD
Plastics Company Limited.
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Dated:
August 12, 2009
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By:
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/s/ Jie Han
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Jie Han
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Chief
Executive Officer
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(Principal
Executive Officer)
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Dated:
August 12, 2009
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By:
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/s/ Taylor
Zhang
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Taylor Zhang
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Chief
Financial Officer
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(Principal
Financial and Accounting Officer)
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32
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