10-K 1 cxdc_10k.htm FORM 10-K cxdc_10k.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
  x
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended DECEMBER 31, 2009
 
or
 
  o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from _______________ to _____________
 
 
Commission File No. 333-134073
 
 
CHINA XD PLASTICS COMPANY LIMITED
 
(Exact name of registrant as specified issuer in its charter)
 
 
Nevada
 
04-3836208
(State or other jurisdiction of incorporation or organization)
 
 
(I.R.S. Employer Identification No.)
No. 9 Qinling Road, Yingbin Road Centralized Industrial Park, Harbin Development Zone, Heilongjiang, P.R. China
 
 
 
150078
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: 86-451-84346600

 
Securities registered under Section 12(b) of the Act: None
 
Securities registered under Section 12(g) of the Act:  Common Stock, par value $0.0001
 
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1934.  Yes oNo x
 
Indicate by checkmark whether the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Exchange Act.  Yes oNo x
 
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes o   No  x

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o
 
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
  Large accelerated filer   o Accelerated filer   o
     
 
Non-accelerated filer    o
(do not check if a smaller reporting company)
Smaller reporting company   x
                                                                       
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o   No x
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2009 is approximately $19,871,383.
 
As of April 8, 2010, there were 44,007,589 issued and outstanding shares of the issuer’s common stock.
 

 
 

 

Explanatory Note

This Annual Report on Form 10-K contains a restatement of our Consolidated Balance Sheet as of December 31, 2008 and our Consolidated Statements of Income and Other Comprehensive Income, Stockholders’ Equity and Cash Flows for the year ended December 31, 2008, and Selected Consolidated Financial Data as of and for each of the three quarters in the year ended December 31, 2009.
 
During the routine course of internal review and internal audit, we have identified and determined a non-cash error regarding the accounting for recognition of stock options granted to our Chairman and CEO, Mr. Jie Han (the “Options”), pursuant to the requirements of Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 718. As previously disclosed, our Chairman and CEO, Mr. Jie Han entered into an option agreement with Ellie Qiuyao Piao (“Ms. Piao”), the sole shareholder of XD Engineering Plastics Company Limited (“XD Engineering”), which was the principal shareholder of our subsidiary Favor Sea Limited (“Favor Sea BVI”) before the reverse merger on May 16, 2008. Pursuant to the option agreement, the Options were granted to Mr. Han by Ms. Piao. The agreement provides that Mr. Han may purchase from Ms. Piao for a nominal price all of the outstanding equity in XD Engineering if, on a consolidated basis, the consolidated revenue of Favor Sea BVI, which indirectly owns our operating subsidiaries Harbin Xinda Macromolecule Material Co., Ltd. and Harbin Xinda Macromolecule Material Research Institute achieves certain revenue thresholds. Mr. Han may purchase 25% of the total outstanding equity in XD Engineering if Favor Sea BVI’s consolidated revenue during the first three quarters of 2008 exceeds $40 million. He may purchase 14% of the total outstanding equity in XD Engineering if Favor Sea BVI’s consolidated revenue during the first three quarters of 2009 exceeds $70 million. He may purchase 61% of the total outstanding equity in XD Engineering if Favor Sea BVI’s consolidated revenue during the first three quarters of 2010 exceeds $110 million. The purpose of the Options is to enable Mr. Han to re-acquire ultimately the legal ownership of China XD Plastics Company Limited in compliance with the laws and regulations of the People’s Republic of China.
 
In accordance with ASC Topic 718, the Options should have been accounted for in the Company’s consolidated financial statements as share-based payments awarded to an employee by a related party as compensation for services rendered.
 
Our consolidated retained earnings as of December 31, 2008 and June 30, 2009 incorporate a non-cash charge of approximately $5.5 million and $8.6 million, respectively, accounted for the above mentioned option grant arrangement. The stock-based compensation expenses of $5.5 million and $3.1 million, respectively, have been recorded to general and administrative expenses in the Consolidated Statements of Income and Other Comprehensive Income for the year ended December 31, 2008 and second quarter in the year ended December 31, 2009.
 
All financial information contained in this Annual Report on Form 10-K gives effect to the restatements of our Consolidated Financial Statements as described above. We have not amended, and we do not intend to amend, our previously filed Annual Reports on Form 10-K for the fiscal year of 2008 or Quarterly Reports on Form 10-Q for each of fiscal quarters of 2009. Financial information included in reports that we previously filed or furnished for the periods from December 31, 2008 through September 30, 2009 should not be relied upon and are superseded by the information in this Annual Report on Form 10-K.
 

 
 

 
 
CHINA XD PLASTICS COMPANY LIMITED
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
 
 
Table of Contents
 
PART I
   
 
Item 1
Business
  2
Item 1A
Risk Factors
  7
Item 1B
Unresolved Staff Comments
  14
Item 2
Properties
  14
Item 3
Legal Proceedings
  15
Item 4
Submission of Matters to a Vote of Security Holders
  15
 
PART II
 
Item 5
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  15
Item 6
Selected Financial Data
  15
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  16
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
  19
Item 8
Financial Statements and Supplementary Data
  19
Item 9
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
  19
Item 9A
Controls and Procedures
  20
Item 9B
Other Information
  21
 
PART III
 
Item 10
Directors, Executive Officers and Corporate Governance
  22
Item 11
Executive Compensation
  26
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  27
Item 13
Certain Relationships and Related Transactions and Director Independence
  28
Item 14
Principal Accountant Fees and Services
  29
 
PART IV
Item 15
Exhibits, Financial Statement Schedules
 
  29
 
 
Financial Statements
 
Index of Financial Statements  F-1
Reports of Independent Registered Public Accounting Firm
 F-2 to F-3
Consolidated Balance Sheets  F-4
Consolidated Statements of Income and Other Comprehensive Income
 F-5
Consolidated Statements of Changes in Stockholders’ Equity
 F-6
Consolidated Statements of Cash Flows
 F-7
Notes to Consolidated Financial Statements
 F-8 to F-43
As used herein, “China XD,” “we,” “us,” “our” and the “Company” refers to China XD Plastics Company Limited.
 
 
 

 
 

 


 
PART I
 
ITEM 1.
BUSINESS.

China XD Plastics Company Limited (“China XD Plastics”), formerly known as NB Telecom, Inc (“NB Telecom”). was originally incorporated as NB Payphones Ltd. under the laws of the state of Pennsylvania on November 16, 1999. On December 27, 2005, we migrated our state of organization to the state of Nevada and effective March 23, 2006, our name changed to NB Telecom.
 
On December 24, 2008, NB Telecom acquired all of the outstanding capital stock of Favor Sea Limited (“Favor Sea BVI”), a British Virgin Islands corporation, whose assets, held through its subsidiaries, are 100% of the registered capital of Harbin Xinda Macromolecule Material Co., Ltd. (“Harbin Xinda”), a limited liability company established under the laws of the People’s Republic of China (“China” or “PRC”) and Harbin Xinda’s wholly-owned subsidiary, Harbin Xinda Macromolecule Material Research Institute (the “Research Institute”). Harbin Xinda is a manufacturer and developer of modified plastics. Harbin Xinda is a high-tech company that was founded in September 2004 under the laws of the PRC with registered capital of 20 million RMB (USD$2,416,451). Harbin Xinda’s executive offices and manufacturing facilities are located at No. 9 Qinling Road, Yingbin Road Centralized Industrial Park and No. 9 Dalian North Road, Haping Road Centralized Industrial Park, Harbin Development Zone, Heilongjiang Province, in northeast China. Harbin Xinda engages in the development, manufacture, and distribution of modified plastic, primarily for use in automobiles. The technology that has enabled Harbin Xinda to become China’s leading producer of automotive modified plastics derives from our wholly-owned research laboratory, the Research Institute, a subsidiary established in 2007. The Research Institute has developed into a leader in research and development for China’s macromolecular industry. The Research Institute is outfitted with more than 80 sets of testing, analytical and production equipment used to analyze the physical and mechanical properties of the heat resistances, durability, stability, and environmental performance exhibited by modified plastics.
 
In connection with the acquisition, the Company entered into an Agreement and Plan of Merger (the “Agreement”) by and among the NB Telecom, Favor Sea BVI, and the shareholders of Favor Sea BVI including the principal shareholder, XD Engineering Plastics Company Limited (“XD Engineering”), a British Virgin Islands corporation. The Company acquired all of the outstanding capital stock of Favor Sea BVI. In connection with the acquisition, and in exchange for the outstanding stock of Favor Sea BVI, the shareholders of Favor Sea BVI received 50,367,778 shares of the common stock of the Company and 1,000,000 shares of convertible Series A preferred stock of the Company, and XD Engineering individually received 1,000,000 shares of Series B preferred stock of the Company (the “Merger”). Subsequent to the Merger and as a direct consequence, the name of the Company was changed to “China XD Plastics Company Limited” pursuant to Chapter 92A the Revised Nevada Statutes in connection with the Merger. The 50,367,778 shares of common stock were converted into 405,802 shares post a reverse stock split of 124.1 for 1 pursuant to Nevada Revised Statutes Section 78.207 for both the total number of authorized shares of common stock and the total number of issued and outstanding shares of common stock. The 1,000,000 shares of convertible Series A preferred stock of the Company are convertible into approximately 1:38.2 into 38,194,072 shares of the common stock of the Company. Assuming the conversion of the Series A preferred stock of the Company, the shareholders of Favor Sea BVI will own approximately 99% of the Common Stock of the Company.
 
Modified plastic is produced by changing the physical and/or chemical characteristics of ordinary resin materials. In order for plastics to be used in the automobile environment, they must satisfy certain physical criteria in terms of electro-magnetic characteristics, reaction to light and heat, durability, flame resistance, and mechanical functionality. Harbin Xinda’s unique formulas and processing techniques enable us to produce low-cost high-quality modified plastic materials, which have been accepted by many of the major automobile manufacturers in China. In addition, we also provide specially engineered plastics and environment-friendly plastics for use in the assembly of equipment for oilfields, mining, ship power, power station equipment, and other industries.
 
Harbin Xinda’s primary market is the rapidly expanding Chinese automotive industry. In 2009, 13.6 million automobiles were sold in China, which increased by 44.7% from the previous year. It is estimated that the Chinese auto market will grow by 15% annually in the coming years. Each automobile requires 100 kg to 150 kg of modified plastic, which means that by 2010 the demand for modified plastic in the Chinese automobile industry will be approximately 1.6 million tons annually. Harbin Xinda’s existing facility has an annual production capacity of 100,000 tons.
 
Our specialized plastics are utilized in the exterior and interior trim and in the functional components of more than 30 automobile brands manufactured in China, including Audi, Red Flag, Volkswagen and Mazda. At present, 145 of 263 Harbin Xinda’s automotive-specific modified plastic products have been certified for use by one or more of the automobile manufacturers in China. The automotive applications for our plastics include exteriors (automobile bumpers, rear- and side- view mirrors, license plate), interiors (door panels, dashboard, steering wheel, glove compartment and safety belt components), and functional components (air conditioner casing, heating and ventilation casing, engine covers, and air ducts).
 
 
2

Our products are organized into seven categories, based on their physical characteristics:
 
Modified Polypropylene:
 
COMPNIPER: a form of modified polypropylene that exhibits high fluidity and impact resistance. These products are primarily used for the interior automobile parts, such as the inner panels, instrument panels, and box lids. 45 of these products have been certified for use in the Chinese auto industry.
 
 
COMPWIPER: a form of modified polypropylene that exhibits low-temperature-resistance and impact resistance. These products are primarily used for external automobile parts, such as the front and back bumpers and mudguards. 25 of these products have been certified for use in the Chinese auto industry.
 
 
COMPGOPER: a form of modified polypropylene that exhibits high-temperature-resistance and resistance to static. These products are used primarily for automobile functional components, such as the unit heater shells and air conditioner shells. 38 of these products have been certified for use in the Chinese auto industry.
 
Modified ABS:
 
 
MOALLOLY: a form of modified ABS (acrylonitrile butadiene styreme) plastic that exhibits high gloss, high rigidity, and size stability. These products are primarily used for automobile functional components, such as the heat dissipating grid and wheel covers. 7 of these products have been certified for use in the Chinese auto industry.
 
Modified Nylon:
 
 
POLGPAMR: a form of modified nylon that exhibits high wear and heat resistance. These products are primarily used for automotive parts requiring high flame and heat resistance. 10 of these products have been certified for use in the Chinese auto industry.
 
Engineering Plastic:
 
 
MOAMIOLY: a wear-resistant form of engineering plastic. These products are primarily used for the engine hood, intake manifold, and bearings. 9 of these products have been certified for use in the Chinese auto industry.
 
Alloy Plastic:
 
 
BRBSPCL: a form of alloy plastic. These products are used primarily for the rearview mirror, grille, automotive electronics and other components. The products can also be used in computers, plasma TVs, mobile phones and other electronic and electrical consumer products. 6 of these products have been certified for use in the Chinese auto industry.
 
Environment-friendly Modified Plastic:
 
 
POLGBSMR: an environment-friendly form of modified plastic, is used in automobiles with environmental standard requirements. 5 of these products have been certified for use in the Chinese auto industry.
 
Modified Plastic for Special Engineering:
 
 
PEEK: a special engineering form of modified plastic that can be used in communication and transportation, electronic and electric appliance, machinery, medical equipment and analytical equipment. Harbin Xinda is developing products in this field based on years of research findings. However, none of these products have been certified for use in the auto industry.
 
 
Raw Materials
 
The principal raw materials used for the production of the Company’s products are plastic resins such as polypropylene, ABS and nylon. Nearly 50% of these raw materials come from overseas petrochemical enterprises, and 50% from domestic petrochemical enterprises. All of our contracts for raw materials are one-year renewable contracts.
 
 
3
 

 
 
 
Polypropylene is a chemical compound manufactured from petroleum.
 
 
 
 
Acrylonitrile Butadiene Styrene (ABS) is a common thermoplastic used to make light, rigid, molded products such as automotive body parts and wheel covers.
 
 
 
Nylon is a thermoplastic silky material.
 
Currently we have adequate access to these raw materials by dealing with major suppliers in the industry. Harbin Xinda has one-year renewable contracts with its major suppliers. Because the raw materials are mostly petroleum products, the rise of oil price will directly affect the cost for the raw materials. However, in that event, we should be able to pass the cost to our customers by raising the price for our products.
 
Because raw materials constitute a substantial part of the cost of our products, we seek to reduce the cost of raw materials by dealing with two major suppliers: Dalian Free Trade Zone Mankeri International Trade Co., Ltd. (“Mankeri”), and Dalian Lanhai International Trade Co., Ltd (“Dalian Lanhai”). During the year ended on December 31, 2009, Harbin Xinda purchased approximately 48.4% of its raw materials from Mankeri and 49.7% from Dalian Lanhai. In 2008 we purchased 65.6% of our raw materials from Mankeri, and 29.5% from Dalian Lanhai . By dealing with these major suppliers, Harbin Xinda obtains reduced prices for raw materials, and thus reduces the cost of our products. If we were unable to purchase from Mankeri or Dalian Lanhai, we would still have adequate sources of raw materials from other petrochemical dealers at similar cost.
 
Intellectual Property
 
Our Research Institute, Xinda Macromolecule Material Research Institute, was organized to provide us with ongoing additions to our technology, which represents the key to our competitive success. Our goal is to utilize state-of-the-art methods and equipment to produce plastics of the highest quality that are cost-efficient for our customers. Toward this end, we have staffed the Research Institute with 77 researcher employees, over 90% of whom have advanced degrees or specialized undergraduate training.
 
To supplement the efforts of our Research Institute, we have developed cooperative research programs with a number of the leading technology centers in China, including the Changchun Institute of Applied Chemistry of the Chinese Academy of Science, the Beijing Chemical Engineering Institute, the Harbin Institute of Technology, the Northeast Forestry University, Jilin University, and Changchu University of Technology. Besides providing specialized research and development skills, these relationships help us to formulate cutting edge research programs aimed at addressing developing issues in plastics engineering.
 
All our significant research and development activities are overseen by the members of our Scientific Advisory Board, which we have assembled from among the leaders in China’s chemical engineering industry. Currently, the members of the Scientific Advisory Board are:

Wu Zhongwen: Director of the Research Institute of Special Plastics Engineering of Jilin University.
 
Zheng Kai: Secretary General of China’s Plastics Engineering Industry Association.
 
Zhang Huixuan: Vice Principal of Changchun University of Technology.
 
Li Bin: Dean of the Science Department at Eastern Forest Industry University.
 
Xing Yuqing: Director of the Teaching and Research Section of the Chemical Engineering Department at Harbin Institute of Technology.
 
Jiang Zhenhua: Director of the Engineering Research Center of the Special Plastics Engineering Education Department of Jilin University.
 

 
4
 
 

 
 
Patents

As a result of our collection of academic and technological expertise, we have a portfolio of 11 patents for which we have applications pending in China which are set forth in the following table.

No.
Patent Name
 
Patent Application No.
Application Date and Status
 
1.
 
Measures for efficient recycling and circulating usage of waste and old plastics
 
 
200510010540.9
 
 
November 15, 2005, pending
 
 
2.
 
Special engineering plastics dedicated to military industry products
 
 
200510010543.2
 
 
November 15, 2005, pending
 
 
3.
 
 
Special materials for wall tubes of polyethylene winding structure of tube inbuilt technology without opening tank lid
 
 
200510010541.3
 
 
November 15, 2005, pending
 
 
4.
 
Stuffing master batch material dedicated to polypropylene resin
 
 
200510010542.8
 
 
November 15, 2005, pending
 
 
5.
 
Special materials for air inflow manifold of automobile engine
 
 
200710072563.1
 
 
July 25, 2007, pending
 
6.
 
High-luster low shrinkage ratio nano polypropylene modified compound and its manufacturing methods
 
 
200510010539.6
 
 
November 15, 2005, pending
 
 
7.
 
Strengthened toughened aging resistant polypropylene/nano calcium carbonate compound material and its manufacturing methods
 
 
200510010538.1
 
 
November 15, 2005, pending
 
 
8.
 
Green inflaming-retardant ABS alloy
 
 
200610009836.3
 
March 21, 2006, pending
 
9.
 
Compound nano special materials dedicated to automobile bumper
 
 
200510010066.x
 
 
June 6, 2005, pending
 
10.
 
 
11.
 
High-performance special polypropylene materials dedicated to automobile
 
Carbon fibre reinforced nylon composites for centralizer in the application of oil field
 
 
200610009837.8
 
 
200910071782.7
 
 
March 21, 2006, pending
 
 
April 15, 2009, pending
 
 
Trademark
 
We own the trademarks for our graphic logo and Chinese characters of Xinda, which we use in packaging our products and marketing ourselves.
 
Marketing
 
Currently Harbin Xinda’s sales network mainly covers the northeastern region of China. In 2009 and 2008, approximately 80% and 91% of our sales were derived from the northeastern market, with continuing expansion into the northern and eastern regions of China.
 
Harbin Xinda sells directly to its customers or indirectly through its distributors and provides full after-sale services to all customers. These customers are usually the major automobile parts manufacturers who relies on our product certifications granted by major automobile manufacturers.
 
 
5
 

We enter into Sales Agency Agreements with local agents in areas where large automobile manufacturers are located. The sales agents are responsible for developing the markets for our products and collecting payments from our customers. In distributing our products during the agency period, the agents are required to use Harbin Xinda’s product certificate, brand and package standards set by us. They must also reimburse us the amount of payment that the customers fail to make within our collection period. After the termination of the agency relationship, the customers developed by the agents are proprietary to Harbin Xinda.
 
Sales to one major distributor accounted for approximately 83% and 81% of the Company’s sales for the years ended December 31, 2009 and 2008, respectively.
 
During the past three years, the Company has sold most of its products in the three northeastern provinces of China: Heilongjiang, Jilin, and Liaoning. In addition, the Company has supplied to customers in Northern part of China, including Beijing, Tianjin, and Hebei province in 2009. We expect to develop more customers in the cities and provinces located in the Northern and Eastern part of China, such as Shanghai and Zhejiang Province.
 
No single customer accounted for more than 10% of our sales during the years ended on December 31, 2009 or 2008.
 
Competition
 
Currently Harbin Xinda’s primary Chinese competitor in the automobile industry is a large industrial company named Guangzhou Kingfa Science & Technology Co., Ltd. (“Guangzhou Kingfa”). Guangzhou Kingfa entered the market in 2006 and its facilities have a manufacturing capacity of 100,000 tons. Guangzhou Kingfa has much larger financial resources than Harbin Xinda. Currently, however, it has fewer certified products and sells less modified plastic to the automobile industry than Harbin Xinda.
 
The Chinese auto market is dominated, however, by modified plastic manufactured overseas or in factories controlled by foreign companies. Almost 60% of the modified plastic used in Chinese automobiles is manufactured by non-Chinese fabricators, primarily manufacturers from Germany, the Netherlands and Japan. Although Harbin Xinda and its Chinese competitors compare very favorably with these foreign competitors in terms of price, service and delivery times, the lack of production capacity in the Chinese modified plastics industry has allowed the foreign competition to remain dominant in that industry.
 
Employees
 
Harbin Xinda’s operations are organized into seven operational departments such as technologies, sales, supply, R&D and finance. There are currently 396 employees, including 153 in manufacturing, 77 in research and development, 47 in management, 17 in financial department, 30 in sales, purchasing and marketing and 72 in other departments. 87 out of the 396 employees are temporary hires as reserve for full-time positions.
 
 

6

 
 

 



Item 1A.
 
Risk Factors
 
You should carefully consider the risks described below before buying our common stock. If any of the risks described below were realized, that event could cause the trading price of our common stock to decline, and you could lose all or part of your investment.
 
Risks related to doing business in China
 
Our business operations are conducted entirely in China. Because China’s economy and its laws, regulations and policies are different from those typically found in the west and are continually changing, we will face risks including those summarized below.
 
China is a developing nation governed by a one-party government and may be more susceptible to political, economic, and social upheaval than other nations.
 
China is a developing country governed by a one-party government. China is also a country with an extremely large population, widening income gaps between rich and poor and between urban and rural residents, minority ethnic and religious populations, and growing access to information about the different social, economic, and political systems to be found in other countries. China has also experienced extremely rapid economic growth over the last decade, and its legal and regulatory systems have changed rapidly to accommodate this growth. These conditions make China unique and may make it susceptible to major structural changes. Such changes could include a reversal of China’s movement to encourage private economic activity, labor disruptions or other organized protests, nationalization of private businesses, internal conflicts between the police or military and the citizenry, and international political or military conflict. If any of these events were to occur, it could shut down China’s economy and cause us to temporarily or permanently cease operations.
 
The PRC’s laws, regulations and policies, and changes to them, may limit our ability to operate profitably or prevent us from operating at all.
 
Our stores and distribution centers, as well as our suppliers and the agricultural producers on whom they depend, are located in China. The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy, including the production, distribution and sale of our merchandise. In particular, we are subject to regulation by local and national branches of the Ministries of Commerce and Transportation, as well as the General Administration of Quality Supervision, the State Administration of Foreign Exchange, and other regulatory bodies. In order to operate under PRC law, we require valid licenses, certificates and permits, which must be renewed from time to time. If we were to fail to obtain the necessary renewals for any reason, including sudden or unexplained changes in local regulatory practice, we could be required to shut down all or part of our operations temporarily or permanently.
 
Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to agriculture, taxation, land use rights and other matters. Such changes could be made at the national or local level and in the form of: farm subsidies; corporate tax rates; employee benefits; leaseholder or land-use rights; enforceability of contracts; intellectual property; or retail pricing. The effects of such changes on our business cannot be predicted but could be significant.
 
All of our assets are located in China. So any dividends or proceeds from liquidation are subject to the approval of the relevant Chinese government agencies.
 
Our assets are located inside China. Under the laws governing FIEs in China, dividend distribution and liquidation are allowed but subject to special procedures under the relevant laws and rules. Any dividend payment will be subject to the decision of the board of directors and subject to foreign exchange rules governing such repatriation. Any liquidation is subject to both the relevant government agency’s approval and supervision as well the foreign exchange control. This may generate additional risk for our investors in case of dividend payment or liquidation.
 
Because our funds are held in banks which do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.
 
Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. As a result, in the event of a bank failure, we may not have access to funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.
 
7
 

Anti-inflation measures may be ineffective or harm our ability to do business in China.
 
In recent years, the PRC government has instituted anti-inflationary measures to curb the risk of an overheated economy characterized by debilitating inflation. These measures have included devaluations of the renminbi, restrictions on the availability of domestic credit, and limited re-centralization of the approval process for some international transactions. These austerity measures may not succeed in slowing down the economy’s excessive expansion or control inflation, or they may slow the economy below a healthy growth rate and lead to economic stagnation or recession; in the worst-case scenario, the measures could slow the economy without curbing inflation. The PRC government could adopt additional measures to further combat inflation, including the establishment of price freezes or moratoriums certain projects or transactions. Such measures could harm the economy generally and hurt our business by limiting the income of our customers available to purchase our merchandise, by forcing us to lower our profit margins, and by limiting our ability to obtain credit or other financing to pursue our expansion plans or maintain our business.
 
Governmental control of currency conversions may affect the value of your investment.
 
All of our revenue is earned in renminbi, and any future restrictions on currency conversions may limit our ability to use revenue generated in renminbi to make dividend or other payments in U.S. dollars. Although the PRC government introduced regulations in 1996 to allow greater convertibility of the renminbi for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises like us may buy, sell or remit foreign currencies only after providing valid commercial documents at a PRC banks specifically authorized to conduct foreign-exchange business.
 
In addition, conversion of renminbi for capital account items, including direct investment and loans, is subject to governmental approval in the PRC, and companies are required to open and maintain separate foreign-exchange accounts for capital account items. There is no guarantee that PRC regulatory authorities will not impose additional restrictions on the convertibility of the renminbi. Such restrictions could prevent us from distributing dividends and thereby reduce the value of our stock.
 
The fluctuation of the exchange rate of the renminbi against the dollar could reduce the value of your investment.
 
The value of our common stock will be affected by the foreign exchange rate between U.S. dollars and renminbi. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into renminbi for our operations, appreciation of the renminbi against the U.S. Dollar could reduce the value in renminbi of our funds. Conversely, if we decide to convert our renminbi into U.S. dollars for the purpose of declaring dividends on our common stock or for other business purposes and the U.S. dollar appreciates against the renminbi, the U.S. dollar equivalent of our earnings from The Company, our subsidiary in China, would be reduced. In addition, the depreciation of significant U.S. Dollar-denominated assets could result in a charge to our income statement and a reduction in the value of these assets.
 
On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the renminbi to the U.S. Dollar. Under the new policy, the renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an appreciation of the renminbi against the U.S. dollar of approximately 18% from July 21, 2005 to December 31, 2009. While the international reaction to the renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the renminbi against the U.S. Dollar.
 
We receive all of our revenues in renminbi. The PRC government imposes controls on the convertibility of renminbi into foreign currencies and, in certain cases, the remittance of currency out of the China. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where renminbi are to be converted into foreign currency and remitted out of the PRC to pay capital expenses, such as the repayment of bank loans denominated in foreign currencies.
 
The PRC government could also restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain expenses as they become due.
 
8
 

Recently-modified SAFE regulations may restrict our ability to remit profits out of China as dividends.
 
SAFE Regulations regarding offshore financing activities by PRC residents have recently undergone a number of changes which may increase the administrative burdens we face. The failure of our stockholders who are PRC residents to make any required applications and filings pursuant to these regulations may prevent us from being able to distribute profits and could expose us and our PRC-resident stockholders to liability under PRC law.
 
SAFE issued a public notice (the “October Notice”), effective as of November 1, 2005, and implementation rules in May 2007, which require registration with SAFE by the PRC-resident stockholders of any foreign holding company of a PRC entity. These regulations apply to our stockholders who are PRC residents. In the absence of such registration, the PRC entity cannot remit any of its profits out of the PRC as dividends or otherwise.
 
In the event that our PRC-resident stockholders have not followed the procedures required under the October Notice and its implementation rules, we could lose the ability to remit monies outside of the PRC and would therefore be unable to pay dividends or make other distributions, and we could face liability for evasion of foreign-exchange regulations. Such consequences could affect our good standing under PRC regulations and our ability to operate in the PRC, and could therefore diminish the value of your investment.
 
China’s legal and judicial system may not adequately protect our business and operations and the rights of foreign investors.
 
China’s legal and judicial system may negatively impact foreign investors. In 1982, the National People’s Congress amended the Constitution of China to authorize foreign investment and guarantee the “lawful rights and interests” of foreign investors in the China. However, the China’s system of laws is not yet comprehensive. The legal and judicial systems in the China are still rudimentary, and enforcement of existing laws is inconsistent. Many judges in China lack the depth of legal training and experience that would be expected of a judge in a more developed country. Because the China judiciary is relatively inexperienced in enforcing the laws that do exist, anticipation of judicial decision-making is more uncertain than would be expected in a more developed country. It may be impossible to obtain swift and equitable enforcement of laws that do exist, or to obtain enforcement of the judgment of one court by a court of another jurisdiction. The China’s legal system is based on civil law, or written statutes; a decision by one judge does not set a legal precedent that must be followed by judges in other cases. In addition, the interpretation of Chinese laws may vary to reflect domestic political changes.
 
As a matter of substantive law, the foreign-invested enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate articles and contracts to foreign-invested enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are qualitatively different from the general corporation laws of the United States. Similarly, the PRC accounting laws mandate accounting practices that are not consistent with U.S. generally accepted accounting principles. PRC accounting laws require that an annual “statutory audit” be performed in accordance with PRC accounting standards and that the books of account of foreign-invested enterprises are maintained in accordance with Chinese accounting laws. Article 14 of the PRC Wholly Foreign-Owned Enterprise Law requires a wholly foreign-owned enterprise to submit certain periodic fiscal reports and statements to designated financial and tax authorities, at the risk of business license revocation. Our subsidiary, Harbin Xinda Macromolecule Material Co, Ltd., is a wholly foreign-owned enterprise and is subject to these regulations.
 
As a matter of enforcement, although the enforcement of substantive rights may appear less clear than in the U.S., foreign-invested enterprises and wholly foreign-owned enterprises are PRC-registered companies, which enjoy the same status as other PRC-registered companies in business-to-business dispute resolution. Because the Articles of Association of the Company do not specify a method for the resolution of business disputes, the Company and other parties involved in any business dispute are free to proceed either in the Chinese courts or, if they are in agreement, through arbitration. Under PRC law, any award rendered by an arbitration tribunal is enforceable in accordance with the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Therefore, PRC laws relating to business-to-business dispute resolution should not work to the disadvantage of foreign-invested enterprises such as the Company.
 
However, the PRC laws and regulations governing our current business operations are sometimes vague and uncertain. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to the laws and regulations governing our business and the enforcement and performance of our arrangements with suppliers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. We and any future subsidiaries are considered foreign persons or foreign-invested enterprises under PRC laws, and as a result, we are required to comply with PRC laws and regulations. These laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.
 
 
9
 

In addition, some of our present and future executive officers and directors, most notably Mr. Jie Han, may be residents of the PRC and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors to effect service of process in the United States, or to enforce a judgment obtained in the United States against us or any of these persons.
 
Risks related to our business
 
Our limited operating history makes it difficult to evaluate our future prospects and results of operations.
 
We have a limited operating history. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early-stage companies in evolving markets such as China. Some of these risks and uncertainties relate to our ability to:
 
 
offer new products to attract and retain a larger customer base;
 
increase awareness of our brand and continue to develop customer loyalty;
 
respond to competitive market conditions;
 
respond to changes in our regulatory environment;
 
manage risks associated with intellectual property rights;
 
maintain effective control of our costs and expenses;
 
raise sufficient capital to sustain and expand our business; and
 
attract, retain and motivate qualified personnel
 
Because we are a relatively new company, we may not be experienced enough to address all the risks in our business or in our expansion. If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and adversely affected.
 
We expect to incur costs related to our planned expansion and growth into new plants and ventures which may not prove to be profitable. Moreover, any delays in our expansion plans could cause our profits to decline and jeopardize our business.
 
We anticipate that our proposed expansion of our plants may include the construction of new or additional facilities. Our cost estimates and projected completion dates for construction of new production facilities may change significantly as the projects progress. In addition, our projects will entail significant construction risks, including shortages of materials or skilled labor, unforeseen environmental or engineering problems, weather interferences and unanticipated cost increases, any of which could have a material adverse effect on the projects and could delay their scheduled openings. A delay in scheduled openings will delay our receipt of increased sales revenues, which, when coupled with the increased costs and expenses of our expansion, could cause a decline in our profits.
 
Our plans to finance, develop, and expand our facilities will be subject to the many risks inherent in the rapid expansion of a high growth business enterprise, including unanticipated design, construction, regulatory and operating problems, and the significant risks commonly associated with implementing a marketing strategy in changing and expanding markets. These projects may not become operational within their estimated time frames and budgets as projected at the time the Company enters into a particular agreement, or at all. In addition, the Company may develop projects as joint ventures in an effort to reduce its financial commitment to individual projects. The significant expenditures required to expand our production plants may not ultimately result in increased profits.
 
 
10
 

Our business and operations are growing rapidly. If we fail to effectively manage our operation, our business and operating results could be harmed.
 
To date we have experienced, and continue to experience, rapid growth in our operations. This has placed, and will continue to place, significant demands on our management, and on our operational and financial infrastructure. If we do not effectively manage our operations, the quality of our products and services will suffer, which would negatively affect our operating results. If the necessary funding can be obtained, we will be able to improve our operational, financial and management controls and our reporting systems and procedures. The complexity of this undertaking means that we are likely to face many challenges, some of which are not yet foreseeable. Problems may occur with our raw material acquisition, with the roll-out of efficient manufacturing processes, and with our ability to sell our products to our customers. If we are not able to obtain the necessary funding and operate efficiently, our business plan may fall short of its goals, and our ability to manage our growth could be hurt.
 
We operate in a highly competitive marketplace, which could adversely affect our sales and financial condition.
 
We compete on the basis of quality, price, product availability and security of supply, product development and customer service. Some competitors are larger than us in certain markets and may have greater financial resources that allow them to be in a better position to withstand changes in the industry. Our competitors may introduce new products based on more competitive alternative technologies that may be causing us to lose customers which would result in a decline in our sales volume and earnings. Our customers demand high quality and low cost products and services. The cost and availability of energy and strategic raw materials may continue to deteriorate domestically while improving in the international market, thus advantaging our foreign competition. Any such change in the global market could adversely impact the demand for our products. Competition could cause us to lose market share and certain lines of business, or increase expenditures or reduce pricing, each of which would have an adverse effect on our results of operations, cash flows and financial condition.
 
An inability to protect our intellectual property rights could reduce the value of our products, services and brand.
 
Our unique technologies and techniques are important assets for us. We have applied to the Chinese government for intellectual property right protection for some of the technologies that we own. However, this legal effort may sometimes not be sufficient or effective, due to the lack of effective legal enforcement in China. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. In addition, since protection of our intellectual property rights is costly and time consuming, any unauthorized use of our to-be-patented technologies could increase our cost of business and eventually harm our operating results. Moreover, since we only registered intellectual property rights for our technologies in China, our technologies may not be well protected in other countries in which our products may be sold in the future.
 
An increase in raw material prices could increase Harbin Xinda’s costs and decrease its profits.
 
Changes in the cost of raw materials could significantly affect Harbin Xinda’s business. Since cost for raw materials constitute a substantial part of our product price, increase in the cost of raw materials will decrease our profit margin. Although we may offset such deduction of our profit by increasing the price for our products, unforeseeable events in the market may occur to prevent the effectiveness of this method. We also rely on two major suppliers to provide such raw materials. Failure to maintain business relationship with these two major suppliers may make the raw materials inaccessible, and thus hurt our operation result.
 
Our performance and planned growth depend on raw material supply and related costs.
 
We rely on Mr. Jie Han, Our Chairman and Chief Executive Officer, for the management of our business, and the loss of his services could significantly harm our business and prospects.
 
We depend, to a large extent, on the abilities and participation of our current management team, but have a particular reliance upon Mr. Jie Han, our Chairman and Chief Executive Officer and President, for the direction of our business. The loss of the services of Mr. Han for any reason could have a material adverse effect on our business and prospects. We cannot assure you that the services of Mr. Han will continue to be available to us, or that we will be able to find a suitable replacement for Mr. Han. We can not guarantee Mr. Han’s continuing to manage the Company. We do not have key man insurance on Mr. Han, and if he were to die and we were unable to replace him for a prolonged period of time, we could be unable to carry out our long-term business plan, and our future prospects for growth, and our business, could be harmed.
 
 
11
 

Difficulties with hiring, employee training and other labor issues could disrupt our operations.
 
We may not be able to successfully hire and train new team members or integrate those team members into the programs and policies of the Company. Any such difficulties would reduce our operating efficiency and increase our costs of operations.
 
Increased environmental regulation in China could increase our costs of operation.
 
Certain processes utilized in the production of modified plastics result in toxic by-products. To date, the Chinese government has imposed only limited regulation on the production of these by-products, and enforcement of the regulations has been sparse. Recently, however, there is a substantial increase in focus on the Chinese environment, which has inspired considerable new regulation. Because Harbin Xinda plans to export plastics to the U.S. and Europe in coming years, Harbin Xinda has developed sufficient safeguards in its manufacturing processes to assure compliance with the environmental regulations imposed by European and U.S regulators. This compliance regimen brings us into compliance with all Chinese environmental regulations. Additional regulation, however, could increase our cost of doing business, which would impair our profitability.
 
We may have difficulty establishing adequate management and financial controls in China.
 
The People’s Republic of China has only recently begun to adopt the management and financial reporting concepts and practices that investors in the United States are familiar with. We may have difficulty in hiring and retaining employees in China who have the experience necessary to implement the kind of management and financial controls that are expected of a United States public company. If we cannot establish such controls, we may experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. standards.
 
We may incur significant costs to ensure compliance with U.S. corporate governance and accounting requirements.
 
We may incur significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, and other rules implemented by the Securities and Exchange Commission. We expect all of these applicable rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors, on committees of our board of directors or as executive officers.
 
As a public company, we are required to comply with rules and regulations of the SEC, including expanded disclosure, accelerated reporting requirements and more complex accounting rules. This will continue to require additional cost management resources. We will need to continue to implement additional finance and accounting systems, procedures and controls as we grow to satisfy these reporting requirements. In addition, we may need to hire additional legal and accounting staff with appropriate experience and technical knowledge, and we cannot assure you that if additional staffing is necessary that we will be able to do so in a timely fashion. If we are unable to complete the required annual assessment as to the adequacy of our internal control over financial reporting or if our independent registered public accounting firm is unable to provide us with an unqualified report as to the effectiveness of our internal controls over financial reporting in the future, we could incur significant costs to become compliant.
 
We rely on highly skilled personnel and, if we are unable to retain or motivate key personnel or hire qualified personnel, we may not be able to grow effectively.
 
Our performance largely depends on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. Our continued ability to compete effectively depends on our ability to attract new technology developers and to retain and motivate our existing contractors.
 
We have limited business insurance coverage.
 
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.
 
 
12
 

Risks related to an investment in our common stock
 
Our Chief Executive Officer has a large degree of control on us through his position and stock ownership and his interests may differ from other stockholders.
 
Our Chief Executive Officer, Mr. Jie Han, has options on shares of XD Engineering, which is a major shareholder of China XD Plastics. As a result, Mr. Han will be able to influence the outcome of stockholder votes on various matters, including the election of directors and extraordinary corporate transactions such as business combinations. Mr. Han’s interests may differ from that of other stockholders.
 
Risks related to Series B Preferred Stock.
 
There are now 1,000,000 Series B Preferred Stock issued to China XD Plastics with 40% of the total voting power of the Company’s common stock put together and other consent rights on mergers and acquisitions, significant acquisition or disposition of assets and change of control, among others. This gives China XD Plastics significant voting power. Such voting power may enable China XD Plastics to block actions that may benefit the common stockholders thus reduce the value of their holdings.
 
We do not intend to pay cash dividends to common stockholders in the foreseeable future.
 
We currently intend to retain all future earnings for use in the operation and expansion of our business. We do not intend to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate. Should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries based in the PRC. Our operating subsidiaries, from time to time, may be subject to restrictions on its ability to make distributions to us, including restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions. See “Risks related to doing business in the People’s Republic of China” above.
 
Our common stock may be subject to the Penny Stock Regulations.
 
Our common stock is, and may be subject to the SEC’s “penny stock” rules to the extent that the price falls below $5.00 per share. Those rules, which require delivery of a schedule explaining the penny stock market and the associated risks before any sale, may further limit your ability to sell your shares.
 
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share. Our common stock, when and if a trading market develops, may fall within the definition of penny stock and subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000 or $300,000, together with their spouse).
 
For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our common stock and may affect the ability of investors to sell their common stock in the secondary market.
 
Our common stock is illiquid and subject to price volatility unrelated to our operations.
 
The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.
 
 
13
 

A large number of shares of common stock will be issuable for future sale which will dilute the ownership percentage of our current holders of common stock. The availability for public resale of those shares may depress our stock price.
 
Also as a result, there will be a significant number of new shares of common stock on the market in addition to the current public float. Sales of substantial amounts of common stock, or the perception that such sales could occur, and the existence of warrants to purchase shares of common stock at prices that may be below the then current market price of the common stock, could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities.
 
Enforcement against us or our directors and officers may be difficult.
 
Because our principal assets are located outside of the U.S. and some or all our directors and officers, both present and future, reside outside of the U.S., it may be difficult for you to enforce your rights based on U.S. federal securities laws against us and our officers and some directors or to enforce a U.S. court judgment against us or them in the PRC.
 
In addition, our operating company is located in the PRC and substantially all of its assets are located outside of the U.S. It may therefore be difficult for investors in the U.S. to enforce their legal rights based on the civil liability provisions of the U.S. Federal securities laws against us in the courts of either the U.S. or the PRC and, even if civil judgments are obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear if extradition treaties now in effect between the U.S. and the PRC would permit effective enforcement against us or our officers and directors of criminal penalties under the U.S. Federal securities laws or otherwise.
 
Item 1B.
Unresolved Staff Comments
 
Not applicable.

Item 2.
Properties
 
Physical Plant and Production
 
Our executive offices and production facilities are located in the Harbin Development Zone in the City of Harbin, which is the provincial capital of Heilongjiang Province in northeast China. Our owned facility has a total usable area of 7,359 square meters (79,212 square feet). The facility includes six buildings with one office building attached by one workshop, one workshop, one storage room, one transformer station, and two guard rooms. All the company’s properties are insured by China Pacific Property Insurances Co., Ltd.
 
The land on which our owned facility is located measures 14,715 square meters (158,391 square feet). The land use right was issued to Harbin Xinda by the City of Harbin. The right will expire in 2053. We also have a long-term lease of the production facilities with Harbin Xinda High-Tech Co., Ltd. (“Xinda High-Tech”), a related party. The land on which our leased facility is located measures 16,537 square meters (178,009 square feet). The facility we rent includes three buildings with two office buildings attached by one workshop respectively, two workshops and one guard room. Compliance with Chinese environmental regulations currently cost us 30,000 RMB (USD$4,392) annually. However during 2008 we engaged in a ground remediation project to comply with new regulations. The remediation project was already completed and we do not expect any additional cost related to environmental regulation in 2010.
 
The process of manufacturing modified plastic consists of modifying a standard plastic (polypropylene, ABS, PA6, PA66, etc.) by adding various agents and additives that will alter the physical and/or functional characteristics of the plastic. Catalysts are added that facilitate the desired chemical reactions, all of which occurs in a specially designed equipment. The resulting plastics are then extracted from the equipment by an extraction technique that is proprietary to Harbin Xinda. Further processing may involve additional blending, extrusion, cooling and cutting, homogenizing and packing, as needed to meet the customer’s requirements.
 
In addition to its unique extraction technology, Harbin Xinda has developed its own techniques and equipment for many of the steps in the production process. Among the aspects of production for which Harbin Xinda has proprietary technology are product formulae, a technique for combining extruder screws, and certain stuffing techniques. With these unique formulas and techniques, our products can satisfy often clients’ standard requirements at a lower cost than competitive products.
 
Our facilities have been certified under the following international qualifications criteria: ISO9001: 2000 quality management system certification and ISO/TS16949: 2002 international auto parts industry quality systems certification. The government of China has designated Harbin Xinda as a National Torch Project and a National Spark Plan Project, and has given Harbin Xinda the “Most Valuable High Tech in China” award. Harbin Xinda is an executive member of the Council of the Chinese Automobile Parts Association, a member of the Chinese Modified Plastics Professional Committee, and a member of the Chinese Plastics Engineering Committee.
 
 
14
 

Item 3.
Legal Proceedings
 
None.

Item 4.
Submission of Matters to a Vote of Security Holders
 
None.
 
PART II
 
Item 5.
 
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Prior to November 27, 2009, our common stock was quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “CXDC.” On November 27, 2009, we terminated our listing on OTCBB and listed our common stock on NASDAQ Global Market also under the symbol “CXDC.” The following table sets forth, for the indicated periods, the high and low sales prices for our common stock, as reported on NASDAQ, and prior to November 27, 2009, as reported on the OTCBB. The quotations represent inter-dealer prices without retail markup, markdown or commission, and may not necessarily represent actual transactions.

   
Year Ended December 31, 2009
   
Year Ended December 31, 2008
 
   
High
   
Low
   
High
   
Low
 
First Quarter
  $ 6.00     $ 0.03     $ 0.05     $ 0.06  
Second Quarter
  $ 4.25     $ 1.30     $ 0.02     $ 0.05  
Third Quarter
  $ 6.90     $ 2.00     $ 0.01     $ 0.02  
Forth Quarter
  $ 11.25     $ 5.20     $ 0.01     $ 0.01  


On April 8, 2010, the closing price for our common stock, as reported by the Nasdaq, was $6.38 per share and there were approximately 397 stockholders of record.
 
Interwest Transfer Company Inc. is the registrar and transfer agent for our common shares. Its address is 1981 Murray Holladay Road, Suite 100, Salt Lake City, UT  84117 USA, telephone: (801)272-9294.
 
Dividend Policy
 
We have not paid any cash dividends since our inception and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We expect to retain our earnings, if any, to provide funds for the expansion of our business. Future dividend policy will be determined periodically by the Board of Directors based upon conditions then existing, including our earnings and financial condition, capital requirements and other relevant factors.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
The Company adopted the 2009 Stock Incentive Plan (the “2009 Plan”) on May 26, 2009, which reserved 7,800,000 shares of common stock for issuance under the 2009 Plan. The 2009 Plan allows the Company to issue awards of incentive non-qualified stock options and stock bonuses to directors, officers, employees and consultants of the Company, which may be subject to restrictions.
 
Recent Sales of Unregistered Securities
 
Other than as disclosed in our Current Report on Form 8-K dated December 3, 2009, no securities were sold by the Company during the fiscal year ended December 31, 2009 that were not registered under the Securities Act.
 
Item 6.
Selected Financial Data
 
Not applicable.
 
 
 
 
15

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
We make forward-looking statements in this report, in other materials we file with the Securities and Exchange Commission (the “SEC”) or otherwise release to the public, and on our website. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media and others. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings) and demand for our products and services, and other statements of our plans, beliefs, or expectations, including the statements contained in this Item 7, “Management’s Discussion and Analysis or Plan of Operation,” regarding our future plans, strategies and expectations are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You are cautioned not to place undue reliance on these forward-looking statements because these forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Thus, our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: economic conditions generally and the automotive modified plastics market specifically, legislative or regulatory changes that affect our business, including changes in regulation, the availability of working capital, the introduction of competing products, and other risk factors described herein. These risks and uncertainties, together with the other risks described from time-to-time in reports and documents that we filed with the SEC should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
 
General
 
We were originally incorporated as NB Payphones Ltd. under the laws of the state of Pennsylvania on November 16, 1999. On December 27, 2005, we migrated our state of organization to the state of Nevada and effective March 23, 2006, our name changed to NB Telecom, Inc.
 
On December 24, 2008, NB Telecom acquired all of the outstanding capital stock of Favor Sea BVI, a British Virgin Islands corporation, through China XD Plastics, a Nevada corporation wholly owned by the Company. Favor Sea BVI is a holding company whose only asset, held through a subsidiary, is 100% of the registered capital of Harbin Xinda.
 
Harbin Xinda is a manufacturer and developer of modified plastics. We believe that Harbin Xinda is one of the primary modified plastics manufacturers for automotive applications in the PRC, developing and producing made-to-order modified plastics and providing after-sales services to such automotive brands as Audi, Red Flag, VW Golf, and Mazda6.
 

 
 
16

 
 
 

 

 
Results of Operations
 
The following table sets forth information from our statements of operations for the years ended December 31, 2009 and 2008, in dollars:
 
 
 
 
   
 
 
 
The Year Ended December 31,
 
 
 
2009
 
2008
 
 
   
(Restated)
 
Net sales
 
  $ 135,745,329     $ 75,765,428  
Cost of sales
 
  $ 105,160,568     $ 58,431,799  
Gross profit
 
  $ 30,584,761     $ 17,333,629  
Operating expenses
 
  $ 12,950,793     $ 8,323,199  
Operating income
 
  $ 17,633,968     $ 9,010,430  
Other income
 
  $ 107,999     $ 28,283  
Interest expense, Net
 
  $ (1,418,395 )   $ (687,659 )
Net income
 
  $ 4,023,266     $ 8,213,583  
Comprehensive income
 
  $ 4,018,965     $ 9,121,652  
 
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 
Net sales
 
During the year ended December 31, 2009, we had net sales of $135,745,329, as compared with net sales of  $75,765,428 during the year ended December 31, 2008, an increase of $59,979,901 or 79.2% due to our increased and expanded sales both in volume and of new variety of products to our existing and new customers.
 
Cost of sales & gross margin
 
During the year ended December 31, 2009, we had cost of sales of $105,160,568, as compared with cost of sales of $58,431,799 during the year ended December 31, 2008, an increase of approximately $46,728,769 or 80.0%, reflecting the increase in net sales. The gross profit rose to $30,584,761 in 2009, or a 76.4% increase during the year ended December 31, 2009 compared with $17,333,629 during the year ended December 31, 2008. Our gross margin decreased slightly from 22.9% during the year ended December 31, 2008 to 22.5% during the year ended December 31, 2009. The decrease was mainly attributed to the slight increase of raw material price and the slight increase of percentage of lower margin products in response to increasing demand of modified plastics used by economy vehicle models in China. Such increase in demand was spurred by the sales tax cuts and government subsidies for economy vehicle models.
 
17
 

Operating Expenses
 
Our operating expenses were $12,950,793 during the year ended December 31, 2009, compared with $8,323,199 (restated) during the year ended December 31, 2008, an increase of $4,627,594 or approximately 55.6%. The increase in operating expenses was principally due to the increase in stock-based compensation expense, incentive option amortization expense, depreciation expenses and payroll expenses. Selling expenses increased slightly from $322,650 during the year ended December 31, 2008 to $400,731 during the year ended December 31, 2009 as we increased our efforts to obtain more customers. General and administrative expenses increased from $7,221,555 (restated) during the year ended December 31, 2008 to $11,220,406 for the year ended December 31, 2009, reflecting the increase in stock-based compensation expense. Research and development expenses increased from $778,994 during the year ended December 31, 2008 to $1,329,656 during the year ended December 31, 2009 reflecting our increased efforts in new product development. As a result, our operating income increased to $17,633,968 during the year ended December 31, 2009 from $9,010,430 (restated) during the year ended December 31, 2008.
 
Interest Expense, Net
 
Interest expense increased $730,736 from $687,659 during the year ended December 31, 2008 to $1,418,395 for the year ended December 31, 2009. The increase in interest expense resulted from the increase in our loans during 2009, as we borrowed to fund the rapid growth in our sales. 
 
Changes in Fair Value of Warrants and Derivative Liabilities
 
During the year ended December 31, 2009, we had a non-cash charge of $12,221,972, which resulted from the changes in the fair value of the warrants and embedded conversion feature of the convertible preferred stock issued to investors in December 2009.
 
Net Income
 
As a result of the factors described above, we had net income of $4,023,266 during the year ended December 31, 2009, compared with $8,213,583 (restated) during the year ended December 31, 2008.
 
Comprehensive Income
 
As a result of a currency translation adjustment, our comprehensive income was $4,018,965 during the year ended December 31, 2009, compared with $9,121,652 (restated) during the year ended December 31, 2008.
 
Liquidity and Capital Resources
 
As of December 31, 2009, we had $6,850,784 in cash and cash equivalents, compared to only $3,869,035 as of December 31, 2008. There was a net increase in cash and cash equivalent of $2,981,749 for the year ended December 31, 2009. The net increase in cash and cash equivalents for the year was mainly due to cash generated from operations, more specifically net income offset by increase in purchase of property, plant and equipment and repayments of bank acceptance note payable and related party loans.
 
Operations
 
For the year ended December 31, 2009, cash provided by operations was $17,137,502 as opposed to $4,874,185 used in operating activities for the year ended December 31, 2008. Increase in our cash liquidity is mainly due to the increase in accounts payable and other payables, decrease in accounts receivable and increase in non-cash expenses such as changes in fair value of warrants and embedded derivatives, depreciation and amortization expense and stock-based compensation expense.
 
Investments
 
Cash used in investing activities was $13,782,468 for the year ended December 31, 2009 as compared to $11,926,327 for the year ended December 31, 2008. We have invested heavily in purchases of new production equipment, which accounted for the majority of the cash used in investing activities in 2009.
 
 
18
 

Financing
 
For the year ended December 31, 2009, net cash used in financing activities was $378,480 as compared to $20,509,249 provided for the same period in 2008. Decrease in cash provided by financing activities is due to the net effect of proceeds received from the issuance of Series C convertible redeemable preferred stock offset by the repayment of bank acceptance notes payable and related party loans.
 
The primary sources of cash in 2009 were from operating activities. For the year ended December 31, 2009, cash provided by operations was $17,137,502.
 
Based on past performance and current expectations, we believe our cash and cash equivalents and cash generated from operations will satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations for at least the next 12 months.
 
The majority of the Company’s revenue and expenses were denominated primarily in Renminbi (“RMB”), the currency of the People’s Republic of China. There is no assurance that exchange rates between the RMB and the U.S. Dollar will remain stable. The Company does not engage in currency hedging. Inflation has not had a material impact on the Company’s business.
 
Off-Balance Sheet Arrangements
 
Neither us, nor any of our subsidiaries has any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on their financial condition or results of operations.
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 
Not applicable.

Item 8.
Financial Statements and Supplementary Data
 
The Consolidated Financial Statements of the Company and its subsidiaries as of December 31, 2009 and 2008, including the notes thereto, together with the report of Moore Stephens Hong Kong and Bagell Josephs Levine & Company, LLC (“BJL”) are presented beginning on page F-1 of this report.

Item 9.
Changes In and Disagreements With Accountants On Accounting and Financial Disclosure
 
On November 2, 2009, the Company changed its principal independent accountants. On such date, BJL was dismissed from serving as the Company’s principal independent accountants and the Company retained Moore Stephens Hong Kong (“MSHK”) as its principal independent accountants. The decision to change accountants was approved by the Company’s Board of Directors.

The Dismissal of Bagell Joseph Levine & Company, LLC

BJL was the independent registered public accounting firm for the Company from December 31, 2008 to November 2, 2009. None of BJL’s reports on the Company’s financial statements from December 31, 2008 to November 2, 2009, (a) contained an adverse opinion or disclaimer of opinion, (b) was modified as to uncertainty other than mentioned below, audit scope, or accounting principles, or (c) contained any disagreements on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of BJL, would have caused it to make reference to the subject matter of the disagreements in connection with its reports. None of the reportable events set forth in Item 304(a)(1)(ii) of Regulation S-K occurred during the period in which BJL served as the Company’s principal independent accountants.

In accordance with Item 304(a)(3), the Company has provided BJL with a copy of this disclosure as previously made on the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 6, 2009 and has requested that BJL furnish it with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the above statements, and if not, stating the respects in which it does not agree. A copy of the letter from BJL addressed to the Securities and Exchange Commission dated November 4, 2009 was filed as an exhibit to the Current Report on Form 8-K on November 6, 2009.

The Engagement of Moore Stephens Hong Kong

During the fiscal years ended December 31, 2008 and 2007 and through November 2, 2009, the Company did not consult with MSHK on (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on the Company’s financial statements, and MSHK did not provide either in a written report or oral advice to the Company that was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii) the subject of any disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304 (a)(1)(v) of Regulation S-K.

19
 

Item 9A.     Controls and Procedures
 
(a) Evaluation of Disclosure Controls and Procedures
 
The Company’s management has evaluated, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operations of the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)), as of the end of the period covered by this annual report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the evaluation of the effectiveness of our disclosure controls and procedures was completed; our disclosure controls and procedures were not effective.
 
(b) Management’s Annual Report on Internal Control over Financial Reporting
 
The Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.
 
A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. An internal control material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
 
We have evaluated the effectiveness of our internal control over financial reporting as of December 31, 2009. This evaluation was performed using the Internal Control – Evaluation Framework developed by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on such evaluation, management identified deficiencies that were determined to be a material weakness.
 
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Because of the material weakness described below, management concluded that our internal control over financial reporting was not effective as of December 31, 2009.
 
The specific material weakness and significant deficiency identified by the Company’s management as of December 31, 2009 is described as follows:
 
Material Weakness
 
Inadequate US GAAP expertise — The current staff in the accounting department are inexperienced in US GAAP and they were primarily engaged in ensuring compliance with PRC accounting and reporting requirements for our operating subsidiaries are not required to meet or apply US GAAP requirements. They need substantial training to meet the higher demands of a US public company. The accounting skills and understanding necessary to fulfill the requirements of US GAAP-based reporting, including the preparation of financial statements and consolidation, are inadequate. Such inexperience with US GAAP has caused us to restate our consolidated financial statement for the year ended December 31, 2008, with respect to the accounting treatment of certain options under ASC Topic 718 which should have been accounted for in the Company’s consolidated financial statements as share-based payments awarded to an employee by a related party as compensation for services rendered.
 
 
20
 

The Company did not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of US GAAP commensurate with the Company’s financial reporting requirements, which resulted in a number of internal control deficiencies that were identified as being significant. The Company’s management believes that the number and nature of these significant deficiencies, when aggregated, was determined to be a material weakness.
 
Significant Deficiency
 
The Company lacks qualified resources to perform the internal audit functions properly. In addition, the scope and effectiveness of the Company’s internal audit function are yet to be developed. We are committed to establishing the internal audit functions but due to limited qualified resources in the region, we were not able to hire sufficient internal audit resources before the end of 2009. However, internally we have started the process to recruit more senior qualified people in order to improve our internal control procedures. Externally, we also seek a qualified consultant to assist the Company in improving the Company’s internal control system based on COSO Framework. We also will increase our efforts to hire the qualified resources.
 
Remediation Initiative
 
In 2009, the Company engaged Ernst & Young (China) Advisory Limited, Beijing Branch Office to assist in improving the Company’s internal control system based on the COSO Framework. Internally, the Company has recruited more senior qualified people in order to improve the internal control procedures. The Company believes that it will be able to be in SOX compliance in 2010.
 
On May 1, 2009, the Board of Directors appointed Mr. Taylor Zhang as the Chief Financial Officer of the Company. Mr. Zhang has over seven years of experience in finance and operations in a broad range of industries. Immediately prior to joining China XD Plastics, Mr. Zhang served as CFO of Advanced Battery Technologies, Inc (Nasdaq: ABAT). From 2007 to 2008, he served as Executive Vice President of Finance of China Natural Gas, Inc. (Nasdaq: CHNG). From 2005 to 2007, Mr. Zhang worked as a research analyst in New York Private Equity. From 2000 to 2002 he was employed as Finance Manager by Datong Thermal Power Limited. He holds a MBA from University of Florida and a Bachelor’s Degree in mechanical and electronic engineering from Beijing Technology and Business University. In addition, the Company hired Ms. Xuan (Donna) Zhou, a CPA licensed in both New York and Virginia, as finance manager in July 2009 in its US office.
 
Conclusion
 
Despite the material weakness and deficiencies reported above, the Company’s management believes that its consolidated financial statements included in this report fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows for the years presented and that this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements misleading, in light of the circumstances under which such statements were made during the years covered by this report.
 
(c) Changes in Internal Control over Financial Reporting
 
Except as described above, there were no other changes in its internal controls over financial reporting in connection with its fourth quarter evaluation that would materially affect, or are reasonably likely to materially affect, its internal control over financial reporting.
 
Item 9B.
Other Information
 
None.

21

 
 
 

 

 
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
 
Directors and Executive Officers
 
Each director is elected for until the next annual meeting of shareholders and their successor is elected and qualified.
 
The following is a list of the names and ages of our directors and executive officers:
 
Name
 
Age
 
Positions with the Company
Jie Han
  44  
Chairman of the Board of Directors and Chief Executive Officer
Taylor Zhang
  31  
Chief Financial Officer and Director
Qingwei Ma
  35  
Chief Operating Officer and Director
Junjie Ma
  34  
Chief Technology Officer
Yong Jin
  74  
Director
Lawrence W. Leighton
  75  
Director
Cosimo J. Patti
  59  
Director
Linyuan Zhai
  60  
Director

All directors hold office until the next annual meeting of our shareholders and until their successors have been elected and qualified. Officers serve at the pleasure of the Board of Directors.
 
Jie Han. Mr. Han co-founded Harbin Xinda in 2004, and has been employed by Harbin Xinda since that time. In January 2008 Mr. Han was appointed Chairman and Chief Executive Officer of Harbin Xinda. Prior to organizing Xinda High-Tech, which was founded in 2003, Mr. Han had been associated with the Harbin Xinda Nylon Factory, which he founded in 1985. With 24 years of experiences in the industry, Mr. Jie Han is an expert in the management and financial works dealing with the manufacture and distribution of modified plastic products. Mr. Han currently serves as an executive director of China Plastic Processing Industry Association and is also a director of the Heilongjiang Industry and Commerce Association. In addition, Mr. Han serves as a deputy to the Harbin Municipal People’s Congress.
 
Taylor Zhang. Mr. Zhang has over seven years of experience in finance and operation in a broad range of industries. Immediately prior to joining China XD Plastics, Mr. Zhang served as CFO of Advanced Battery Technologies, Inc (Nasdaq: ABAT). From 2007 to 2008, he served as Executive Vice President of Finance of China Natural Gas, Inc. (Nasdaq: CHNG). From 2005 to 2007, Mr. Zhang worked as a research analyst in New York Private Equity. From 2000 to 2002 he was employed as Finance Manager by Datong Thermal Power Limited. He holds a MBA from University of Florida and a Bachelor’s Degree in mechanical and electronic engineering from Beijing Technology and Business University.
 
Qingwei Ma. Mr. Ma has been employed as General Manager of Harbin Xinda since it was founded in 2004. In 2008 he was promoted to Chief Operating Officer and appointed Director to the Board in 2008. Prior to joining Harbin Xinda, Mr. Ma was employed for six years by Harbin Xinda Nylon Factory as Manager of Quality Assurance, then as Manager of Research and Development, and finally as Production Manager. In 1997 Mr. Ma was awarded a bachelor’s degree by the Northern China Technology University, where he specialized in the chemical engineering of high polymers. Mr. Ma has 11 years of experiences in the industry. He also published two articles in China’s key journals in the areas of modified plastic industry. In 2001 Mr. Ma was selected as “Harbin Quality Work Advanced Enterprise and Advanced Worker”; in 2004 he was awarded the Heilongjiang First Professional Manager Qualification Certificate. One of his inventions, “compound nano modified materials dedicated to the automobile bumper” won the “Science and Technology Progress Awards” issued by Harbin Municipality.
 
Junjie Ma. Mr. Ma graduated from Beijing University of Science and Technology, majored in Polymer materials and engineering. He was appointed acting Chief Technology Officer of China XD Plastics in 2009 and Director of the Board in 2008. He resigned as Director of the Board in 2009. He was a technician of Harbin Longjiang Electrical Plant from 1997 to 2004 and was a supervisor and manager of Harbin Xinda Macromolecule Material Inc. from 2004 to 2007. Since 2008, he was elected to be Head of Research Institute of Harbin Xinda Macromolecule Material Co., Ltd. Mr. Junjie Ma is a polymer materials engineers and has developed more than 120 plastic additives, modified plastics for automobiles and engineering plastics among which 50 products have been approved by auto enterprises. A number of products have been awarded as the National Torch Program projects, Spark Projects and Harbin City Important New Products project.
 
22
 
 

Yong Jin. Mr Jin, a professor at Tsinghua University and an academician of the Chinese Academy of Engineering, is an executive member of Chemical Industry and Engineering Society of China and Chinese society of particuology, vice chairman of China Institute of Ecological Economy, director of Industrial Ecology Economy and Technology Committee, Council Convenor of the Chemical discipline in the State Council Academic Degrees Committee, professional advisers for Beijing Municipal Government, Lectureship Award recipient in fluidization by American Institute of Chemical Engineers (AIChE), the world's leading organization for chemical engineering professionals, with more than 40,000 members from 93 countries, consultant for the Germany magazine "Chemical engineering & technology". Mr. Jin has published and presented more than 350 papers in important journals and conferences domestically and internationally, 138 of which were included in Science. Mr. Jin also has more than 30 patent applications.

Lawrence W. Leighton. Mr. Leighton has had an extensive 40-year international investment banking career.  Mr. Leighton received his BSE degree in engineering from Princeton University and an MBA degree from Harvard Business School. His previous positions include Co-Head of the Corporate Finance Department at Clark, Dodge & Co., Limited Partner of Bear Stern, Managing Director of JPMorgan Chase Bank and CEO of the U.S. investment bank of Credit Agricole, the major French Bank. Mr. Leighton has been an Independent Director of China Natural Gas, Inc. (NASDAQ: CHNG) since August 2008.
 
Cosimo J. Patti. Mr. Patti’s previous positions include roles as Senior Director of Strategy Management, Director of Business Strategy, and Senior Vice President of Lehman Brothers. He is an Arbitrator of SEC and National Association of Securities. Mr. Patti has been an Independent Director of American Oriental Bioengineering Inc. (NYSE: AOB) since 2004. Mr. Patti has been an Independent Director of American Oriental Bioengineering, Inc and Advanced Battery Technologies, Inc.
 
Linyuan Zhai. Mr. Zhai worked for China FAW Group Corporation for 37 years with abundant experience in terms of technology, production, and business management. He is a Senior Expert in the auto industry. Mr. Zhai served as general manager of automobile manufacturing, successfully led Four Ring Company, a subsidiary of FAW group, to go public in China. He is one of the pioneers and outstanding contributors of FAW group’s success.

Meetings of the Board of Directors

The Board of Directors held ten meetings during fiscal year 2009, one of which were regularly scheduled meetings and two of which were special meetings. The Board also acted seven times by unanimous written consent. Each of the foregoing directors attended at least 75% of the aggregate number of meetings of our Board of Directors and the committees on which each director served during fiscal year 2009 and was eligible to attend.  

Board Leadership Structure
 
The Board of Directors believes that Mr. Han’s service as both Chairman of the Board and Chief Executive Officer is in the best interest of the Company and its stockholders. Mr. Han possesses detailed and in-depth knowledge of the issues, opportunities and challenges facing the Company and its business and is thus best positioned to develop agendas that ensure that the Board’s time and attention are focused on the most critical matters. His combined role enables decisive leadership, ensures clear accountability, and enhances the Company’s ability to communicate its message and strategy clearly and consistently to the Company’s shareholders, employees, customers and suppliers.
 
Family Relationships

There are no family relationships between or among any of our current directors, executive officers or persons nominated or charged by the Company to become directors or executive officers. There are no family relationships among our officers and directors and the officers and directors of our direct and indirect subsidiaries.

Involvement in Certain Legal Proceedings

None of our directors or executive officers has, during the past ten years:

(a) 
Had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

(b) 
Been convicted in a criminal proceeding or subject to a pending criminal proceeding;

(c) 
Been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or any federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities; and

(d) 
Been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
 
 
23

Committees of the Board of Directors
 
Our board of directors formed its committees and adopted its corporate governance charters and policies at the May 26, 2009 meeting. At this meeting, the board adopted Corporate Governance Guidelines and formed three committees, the Audit, Nominating and Compensation Committees. Charters were approved for each of the committees.
 
The Board of Directors has the following standing committees: (1) Audit Committee, (2) Nominating Committee and (3) Compensation Committee. The Board of Directors has adopted a written charter for each of these committees, copies of which can be found on our website at www.chinaxd.net in the Investor Relations section of our website. All members of the committees appointed by the Board of Directors are non-employee directors and are independent directors within the meaning set forth in the NASDAQ rules, as currently in effect.
 
The following chart details the current membership of each committee:
 
Name of Director
 
Audit
   
Nominating
   
Compensation
 
Lawrence Leighton
  C     M     M  
Cosimo Patti
  M     M     C  
Linyuan Zhai
  M     C     M  
Yong Jin
        M        
M=Member
                 
C=Chair
                 
 
Audit Committee.
 
On May 26, 2009, the Board of Directors appointed an Audit Committee chaired by Mr. Leighton with Mr. Patti and Mr. Zhai as committee members. On July 27, 2009, the Board adopted a charter which provides that the Audit Committee, (i) oversees our accounting, financial reporting and audit processes; (ii) appoints, determines the compensation of, and oversees, the independent auditors; (iii) pre-approves audit and non-audit services provided by the independent auditors; (iv) reviews the results and scope of audit and other services provided by the independent auditors; (v) reviews the accounting principles and practices and procedures used in preparing our financial statements; and (vi) reviews our internal controls, a copy of which is available on our website at www.chinaxd.net in the Investor Relations section.
 
The Audit Committee works closely with management and our independent auditors. The Audit Committee also meets with our independent auditors without members of management present, on a regular basis, following completion of our auditors’ annual audit and prior to our earnings announcements, to review the results of their work. The Audit Committee also meets with our independent auditors to approve the annual scope and fees for the audit services to be performed.
 
Each of the Audit Committee members is an independent director within the meaning set forth in the rules of the SEC, as currently in effect. In addition, the Board of Directors has determined that Mr. Leighton is an “audit committee financial expert” as defined by SEC rules.
 
The Audit Committee held two meetings during fiscal year 2009. Each director who is a member of the Audit Committee attended at least 75% of the aggregate number of meetings of the Audit Committee during fiscal year 2009.

AUDIT COMMITTEE REPORT

The following is the report of the Audit Committee of the Board of Directors. The Audit Committee has reviewed and discussed our audited financial statements for the fiscal year ended December 31, 2009 with our management. In addition, the Audit Committee has discussed with Moore Stephens Hong Kong, our independent auditors, the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (Communications with Audit Committee). The Audit Committee also has received the written disclosures and the letter from Moore Stephens Hong Kong as required by the Public Company Accounting Oversight Board Rule 3526 “Communications with Audit Committees Concerning Independence” and the Audit Committee has discussed the independence of Moore Stephens Hong Kong with that firm.

Based on the Audit Committee’s review of the matters noted above and its discussions with our independent auditors and our management, the Audit Committee recommended to the Board of Directors that the financial statements be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Respectfully submitted by:

Lawrence Leighton (Chair)
Cosimo Patti
Linyuan Zhai

24

 

Nominating Committee

On May 26, 2009, the Board of Directors appointed a Nominating Committee chaired by Mr. Zhai with Mr. Patti and Mr. Jin as committee members. On July 27, 2009, the Board adopted a charter which provides that the Nominating Committee (i) assisting the Board by identifying individuals qualified to become Board members and recommending to the Board director candidates to stand for election at the next annual meeting of stockholders; (ii) making recommendations to the Board as to the independence of each director; (iii) monitoring significant developments in the law and practice of corporate governance and of the duties and responsibilities of directors of public companies; (iv) leading the Board in any annual performance self-evaluation, including establishing criteria to be used in connection with such evaluation; and (v) developing and recommending items for Boar; meeting agendas.

Each current member of the Governance, Compensation and Nominating Committee is an independent director within the meaning set forth in the rules of the Nasdaq Stock Market, as currently in effect.

The Nominating Committee considers properly submitted stockholder recommendations for candidates for membership on the Board of Directors as described below under “Identification and Evaluation of Nominees for Directors.” In evaluating such recommendations, the Nominating Committee seeks to achieve a balance of knowledge, experience and capability on the Board of Directors and to address the membership criteria set forth under “Director Qualifications.” Any stockholder recommendations proposed for consideration by the Nominating Committee should include the candidate’s name and qualifications for membership on the Board of Directors and should be addressed to the attention of our Corporate Secretary — re: stockholder director recommendation.

Director Qualifications.  The Nominating Committee does not have any specific, minimum qualifications that must be met by a Nominating Committee-recommended nominee, but uses a variety of criteria to evaluate the qualifications and skills necessary for members of our Board of Directors. Under these criteria, members of the Board of Directors should have the highest professional and personal ethics and values. A director should have broad experience at the policy-making level in business, government, education, technology or public interest. A director should be committed to enhancing stockholder value and should have sufficient time to carry out their duties, and to provide insight and practical wisdom based on their past experience. A director’s service on other boards of public companies should be limited to a number that permits them, given their individual circumstances, to perform their director duties responsibly. Each director must represent the interests of the Company’s stockholders.

Identification and Evaluation of Nominees for Directors.  The Governance, Compensation and Nominating Committee utilizes a variety of methods for identifying and evaluating nominees for director. The Governance, Compensation and Nominating Committee regularly assesses the appropriate size of the Board of Directors, and whether any vacancies on the Board of Directors are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Governance, Compensation and Nominating Committee considers various potential candidates for director. Candidates may come to the attention of the Governance, Compensation and Nominating Committee through current members of the Board of Directors, professional search firms, stockholders or other persons. These candidates are evaluated at regular or special meetings of the Nominating Committee, and may be considered at any point during the year. The Nominating Committee considers properly submitted stockholder recommendations for candidates for the Board of Directors. In evaluating such recommendations, the Nominating Committee uses the qualifications standards discussed above and seeks to achieve a balance of knowledge, experience and capability on the Board of Directors.

A copy of the Committee’s written charter is available in the Investor Relations section of our website at www.chinaxd.net.

The Nominating Committee held two meetings during fiscal year 2009. Each director who is a member of the Nominating Committee attended at least 75% of the aggregate number of meetings of the Committee during fiscal year 2008.
 
 
 
25

Compensation Committee

On May 26, 2009, the Board of Directors appointed a Compensation Committee chaired by Mr. Patti with Mr. Leighton and Mr. Zhai as committee members. On July 27, 2009, the Board adopted a charter which provides that the Compensation Committee shall discharge the Board's responsibilities relating to compensation of the Company’s executive officers. The Committee has overall responsibility for approving and evaluating the executive officer compensation plans, policies and programs of the Company. A copy of the charter is available on our website at www.chinaxd.net in the Investor Relations section.

The Compensation Committee held two meetings during fiscal year 2009. Each director who is a member of the Compensation Committee attended at least 75% of the aggregate number of meetings of the Committee during fiscal year 2009.

Code of Ethics

On July 27, 2009 we adopted a Code of Business Conduct, and an Insider Trading policy. Copies of these policies are available on our corporate web site at www.chinaxd.net. We will disclose amendments to, or waivers from, our policies on our corporate web site at www.chinaxd.net.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the Securities and Exchange Commission regulations to furnish our Company with copies of all Section 16(a) reports they file. One late Form 3 was filed by each of Messrs. Jie Han, Junjie Ma, Qingwei Ma, Meijuan He, Taylor Zhang, Patti Cosmo and a 10% stockholder, XD Engineering Plastics Company Limited. Other than as set forth above, we believe that, during fiscal 2009, our directors, executive officers and 10% stockholders complied with all Section 16(a) filing requirements. In making this statement, we have relied upon examination of the copies of Forms 3, 4 and 5, and amendments thereto, provided to the Company and the written representations of its directors and executive officers.

Item 11.
Executive Compensation
 
The following table is a summary of the compensation paid to our executive officers for the two years ended December 31, 2009 and 2008.

SUMMARY COMPENSATION TABLE

Name and Principal Position
 
Year
 
Salary
($)
   
Bonus
($)
   
Stock Awards
($)
   
Option Awards
($)
   
Non-Equity Incentive Plan Compensation
($)
   
Change in Pension Value and Nonqualified Deferred Compensation Earnings
($)
   
All Other Compensation
($)
   
Total
($)
 
Jie Han,
CEO
 
2009
    17,567       -       -       3,065,388  (2)     -       -       -       3,082,955  
   
2008
    103,632       -       -       5,473,907  (2)     -       -       -       5,577,539  
 
Taylor Zhang, CFO (1)
 
2009
    72,000                                                       72,000  
   
2008
    -       -       -       -       -       -       -       -  
 
(1)
Mr. Zhang was appointed as our CFO on May 1, 2009.
 
(2)
The options were issued pursuant to an Incentive Option Agreement dated May 16, 2008 between Ms. Piao and Mr. Han whereby Ms. Piao granted Mr. Han 40,000 options to purchase all the  shares of XD Engineering, the controlling shareholder of the Company, subject to the Company achieving certain financial performance targets, which the Company believes should be accounted for as share-based compensation awarded to an employee by a related party as compensation for services rendered in accordance to ASC Topic 718.
 
26

 
 
 

 

 
The following is a summary of all options, unvested stock and equity incentive plans for our Executive Officers for the year ended December 31, 2009.
 
Outstanding Equity Awards at Fiscal Year-End
 
   
Option Awards
   
Stock Awards
 
Name
 
Name of securities underlying unexercised options
(#)
exercisable
   
Number of securities underlying unexercised options
(#)
unexercisable
   
Equity incentive plan awards:
Number of securities underlying unexercised unearned options
(#)
   
Option exercise price
($)
   
Option expiration date
   
Number of shares or units of stock that have not vested
(#)
   
Market value of shares or units of stock that have not vested
(#)
   
Equity incentive plan awards:
Number of unearned shares, units or other rights that have not vested
(#)
   
Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested
($)
 
Jie Han, CEO
  -     -     -     -     -       -       -       -       -  
Taylor Zhang, CFO
  -     -  
 
 
-     -     -       -       -       -       -  
 
The above table does not include the options granted pursuant to an Incentive Option Agreement dated May 16, 2008, whereby Ms. Piao granted 40,000 options to Mr. Jie Han to purchase all the shares of XD Engineering, the controlling shareholder of the Company.
 
The following is a summary of the compensation paid to our non-employee Directors for the year ended December 31, 2009. Our employee directors do not receive compensation for their services to the Company as directors.
 
DIERCTOR COMPENSATION
 
Name
 
Fees earned or paid in cash
($)
   
Stock awards
($)
   
Option awards
($)
   
Non-equity incentive plan compensation
($)
   
Nonqualified deferred compensation earnings
($)
   
All other compensation
($)
   
Total
($)
 
Lawrence Leighton
  24,000     51,269     -     -     -     -     75,269  
Cosimo Patti
  24,000     51,269     -     -     -     -     75,269  
Yong Jin
  3,513     7,502     -     -     -     -     11,015  
Linyuan Zhai
  3,513     7,502     -     -     -     -     11,015  
 
 
Employment Agreements
 
All of our officers and directors serve on an at-will basis.
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The following table lists, as of April 8, 2010, the number of shares of common stock beneficially owned by (i) each person or entity known to the Company to be the beneficial owner of more than 5% of the outstanding common stock; (ii) each officer and director of the Company; and (iii) all officers and directors as a group. Information relating to beneficial ownership of common stock by our principal stockholders and management is based upon information furnished by each person using “beneficial ownership” concepts under the rules of the Securities and Exchange Commission. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or direct the voting of the security, or investment power, which includes the power to vote or direct the voting of the security. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Under the Securities and Exchange Commission rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may not have any pecuniary beneficial interest. Except as noted below, each person has sole voting and investment power.
 
The Certificate of Change to effectuating the 124.1 for 1 reverse split of the issued and outstanding shares of common stock, while correspondingly reducing the Company’s authorized capital, was filed with the Secretary of State of Nevada on January 6, 2009. As of such date, the Company had 110,000,000 shares of stock authorized, of which 100,000,000 shares of common stock were authorized, issued and outstanding and 10,000,000 shares of preferred stock were authorized, of which 1,000,000 shares of Series A Preferred Stock were issued and outstanding and 1,000,000 shares of Series B Preferred Stock were issued and outstanding.
 
 
27
 

As of December 31, 2009, there are 15,188 shares of Series C preferred stock, 1,437,957 shares of warrants convertible into 3,301,739 and 1,437,957 shares of the Company’s common stock, respectively.
 
Name and Address of
Beneficial Owner(1)
 
Amount and Nature
of Beneficial
Ownership(2)
 
Percentage
of Class(3)
Jie Han
   
8,127,533
   
18.47% 
Qingwei Ma
   
-
   
 * 
Junjie Ma
   
-
   
Taylor Zhang
   
-
   
   * 
Cosimo J. Patti
   
8,734
   
   * 
Lawrence W. Leighton
   
8,734
   
   * 
Linyuan Zhai
   
1,278
   
   * 
Yong Jin
   
1,278
   
   * 
All officers and directors
           
as a group (1 person)
   
8,147,557
   
18.51% 
XD. Engineering Plastics Company Limited
           
P.O. Box 957, Offshore Incorporations Centre
           
Road Town, Tortola, British Virgin Islands
   
25,382,598 
 (4)
 
57.68% 
*Less than 1%
   
(1)
Except as otherwise noted, each shareholder’s address is No. 9 Qinling Road, Yingbin Road Centralized Industrial Park, Harbin Development Zone, Heilongjiang, China 150078.
   
(2)
Except as otherwise noted, all shares are owned of record and beneficially.
   
(3)
Percentage of beneficial ownership is based upon 44,007,589 shares of Common Stock outstanding as of April 8, 2010.
   
(4)
Includes 1,000,000 shares of Series B Preferred Stock which has voting power equivalent to 40% of the total voting power of the Company.
   
   

Item 13.
Certain Relationships and Related Transactions, and Director Independence
 
 
Related Party Transactions
 
Prior to the reverse merger, Ms. Piao owned 100% of Favor Sea (BVI) indirectly via XD Engineering, the former sole shareholder of Favor Sea (BVI).  Xinda High-Tech and Heilongjiang Xinda Hyundai Engineering Plastics Co., Ltd. are affiliate companies owned by the spouse of Mr. Han, who was the major shareholder of Harbin Xinda before the ownership was transferred to HK Engineering Plastics.

On September 20, 2008, Harbin Xinda (“Buyer”) signed an agreement (“Agreement”) with Xinda High-Tech (“Seller”) to acquire all of the assets of Xinda High-Tech, including plant and buildings, land use rights, machinery and equipment for a total amount of RMB240,000,000 (approximately $35,136,006 at date of signing). Harbin Xinda was required to make two installment payments of the full purchase price of RMB50,000,000 by the end of December 31, 2008 and the remaining balance of RMB190,000,000 by the end of September 30, 2009 if all assets purchased are transferred to the Company.  On May 1, 2009, Harbin Xinda and Xinda High-Tech agreed to rescind the Agreement.

Prior to signing of the above-mentioned Agreement, the Company rented the buildings and equipment of Xinda High-Tech for the purpose of its production expansion. The lease term was from May 1, 2008 to April 30, 2011. The lease payment was for a total of RMB2,000,000 per year. The lease contract was cancelled when Harbin Xinda and Xinda High-Tech rescinded the Agreement on May 1, 2009 and at the same time, Harbin Xinda and Xinda High-Tech re-signed a new lease agreement for the office and factory space at No. 9 Dalian North Road, Haping Road Centralized District, Harbin Development Zone, Harbin, Heilongjiang, China. The leased space is 23,893.53 square meters and the term of the lease is from May 1, 2009 to April 30, 2012. The lease payment remains at RMB2,000,000 per year. In the years ended December 31, 2009 and 2008, the Company recorded and paid $292,954 and $119,945, respectively for the rent expenses.
 
28
 


 
Item 14.
Principal Accountant Fees and Services
 
For the fiscal years ended December 31, 2009 and December 31, 2008, Moore Stephens Hong Kong and Bagell Josephs, Levine & Company, LLC, respectively, have billed us the following fees for services rendered in connection with the audit and other services in respect to these years:

   
2009
   
2008
 
Audit Fees (1)
  $ 109,819     $ 95,000  
Audit-Related Fees
    -       -  
Total Audit and Audit-Related Fees
    109,819       95,000  
Tax Fees (2)
    -       -  
All Other Fees (3)
    7,500       2,500  
                 
Total for independent public audit firms
  $ 117,319     $ 97,500  
 
(1) Services rendered for the audit of our annual financial statements included in our report on Form 10-K and the reviews of the financial statements included in our reports on Form 10-Q filed with the SEC.
(2) Services in connection with the preparation of tax returns and the provision of tax advice.
(3) Services related to other miscellaneous securities filings

All (100%) of the fees described above were approved by our Board of Directors.

Item 15.
Exhibits, Financial Statement Schedules

         
Exhibit No.
 
Description of Exhibit
 
Footnote
3.1
 
Certificate of Incorporation
 
(1)
         
3.2
 
Amended and Restated Certificate of Incorporation
 
(1)
         
3.3
 
By-laws
 
(1)
         
3.4
 
Certificate of Designation for Series C Convertible Preferred Stock
   
         
4.0
 
Stock Certificate
 
(1)
         
4.1
 
2009 Stock Option Plan
 
(5)
         
4.2
 
Form of Series A Warrant
 
(7)
         
4.3
 
Form of Series B Warrant
 
(7)
         
10.1
 
Agreement and Plan of Merger dated December 24, 2008 among the Company and the shareholders of Favor Sea Limited
 
(2)
         
10.2
 
Designation Certificate of Series A Preferred Stock
 
(2)
         
10.3
 
Designation Certificate of Series B Preferred Stock
 
(2)
         
10.4
 
Asset Purchase Agreement dated September 20, 2008 between Harbin Xinda Macromolecule Material Co., Ltd. and Harbin Xinda High-Tech Co., Ltd.
 
(2)
         
10.5
 
First Amendment to the Asset Purchase Agreement  dated September 20, 2008
 
(3)
         
10.6
 
Termination Agreement by and between Harbin Xinda Macromolecule Material Co., Ltd. and Xinda High-Tech Co., Ltd. dated as of May 1, 2009
 
(4)
         
10.7
 
Lease Agreement dated May 1, 2009
 
(4)
         
10.8
 
Securities Purchase Agreement dated November 27, 2009
 
(7)
         
10.9
 
Registration Rights Agreement dated November 27, 2009
 
(7)
         
10.10
 
Form of Lock-Up Agreement
 
(7)
 
 
 
 
29

 
 
         
16.1
 
Letter, dated December 31, 2008, from Robison, Hill & Co. to the Securities and Exchange Commission
 
(2)
         
16.2
 
Letter, dated November 4, 2009 from Bagell Josephs Levine & Company, LLC,  to the Securities and Exchange Commission
 
(6)
         
21.1
 
Subsidiaries of Registrant
 
*
         
23.1
 
Consent of Bagell Josephs, Levine & Company, LLC, Independent Auditors
 
(7)
         
23.2
 
Consent of Bagell Josephs, Levine & Company, LLC, Independent Auditors
 
(8)
         
31.1
 
Certification of Principal Executive Officer Required Under Section 302 of Sarbanes-Oxley Act of 2002
 
*
         
31.2
 
Certification of Principal Financial Officer Required Under Section 302 of Sarbanes-Oxley Act of 2002
 
*
         
32.1
 
Certification of Principal Executive Officer and Principal Financial Officer Required Under Section 906 of Sarbanes-Oxley Act of 2002
 
*
         
32.2
 
Certification of Principal Financial Officer and Principal Financial Officer Required Under Section 906 of Sarbanes-Oxley Act of 2002
 
*
   
 
*
Filed herewith.
   
+
Management contract or compensatory plan or arrangement.
   
(1)
Filed as an exhibit to the Company’s registration statement on Form SB-2, as filed with the Securities and Exchange Commission on May 12, 2006, and incorporated herein by this reference.
   
(2)
Filed as an exhibit to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on December 31, 2008, and incorporated herein by this reference.
   
(3)
Filed as an exhibit to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on February 27, 2009, and incorporated herein by this reference.
   
(4)
Filed as an exhibit to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on May 1, 2009, and incorporated herein by this reference.
   
(5)
Filed as an exhibit to the Company’s registration statement on Form S-8, as filed with the Securities and Exchange Commission on May 29, 2009, and incorporated herein by this reference.
   
(6)
Filed as an exhibit to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on November 6, 2009, and incorporated herein by this reference.
   
(7)
Filed as an exhibit to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on November 30, 2009, and incorporated herein by this reference.
   
(8)
Filed as an exhibit to the Company’s registration statement on Form S-3, as filed with the Securities and Exchange Commission on December 24, 2009, and incorporated herein by this reference.

 
30

 
 

 

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date: April 14, 2010
   
  
  
  
China XD Plastics Company Limited
  
  
  
/s/ Jie Han
  
Jie Han
  
Chief Executive Officer
  
(Principal Executive Officer)
 
POWER OF ATTORNEY
 
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jie Han, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
         
  
  
  
  
  
  
  
Title
  
Date
 
/s/ Jie Han
  
Chairman/Chief Executive Officer
  
April 14, 2010
Jie Han
  
(Principal Executive Officer and Director)
  
  
  
  
  
  
  
/s/ Taylor Zhang
  
Chief Financial Officer
  
April 14, 2010
Taylor Zhang
  
(Principal Financial and Accounting Officer)
  
  
  
  
  
  
  
/s/ Qingwei Ma
  
Director
  
April 14, 2010
Qingwei Ma
  
  
  
  
  
  
  
  
  
/s/ Lawrence Leighton
  
Director
  
April 14, 2010
Lawrence Leighton
  
  
  
  
  
  
  
  
  
/s/ Cosimo Patti
  
Director
  
April 14, 2010
Cosimo Patti
  
  
  
  
  
  
  
  
  
/s/ Yong Jin
  
Director
  
April 14, 2010
Yong Jin
  
  
  
  
  
  
  
  
  
/s/ Linyuan Zhai
  
Director
  
April 14, 2010
Linyuan Zhai
  
  
  
  
         

31

 
 

 
 
 
 
 
 
Financial Statements
 
Index of Financial Statements  F-1
Reports of Independent Registered Public Accounting Firm
 F-2 to F-3
Consolidated Balance Sheets  F-4
Consolidated Statements of Income and Other Comprehensive Income
 F-5
Consolidated Statements of Changes in Stockholders’ Equity
 F-6
Consolidated Statements of Cash Flows
 F-7
Notes to Consolidated Financial Statements
 F-8 to F-43
 
 
 
 
 
 
 
 
F-1
 

 
 
 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
China XD Plastic Company Limited

We have audited the accompanying consolidated balance sheet of China XD Plastics Company Limited and subsidiaries (the "Company") as of December 31, 2009, and the related consolidated statements of income and other comprehensive income, changes in stockholders' equity and cash flows for the year then ended, as well as the effect of the adjustment for the correction of the error described in Note 3 as of and for the year ended December 31, 2008. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We were not engaged to audit, review, or apply any procedures to the consolidated financial statements of the Company for the year ended December 31, 2008 other than with respect to the aforementioned adjustment and, accordingly, we do not express an opinion or any other form of assurance on the consolidated financial statements for the year ended December 31, 2008, taken as a whole.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2009, and the results of its operations and its cash flows for the year then ended, as well as the effect of the adjustment for the correction of the error described in Note 3 as of and for the year ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.


/s/ Moore Stephens
Certified Public Accountants
Hong Kong
April 14, 2010
 
 
 
F-2
 
 
 

 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
The Board of Directors and Shareholders of
China XD Plastics Company Ltd
(Formerly NB Telecom, Inc)
 
 
We have audited the accompanying consolidated balance sheets of China XD Plastics Company Ltd (formerly NB Telecom, Inc) as of December 31, 2008 and 2007 and the related consolidated statements of income and other comprehensive income, changes in stockholders’ equity, and cash flows for the years ended December 31, 2008 and 2007. China XD Plastics Company Ltd’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with standards established by the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China XD Plastics Company Ltd as of December 31, 2008 and 2007 and the results of its operations, changes in stockholders’ equity, and cash flows for the years ended December 31, 2008 and 2007 in conformity with accounting principles generally accepted in the United States of America.
 
   
/s/ Bagell Josephs, Levine & Company, LLC
 
   
Bagell Josephs, Levine & Company, LLC
Marlton, New Jersey
March 9, 2009
 

 
 
This report is a copy of the previously issued report.
 
The predecessor auditor has not reissued this report.
 
F-3
 
 

CHINA XD PLASTICS COMPANY LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2009 AND 2008
 
                 
                   
   
Note
   
2009
   
2008
 
ASSETS
             
(Restated - note 3)
 
                   
Current assets:
                 
      Cash and cash equivalents
        $ 6,850,784     $ 3,869,035  
      Restricted cash
  4       -       3,664,346  
      Notes receivable
          407,487       303,437  
      Accounts receivable - net of allowance for doubtful receivables of
                     
        $166,095 and $99,669, respectively
  5       8,558,172       11,234,507  
      Prepaid expenses and other receivables
          253,172       21,917  
      Inventories
  6       18,371,485       12,438,782  
      Advances to employees
  7       512,745       92,329  
      Advances to suppliers
  2       20,245,861       13,131,074  
      Taxes receivable           406,755       -  
                       
            Total current assets
          55,606,461       44,755,427  
                       
Property, plant and equipment, net
  8       31,083,389       19,332,712  
                       
Other assets:
                     
      Deferred charges
  9       -       378,073  
      Intangible assets, net
  10       241,945       247,681  
                       
            Total other assets
          241,945       625,754  
                       
            Total assets
        $ 86,931,795     $ 64,713,893  
                       
LIABILITIES AND STOCKHOLDERS' EQUITY
                     
                       
Current liabilities:
                     
      Short term loans
  12     $ 21,678,565     $ 20,520,337  
      Bank acceptance notes payable
  13       -       8,061,561  
      Accounts payable
          1,258,459       113,232  
      Other payables
          714,504       106,232  
      Accrued expenses
          648,358       820,625  
      Taxes payable
          4,134       17,777  
      Due to related parties
  11       148,397       7,542,950  
      Deferred revenue
          300,296       3,469,796  
      Dividends payable
          77,396       -  
                       
            Total current liabilities
          24,830,109       40,652,510  
                       
Other liabilities:
                     
      Embedded conversion feature liabilities
  15       18,798,059       -  
      Common stock warrant purchase liabilities
  15       7,892,513       -  
                       
Total other liabilities
          26,690,572       -  
                       
Total liabilities         $ 51,520,681     $ 40,652,510  
                       
Series C convertible redeemable preferred stock 15,188 and -0-
                     
shares issued and outstanding as of December 31, 2009 and 2008, respectively
  15       13,891,477       -  
                       
Commitments and contingencies
  20                  
                       
Stockholders' equity
                     
                       
 
 
Preferred Stock, $0.0001 par value, 50,000,000 and 10,000,000 shares authorized
as of December 31, 2009 and 2008, respectively
                     
 
         
Series A Preferred Stock, - 0 - and 1,000,000 shares issued and outstanding
as of December 31, 2009 and 2008, respectively
  17       -       100  
 
         
Series B Preferred Stock, 1,000,000 shares issued and outstanding as of
December 31, 2009 and 2008, respectively
  17       100       100  
 
         
Common Stock, $0.0001 par value, 500,000,000 and 100,000,000 shares authorized,
 40,867,050  and 805,802 shares issued and outstanding as of December 31, 2009 and 2008, respectively
  17       4,087       81  
Additional paid-in-capital
          15,360,949       7,956,693  
Retained earnings
          2,160,621       14,577,235  
Statutory surplus reserve fund
  21       2,471,007       -  
Accumulated other comprehensive income
          1,522,873       1,527,174  
                       
            Total stockholders' equity
          21,519,637       24,061,383  
                       
            Total liabilities and stockholders' equity
        $ 86,931,795     $ 64,713,893  
 
 
The accompanying notes are an integral part of these consolidated financial statements

F-4
 
 
 

 
CHINA XD PLASTICS COMPANY LIMITED
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

                   
                   
   
Note
   
2009
   
2008
 
               
(Restated - note 3)
 
                   
Sales
        $ 135,745,329     $ 75,765,428  
                       
Cost of sales
          (105,160,568 )     (58,431,799 )
                       
Gross profit
          30,584,761       17,333,629  
                       
Operating expenses
                     
Research and development expenses
    2       1,329,656       778,994  
Selling expenses
            400,731       322,650  
General and administrative expenses
            11,220,406       7,221,555  
Total operating expenses
            12,950,793       8,323,199  
                         
Operating income
            17,633,968       9,010,430  
                         
Other income (expenses)
                       
Interest income (expenses)
            (1,418,395 )     (687,659 )
Other income
            107,999       28,283  
Other expense
            (11,085 )     (102,139 )
Changes in fair value of warrants and embedded derivatives
    15       (12,221,972 )     -  
Total other expense
            (13,543,453 )     (761,515 )
                         
Income before income taxes
            4,090,515       8,248,915  
                         
Provision for income taxes
    14       (67,249 )     (35,332 )
                         
Net income
          $ 4,023,266     $ 8,213,583  
                         
Other comprehensive income (loss)
                       
Foreign currency translation adjustment
            (4,301 )     908,069  
                         
Comprehensive income
          $ 4,018,965     $ 9,121,652  
                         
Net income
    19     $ 4,023,266     $ 8,213,583  
                         
Dividends to Series C preferred stockholders
    19       (77,396 )     -  
Deemed Series C preferred stock dividends
    19       (13,891,477 )     -  
                         
Net income (loss) attributable to common shareholders
    19     $ (9,945,607 )     8,213,583  
                         
Basic and diluted earnings (loss) per common share
                       
Basic
    19     $ (0.36 )   $ 19.81  
Diluted
    19     $ (0.36 )   $ 0.21  
                         
Weighted average common share outstanding
                       
Basic
    19       27,789,044       414,569  
Diluted
    19       27,789,044       38,608,641  
 
The accompanying notes are an integral part of these consolidated financial statements

F-5
 
 
 

 
CHINA XD PLASTICS COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

 
                                                       
                                     
 
                                                 
                                                                   
                                                                   
                                                                   
                                                                   
   
Commen Stock, Par value $ 0.0001
   
Preferred Stock A, Par value $ 0.0001
   
Preferred Stock B, Par value $ 0.0001
   
Additional
   
Statutory Surplus
   
Retained
     Accumulated Other   
 
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Paid-in-Capital
   
Reserve Fund
   
Earnings
   
Comprehensive Income
   
Total
 
                                                                   
Balance at
December 31, 2007
    405,802     $ 41       1,000,000     $ 100       1,000,000     $ 100     $ 2,482,826     $ -     $ 6,363,652     $ 619,105     $ 9,465,824  
                                                                                         
Shares issued in connection with reverse merger
    400,000       40       -       -       -       -       (40 )     -       -       -       -  
                                                                                         
Stock options issued to a director (note 3)
    -       -       -       -       -       -       5,473,907       -       -       -     $ 5,473,907  
                                                                                         
Net income for the year (restated - note 3)
    -       -       -       -       -       -       -       -       8,213,583       -       8,213,583