10-K 1 cxdc_10k-123115.htm FORM 10-K FOR THE FISCAL YEAR ENDED 12/31/2015
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015
or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _____________

Commission File No. 001-34546

 
CHINA XD PLASTICS COMPANY LIMITED
 
 
(Exact name of registrant as specified in its charter)
 


Nevada
 
04-3836208
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
No. 9 Dalian North Road, Haping Road Centralized Industrial Park,
 Harbin Development Zone,
Heilongjiang Province, P. R. China
 
150060
(Address of principal executive offices)
 
(Zip Code)

Registrant's telephone number, including area code: (86) 451-8434-6600

Securities registered pursuant to Section 12(b) of the Act:


Title of each class
 
Name of each exchange on which registered
Common Stock, $0.0001
 
NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   No 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes    No 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes       No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes     No







Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer  
Accelerated filer  
   
Non-accelerated filer  
(Do not check if a smaller reporting company)
Smaller reporting company  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes   No

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2015 was approximately $102,796,027

As of March 10, 2016, there were 49,406,191 shares of common stock, par value US$0.0001 per share, outstanding.

Documents incorporated by reference: None.



CHINA XD PLASTICS COMPANY LIMITED
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015


Table of Contents

   
PART I 
 
  2
 
Item 1
Business
  2
 
Item 1A
Risk Factors
  36
 
Item 1B
Unresolved Staff Comments
  49
 
Item 2
Properties
  49
 
Item 3
Legal Proceedings
  50
 
Item 4
Mine Safety Disclosures
  50
   
PART II
 
  51
 
Item 5
Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  51
 
Item 6
Selected Financial Data
  53
 
Item 7
Management's Discussion and Analysis of Financial Condition and Results of Operations
  54
 
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
  71
 
Item 8
Financial Statements and Supplementary Data
  72
 
Item 9
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
  72
 
Item 9A
Controls and Procedures
  72
 
Item 9B
Other Information
  74
   
PART III
 
  75
 
Item 10
Directors, Executive Officers and Corporate Governance
  75
 
Item 11
Executive Compensation
  83
 
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  94
 
Item 13
Certain Relationships and Related Transactions and Director Independence
  96
 
Item 14
Principal Accountant Fees and Services
  98
   
PART IV
 
  99
 
Item 15
Exhibits, Financial Statement Schedules
  99
   
Financial Statements
 
Index to Consolidated Financial Statements
  F-1
Report of Independent Registered Public Accounting Firm
  F-2
Consolidated Balance Sheets
  F-3
Consolidated Statements of Comprehensive Income
  F-4
Consolidated Statements of Changes in Equity
  F-5
Consolidated Statements of Cash Flows
  F-6
Notes to the Consolidated Financial Statements
  F-7


1



PART I

ITEM 1.   BUSINESS.


Our Business

China XD Plastics Company Limited ("China XD", "we", and the "Company", and "us" or "our" shall be interpreted accordingly) is one of the leading specialty chemical companies engaged in the research, development, manufacture and sale of modified plastics primarily for automotive applications in China and to a lesser extent, in Dubai, United Arab Emirates ("UAE").  Through our wholly-owned subsidiaries Heilongjiang Xinda Enterprise Group Company Limited ("HLJ Xinda Group") and AL Composites Materials FZE ("Dubai Composites"), we manufacture and sell polymer composite materials (a broader category including modified plastics), primarily for automotive applications. We develop our products using our proprietary technology through our wholly-owned research laboratory, Heilongjiang Xinda Enterprise Group Macromolecule Material Research Center Company Limited ("HLJ Xinda Group Material Research"). HLJ Xinda Group Material Research is a professional macromolecular material research and development institution and has 361 certifications from manufacturers in the automobile industry as of December 31, 2015. We are the only company certified as a National Enterprise Technology Center in modified plastics industry in Heilongjiang Province.  Our research and development (the "R&D") team consists of 362 professionals and 11 consultants, including one consultant who is a member of the Chinese Academy of Engineering. As a result of the combination of our academic and technological expertise, we have a portfolio of 278 patents, 10 of which we have obtained the patent registration in China and the applications for the remaining 268 of which are pending in China as of December 31, 2015. 

Modified plastics are produced by changing the physical and/or chemical characteristics of ordinary resin materials. In order for plastics to be used to produce automobile parts and components, they must satisfy certain physical criteria in terms of mechanical functionality, stability under light and heat, durability, flame resistance, and environmental friendliness. Our unique proprietary formulas and processing techniques enable us to produce low-cost high-quality modified plastic materials, which have been certified by many of the major domestic and international automobile manufacturers in China. In addition, we also provide specially engineered plastics and environment-friendly plastics for use in oil-field equipment, mining equipment, vessel-propulsion systems and power station equipment.

China XD's primary end-market is the Chinese automotive industry that has been rapidly growing for the past few years where our modified plastics are used by our customers to fabricate the following auto components: exteriors (automobile bumpers, rearview and sideview mirrors, license plate parts), interiors (door panels, dashboard, steering wheel, glove compartment and safety belt components), and functional components (air conditioner casing, heating and ventilation casing, engine covers, and air ducts). Our specialized plastics are utilized in more than 28 automobile brands manufactured in China, including leading brands such as AUDI, Mercedes Benz, BMW, Toyota, Buick, Chevrolet, Mazda, and VW Passat, Golf, and Jetta. As of December 31, 2015, 361 of HLJ Xinda Group's automotive-specific modified plastic products have been certified by one or more of the automobile manufacturers in China and are in commercial production. As of December 31, 2015, 144 of our products were in the process of product certification by automobile manufacturers. In addition, since the second quarter of 2014, the Company has developed and maintained its presence in the Republic of Korea (the "ROK") by selling to a ROK customer primarily higher-end PA66 and plastic alloy, which embarked our entry into the international market.

We operate three manufacturing bases in Harbin, Heilongjiang in the People's Republic of China (the "PRC"). In addition, we completed and started the trial production in the plant in Dubai, UAE with additional 2,500 metric tons ("Phase 1") targeting high-end products for the overseas markets.  As of December 31, 2015, in domestic market, we had approximately 390,000 metric tons of production capacity across 84 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwanese conveyer systems. Prior to December 2012, we had approximately 255,000 metric tons of annual production capacity across 58 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwan conveyer systems. In December 2012, we further expanded our third production base in Harbin with additional 135,000 metric tons of annual production capacity, bringing total installed production capacity in our three production bases to 390,000 metric tons with additional 30 new production lines. In December 2013, we broke ground on the construction of our fourth production base in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, expecting to bring total domestic installed production capacity to 690,000 metric tons with additional 70 new production lines at the completion of the construction of our fourth production base. Sichuan Xinda Enterprise Group Co., Ltd. ("Sichuan Xinda") has supplied to its customers since 2013, backed by production capacity in our Harbin production base. To streamline the management in Sichuan, the Company completed a restructuring in July 2015 by merging its subsidiary in Nanchong City, the entire registered capital (US$99.99 million) of which was owned by Xinda (Heilongjiang) Investment Co., Ltd, into Sichuan Xinda.  The Company expects Sichuan facility to be completed around the middle of 2016. In order to meet the increasing demand from our customer in the ROK and to develop potential overseas markets, on January 25, 2015, AL Composites Materials FZE obtained a leased property of approximately 10,000 square meters from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE with constructed building comprising a warehouse, office and service block with lease term granted 15 years. The Company is planning to complete installing 75 production lines with additional 14,000 metric tons ("Phase 2") of annual production capacity in that property at the beginning of 2017, bringing total production capacity in Dubai to 16,500 metric tons.
 
 
2


 
Our History

China XD, formerly known as NB Payphones Ltd. and NB Telecom, Inc., was originally incorporated under the laws of the state of Pennsylvania on November 16, 1999. On December 27, 2005, we migrated to the state of Nevada.

On December 24, 2008, we acquired Favor Sea Limited ("Favor Sea (BVI)"), a British Virgin Islands corporation, which is the holding company for Harbin Xinda Macromolecule Material Co., Ltd. ("Harbin Xinda") and Harbin Xinda's wholly-owned subsidiary, Harbin Xinda Macromolecule Material Research Institute ("Research Institute"). Harbin Xinda is a high-tech manufacturer and developer of modified plastics, which was established in September 2004 under the laws of the PRC. In December 2010, our management determined that the Research Institute could not meet the Company's development needs, including meeting the criteria to be a National Enterprise Technology Center. As a result, the Research Institute was deregistered.

On June 11, 2010, Harbin Xinda established Harbin Xinda Macromolecule Material Engineering Center Co., Ltd. ("Xinda Engineering Center") to focus on research and development of high-end products such as engineering plastics, modified PA, alloy plastics and modified ABS. Xinda Engineering Center was deregistered in 2012 as part of our group restructuring.

On October 14, 2010, Harbin Xinda established Heilongjiang Xinda Software Development Company Limited ("Xinda Software") to develop software applications that provide certain standard and programmable technical services remotely.

On December 10, 2010, Harbin Xinda established Harbin Xinda Macromolecule Material Research Center Co., Ltd. ("Xinda Macromolecule Research Center") to focus on research and development of products such as modified PP and environment-friendly modified plastics.  Xinda Macromolecule Research Center was deregistered in 2012 as part of our group restructuring.

On March 31, 2011, Harbin Xinda established a wholly-owned subsidiary, Harbin Xinda Macromolecule Material Testing Technical Co., Ltd. ("Xinda Testing"), to develop a nationally recognized testing laboratory and provide testing services of macromolecule materials, engineering plastics and other products.

In response to our rapid business expansion and in order to be eligible for beneficial tax policies for certain regions in China, we developed a group restructuring plan.

From August 2011 to December of 2012, Harbin Xinda established (i) Harbin Meiyuan Enterprise Management Service Company Limited ("Meiyuan Training") in Harbin to provide all year round training to both our existing and new employees, accommodate our customers and business partners as well as host industry conferences; and (ii) Heilongjiang Xinda Enterprise Group Technology Center Company Limited ("Xinda Group Technology Center") in Harbin to focus on long-term research and development projects.

HLJ Xinda Group, a wholly-owned subsidiary of Xinda HK Company Limited and the proposed direct parent company of all of our PRC-based operating subsidiaries after the group restructuring was established in December 2011. Harbin Xinda Plastics Material Research Center Company Limited ("Xinda Material Research Center") was established in December 2011 to focus on research and development of products close to commercialization phase.

Xinda Group Material Research was established in December 2012.
 
 
3


During the year ended December 31, 2013, following the overall reorganization plan, the Company completed the deregistration of Haikou New Materials, Haikou Technical Center and Haikou Software and merged Xinda Testing and Xinda Material Research Center into HLJ Xinda Group Material Research in 2013, whose major functions included technical support for our production bases, research and development of modified plastic products for applications in areas such as automotive, high-speed rail, aircraft and others, customer post-sales support, and collaboration with industry leading universities and institutions.

On March 19, 2013, Xinda Group established Sichuan Xinda, which subsequently established Sichuan Xinda Enterprise Group Meiyuan Training Center Co., Ltd. ("Sichuan Meiyuan"), Sichuan Xinda Enterprise Group Software Development Co., Ltd. ("Sichuan Software"), and Sichuan Xinda Enterprise Group Sales Co., Ltd ("Sichuan Sales") in April 2013, in order to expand our business in Southwest China.

On April 23, 2013, Xinda Holding (HK) Co, Ltd. ("Xinda Holding (HK)"), formerly known as Hong Kong Engineering Plastics Co., Ltd., set up Xinda (HK) International Trading Company Ltd ("Xinda (HK) Int'l Trading") for import and export business through Hong Kong. 

On January 8, 2014, Xinda Holding (HK) set up Dubai Composites for international expansion business.

On March 5, 2014, Xinda Holding (HK) set up Xinda (HK) Trade Co., Ltd ("Xinda Trading") for import and export business through Hong Kong.

On June 17, 2014, Xinda Holding (HK) set up Xinda (Heilongjiang) Investment Co., Ltd. ("Heilongjiang Investment") for its domestic investment activities in PRC.

On August 1, 2014, Heilongjiang Investment set up Nanchong Xinda Composite Materials Co., Ltd ("Nanchong Composite Materials") in order to expand our business in Southwest China and other regions in its proximity.

On November 12, 2014, Heilongjiang Investment set up Heilongjiang Xinda Meiyuan Tennis Club Co., Ltd. ("Meiyuan Tennis Club") in order to replace the Meiyuan Training.

In July 2015, Nanchong Composite Materials merged into Sichuan Xinda as part of the efforts to streamline the Company’s management in Sichuan.

On October 16, 2015, Xinda Holding (HK) set up Xinda CI (Beijing) Investment Holding Co., Ltd. ("Beijing Investment") in order to manage domestic companies in mainland China.


4


Corporate Structure

The corporate structure of the Company as of December 31, 2015 was as follows:
 
 
 

 
5




Our Industry

According to a research report prepared exclusively for the Company and issued by Frost & Sullivan in 2015, China is estimated to have consumed approximately 20.9 million Metric Tons ("MT") of modified plastic products in 2015, representing an increase of 11.9% compared to 2014. With China being the world's leading manufacturing center and with rising domestic individual consumption, we believe that demand for modified plastics from China will continue to increase in the foreseeable future. As shown in Figure 1, the market demand for modified plastics will reach 30.3 million MT in 2019, representing compound annual growth rates ("CAGR") of 9.8% and 9.7% by sales volume and revenues from 2015 to 2019. Currently, demand for our products is primarily driven by the Chinese automotive industry. In order for plastics to be used in automobile parts and components, they must satisfy specific physical criteria in terms of mechanical functionality, stability under light and heat, durability, flame resistance, and environmental friendliness. Modified plastics are usually found in interior materials, door panels, dashboards, mud flaps, chassis, bumpers, oil tanks, gas valves, grilles, unit heater shells, air conditioner shells, heat dissipating grids, wheel covers, and other components.

Figure 1: Analysis of Chinese Modified Plastics Market: Sales Volume and Revenue (China), 2009-2019E




                                 

6

 

According to Frost & Sullivan's report, the Chinese automotive modified plastics market has experienced rapid deelopment from 2010 to 2013 with nearly a three-fold growth in terms of revenue and sales volume during this period. Due to the drop of crude oil price since the latter half of 2014, market price of modified plastics has experienced an obvious decrease, which undulates sales revenue of the market in 2015. However the overall revenue of Chinese modified plastics has kept stable increase as the fast growing sales volume in different downstream application fields. The market demand is projected to reach 20.9 million MT in 2015. As illustrated in Figure 2, the Chinese automotive modified plastics market is expected to sustain rapid increase in terms of sales volume and revenues with CAGR of 13.8% and 12.5% from 2015 to 2019, respectively. Approximately 31.5% of the automotive modified plastic consumed in 2014 was imported from outside of the PRC or manufactured by multinational and joint venture companies. We believe that the demand for automotive modified plastic in China will grow continuously due to the fast growing Chinese automotive market, the increasing use per unit of plastic content in automobiles and favorable government incentives and regulations. Moreover, domestic producers will likely gain larger market share from imports as they are able to manufacture products with comparable quality at highly competitive prices and close proximity to their customers. We believe that the following are the key drivers for the automotive modified plastic industry in China.

Figure 2: Analysis of Chinese Automotive Modified Plastics Market: Sales Volume and Revenue (China), 2009-2019E
Source: Frost & Sullivan
 
 

 
According to the statistics by the China Association of Automobile Manufacturers ("CAAM") in 2015 China's production volume of automobiles increased from 13.8 million units in 2009 to 24.5 million units in 2015. The market is expected to slow down after several years' rapid growth, though a comparatively high CAGR of 13.8% from 2014 to 2019, reaching 62.0 million units in 2019. China has exceeded the United States to become the world's largest auto market as measured by the number of automobiles sold. We believe the growth momentum in China's auto sales will remain strong over the next four years. The automotive industry in China is still in its infancy with passenger car ownership of 106 vehicles per 1,000 inhabitants in 2014, which is significantly below Europe's average of 793 and United States' average of 503 according to National Bureau of Statistics, US Department of Energy, Eurosta, Frost & Sullivan.
 
7


Figure 3: Overview of Chinese Macro Economy:
 
Vehicle Per 1,000 People Comparison (Units per 1,000 People), 2009-2019E
 
 


 
 
Source: National Bureau of Statistics, US Department of Energy, Eurosta, Frost and Sullivan
 

According to the National Bureau of Statistics, the total number of Chinese automobile parts has experienced a rapid growth because of the economic development and the incentive policies issued by the government. The number kept a booming trend all the way from 62,880.0 thousand units in 2009 to 144,750.0 thousand units in 2014, and is forecasted to hit a record of 244,264.0 thousand units by 2019, with a CAGR of 10.7% between 2015 and 2019 as shown in Figure 4.

 
8

 

 
Figure 4: Overview of Chinese Macro Economy: Growth of Automotive Parts, 2009-2018E

                 
 
Source: National Bureau of Statistics, Frost and Sullivan
 
 
Rising personal income in China is one of the key drivers for the rapid growth of the Chinese automobile industry. As shown in Figure 5, China has shown strong economic growth with its with its GDP increasing from approximately RMB 34,562.9 billion in 2009 to RMB 69,238.0 billion in 2015, and is expected to sustain the steady growth from 2015 to 2019.  Per Capita Consumption Expenditure of Urban Household also shows an optimistic picture with a total nominal increase of 62.8% between 2009 and 2014, and is forecasted to reach RMB 28,243.9 by the end of 2019. Moreover, cars have become more affordable in China as local or joint venture automobile manufacturers continuously expand their production to achieve economies of scale to lower production cost and source cheaper auto parts locally. Growing income and decreasing vehicle prices will continue to make car ownership more affordable for China's rising middle class.
 
9


Figure 5: Overview of Chinese Macro Economy: Growth of Nominal GDP and Per Capita Consumption Expenditure of Urban Household (China), [2009-2019E].

 
 


 
Source: National Bureau of Statistics, International Monetory Fund and Sullivan
 
Benefit and Increasing Use of Plastics in Automobiles

(1) Cost Reduction: The primary demand driver for modified automotive plastics arises out of the cost-reduction characteristics evidenced by the plastics material inclusion in the automobile manufacturing process. Modified plastics can deliver the same performance as metallic materials at approximately a tenth of the cost. In addition, modified plastics can substitute some kinds of more expensive engineering plastics. This benefit of modified plastics will become more significant with the increasing competition in automobile manufacturing industry to improve efficiency and reduce costs.

(2) Vehicle Emissions Reduction: Plastic components impact fuel efficiency by saving approximately 2.5 liters of fuel per kilograms ("kg") used (equivalent to 6 kg of CO2 emissions) over the lifetime of the vehicle. Automobile manufacturers have been reducing vehicle weights in an attempt to reduce emissions and increase efficiencies. Modified plastics reduce the weight of components by 40% compared with traditional metallic materials.

(3) Performance and Safety Improvement: The development of advanced plastics applications lead to the improvement in performance through reducing the number and weight of the vehicle parts, causing the fuel consumption per vehicle to drop significantly. In addition, the lower net weight of the vehicles improves handling performance and thereby eliminates the likelihood of losing control in case of emergency stops. The involvement of modified plastics in automotive applications results in significant improvement of the safety features of the vehicle parts, like seat belts, air bags, and air bag containers in the recent years.

(4) New Applications:  Plastics reduce the number of the required parts used in automobile manufacturing and introduce new design possibilities. Conventional materials struggle to compete against this open innovation platform associated with the plastics industry. In addition, the performance benefits associated with plastic materials continue to create a competitive advantage for the plastics industry.

(5) Increasing Use of Plastics per Vehicle: Weight of modified plastics per vehicle in China continually increased from 2008 to 2012, and is forecasted to reach 169.8 kg by the end of 2017, with a growth rate of 40.2% as shown in Figure 6. Although the weight of modified plastics per vehicle in China will still be less than that in North America and Europe, the highest growth rate indicates the huge potential for market growth. In 2012, plastic use in China is estimated to be about 128.6 kg per vehicle, whereas models imported from Europe contain on average as much as 219 kg per vehicle. In addition, the Chinese government's goals regarding electric and hybrid vehicles may also push the market further as weight concerns are more important for these vehicles than for traditional passenger cars.
 
 
10


 
Figure 6: Comparison of Weight of Modified Plastics per Vehicle in China, North America, and Europe, 2008, 2012, 2017E
 
 
 
 
Source: Frost & Sullivan, American Chemistry Council's Plastics Industry Producers' Statistics Group

 Increasing Substitution of Imports

Though China's automotive plastic market has been dominated by foreign or joint venture ("JV") companies, Chinese suppliers are continually gaining market share. It is estimated that automotive plastics imported and manufactured by multinational and JV companies accounted for 31.5% of the total China automotive plastic supply in 2014, decreasing from 35.4% in 2010 according to a report by Frost & Sullivan. Compared to foreign competitors including JV companies, local manufacturers can largely benefit from the lower cost and geographical convenience in China and their product sales can be customized with time-efficient after sales services and technical supports. As the local production capacity of both domestic and foreign companies has been expanding, share of imports and multiple national companies is expected to decrease to 21.5% by the end of 2019, while the share of domestic manufacturers is forecast to rise to 78.5% in 2019 as they expand at a greater rate than MNC and JV in China.

The financial crisis beginning in 2008 and the European debt crisis beginning in 2011 forced global automakers and suppliers to concentrate on their cost structure and pricing mechanisms. Many automakers accelerated cost reduction initiatives. Moving manufacturing operations to and sourcing raw materials from low cost regions have emerged as key measures to save costs. With its huge consumer market, low labor costs and high-quality manufacturing and logistics infrastructure, China is a location favored by global auto and component makers who source parts and components not only for their local operations in China but also for their global operations. As a result, we believe that China's local plastic suppliers will benefit from such global outsourcing trends and increasingly become a good substitute for expensive imported plastic products. JV manufacturers based in China in automotive plastics sector have been slow to invest and expand in China.

Favorable National Government Policies

In the past decade, the Chinese government has adopted a number of policies and initiatives intended to encourage the development of the Chinese modified plastics industry and stimulate the growth of the Chinese automobile industry. 

Since 2000, modified plastics, including engineering plastics, have been categorized as a prioritized industrialization area by a series of government guidelines or development plans. Some of these policies include: 

· It is expected that the 13th Five-Year Plan to be launched in 2016 is likely to include favorable policies toward advanced technologies in developing new materials, aviation and space.

It was stated in the "Outline of China's Twelfth Five-year Plan (2011)" that new functional materials, advanced structural materials, common base materials, fiber of high performance and its compounded material are key development directions of new material industry.
 
 
11

 

 
It was stated in the "Catalogue for Guidance on Adjustment of Industrial Structure (2011)" promulgated by the National Development and Reform Commission on March 27, 2011, that the country is currently promoting the development of production equipment of polycarbonate by the use of non-phosgene method, with annual output of 60000t/year and above, production of engineering plastic including liquid crystalline polymer (LCP) and development and application of bleeding modification and alloying; development and production of water – absorbed resin, conductible resin and biodegradable polymers; development and production of new polyamide including nylon 11, nylon 1414 and nylon 46, nylon with long carbon chain and heat resistant nylon.

It was stated in the "Guidance on Key Areas of Industrialization of High Technology with Current Priority in Development (2011)" jointly promulgated by the National Development and Reform Commission, the Ministry of Science and Technology, the Ministry of Commerce and the State Intellectual Property Office on June 23, 2011 that modified technologies applied to general plastics, including new engineering plastics and plastic alloy, new special engineering plastics, fire resistant modified plastics, and modified technology of general plastics, are currently prioritized areas to develop and industrialize in China's macromolecule materials sector.

A series of modified plastics technologies have been listed in the "National Support for Key High-tech Fields" as stated in the Circular on the Issuance of the Administrative Measure for the Recognition of High-tech Enterprise jointly promulgated by the Ministry of Science and Technology, Ministry of Finance, the State Administration of Taxation in April 2008. These technologies include special engineering plastics, macromolecular compound or new synthetic modified, etc.

Determining the detailed standards for average fuel consumption for passenger car manufacturers: 1) In 2015 average fuel consumption for passenger car reach 0.069L per kilometer; 2) In 2020 average fuel consumption for passenger car reach 0.05L per kilometer. It will accelerate the automobile lightweight progress.

In addition, with the Chinese government strongly encouraging the production of more fuel-efficient and environmentally friendly vehicles, as one means to help resolve the nation's worsening air pollution problem, especially in big cities, opportunities abound for suppliers of plastics materials and auto components.

We believe that the above government measures and programs will continue to accelerate the demand for automotive modified plastics in China.

Tightening Trend and Local Government Policies

Despite the favorable national government policies as set forth above, in the past couple of years, the Chinese government has implemented certain measures to control the pace of economic growth and discontinued certain stimulus measures implemented to deal with the recent global financial crisis, including incentives for consumers to purchase automobiles.

Since 2011, in order to resolve the extreme traffic congestion, Beijing government has been implementing a vehicle purchase quota policy, which limits the maximum vehicles sold in Beijing per month to 20,000. Other cities which have begun to show signs of traffic congestion have also begun to implement similar measures to control traffic congestion, including the limited automobile licenses policy implemented in Shanghai and Tianjin and the imposition of congestion charges in Shenzhen.  The termination of nation-wide preferential policies can negatively affect consumer demand for new vehicles, and local restrictive measures over automobile purchases in major cities may result in the reduction in the sale of vehicles nationwide.
 
 
12


Our Products

Modified plastic is processed by adding chemical agents to basic plastics to generate or improve certain physical and/or chemical characteristics of plastic, such as heat resistance, hardness, tensile strength, wear resistance, and flame resistance. Based on the type of materials, our products include eleven categories: Modified Polypropylene (PP), Modified Acrylonitrile Butadiene Styrene (ABS), Modified Polyamide 66 (PA66), Modified Polyamide 6 (PA6), Modified Polyoxymethylenes (POM), Modified Polyphenylene Oxide (PPO), Plastic Alloy, Modified Polyphenylene Sulfide (PPS), Modified Polyimide (PI), Modified Polylactic acid (PLA) and Poly Ether Ether Ketone (PEEK).

Our products are organized into eleven product groups, based on their physical characteristics, as set forth below:

 
Product Group
 
Number of Products Certified
 
 
Characteristics
Automotive or Other Application
Modified Polyamide 66 (PA66)
   
34
 
Abrasive resistance, self-lubrication, high strength, high temperature resistance, and flame resistance
Roof handles, door knobs, transmission connection plates, fan shrouds, glovebox assembles, engine hoods, stents baffle blocks, trajectory, fasteners, etc.
             
 Modified Polyamide 6 (PA6)
   
32
 
High temperature resistance, weather resistance, high strength
Inner door knobs, door knobs, hand shanks, transmission connection plates, visor bases, etc.
             
 Plastic Alloy
   
110
 
High impact resistance, high temperature resistance, flame resistance, platable
Instrument panels, instrument frames, shields, automotive center stacks, speaker covers, grids, fog light shells, battery bases, seat armrests, luggage holders, etc.
             
Modified Polypropylene (PP)
   
160
 
Non-toxic, odorless, low density, insulated, and low moisture uptake
Instrument panels, inner panels, columns, bumpers, air conditioner shells, door knobs, mudguards, etc.
             
Modified Acrylonitrile butadiene styrene (ABS)
   
22
 
High rigidity, low density, rigidity toughness balance, slow burn, and corrosion resistance
Heat dissipating grids, steering wheel shells, cup holders, seal banks, instrument panels, inner door knobs, wheel covers, etc.
             
Polyoxymethylenes (POM)
   
1
 
High strength, low moisture uptake, size stability, high glass, high temperature resistance, fatigue resistance
Heater fans, signal lamps switches, gas reseior covers, door knobs, hand shanks, fuel pumps, dynamic valves, accelerator pedals, rampetior elements, etc.
             
Polyphenylene Oxide (PPO)
   
1
 
High rigidity, flame retardant, abrasive resistance, pollution resistance, high temperature resistance
Battery plants, lamp holder insulation parts, anti freezer grids, booms, instrument panels, window frames, tool cabinet covers, handwheel boxes, heater holders, heater baffles, cooling system connections, pump strainer nets, ammeler frameworks, reaview, etc.
             
Modified Polyphenylene Sulfide (PPS)
   
1
 
High temperature resistance, corrosion resistance, radiation resistance, flame resistance, size stability
Air bleed control valves, pneumatic signal conditioners, sparks plug wire insulation covers, tachometer sensor covers, electrical pumps, fuel pump impellers and covers, air cylinder covers, water pump impellers, etc.
             
Modified Polylactic Acid (PLA)
   
-
 
Reproducible, good biological compatibility and totally degraded
Glove box handle, seat cover, rearview mirror shell, etc.
 
 
 
13

 
 
             
Modified Polyimide (PI)
   
-
 
Flame resistance, high strength, high temperature resistance, corrosion resistance
Compressor blade, piston ring, sealing washer, bushing, gear, brake block, etc.
             
PEEK*
   
N/A
 
Excellent mechanical and chemical resistance and temperature tolerance
Used in communications and transport electronics and electrical appliances, machinery, medical and analytical equipment
             
Total
   
361
     


*PEEK is primarily used in applications that are unrelated to automotive applications, which does not require certifications and is in the product development stage.


Raw Materials

The principal raw materials used for the production of our modified plastic products are plastic resins such as polypropylene, ABS and nylon. Polypropylene is a chemical compound manufactured from petroleum.  ABS is a common thermoplastic used to make light, rigid, molded products such as automotive body parts and wheel covers.  Nylon is a thermoplastic silky material. Approximately 54.4% of our total raw materials purchased by volume are sourced from overseas petrochemical enterprises and 45.6% from domestic petrochemical enterprises during the year ended December 31, 2015.

The Company has one-year renewable contracts with its major suppliers, which are distributors of petrochemical enterprises. Because the raw materials used in our products are primarily petroleum products, the rise or fall in oil prices directly affects the cost of the raw materials. We attempt to mitigate the increase or decrease in our raw materials prices by appropriately raising or lowering the price for our products to pass the cost or savings to our customers as part of our pricing policy.

Because raw materials constitute a substantial part of the cost of our products, we seek to reduce costs by dealing with major suppliers. During the year ended December 31, 2015, the Company purchased approximately 80% of the Company's raw materials from seven major suppliers. By dealing in large quantities with these major suppliers, we obtain reduced prices for raw materials, therefore reducing the cost of our products. If we were unable to purchase from these suppliers, we believe we would still have adequate sources of raw materials from other petrochemical distributors without material impact on the cost of our products.  

Research and Development

HLJ Xinda Group and Sichuan Xinda were organized to provide us with ongoing additions to our technology through advanced development methods, which represent the key to our competitive strength and success. Our goal is to utilize our state-of-the-art methods, equipment and our technical expertise to produce plastics of the highest quality that are cost-efficient for our customers. Toward this end, we have staffed Xinda Material Research Center and HLJ Xinda Group with 46 employees who have Ph.D. and/or Master's degrees, 284 employees who have Bachelor's degrees, and 25 employees with Associate Bachelor's degrees.  In addition, we have 11 consultants, including one consultant who is a member of the Chinese Academy of Engineering. On average, our employees have been working in our industry for more than three years, and our key R&D employees have on average more than 10 years of experience in our industry.

To supplement the efforts of our HLJ Xinda Group Material Research, we have cooperated with a number of the leading technology institutions in China. Besides providing specialized research and development skills, these relationships help us formulate cutting-edge research programs aimed at developing new technologies and applications in plastics engineering.

In addition, Dubai Composites focuses on more advanced research and development in high-end applications relative to our research and development efforts in China.
 
14

 

All our significant research and development activities are overseen by the members of our Scientific Advisory Board, which we have assembled from the leaders in China's chemical engineering industry.  Currently, the members of the Scientific Advisory Board are:

Shanyi Du: Member of Chinese Academy of Engineering, Professor of Harbin Institute of Technology
Xiabin Jing: Postdoctoral Advisor and Researcher of Changchun Institute of Applied Chemistry of the Chinese Academy of Sciences
Huixuan Zhang: President of Changchun University of Technology
Baohua Guo: Director of Tsinghua University Laboratory of Polymer
Kai Zheng: Secretary General of China Engineering Plastics Industry Association
Aimin Zhang: Professor of the State Key Laboratory of Polymer Materials Engineering Polymer Research Institute of Sichuan University
Chifei Wu: Professor of East China University of Science and Technology
Chao Bi: Associate Professor of School of Mechanical and Electrical Engineering of Beijing University of Chemical Technology
Tiejun Ge: Professor of Shenyang Chemical University
Yuezhen Bin: Professor of  Dalian University of Technology
Su Cheng: Associate Professor of Harbin University of Science and Technology

We host our annual seminar on the Development of the Macromolecule Materials Industry since 2008, during which we bring prominent industry-leading consultants to meet with our R&D staff. The annual seminar gives industry experts an opportunity to review and evaluate the Company's R&D initiatives in terms of technology advancement on the backdrop of government policies which support development of the modified plastics industry. During the seminar, industry experts assess the progress of the Company's R&D projects for the current year, and then evaluate the Company's R&D projects for the next year. Projects are reviewed in terms of overall strategy, alignment with government policies, market opportunities, efficient utilization of R&D and technical feasibility. 
We have been certified as a National Level Enterprise Technology Center, the only institution certified as such in the modified plastics industry in Heilongjiang. This certification makes us eligible for participation of issuing modified plastics industry standards, certain tax and tariff relief for scientific research and development, certain funding designated for National Enterprise Technology Center and municipal subsidies and Postdoctoral and Academy Member Workstation in Heilongjiang Province.

Our research and development expenses were US$21,061,345, US$29,434,680 and US$21,258,549 during the years ended December 31, 2015, 2014 and 2013, respectively.   
 
 
15

 

 
Intellectual Property

Patents

As a result of our collection of academic and technological expertise, we have 10 approved patents and 268 pending patent applications in China, as set forth in the following table:

No
Patent Name
Application No
Date
Status
1
A sprayed directly material used in car bumper
200810051570.8
December 10, 2008
Approved
         
2
Supercritical fluid rapid diffusion synthesis of nano calcium carbonate enhanced  microcrystalline polypropylene composites
200910073402.3
December 11, 2009
Approved
         
3
A method for automotive interior low odor, low VOC, high performance polypropylene composites
201010258937.0
August 20, 2010
Approved
         
4
A high heat-resistant PC/ASA alloy material and its preparation method
201010508149.2
October 15, 2010
Approved
         
5
A preparation method of polylactic acid used in auto dashboard
201110035716.1
February 11, 2011
Approved
         
6
A rapid detection method of the tensile property of modified PP used in auto specially by non-standard situation
201110094454.6
April 15, 2011
Approved
         
7
A high-powered aircraft tail composite material and its preparation process
201110196209.6
July 12, 2011
Approved
         
8
A preparation method of polypropylene resin foam particles with supercritical CO2 act
201110230302.4
August 12, 2011
Approved
         
9
A high toughness, low warpage and high-mobility PET/PBT/PC alloy reinforced by glass fiber and its preparation method
201110235189.9
August 17, 2011
Approved
         
10
A high impact and high heat-resistant flame retardant ABS composite material reinforce by glass fiber and its preparation process
201110268625.2
September 13, 2011
Approved
         
11
A high notched impact PA/ASA alloy material and its preparation method
201010230061.9
July 19, 2010
Pending
         
12
A method for automotive interior matte, anti-scratch modified polypropylene composites
201010230064.2
July 19, 2010
Pending
         
13
A high impact and high flow PC/ASA alloy material and its preparation method
201010258950.6
August 20, 2010
Pending
         
14
Nano-ZnO filled with modified PEEK film and its preparation method
201010258955.9
August 20, 2010
Pending
         
15
A lower mold shrinkage ratio method of calcium carbonate / polypropylene nanocomposites
201010230088.8
September 15, 2010
Pending
         
16
A preparation method of SiO2/CaCO3 nano-composite particles modified polypropylene
201010282042.0
September 15, 2010
Pending
 
 
16

 
 
         
17
An anti-aging, anti-yellowing, low odor polypropylene composite material and its preparation method
201010508177.4
October 15, 2010
Pending
         
18
A alloy material of high-impact, high-brightness ASA
201010543439.0
November 15, 2010
Pending
         
19
A high heat-resistant and high wear-resistant PEEX composite material and its preparation  process
201110347338.0
January 10, 2011
Pending
         
20
A preparation process of high weathering  color ASA resin
201110347336.1
February 11, 2011
Pending
         
21
A preparation method of the thermoplastic elastomers PP with high mobility and high resistance of deformation
201110035725.0
February 11, 2011
Pending
         
22
A preparation method of polymer composites with high toughness
201110035736.9
February 11, 2011
Pending
         
23
A special material of cooling grille with high heat resistance and high weather resistance
201110094466.9
April 15, 2011
Pending
         
24
A preparation process of ABS alloy with high impact performance and high heat resistance
201110122586.5
May 12, 2011
Pending
         
25
A preparation process of centralized control method used in plastic production line
201110122566.8
May 12, 2011
Pending
         
26
A preparation method of easily dispersed and easily processed polyprolene composite material
201110158511.2
June 14, 2011
Pending
         
27
A preparation method of high heat-resistant and high rigid PLA composite material reinforced by fully biodegrdable natural fiber
201110158512.7
June 14, 2011
Pending
         
28
A preparation process of the premixed screening system
201110158488.7
June 14, 2011
Pending
         
29
A rapid detection method of the impact property of modified plastics used in automobile specially
201110158528.8
June 14, 2011
Pending
         
30
A high impact PA6 composite material with core-shell toughening and its preparation method
201110196226.X
July 13, 2011
Pending
         
31
A preparation method of the plastic production line with high performance and high homogeneity
201110233488.9
August 16, 2011
Pending
         
32
A preparation method of polylactic acid used composite material modified by hydroxyapatite with supercritical water act
201110268687.3
September 13, 2011
Pending
         
33
A polypropylene composite material used in battery tank of new source of energy automobile and its preparation  method
201110347320.0
November 7, 2011
Pending
         
34
A high toughness, low warpage and low mold temperature PET/PA6 alloy reinforced by glass fiber and preparation method
201110347339.5
November 7, 2011
Pending
         
35
A preparation method of glass fiber reinforced polyether ether ketone with high strength and high heat resistance
201110399890.4
December 5, 2011
Pending
 
 
 
17

 
 
 
         
36
A high toughness of polycarbonate blends material and its preparation method
201110319832.6
December 20, 2011
Pending
         
37
A high-strength carbon fiber reinforced polyether ether ketone composite material and its preparation method
201210114931.5
April 20, 2012
Pending
         
38
A high-impact, green flame retardant PC/ABS alloy material and its preparation process
201210122281.9
April 25, 2012
Pending
         
39
A preparation method for heat-resistant and easy processing of natural fiber reinforced polylactic acid composites
201210147444.9
May 14, 2012
Pending
         
40
High performance halogen-free flame-retardant PC/ABS composite material and its preparation method
201210201826.5
June 19, 2012
Pending
         
41
A high temperature conductive PPO/PA6 alloy material and its preparation method
201210241856.9
July 13, 2012
Pending
         
42
High-performance, green flame retardant reinforced PA66 composites technology
201210260160.0
July 26, 2012
Pending
         
43
A preparation method of high encapsulation efficiency and stable release polylactic lysozyme drug microsphere
201210295154.9
August 20, 2012
Pending
         
44
An antistatic LSOH flame retardant PC/ABS alloy material and its preparation method
201210296750.9
August 20, 2012
Pending
         
45
A Supercritical carbon dioxide reactor pressure method for preparing polypropylene foamed material
201210298694.2
August 22, 2012
Pending
         
46
A free primer and  sprayed directly on the bumper composites
201210306240.5
August 27, 2012
Pending
         
47
An antimicrobial, dust suppression, halogen-free flame retardant ABS and its preparation process
201210305824.0
August 27, 2012
Pending
         
48
A preparation methods of ultra-hydrophobic microporous polymer film
201210358122.9
September 25, 2012
Pending
         
49
An extrusion grade sisal fiber reinforced polypropylene composite material and its preparation process
201210357867.3
September 25, 2012
Pending
         
50
A flame-retardant glass fiber reinforced PA66 and its preparation method
201210370558.X
September 25, 2012
Pending
         
51
A long glass fiber reinforced polypropylene material and its preparation method
201210362626.8
September 26, 2012
Pending
         
52
A modified Kevlar fiber reinforced PA66 material and its preparation method
201210369747.5
September 29, 2012
Pending
         
53
The chest protected belts
201220526299.0
October 15, 2012
Pending
         
54
A non-asbestos and non-metal materials brake pads composite material and its preparation method
201210395921.3
October 18, 2012
Pending
         
55
A high toughness wear-resistant fiberglass /PA6 composites for rail transit fasteners
201210396122.8
October 18, 2012
Pending
 
 
18

 
 
 
 
     
56
A glass fiber reinforced poly (ethylene terephthalate)/polycarbonate alloy
201210403197.4
October 22, 2012
Pending
         
57
A wear-resistant, anti-static, flame retardant ultra-high molecular weight polyethylene composite material
201210402814.9
October 22, 2012
Pending
         
58
A high impact, high heat-resistant PC/PBT alloy material and its preparation process
201210403095.2
October 22, 2012
Pending
         
59
A continuous aramid fiber reinforced POM materials and preparation methods
201210411967.X
October 25, 2012
Pending
         
60
Graphene/polymer conductive composites
201210411231.2
October 25, 2012
Pending
         
61
A production method of antimicrobial, hydrophilic polypropylene particle
201210411680.7
October 25, 2012
Pending
         
62
A glass fiber, SiO2 enhanced toughening polyphenylene sulfide material and its preparation method
201210439116.6
November 7, 2012
Pending
         
63
An alcohol solution PA66 material special for intake manifold and its preparation method
201210442251.6
November 8, 2012
Pending
         
64
An environmentally friendly self- aromatic polypropylene material and its preparation process
201210457403.X
November 15, 2012
Pending
         
65
A mechanical strength polypropylene power lithium battery separator and its preparation method
201210472283.0
November 21, 2012
Pending
         
66
A multilayer hot pressing method for preparing hydroxyapatite / polylactide composite
201210474211.X
November 21, 2012
Pending
         
67
Preparation of a glass fiber reinforced nylon 66/nylon 6 Composites
201310185041.8
May 20, 2013
Pending
         
68
An environmentally friendly foam polypropylene material and preparation method
201310185228.8
May 20, 2013
Pending
         
69
An ramie fiber reinforced polypropylene composite material and its preparation process
201310185514.4
May 20, 2013
Pending
         
70
A high mobility of polyvinyl alcohol/lignin WPC
201310203047.3
May 28, 2013
Pending
         
71
A preparation method of  reinforced, flame-retardant ABS material
201310367420.9
August 22, 2013
Pending
         
72
A applied to electrostatic spraying PPO/PA6 alloy material and its preparation method
201310367459.0
August 22, 2013
Pending
         
73
One kind of aramid pulp-reinforced PA66 composite material and preparation method
201310367404.X
August 22, 2013
Pending
         
74
Preparation of a high-performance fiber-reinforced polyphenylene sulfide composites
201310372289.5
August 24, 2013
Pending
 
 
19

 
 
         
75
One kind of anti-alcohol solution, low warpage reinforced nylon66 composite material and preparation method
201310372282.3
August 24, 2013
Pending
         
76
A high-gloss, free paint, scratch-resistant alloy material and preparation method
201310372789.9
August 26, 2013
Pending
         
77
A method for preparing an enhanced flame retardant rigid polyurethane composites
201310467797.1
October 10, 2013
Pending
         
78
A MARINE with wear-resistant ultra high molecular weight polyethylene composites
201310468060.1
October 10, 2013
Pending
         
79
Preparation method of impact-resistant strain of modified polylactic acid material
201310468059.9
October 10, 2013
Pending
         
80
A method for preparing low temperature resistance, scratch-resistant zipper jacket compound for cars
201310468076.2
October 10, 2013
Pending
         
81
A free spray paint bumper with modified material and preparation method
201310468057.X
October 10, 2013
Pending
         
82
An environmentally friendly fire-retardant, high-performance EVA composite material and preparation method
201310467812.2
October 10, 2013
Pending
         
83
A direct line of long glass fiber reinforced thermoplastic composite material and its preparation method
201010471859.6
October 12, 2013
Pending
         
84
A toughening wear-resistant alloy material and preparation method
201310556261.7
November 12, 2013
Pending
         
85
A high resistance temperature reinforced polyamide 6 material and preparation method
201310556569.1
November 12, 2013
Pending
         
86
Preparation of an aircraft engine surrounding high temperature polyimide composites
201310555389.1
November 12, 2013
Pending
         
87
Preparation of a high strength of continuous glass fiber reinforced nylon 6 material
201310555451.7
November 12, 2013
Pending
         
88
A highly weather-resistant polypropylene self-luminous material and preparation method
201310555483.7
November 12, 2013
Pending
         
89
A polypropylene foam material and preparation method
201310559024.6
November 13, 2013
Pending
         
90
One kind of aramid fiber / polyimide composite material and preparation method
201310559294.7
November 13, 2013
Pending
         
91
 An alloy NiMoB modified talc enhanced Bumper material and its preparation method
201310559588.X
November 13, 2013
Pending
         
92
Method for preparing porous polymer composite superhydrophobic  films
201310559589.4
November 13, 2013
Pending
         
93
A silicone toughening polyphenylene sulfide material and its preparation method
201310560625.9
November 13, 2013
Pending
 
 
 
20

 
 
         
94
A high toughness, wear-resistant rail fasteners with glass/nylon 6 Composites
201310646768.1
December 6, 2013
Pending
         
95
A high-gloss, avoid spraying PTT/PMMA rearview mirror Compound and its production process
201310652729.2
December 6, 2013
Pending
         
96
A keyboard and mouse with anti-bacterial perspiration modified plastics and its preparation method
201310676101.6
December 13, 2013
Pending
         
97
A high-strength lightweight hollow glass microspheres toughening PP material and preparation method
201310721731.0
December 25, 2013
Pending
         
98
a method for producing a heatproof polyimide composite used for aircraft engine periphery
201410144739.X
April 12, 2014
Pending
         
99
Preparation method of a special fiber reinforced skis
201410144740.2
April 12, 2014
Pending
         
100
A 2D carbon fiber heating cloth
201410144738.5
April 12, 2014
Pending
         
101
A kind of thermoplastic carbon fiber prepreg and its preparation method.
201410145300.9
April 14, 2014
Pending
         
102
The preparation method of a kind of special fiber cable oil and gas exploration
201410146070.8
April 14, 2014
Pending
         
103
a method for preparing super toughened polylactic acid base composite material
201410145345.6
April 14, 2014
Pending
         
104
Preparation method of a glass fiber reinforced polylactic acid base composite material
201410145388.4
April 14, 2014
Pending
         
105
Oil and gas exploration prepared by weaving method of special fiber cable
201410205870.2
May 16, 2014
Pending
         
106
A high toughness flame retardant PLA/PC alloy
201410206092.9
May 16, 2014
Pending
         
107
Preparation method of PBO fiber reinforced skis
201410205670.7
May 16, 2014
Pending
         
108
A thermosetting carbon fiber prepreg and its preparation method
201410205668.X
May 16, 2014
Pending
         
109
A method for producing a heatproof polyimide composite
201410205669.4
May 16, 2014
Pending
         
110
High thermal conductivity high heat resistance carbon fiber heating cloth
201410262691.2
June 13, 2014
Pending
         
111
An advantage of specially coupling treated carbon fibers reinforced PEEK
201410262651.8
June 13, 2014
Pending
         
112
A high dimensional stabilityexcellent abrasion resistance PEEK valve composite
201410262638.2
June 13, 2014
Pending
         
113
The preparation method of a high-strength PEEK composites
201410262746.X
June 13, 2014
Pending
         
114
Preparation of low temperature resistance special fiber reinforced skis
201410262850.9
June 14, 2014
Pending
 
 
21

 
 
         
115
The prepatation method of a kind of long glass fiber reinforced polypropylene
201410264159.4
June 16, 2014
Pending
         
116
A Method for preparing high performance PEEK/long glass fiber composites
201410263606.4
June 16, 2014
Pending
         
117
A kind of high thermal conductive composite fiber cloth
201410326610.0
July 10, 2014
Pending
         
118
Preparation  of one kind of ultra light and thin fiber reinforced skids
201410326799.3
July 10, 2014
Pending
         
119
A preparation method  of  jute fiber reinforced polypropylene
201410326831.8
July 10, 2014
Pending
         
120
A  method for producing a polyimide composite
201410326840.7
July 10, 2014
Pending
         
121
Preparation of Carbon Fiber Reinforced PI Composite Material
201410326641.6
July 10, 2014
Pending
         
122
Preparation of  a high tensile strength of PEEK composites
201410326616.8
July 10, 2014
Pending
         
123
The preparation method of  glass fiber reinforced polypropylene
201410365812.6
July 29, 2014
Pending
         
124
The preparation method of large tow carbon fiber cable
201410363355.7
July 29, 2014
Pending
         
125
A toughening polylactic and acid and its preparation method
201410362495.2
July 29, 2014
Pending
         
126
A high transparent heat-proof polylactic acid based composite material of the preparation method
201410413616.1
August 21, 2014
Pending
         
127
A preparation method  of PEAK modified epoxy resin system/carbon fiber cable
201410413361.9
August 21, 2014
Pending
         
128
The preparation of a high-strength ,high-temperature polyimide composites
201410413832.6
August 21, 2014
Pending
         
129
A high-heat-resistant, excellent in abrasion resistance sheet composite PEEK valve
201410413379.9
August 21, 2014
Pending
         
130
Toughened prepreg of carbon fiber and its preparation method
201410418312.4
August 25, 2014
Pending
         
131
A preparation method  of poly(lactic acid)/starch composite foams
201410489544.9
September 22, 2014
Pending
         
132
Preparation of  PI composite material by coupling agent treated glass fiber
201410481809.0
September 22, 2014
Pending
         
133
New type of composite carbon fiber heating cloth
201410481306.3
September 24, 2014
Pending
 
 
22

 
 
         
134
A kind of 3D printing poly lactic acid/leather powder composite materials and its preparation method
201410690528.6
November 27, 2014
Pending
         
135
A kind of  biodegradable polymer-docetaxel bonding medicine and its preparation method
201410690529.0
November 27, 2014
Pending
         
136
A preparation method of polyimide composite material
201410691532.4
November 27, 2014
Pending
         
137
A preparation method of high toughness biodegradable polylactic acid foam plastics
201410691587.5
November 27, 2014
Pending
         
138
A preparation of  antibacterial polylactic acid fiber
201410691901.X
November 27, 2014
Pending
         
139
A kind of poly lactic acid preparation method of lactide ring-opening polymerization
201410697015.8
November 28, 2014
Pending
         
140
A modification of PLA material and its preparation method
201410697822.X
November 28, 2014
Pending
         
141
A method of preparing high strength PLA composites
201410697790.3
November 28, 2014
Pending
         
142
A kind of  twin screw reactive extrusion method ring opening polymerization preparation of PLA
201410697838.0
November 28, 2014
Pending
         
143
A method of preparing high toughness PLA composites
201410697801.8
November 28, 2014
Pending
         
144
A kind of  organic molecule catalytic method for preparation of poly lactic acid
201410703493.5
November 30, 2014
Pending
         
145
A surface treatment of carbon fiber reinforced thermoplastic polyimide composites
201410703815.6
November 30, 2014
Pending
         
146
A carbon fiber-reinforced thermoplastic polyimide composites
201410703816.0
November 30, 2014
Pending
         
147
A preparation method  of the high toughness, high mobility PLA/PP Alloy
201410704664.6
December 4, 2014
Pending
         
148
A preparation method  of  the natural fiber/polylactic acid based composite materials
201410704612.9
December 4, 2014
Pending
         
149
A preparation method  of  the high toughness ABS/PLA-based alloys
201410704588.9
December 4, 2014
Pending
         
150
Nanoparticles/CF hybrid reinforced PEEK composite material and its preparation method
201410729719.9
December 5, 2014
Pending
         
151
Method for preparing thermoplastic polyimide composites
201410730324.0
December 5, 2014
Pending
         
152
Boron fiber reinforced polyimide
201410730235.6
December 5, 2014
Pending
         
153
A method of preparation of carbon fiber prepreg reinforced skis
201410729635.5
December 5, 2014
Pending
         
154
High mobility TLCP/PES/PEEK composite material and its preparation method
201410729614.3
December 5, 2014
Pending
         
155
An  PEEK/BaSo4 composite material  and its preparation method
201410730260.4
December 5, 2014
Pending
         
156
Foamed PP and graphite fiber composites preparation methods of enhancement of skis
201410729634.0
December 5, 2014
Pending
 
 
 
 
23

 
 
         
157
Method for increasing the compatibility of PPS/PEEK composite materials
201410730258.7
December 5, 2014
Pending
         
158
A compressor valve plate with a modified material and the method
201410733902.6
December 8, 2014
Pending
         
159
An automobile air conditioner drive gear with the modified materials and the method
201410733905.X
December 8, 2014
Pending
         
160
Method for preparing high toughness of polycarbonate/polylactic acid-based alloys
201410733882.2
December 8, 2014
Pending
         
161
A preparation method of high performance PEEK/carbon fiber composite material
201410747379.2
December 10, 2014
Pending
         
162
A preparation method of PEEK composite material
201410746978.2
December 10, 2014
Pending
         
163
A ternary no return toughening copolymer of polylactic acid composite material and its preparation method
201410747386.2
December 10, 2014
Pending
         
164
Sensor with high-performance fiber-reinforced PPS composites
201410747061.4
December 10, 2014
Pending
         
165
Glass fiber modified wearable Polyimide
201410747053.X
December 10, 2014
Pending
         
166
An advantage of specially prepared by coupling treatment sio2 reinforced PEEK
201410747062.9
December 10, 2014
Pending
         
167
A high-mobility PVA/wood flour composite biomass
201410747054.4
December 10, 2014
Pending
         
168
One kind of thermal evaporation method graphene Gec
201410746877.5
December 10, 2014
Pending
         
169
A highly heat-resistant polylactic acid/Wood Flour Composites
201410747097.2
December 10, 2014
Pending
         
170
Preparation of  an enhanced flame retardant polyurethane composites
201410747055.9
December 10, 2014
Pending
         
171
A process for producing fiber reinforced PA6 dedicated 3D printing materials processing using a special method
201410747082.6
December 10, 2014
Pending
         
172
A preparation method  of low warpage ABS special 3D printing materials
201410746979.7
December 10, 2014
Pending
         
173
A preparation method  of impact-resistant strain of modified polylactic acid materials
201410747377.3
December 10, 2014
Pending
         
174
A preparation method  of  chemical vapor deposition method graphene films
201410747180.X
December 10, 2014
Pending
         
175
A process for producing acrylic polyurethane high-solids coatings
201410747079.4
December 10, 2014
Pending
         
176
The use of core-shell particles toughening PC and PBT resin
201410747406.6
December 10, 2014
Pending
         
177
A high strength, high modulus of PEEK composite material and preparation method
201410747376.9
December 10, 2014
Pending
 
 
24

 
 
         
178
A modified high-performance carbon fiber composite materials
201410747395.1
December 10, 2014
Pending
         
179
A kind of microfluidics device prepared by the technology of 3D-printing
201410747264.3
December 10, 2014
Pending
         
180
A high-retardant polyvinyl alcohol/Wood Flour Composites biomass
201410746938.8
December 10, 2014
Pending
         
181
A method of processing aids (ACR) improved PVC materials
201410746804.6
December 10, 2014
Pending
         
182
A preparation method  of  polylactic acid film
201410746939.2
December 10, 2014
Pending
         
183
A catalyst with double function activation properties of  PLA and preparation method
201510949309.x
December 20, 2015
Pending
         
184
A  preparation method of high strength and biodegradable PLA composite material
201510949307.0
December 20, 2015
Pending
         
185
A high-performance PLA and its preparation method
201510949312.1
December 20, 2015
Pending
         
186
A kind of biodegradable recycling PLA material and its preparation method
201510949306.6
December 20, 2015
Pending
         
187
A high flexibility and heat resistance of  PLA modified material and its preparation method
201510949313.6
December 20, 2015
Pending
         
188
A kind of inorganic filler biodegradable 3D printing consumables and its preparation method
201510949636.5
December 20, 2015
Pending
         
189
A kind of biodegradable 3D printing toughening material and its preparation method
201510949638.4
December 20, 2015
Pending
         
190
A low-cost biodegradable 3D printing consumables and its preparation method
201510949637.x
December 20, 2015
Pending
         
191
A kind of biodegradable 3D printing reinforced material and its preparation method
201510949653.9
December 20, 2015
Pending
         
192
A biodegradable 3D printing alloy material and its preparation method
201510949651.x
December 20, 2015
Pending
         
193
A kind of suitable for 3D printing chest straps of polylactic acid materials and its preparation method
201510089885.1
February 28, 2015
Pending
         
194
A stereoscopic word based on 3D printing
201520229477.7
April 16, 2015
Pending
         
195
A kind of alloy material for 3D printing
201510179994.2
April 16, 2015
Pending
         
196
A method of preparation of water-soluble PLA support material for 3D printing
201510180141.0
April 17, 2015
Pending
         
197
A kind of  high performance PEEK/chopped carbon fiber composite material and the preparation method
201510180750.6
April 17, 2015
Pending
 
 
25

 
 
         
198
The preparation method of  a high toughness polylactic acid based composite material
201510180761.4
April 17, 2015
Pending
         
199
A nylon base composite material for medical strap by 3D printing and the preparation method
201510180170.7
April 17, 2015
Pending
         
200
A medical chest straps based on 3D printing technology and its preparation method
201510290769.6
June 1, 2015
Pending
         
201
A preparation method  of 3D printing support material of PVA with amylum filled
201510342646.2
June 19, 2015
Pending
         
202
A preparation method  of  ASA composite materials for  3D printing
201510342647.7
June 19, 2015
Pending
         
203
A kind of PBT/carbon fiber composite material and its preparation method
201510343448.8
June 20, 2015
Pending
         
204
A kind of anionic catalytic method for preparation of PLA
201510343470.2
June 20, 2015
Pending
         
205
A kind of suitable for 3D printing flexible material and its preparation method
201510343479.3
June 20, 2015
Pending
         
206
A gear assembly line pen container
201510372972.8
July 1, 2015
Pending
         
207
A 3D printing PA-12 composite materials and preparation methods
201510425924.0
July 21, 2015
Pending
         
208
A kind of  PC/ABS alloy for 3D printing
201510425922.1
July 21, 2015
Pending
         
209
A kind of  chitosan fill the PVA support materials for 3D printing
201510425923.6
July 21, 2015
Pending
         
210
A preparation methods of  PA-12 composite materials for 3D printing
201510425925.5
July 21, 2015
Pending
         
211
A preparation methods of  ASA composite materials for 3D printing
201510426034.1
July 21, 2015
Pending
         
212
A PCL materials for 3D printing
201510426518.6
July 21, 2015
Pending
         
213
A PLA/carbon fiber composite materials for 3D printing
201510444970.5
July 21, 2015
Pending
         
214
A ABS/carbon fiber composite materials for 3D printing
201510444857.7
July 21, 2015
Pending
         
215
A low-cost PEEK composite materials
201510442250.5
July 21, 2015
Pending
         
216
A kind of flame retardant PEK-C composite materials
201510442249.2
July 21, 2015
Pending
         
217
The preparation method  of  PLA composites with higher strength
201510513220.9
August 20, 2015
Pending
         
128
High flexibility and heat resistance of modified PLA material and its preparation method
201510513331.X
August 20, 2015
Pending
 
 
26

 
 
         
219
The preparation method of high toughness PLA composites
201510513381.8
August 21, 2015
Pending
         
220
A low hardness material for 3D printing and its preparation method
201510513507.1
August 21, 2015
Pending
         
221
A kind of high toughness ABS/PLA base alloy and its preparation method
201510513987.1
August 21, 2015
Pending
         
222
A preparation methods of  PLA/carbon fiber composite cable
201510513965.5
August 21, 2015
Pending
         
223
A kind of high toughness PC/PLA base alloy and its preparation method
201510513964.0
August 21, 2015
Pending
         
224
A PLA/PCL materials for 3D printing
201510513963.6
August 21, 2015
Pending
         
225
A preparation methods of biodegradable PP  composite materials
201510516595.0
August 21, 2015
Pending
         
226
A kind of twin screw reactive extrusion method ring opening polymerization preparation of PLA
201510516697.2
August 21, 2015
Pending
         
227
A 3D printing with PLA wood plastic composite material and its preparation method
201510516892.5
August 22, 2015
Pending
         
228
A kind of biodegradable plastic material
201510516891.0
August 22, 2015
Pending
         
229
A water-soluble 3D printing support material and its preparation method
201510517574.0
August 22, 2015
Pending
         
230
A kind of modified carbon fiber reinforced PEK-C composite materials
201510518210.4
August 24, 2015
Pending
         
231
The preparation method of  PLA by catalytic organic molecules
201510529386.x
August 26, 2015
Pending
         
232
A kind of alloy material for 3D printing
201510529324.9
August 26, 2015
Pending
         
233
The preparation method of  PLA by glue lactide ring-opening polymerization
201510529229.9
August 26, 2015
Pending
         
234
A PLA/PCL based materials for 3D printing
201510596497.2
September 19, 2015
Pending
         
235
A kind of  PC/PLA alloy for 3D printing
201510596496.8
September 19, 2015
Pending
         
236
A preparation methods of  PA-12 composite materials for 3D printing
201510596494.9
September 19, 2015
Pending
         
237
A straw filling masterbatch for car and its preparation method
201510596493.4
September 19, 2015
Pending
         
238
A kind of flame retardant straw man-made composite panels and its preparation method
201510598097.5
September 21, 2015
Pending
         
239
A kind of injection molding with straw powder/PP composite wood plastic material
201510598151.6
September 21, 2015
Pending
 
 
27

 
 
         
240
A free aldehyde a two-component straw green adhesive and its preparation method
201510598096.0
September 21, 2015
Pending
         
241
A radiation-hardened PEK-C composite materials
201510598127.2
September 21, 2015
Pending
         
242
A highly transparent and heat resistant PLA based composite materials and  preparation methods
201510605550.0
September 22, 2015
Pending
         
243
A long natural fiber/PLA based composite materials and  preparation methods
201510605549.8
September 22, 2015
Pending
         
244
A high toughness, high liquidity PLA/PP alloy and  its preparation method
201510605551.5
September 22, 2015
Pending
         
245
A kind of chemical modification of two-component straw without adhesive and  its preparation method
201510606502.3
September 23, 2015
Pending
         
246
A filler masterbatch containing straw fiber and its preparation method
201510620223.2
September 26, 2015
Pending
         
247
A kind of high toughness of polyolefin/PLA based alloy material  and its preparation method
201510620222.8
September 26, 2015
Pending
         
248
A straw in organic resin environmental protection plastic masterbatch and preparation method
201510620187.X
September 26, 2015
Pending
         
249
A kind of SEBS compound materials for 3D printing and preparation methods
201510625700.4
September 26, 2015
Pending
         
250
A straw combined with compound wood plastic material and its preparation method
201510621223.4
September 28, 2015
Pending
         
251
A 3D printing in toughening PLA material
201510678609.9
October 21, 2015
Pending
         
252
A 3D printing with imitation wood material and its preparation method
201510678582.3
October 21, 2015
Pending
         
253
A shock profile ASA modification and preparation method
201510678508.1
October 21, 2015
Pending
         
254
A kind of suitable for 3D printing PP/SEBS composite materials
201510678417.8
October 21, 2015
Pending
         
255
A weather resistance type ASA material preparation method
201510682952.0
October 22, 2015
Pending
         
256
A 3D printing with PA-12/carbon fiber composite material preparation method
201510774246.9
November 14, 2015
Pending
         
257
A PEEK composites used for 3D printing
201510776191.5
November 16, 2015
Pending
         
258
A 3D printing use environmental protection material and  its preparation method
201510781986.5
November 17, 2015
Pending
         
259
A 3D printing to strengthen PLA material
201510781729.1
November 17, 2015
Pending
         
260
A 3D printing for PVA/PLA composite materials
201510781822.2
November 17, 2015
Pending
 
 
 
28

 
 
         
261
Carbon fiber reinforced polylactic acid/hydroxyapatite composite material preparation method
201510781758.8
November 17, 2015
Pending
         
262
A PLA/PCL composite materials for 3D printing fixed with chest photo
201510781757.3
November 17, 2015
Pending
         
263
A carbon fiber thermoplastic composites material and its preparation method
201510802664.4
November 20, 2015
Pending
         
264
A kind of plant fiber modified PP composite material and its preparation process
201510801217.7
November 20, 2015
Pending
         
265
A straw biodegradable green tableware and its preparation method
201510800686.7
November 20, 2015
Pending
         
266
A straw packaging products and its preparation method
201510800422.1
November 20, 2015
Pending
         
267
A long natural fiber/polylactic acid based composite material  preparation method
201510807808.5
November 23, 2015
Pending
         
268
One kind of resistance to warpage reinforced polyamide 6 material and preparation method
201310250426.8
June 24,2013
Pending
         
269
Preparing a polyamide material reinforced with continuous glass fibers
201310250967.0
June 24,2013
Pending
         
270
A low-cost method for preparing hydrophobic material of polypropylene
201310250185.7
June 24,2013
Pending
         
271
A polypropylene self-luminous material and preparation method
201310250047.9
June 24,2013
Pending
         
272
A molding method suitable PEEK
201010173663.5
May 17,2010
Pending
         
273
A preparation process of heat-stable flame retardant reinforced nylon composite material
201310413691.3
September 12,2013
Pending
         
274
An anti-oxidation, high flow, flame retardant ABS and preparation process
201310413270.0
September 12,2013
Pending
         
275
An flax oil fiber reinforced polypropylene composite material and its preparation process
201310413287.6
September 12,2013
Pending
         
276
A preparation of applying to charging pile casing PC / ABS alloy compound
201310414007.3
September 12,2013
Pending
         
277
A no-spray, high durability, scratch-resistant, flame retardant ABS Preparation and Process
201310414024.7
September 12,2013
Pending
         
278
An antistatic, low smoke, flame retardant PC/ABS alloy materials and  preparing process
201310414847.X
September 13,2013
Pending
 
 
 
29

 

 
Trademark

We own the trademarks for our graphic logo and Chinese characters of "Xinda", which we use in packaging our products and marketing.

Certification Process

To meet the requirements of an automobile manufacturer, products used as component parts must pass a rigorous certification process by the manufacturer's technological quality assurance department before they can be approved for and used in production. The certification process consists of three stages.

First, the automobile manufacturer reviews the manufacturer of modified plastics.  The examination involves assessment of the operation history of the modified plastics manufacturer, their experience in providing component services, the specialization of their factory equipment, their research and development capacity and quality assurance systems. The manufacturer's operations need to meet the requirements of the automobile manufacturer. Once the initial review is passed, the modified plastics manufacturer will obtain a qualification as an automobile component manufacturer. This initial stage takes approximately sixteen to twenty two months to complete.

Second, the automobile manufacturer and the manufacturer of modified plastics reach an understanding about a product specification. The modified plastics manufacturer provides product research and development materials to the automobile manufacturer for inspection. The automobile manufacturer tests the product specification according to its standards and, if results are satisfactory, the modified plastics manufacturer obtains a product specification certification and enters the product certification stage. The second stage takes approximately eight months to complete.

Third, the parties complete technology R&D tests and perform automobile component finished parts tests.  The product undergoes additional testing by the automobile manufacturer and is used in road tests. This stage takes approximately five to fifteen months depending on whether the car model is an existing model or a new model. At the conclusion of the third stage, the modified plastics manufacturer receives a product certification from the automobile manufacturer.

We believe that the necessity, rigorousness, complexity and duration of the certification process make it difficult for outside competitors to enter the field in a short period of time. We have 361 certifications from automobile manufacturers as of December 31, 2015, which we believe is currently one of the largest portfolios of product certifications in the Chinese automobile modified plastics industry.

Sales and Marketing

Currently, our sales network focuses on the northeastern, northern, eastern and southwestern regions of China. We primarily sell to end customers through our approved distributors.  To a less extent, we also sell directly to end customers.  A typical customer development cycle starts when our R&D staff develops customized products for new end customers and obtains product certifications. These end customers are usually major automobile parts manufacturers who can only source from suppliers like China XD with product certifications granted by major automobile manufacturers. After we established relationships with these end customers and began to have large volume of transactions with them, we assign end customers to our approved distributors according to our internal policies. We also acquired end customers with our existing certifications from time to time. In 2015, approximately 92.6% of our sales were generated from approved distributors.

We enter into distribution agreements with local distributors in areas where large automobile manufacturers are located. The distribution agreements usually have a term of one year, during which period we can enter into distribution agreements with other distributors for our products. The distributors are responsible for marketing and distributing our products. Through the established sales channels, we can quickly respond to local market demand, address customer needs, enhance our ability to provide technical support and after-sales services, and lower our marketing expenses. Our general credit term with our distributors is three months and our collection of payment from distributors is not contingent upon their cash collection from end customers. We manufacture products according to orders received from our distributors and maintain a certain quantity of raw materials based on our experience and the distributors order patterns. By doing this we hope to ensure the smooth implementation of the production plan of major automobile manufacturers and avoid risks of inventory shortage.  We do not provide the distributors nor end customers with the right of return, price protection or any other concessions.  We allow for an exchange of products or return only if the products are defective.
 
30

 

We have been actively extending our distribution network to 8 distributors in 2015 and we believe we have good relationships with our distributors.  We believe that we have been able to secure and maintain strong relationships with end customers due to our existing certifications, advanced technologies and high product quality, which establish a higher barrier to entry for others. Most of the end customer relationships will be developed through our own R&D and sales force and maintained by our R&D and sales professionals and our distributors.  According to our distribution contracts, our distributors are prohibited from selling our competitors' products and required to use the product certificate, brand name and package standards set by us during the distribution period. After the expiration of the distribution contracts in absence of renewal, we retain the customer relationships with end customers.

While the pricing volatility of our raw materials is a primary cause of cost variations in our products, we are generally able to pass the cost of price changes in our raw materials to our customers, although there are timing delays of varying lengths depending upon volatility of raw material prices, the type of products, competitive conditions and individual customer arrangements.

We sell our products substantially through approved distributors in the PRC.  Our sales to our distributors are highly concentrated but have been gradually diversified in recent years. Sales to major distributors and direct customer, which individually exceeded 10% of our revenues, accounted for approximately 84.7%, 86.7% and 79.6% of our revenues for the years ended December 31, 2015, 2014 and 2013, respectively.  We expect to reduce our distributor concentration over time, although revenues from these distributors are expected to continue to represent a substantial portion of our revenue in the future.  Further information about our major distributors and the director customer, which individually exceeded 10% of our revenues, for the years ended December 31, 2015, 2014 and 2013, is set forth in Note 1 of the notes to the consolidated financial statements of this Annual Report on Form 10-K.

We have initiated our marketing efforts to develop new customers outside of China, in particular those in the Korean market. We have started offering certain high-end products, such as PA66 and long-chain PA12 manufactured from our Heilongjiang plants, directly to the Korean market since the second quarter of 2014. In addition, we completed and run the trial production in the plant in Dubai, UAE with additional 2,500 metric tons ("Phase 1") targeting high-end products for the overseas markets.  We plan to serve customers in oversea markets from our Dubai Composites plant.  Information about geographic revenue is set forth in Note 24 of the notes to the consolidated financial statements of this Annual Report on Form 10-K.

Competition

The PRC automotive modified plastics industry is growing rapidly and highly fragmented with the top three domestic producers occupying less than approximately 26.6% of the market shares in 2013 according to Frost & Sullivan's report. According to Frost & Sullivan's report, in terms of sales volume and production capacity, we are one of the leading domestic specialized manufacturers of modified plastic for automobile parts in China, with a market share of approximately 9.5% in 2014 and  11.6% in 2013. In 2015, our sales volume of automotive plastics was approximately 332,144 MT.  As of December 31, 2015, our annual production capacity of automotive plastics was 392,500 MT.

In 2014, the Company developed a customer from the ROK by the sales of mainly higher-end polymer composite materials. Our competitors in the ROK are mostly global brand name companies. Due to our high quality standard and competitive pricing, we are able to compete in and penetrate markets outside of China.

We installed 30 new product lines in December 2012, which are utilized primarily for the manufacture of higher value-added modified plastics products. The lines increased the Company's total production capacity by 135,000 MT to 390,000 MT per annum.

In addition, we completed and run the trial production in the plant in Dubai, UAE with additional 2,500 metric tons ("Phase 1") targeting high-end products for the overseas markets. 
 
 
31

 

 
Currently, HLJ Xinda Group's primary Chinese competitor in the automobile industry is Guangzhou Kingfa Science & Technology Co., Ltd. ("Guangzhou Kingfa"). Guangzhou Kingfa entered the automotive modified plastics market in 2006 and its facilities had an annual manufacturing capacity of 312,000 MT for its modified plastics products used in the automobile industry at the end of 2014, according to the research report by Frost and Sullivan. Guangzhou Kingfa has the largest capacity expansion plans and was expected to expand to 1.06 million MT by 2015 according to Frost and Sullivan's report, but its utilization rate of production capacity is expected to be lower than that of China XD based on Frost & Sullivan's report. Guangzhou Kingfa has much larger financial resources than HLJ Xinda Group. However, we believe that it is less focused in automotive sector and currently holds fewer number of product certifications for automotive modified plastic to the automobile industry compared to HLJ Xinda Group. Another top domestic manufacturer of modified plastic is Shanghai Pret Composites Co., Ltd. ("Shanghai Pret"), which focuses on the production of automotive plastics.  It had an annual capacity and sales volume of 136,600 MT and 113,524 MT in 2014 and 2013, respectively, according to a report by Frost and Sullivan.

Historically, the Chinese auto market predominantly used modified plastics manufactured overseas or in factories controlled by foreign companies, such as manufacturers from Germany, the US, the Netherlands and Japan. Although China's automotive plastic market has been dominated by foreign or JV players, Chinese suppliers are continuing to gain market share. It is estimated that automotive plastics imported or manufactured by multinational and JV companies accounted for approximately 33.4% of the total China automotive plastic supply in 2013, decreased from 35.4% in 2010. JV manufacturers based in China in automotive plastics sector have been slow to invest and expand in China. Compared to non-domestic competitors including JV manufacturers, domestic manufacturers can benefit from the lower costs and geographical proximity in China. As local players continue to invest in research and development, enhance product quality and improve management skills, we believe that domestic production of automotive plastics will compete very favorably with the foreign competitors in terms of price, quality, services and delivery times and continue to replace imported plastics.

Our Competitive Strengths

We believe that the following competitive strengths continue to enable us to compete effectively in the automotive modified plastics market in the PRC:

 ●
Leading Market Position with High Barrier to Entry. We believe that we are one of the China's leading specialized manufacturers of modified plastic for automobile parts in terms of sales volume and production capacity, with a market share of approximately 9.5% in 2014. The PRC automotive modified plastics industry is growing rapidly and is highly fragmented with the top three domestic producers occupying less than approximately 26.6% of the market shares in 2014. In 2015, our sales volume of automotive plastics was approximately 332,144 MT, representing a decrease of 2.7% compared to that in 2014 mostly due to the slowdown of the auto industry in China. As of December 31, 2015, our annual production capacity of automotive plastics was 392,500 MT. We believe our leading market position allows us to successfully compete with other foreign and domestic modified plastic manufacturers in the market. Being one of the leading specialized manufacturers of automotive modified plastics in China, we believe we are well-positioned to not only grow with the increasing market demand but increase market share by replacing smaller and less efficient modified plastic manufacturer.
 
In addition, as a result of our consistent research and development efforts, we have 361 product certifications from major automotive manufacturers in the PRC as of December 31, 2015, which we believe is among the largest numbers of product certifications by any domestic player in China's automotive plastics industry. Strict certification requirements and long certification periods result in high barriers to entry. Our current or potential competitors are required to obtain relevant product certifications from automotive manufacturers in order to compete with us. Each certification normally takes over two years to complete, and as a result, automotive manufacturers are reluctant to replace suppliers like us who have already received necessary certifications and proven consistent product quality. We believe that having one of the largest portfolios of product certifications in China allows us to strengthen our competitive position.
 
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Long-Term Relationships with Reputable End Users. Our senior management has been involved in the business of modified plastics since 1985. We benefit from the industry connections and experience of our senior management, which have enabled us to establish long-term customer relationships and strong industry recognition. We are a qualified provider of high-quality automotive plastics, and have sold our products through plastic auto part manufacturers to many leading automotive manufacturers in China. Currently, our modified plastics are utilized in more than 28 automobile brands and over 80 automobile models manufactured in China, including Audi, Volkswagen, BMW, GM, Mazda, Toyota, Cherry, and Geely. We believe that our brand and our products are well recognized and respected in China's automotive modified plastics market.
 
High Quality Products with Lower Costs.  We purchase our raw materials from a small number of large suppliers who procure resins locally or internationally. By concentrating our purchases from a small group of suppliers, we are able to keep the costs of purchasing raw materials relatively low. Also, since our manufacturing facilities are located in China where labor, raw materials and operation costs are relatively lower, we are able to charge lower prices than our international competitors while maintaining comparable quality. Compared to our domestic competitors, we believe our long-standing manufacturing experience, in-depth market knowledge, significant scale of economy and strong R&D capabilities enable us to provide higher quality products at competitive prices.
 
Manufacturing facilities are critical to the quality of products. We have in the past invested substantial time and resources in building state-of-the-art production lines to enhance our product quality. Our facilities have maintained ISO/TS16949, a certification of quality management systems specific to the automotive industry. 
 
Strong Customer-Oriented R&D Capabilities. The modified plastics industry is characterized by rapid development and increasing demand for high quality products. We have strong R&D capabilities that allow us to have successfully passed OEM automakers' certification processes in the past and continually introduce new and high quality products to the market. Compared to international plastic supply models, which target larger scale applications of common plastics and involve less customization and specialization, we provide customer-oriented product development through our certification process.  By working closely with our customers, we are able to adjust our product features to better satisfy the specific needs of each customer. To achieve this, we have staffed our R&D team with professionals, of whom 46 have Ph.D. and/or Master's degrees. On average, our R&D employees have worked with us for more than three years, and some key experts have more than 10 years of experience in our industry. We have also cooperated with a number of the leading technology centers in China. Besides providing specialized research and development skills, these relationships help us formulate cutting edge research programs aimed at developing new technologies and applications in plastics engineering.  We currently have 10 approved patents and 268 pending patent applications with the State Intellectual Property Office of the PRC, or SIPO.

Established Distribution Model. Through 8 distributors across China, we have established distribution networks that cover Northeast, North, Southwest and East China, with a current focus on Northeast China. We enter into distribution agreements with local distributors in areas where large automobile manufacturers are located.  By leveraging the proximity of our distributors to the automobile manufacturers, we can enhance our relationships with our customers. Through the established sales channels, we can quickly respond to local market demand, address customer needs, enhance our ability to provide superior technological support and after-sales services, and lower our marketing expenses.  At the same time, our distributors are responsible for the payments to us which is not contingent upon their cash collection from end customers. By actively managing our distribution network, we are also able to accelerate local market penetration and increase sales opportunities. For example, we entered the north China market in 2009 through a local distributor, one year earlier than we planned, and in 2013, we entered into the Southwest China market, and in 2014, we entered into South China and Central China market. For the year ended December 31, 2015, Northeast, North, East, Southwest, South, and Central China account for approximately 38.0%, 15.6%, 31.2%, 1.2%, 1.3% and 5.5% of our revenues, respectively.
 
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Entry to Overseas Market. In 2015, the Company developed its presence in the Korean market by selling primarily higher-end PA66 and (Long Chain) plastic alloy, US$71.6 million products to the Korean market, accounting for 7.2% of the total revenues for the year ended December 31, 2015.

Seasoned Management Team. Our senior management team and key personnel have extensive operating and industry experience. Mr. Han, our chief executive officer and president, founded our former affiliate Harbin Xinda Nylon Factory in 1985. With 30 years of industry experience, Mr. Han has in-depth knowledge and expertise in China's modified plastics industry. He currently serves as executive director of the China Plastics Processing Industry Association and as a member of the Standing Committee of the Heilongjiang Association of Industry and Commerce. Our chief executive officer, chief technology officer and chief operating officer have over 50 years combined experience in the modified plastics industry and we believe their extensive expertise and knowledge can well serve our customers.
 

Our Strategies

Our goal is to capitalize on China's modified plastics growth trend, with a specific focus on applications in the auto sector, and to eventually be the leading modified plastics manufacturer in China. We are committed to enhancing our sales and profitability and achieving our goals through the following strategies:

Continue to Increase Production Capacity.  Over the past five years, we have consistently increased production capacity to meet the rising demands of the automotive industry in the PRC. As of December 31, 2015, we have an installed annual production capacity of 392,500 metric tons, and we have been operating at near full capacity since 2007. With the expected strong growth in the automotive modified plastics market of China, we expect that we will continue to experience strong demand from our customers. Therefore, we intend to continue to strategically increase our production capacity to meet customer demands from both expanded geographical locations and future downstream sector growth. In 2013, we commenced to construct our fourth production base with 300,000 MT new material production capacity and the affiliated research and development center and training center in Nanchong City of Sichuan Province (the "Project"). We plan to complete the Project by 2016 and upon its completion, our annual domestic capacity is expected to reach approximately 690,000 MT by 2016. The Company completed and started the trial production in the plant in Dubai, UAE with additional 2,500 metric tons targeting high-end products for the overseas markets.  The Company is planning to complete installing 75 production lines with additional 14,000 metric tons ("Phase 2") of annual production capacity in that property at the beginning of 2017, bringing total production capacity in Dubai to 16,500 metric tons.
 
Focus on R&D and Develop New Product Offerings.  We are currently utilizing our R&D capabilities to obtain further product certifications, develop new products, applications and technologies. Approximately 90% of our automotive plastics product certification applications are currently undergoing trial manufacturing periods to obtain the necessary certifications. In addition, we are developing new products for automotive applications to expand our product portfolio, including initiating R&D on modified plastic for use in electric vehicles. We are also developing specialty engineering plastics and bio-plastics for use in other applications, such as high-speed trains, vessel-propulsion systems, mining and oil-field equipment and aerospace equipment. We are the first non-State-Owned-Enterprise awarded National Level Enterprise Technology Center, in Heilongjiang Province. In addition, we have Postdoctoral and Academy Member Workstation in Heilongjiang Province enhancing our research and development capabilities.
 
 
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Expand Customer Base Domestically and Internationally.  The automotive plastics market in the PRC is highly fragmented with significant barriers to entry. Although we had approximately 9.5% of the market share in 2014, our customer coverage was concentrated in the northeast regions of the PRC. We seek to steadily enhance our market share in Northeast China, and also expand our reach to Northern and Eastern China. In addition, we have conducted sales in overseas markets and exported our products including non-auto sectors in 2015. We plan to implement such strategies through further expanding our distribution network by working with local distributors who have contacts and networks overseas and directly establishing strategic alliances with certain of our non-PRC customers. Although the entry barrier of some non-auto sectors might not generally be as high as that of the auto sector, our focus is to target high-value-added products by leveraging our technology, expertise and know-how accumulated in the auto sector over the course of our operational history.

Pursue Selective Strategic Acquisitions.  While we have experienced substantial organic growth, we plan to pursue a disciplined and targeted acquisition strategy to accelerate our growth. Our strategy will focus on strengthening presence in certain geographies, improving our penetration in attractive markets, enhancing research and development capabilities and acquiring new markets or customers.

Increase Efficiency by Corporate Restructuring. We completed our corporate restructuring plan at the end of 2014, with the aim of establishing a more efficient company group structure, as a result of which our subsidiaries are more easily accessible to our end customers and our operations are able to respond to the market changes in a more efficient manner.


Environmental Laws

The cost of compliance with Chinese environmental regulations currently is minimal. Most of the waste produced from our production process is water, which we circulate in our enclosed water treatment system.  

Employees

China XD's operations are organized into several operational departments including manufacturing, R&D, management, finance, sales, purchasing and marketing and others. As of December 31, 2015, there were 1,647 employees, including 591 in manufacturing, 362 in R&D, 553 in management, 65 in finance, 58 in sales, purchasing and marketing and 18 in other departments.

Available Information

We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and registration statements, and any amendments thereto, with the Securities and Exchange Commission (SEC). All such filings are available online through the SEC's website at http://www.sec.gov or on our corporate website at http://www.chinaxd.net. We make available free of charge, on or through our corporate website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the SEC. In addition, copies of the written charters for the committees of our board of directors and our Code of Business Conduct are also available on our website, and can be found under the Investor Relations-Corporate Governance links. You may read and copy any materials we file with the SEC at the Securities and Exchange Commission Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Our website address is intended to be an inactive textual reference only, and none of the information contained on our website is part of this report or is incorporated in this report by reference.
 
 
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ITEM 1A.   RISK FACTORS

In addition to the other information in this Form 10-K, readers should carefully consider the following important factors. These factors, among others, in some cases have affected, and in the future could affect, our financial condition and results of operations and could cause our future results to differ materially from those expressed or implied in any forward-looking statements that appear in this on Form 10-K or that we have made or will make elsewhere.

The global economic uncertainty could further impair the automotive industry thereby limiting demand for our products.

The continuation or intensification of the recent global economic uncertainty arising from the European debt crisis and economic slowdown in Asia may adversely impact our business and the businesses of our customers. Our specialized plastics are sold to automobile parts manufacturers and distributors. The recent global economic uncertainty harmed most industries and has been detrimental to the automotive industry. Since virtually all of our sales are made to auto industry participants, our sales and business operations are dependent on the financial health of the automotive industry and could suffer if our customers experience, or continue to experience, a downturn in their business. Presently, it is unclear whether and to what extent the economic stimulus measures facilitated by the European Union and other governments throughout the world will mitigate the effects of the crisis on the automotive industry and other industries that affect our business.

We concentrate our operations primarily in the automotive industry; therefore, a contraction in automotive sales and production could have a material adverse effect on our results of operations and liquidity.

We develop, manufacture, and distribute modified plastic, primarily for use in automobiles. Automotive sales and production are highly cyclical and depend, among other things, on general economic conditions and consumer spending and preferences (which can be affected by a number of issues including fuel costs and the availability of consumer financing). As the volume of automotive production fluctuates, the demand for our products also fluctuates. In 2015, the China automotive sales and production volume recorded a slower growth rate of 4.68% and 3.25%, respectively, according to China Association of Automobile Manufacturers. The contraction in automotive sales and production will harm our results of operations and financial condition. Consequently, we are exposed to the risks of adverse developments affecting the auto industry to a greater extent than if our operations were dispersed over a variety of industries.

Our financial performance may be affected by the prospect of our Dubai facility and the associated expansion into Middle East, Europe and other parts of Asia.

Since 2014, we developed the presence in the ROK by selling to our ROK customer primarily long carbon chain PA plastic alloy and high-performance modified PA66 products, which embarked our entry into the international market after approximately one year of product development and marketing effort. Although the average number of collection days in 2014 from our ROK customer was longer than that from customers in China, it was largely within our standard collection term and industry norm (90 days) in 2014. However, we have experienced delayed payments from our ROK customer in 2015. To better manage its financial risk, we ceased supply to the customer for 60 days. The DSO for ROK customer has increased from 55 days for the year ended December 31, 2014 to 107 days for the year ended December 31, 2015.  In addition, we purchased raw materials in the amount of US$70.0 million on behalf of our ROK customer during the second half year of 2015, but did not receive all the payment. As of December 31, 2015, the amount due from our ROK customer is approximately US$9.5 million. In the event the payment for raw materials and/or the outstanding accounts receivable become uncollectable despite management's efforts, we will suffer financial losses and as a result, our plan to develop overseas market may be delayed.
 
 
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The withdrawal of preferential government policies and the tightening control over the Chinese automotive industry and automobile purchase restrictions imposed in certain major cities may limit market demand for our products.

In 2011, Chinese government terminated two preferential policies for its automotive industry: (1) vehicles with 1.6L or lower air displacement were given a 50% discount in purchase tax and (2) vehicles sold in rural area were given a government subsidy. Since 2011, in order to resolve the extreme traffic congestion, the Beijing government has been implementing the vehicle purchase quota policy, which limits the maximum vehicles sold in Beijing per month to 20,000. Other cities which have begun to show signs of traffic congestion have also begun to implement similar measures to control traffic congestion, including the limited automobile licenses policy implemented in Shanghai and Tianjin and the imposition of congestion charges in Shenzhen. The termination of two nation-wide preferential policies negatively affected consumer demand for new vehicles, and local restrictive measures over automobile purchases in major cities has resulted in slower growth of sales in 2015 and may cause reduction in the sale of vehicles nationwide. The national and local policies over the Chinese automotive industry may continue to impact market demand for automobiles in 2016 and eventually result in a reduction in our product sales.

The Chinese automotive industry's growth is slowing after the rapid growth since 2000 and such slowdown may adversely affect the market demand for our products.

There is a direct correlation between our business and automobile production volume and sales, which are dependent on economic policies and market sentiment. The Chinese automotive industry had been rapidly growing for a decade prior to 2011. However, inflation, higher interest rates, tighter bank lending, lifting of consumer subsidies and buying restrictions in congested cities all contributed to a more modest environment since 2011, resulting in a slow-down in automobile sales volume growth rate to 4.68% in 2015, compared to 6.86% in 2014, according to China Association of Automobile Manufacturers. Any significant reduction in automobile production and sales would have a material and adverse effect on our business. There can be no assurance that the market conditions, government policies and other factors leading to the existing slowdown in demand for automobiles will not continue. The decline in demand for automobiles would directly and adversely affect demand for our products and hence our business, financial condition and results of operations.

A large percentage of our sales revenue is derived from sales to a limited number of distributors and a limited number of customers, and our business will suffer if sales to these customers decline.

A significant portion of our sales revenue historically has been derived from a limited number of distributors in China. Sales to major distributors and direct customer, which individually exceeded 10% of the Company's revenues is approximately 84.7% and 86.7% in 2015 and 2014, respectively. Any significant reduction in demand for modified plastics by any of these major distributors, any decrease in demand of products by its customers or by our ROK customer could harm our sales and business operations, financial condition and results of operations.  During the third quarter of 2015, the Company experienced a delay in its cash collection from the ROK customer. To better manage its financial risk, the Company ceased supply to the customer while both parties actively negotiated future pricing and payment terms associated with the Company's high-end products.  By the end of 2015, all the outstanding accounts receivable from the ROK customer were collected and the supply to this customer has been resumed, despite at a slower run rate initially. In the case of any such delay in payment from the ROK customer or other customers in the future, our sales and business operations, financial conditions and results of operations may be negatively affected.

We are dependent on a limited number of suppliers. While we have identified alternative sources for the materials and equipment we use, a temporary disruption in our ability to procure necessary materials and equipment could adversely impact our sales in future periods.

Materials constitute a substantial part of the cost of our products.  We seek to reduce the cost of raw materials by dealing with major suppliers. During the year ended December 31, 2015, we purchased approximately 80.0% of our raw materials from seven major suppliers. The Company purchased equipment from two suppliers, which accounted for 99.8% of the Company's equipment purchases for the year ended December 31, 2015. We believe the relationship with our suppliers is satisfactory and that alternative suppliers are available if relationships falter or existing suppliers should become unable to keep up with our requirements. However, there can be no assurance that our current or future suppliers will be able to meet our requirements on commercially reasonable terms or within scheduled delivery times. An interruption of our arrangements with suppliers could cause a delay in the production of our products for timely delivery to distributors and customers, which could result in a loss of sales in future periods.
 
 
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If we are subject to product quality or liability claims relating to our products, we may incur significant litigation expenses and management may have to devote significant time defending such claims, which if determined adversely to us, could require us to pay significant damage awards.

Although we have adopted certain internal measures to supervise and examine the quality of our products, we may be subject to legal proceedings and claims from time to time relating to our product quality. The defense of these proceedings and claims could be both costly and time-consuming and significantly divert the efforts and resources of our management. An adverse determination in any such proceedings could subject us to significant liability. In addition, any such proceeding, even if ultimately determined in our favor, could damage our market reputation and prevent us from maintaining or increasing sales and market share. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase of our products.

We have limited insurance coverage on our assets in China and any uninsured loss or damage to our property, business disruption or litigation may result in our incurring substantial costs.

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited insurance products. Other than automobile insurance on certain vehicles and property and casualty insurance for some of our assets such as factories and equipment we do not have insurance coverage on our other assets or inventories, nor do we have any business interruption, product liability or litigation insurance for our operations in China. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured loss or damage to property, business disruption or litigation may result in our incurring substantial costs and the diversion of our resources, which may have a material adverse effect on our results of operations, financial condition and/or liquidity.

SAFE regulations relating to offshore investment activities by PRC individuals may increase our administrative burden and restrict our overseas and cross-border investment activity. If our shareholders and beneficial owners who are PRC individuals fail to make any required applications, registrations and filings under such regulations, we may be unable to distribute profits and may become subject to liability under PRC laws.

The State Administration of Foreign Exchange, or "SAFE", has promulgated several regulations, including the Circular on Relevant Issues Relating to Domestic Resident's Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular No. 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions.  SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular No. 75.
 
 
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We have requested our shareholders and beneficial owners who are PRC residents to make the necessary applications and filings as required under these regulations and under any implementation rules or approval practices that may be established under these regulations. As of the date of this Annual Report on Form 10-K, Mr. Han, our Chief Executive Officer, has registered his beneficial ownerships in China XD and XD Engineering Plastics Company Limited ("XD Engineering Plastics") respectively with local SAFE in accordance with Circular No. 37. However, we cannot assure you that the rest of our shareholders and beneficial owners who are PRC individuals have timely updated their registrations with SAFE in accordance with SAFE regulations. The failure or inability of our PRC shareholders and beneficial owners make any required registrations may subject us to fines and legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries' ability to make distributions or pay dividends or affect our ownership structure, as a result of which our acquisition strategy and business operations and our ability to distribute profits to you could be materially and adversely affected.

On December 25, 2006, the People's Bank of China issued the Administration Measures of Foreign Exchange Matters for Individuals, which set forth the respective requirements for foreign exchange transactions by individuals (both PRC and non-PRC citizens) under the current account or the capital account, and the corresponding Implementing Rules were issued by SAFE on January 5, 2007, both of these regulations became effective on February 1, 2007. According to these regulations, all foreign exchange matters relating to employee stock holding plans, share option plans or similar plans of an overseas publicly-listed company in which PRC citizens will participate require approval from SAFE or its authorized branch. 

In February 2012, SAFE promulgated the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, or the New Stock Option Rules, which replaced and substituted the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule. According to the New Stock Option Rules, if a PRC resident participates in any stock incentive plan of an overseas publicly-listed company, a qualified PRC domestic agent, which could be a PRC subsidiary of such overseas publicly-listed company or another qualified institution selected by such PRC subsidiary, among other things, must file on behalf of such participant an application with SAFE to conduct the SAFE registration with respect to such stock incentive plan and obtain approval for an annual allowance with respect to the purchase of foreign exchange in connection with the exercise or sale of stock options or stock such participant holds. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the qualified PRC domestic agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the qualified PRC domestic agent or the overseas entrusted institution or other material changes. Such participant's foreign exchange income received from the sale of stock and dividends distributed by the overseas publicly-listed company must be fully remitted into a specific domestic foreign currency account opened and managed by such qualified PRC domestic agent first, before distribution to such participants.

We are an offshore listed company and, as a result, any Chinese employee or foreign employee of our PRC subsidiaries, who resides in PRC more than one year consecutively, including without limitation, directors, supervisors and other senior management staffs of our PRC subsidiaries, who have been granted share options or shares under our existing share incentive plan, are subject to the New Stock Option Rules.  We completed the application with local SAFE in Heilongjiang on December 16, 2013, obtaining a registration in respect of our incentive share plan in accordance with the New Stock Option Rules. If our PRC subsidiaries or their qualified employees fail to comply with these regulations, including the New Stock Option Rules, they may be subject to fines or other legal sanctions imposed by SAFE or other Chinese government authorities. In that case, our ability to compensate our employees, directors, supervisors and other senior management staffs through equity compensations may be hindered and our business operations may be adversely affected.
 
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Under the PRC EIT Law, we and/or Favor Sea BVI may be classified as a "resident enterprise" of the PRC. Such classification could result in tax consequences to us, our non-PRC resident shareholders and Favor Sea BVI.

On March 16, 2007, the National People's Congress approved and promulgated the PRC Enterprise Income Tax Law, or "EIT Law," which took effect on January 1, 2008. Under the EIT Law, enterprises are classified as resident enterprises and non-resident enterprises. An enterprise established outside of China with "de facto management bodies" within China is considered a "resident enterprise," and subject to the uniform 25% enterprise income tax rate on global income. The implementing rules of the EIT Law define "de facto management bodies" as a managing body that in practice exercises "substantial and overall management and control over the production and operations, personnel, accounting, and properties" of the enterprise; however, due to the short history of the EIT Law and lack of applicable legal precedents, it remains unclear whether the PRC tax authorities would deem our managing body as being located within China, or whether we or our non-PRC subsidiaries would be deemed as resident enterprises of the PRC.

If the PRC tax authorities determine that we, Favor Sea Limited, a British Virgin Islands corporation ("Favor Sea BVI") and/or Xinda Holding (HK) Company Limited, a Hong Kong corporation ("Xinda HK"), are "resident enterprises" for PRC enterprise income tax purposes, a number of PRC tax consequences could follow.  We, Favor Sea BVI and/or Xinda HK may be subject to enterprise income tax at a rate of 25% on our, Favor Sea BVI's and/or Xinda HK's worldwide taxable income, as well as PRC enterprise income tax reporting obligations. However, under the EIT Law and its implementing rules, dividends paid between "qualified resident enterprises" are exempt from enterprise income tax. As a result, if we, Favor Sea BVI and Xinda HK are treated as PRC "qualified resident enterprises," all dividends paid from HLJ Xinda Group to Xinda HK, from Xinda HK to Favor Sea BVI and from Favor Sea BVI to us may be exempt from PRC tax. Otherwise, all dividends paid from HLJ Xinda Group to Xinda HK, from Xinda HK to Favor Sea BVI and from Favor Sea BVI to us may be subject to withholding tax under the EIT Law and its implementing rules. 

On April 22, 2009, State Administration of Taxation ("SAT") enacted "Circular of the State Administration of Taxation on Issues Concerning the Identification of Chinese-Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance With the Actual Standards of Organizational Management". On July 27, 2011, SAT enacted "Announcement of the State Administration of Taxation on Printing and Distributing the Administrative Measures for Income Tax on Chinese-controlled Resident Enterprises Incorporated Overseas (Trial Implementation)". Under those two rules, either the enterprises may request the PRC tax authorities to determine their "resident enterprises" identity or the tax authority may investigate and determine an enterprise's identity. The target enterprises under those two rules are foreign registered companies controlled by the PRC companies, however, the PRC tax authority may determine if a foreign registered company controlled by the PRC individual(s) is a "resident enterprise" or not by reference to those two rules.
 
Under the EIT Law and its implementation rules, dividends payable by a foreign-invested enterprise in China to its shareholders that are "non-resident enterprises" are subject to a 10% withholding tax, unless such shareholders' jurisdiction of incorporation has a tax treaty with China that provides for a preferential arrangement. Pursuant to the Notice of the SAT on Issuing the Table of Tax Rates on Dividends in Treatises, or Notice 112, which was issued on January 29, 2008, the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double Taxation Arrangement (Hong Kong), which became effective on December 8, 2006, such withholding tax may be lowered to 5% if the PRC enterprise is at least 25% directly held by a Hong Kong enterprise. In October 2009, the SAT further issued the Notice on How to Understand and Determine the "Beneficial Owners" in Tax Treaties, or Circular 601. According to Circular 601, non-resident enterprises that cannot provide valid supporting documents as "beneficial owners" may not be approved to enjoy tax treaty benefits, and "beneficial owners" refer to individuals, companies or other organizations which are normally engaged in substantive operations. These rules also set forth certain adverse factors on the recognition of a "beneficial owner." Specifically, they expressly exclude a "conduit company" that is usually established for the purposes of avoiding or reducing tax obligations or transferring or accumulating profits and not engaged in substantive operations such as manufacturing, sales or management, from being a "beneficial owner." As a result, if we are treated as PRC "non-resident enterprises" under the EIT Law, then dividends from HLJ Xinda Group (assuming such dividends were considered sourced within the PRC) paid to us through Xinda HK may be subject to a reduced withholding tax at a rate of 5% if Xinda HK is determined to be Hong Kong tax residents and are considered to be "beneficial owners" that are generally engaged in substantive business activities and entitled to treaty benefits under the Double Taxation Arrangement (Hong Kong). Otherwise, we may not be able to enjoy the preferential withholding tax rate of 5% under the tax arrangement and therefore be subject to withholding tax at a rate of 10% with respect to dividends to be paid by HLJ Xinda Group (assuming such dividends were considered sourced within the PRC) to us through Xinda HK. Any such taxes on dividends could materially reduce the amount of dividends, if any, we could pay to our shareholders.
 
 
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However, if we are deemed as a "resident enterprise," the new "resident enterprise" classification could result in a situation in which an up to 10% PRC tax is imposed on dividends we pay to our non-PRC shareholders that are not PRC tax "resident enterprises". In such event, we may be required to withhold an up to 10% PRC tax on any dividends paid to non-PRC resident enterprise shareholders. Our non-PRC resident enterprise shareholders also may be responsible for paying PRC tax at a rate of 10% on any gain realized from the sale or transfer of our ordinary shares in certain circumstances if such income is considered PRC-sourced income by relevant tax authorities. We would not, however, have an obligation to withhold PRC tax with respect to such gain.

On December 15, 2009, the State Administration of Taxation ("SAT") released the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises ("Circular 698") that reinforces the taxation of non-listed equity transfers by non-resident enterprises through overseas holding vehicles. Circular 698 is retroactively effective from January 1, 2008.  Subsequently SAT also released the Announcement on Several Issues Related to Enterprise Income Tax for Indirect Asset Transfer by Non-PRC Resident Enterprises (“Announcement 7”), effective from February 3, 2015, which in part supersedes Circular 698.

Announcement 7 addresses indirect share transfer as well as other issues.  According to Announcement 7, if a non-PRC resident enterprise transfers the equity interests of or similar rights or interests in overseas companies which directly or indirectly own PRC taxable assets through an arrangement without a reasonable commercial purpose, but rather to avoid PRC corporate income tax, the transaction will be re-characterized and treated as a direct transfer of PRC taxable assets subject to PRC corporate income tax. Announcement 7 specifies certain factors that should be considered in determining whether an indirect transfer has a reasonable commercial purpose. Since Announcement 7 has a short history, there is uncertainty as to its application and in particular, the interpretation of the term “reasonable commercial purpose.”
 
Announcement 7 further provides that, the entity which has the obligation to pay the consideration for the transfer to the transferring shareholders has the obligation to withhold any PRC corporate income tax that is due. If the transferring shareholders do not pay corporate income tax that is due for a transfer and the entity which has the obligation to pay the consideration does not withhold the tax due, the PRC tax authorities may impose a penalty on the entity that so fails to withhold, which may be relieved or exempted from the withholding obligation and any resulting penalty under certain circumstances if it reports such transfer to the PRC tax authorities. 

We (or a foreign investor) may become at risk of being taxed or imposed a penalty under Announcement 7 and may be required to expend valuable resources to comply with Announcement 7 or to establish that we (or such foreign investor) should not be taxed under Announcement 7, which could have a material adverse effect on our financial condition and results of operations (or such foreign investor's investment in us).

PRC regulations relating to mergers and acquisitions of domestic enterprises by foreign investors may increase the administrative burden we face and create regulatory uncertainties.

On August 8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce, or MOFCOM, the State Assets Supervision and Administration Commission, or SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or CSRC, and SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, which became effective on September 8, 2006. The M&A Rule purports, among other things, (i) to require any PRC company, enterprise or individual that intends to merge or acquire its domestic affiliated company in the name of an overseas company which it lawfully established or controls, to apply for MOFCOM's examination on and approval for the proposed merger or acquisition; and (ii) to require SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled directly or indirectly by PRC companies or individuals, to obtain the approval of CSRC prior to publicly listing their securities on an overseas stock exchange. However, there are substantial uncertainties regarding the interpretation, application and enforcement of these rules, and CSRC has yet to promulgate any written provisions or formally to declare or state whether the overseas listing of a PRC-related company structured similar to ours is subject to the approval of CSRC. As a result, we are not sure whether the M&A Rule would require us or our entities in China to obtain the approval from either MOFCOM or CSRC or any other regulatory agencies in connection with the transaction contemplated by the share transfer contracts which were entered into between Mr. Jie Han, Mr. Qingwei Ma and Xinda Holding (HK) Company Limited on June 26, 2008, the transaction contemplated in the Agreement and Plan of Merger entered into by and among NB Telecom, Favor Sea (BVI) and the shareholders of Favor Sea (BVI) on December 24, 2008 (detailed description of both of the two aforesaid transactions and relevant contracts can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed on April 14, 2010) the adoption and performance of the option agreement dated May 16, 2008 between Ms. Piao and Mr. Han.
 
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Further, in the event MOFCOM or CSRC deems it necessary for us to obtain its approval prior to our entry into the aforesaid agreements, we could be subject to severe penalties. The M&A Rule does not stipulate the specific penalty terms, therefore, we are unable to determine what penalties we may face, and how such penalties may affect our business operations or future strategy.

Our business will suffer if we cannot obtain or maintain necessary permits or approvals.

Under PRC laws, we are required to obtain from various PRC governmental authorities certain permits and licenses in relation to the operation of our business. These permits and licenses are subject to periodic renewal and/or reassessment by the relevant PRC government authorities and the standards of compliance required in relation thereto may from time to time be subject to change. We cannot assure you that we can always obtain, maintain or renew all the permits and licenses in a timely manner. Additionally, any changes in compliance standards, or any new laws or regulations that may prohibit or render it more restrictive for us to conduct our business or increase our compliance costs may adversely affect our operations or profitability. Any failure by us to obtain, maintain or renew necessary licenses, permits and approvals, could subject us to fines and other penalties and limit the business we could conduct, which could have a material adverse effect on the operation of our business. In addition, we may not be able to carry on business without such permits and licenses being renewed and/or reassessed.

Pursuant to PRC laws and regulations, construction or expansion of a building or a production facility is subject to various permits and approvals from different government authorities. In connection with the construction of HLJ Xinda Group's factory and production facilities, which has already been completed and put into operation, we obtained a project approval from Administration Committee of Harbin Economic and Technological & High-tech Development Zone and an approval for the environmental impact assessment report on the construction project of HLJ Xinda Group in 2003. In connection with the construction of Sichuan Xinda Group's factory and production facilities which are in progress and is expected to be completed by the middle of 2016, we obtained the project approvals from Bureau of Development and Reform of Shunqing District, Nanchong City in 2013 and 2015, respectively.  In connection with the Phase II construction of AL Composites which is expected to be completed by the middle of 2016, we obtained the project approval from Engineering & Project Management  Department, UAE region Economic Zones World ("EZW") in June 2015, and the building permit from Department of Planning & Development,  Ports, Customs & Free Zone Corporation, Government of Dubai in September 2015,  However, certain other necessary permits relating to the construction and operation of HLJ Xinda Group's factory and production facilities are outstanding. Failure to obtain all necessary approvals/permits may subject us to various penalties, such as fines or being required to vacate from the facilities where we currently operate our business.

Increased environmental regulation in China could increase our costs of operation.

Certain processes utilized in the production of modified plastics result in toxic by-products. To date, the Chinese government has imposed only limited regulation on the production of these by-products, and enforcement of the regulations has been sparse. Recently, however, there is a substantial increase in focus on the Chinese environment, which has inspired considerable new regulation. Because we plans to export plastics to the U.S. and Europe in coming years, we have developed certain safeguards in our manufacturing processes to assure compliance with the environmental protection standard ISO/TS16949 Quality Assurance Standard, the European Union's RoHS Standards and Germany's PAHs Standards. Furthermore, we are in the process of applying for the U.S.'s UL Safety Certification, ISO14001 Environmental Management System Certification and OHSAS18001 Occupational Health Management System Certification. This compliance regimen brings us into compliance with all Chinese environmental regulations. Additional regulation, however, could increase our cost of doing business, which would impair our profitability.

Our independent registered public accounting firm's audit documentation related to its audit reports included in our annual report may include audit documentation located in the Peoples' Republic of China. The Public Company Accounting Oversight Board currently cannot inspect audit documentation located in China and, as such, you may be deprived of the benefits of such inspection.

Our independent registered public accounting firm issued an audit opinion on the financial statements included in our Annual Report filed with the SEC. As auditors of companies that are traded publicly in the United States and a firm registered with the PCAOB, our auditor is required by the laws of the United States to undergo regular inspections by the PCAOB. However, work papers located in China are not currently inspected by the PCAOB because the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities.
 
Inspections of certain other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. However, the PCAOB is currently unable to inspect an auditor’s audit work related to a company’s operations in China and where such documentation of the audit work is located in China. As a result, our investors may be deprived of the benefits of the PCAOB’s oversight of auditors that are located in China through such inspections.
 
The inability of the PCAOB to conduct inspections of an auditor’s work papers in China makes it more difficult to evaluate the effectiveness of any of our auditor’s audit procedures or quality control procedures that may be located in China as compared to auditors outside of China that are subject to PCAOB inspections. Investors may consequently lose confidence in our reported financial information and procedures and the quality of our financial statements.
 
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The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory body in China. Accordingly, our public disclosures should be reviewed in light of the fact that no governmental agency located in China where substantially all of our operations and business are located has conducted any due diligence on our operations or reviewed or cleared any of our disclosures.

We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of the CSRC, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any due diligence on the Company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local regulator.

Our independent registered public accounting firm may be temporarily suspended from practicing before the SEC if unable to continue to satisfy SEC investigation requests in the future. If a delay in completion of our audit process occurs as a result, we could be unable to timely file certain reports with the SEC, which may lead to the delisting of our stock.
  
On January 22, 2014, Judge Cameron Elliot, an SEC administrative law judge, issued an initial decision suspending the Chinese member firms of the “Big Four” accounting firms, including our independent registered public accounting firm, from practicing before the SEC for six months. In February 2014, the initial decision was appealed. While under appeal and in February 2015, the Chinese member firms of “Big Four” accounting firms reached a settlement with the SEC. As part of the settlement, each of the Chinese member firms of “Big Four” accounting firms agreed to settlement terms that include a censure, undertakings to make a payment to the SEC, procedures and undertakings as to future requests for documents by the SEC, and possible additional proceedings and remedies should those undertakings not be adhered to.
 
If the settlement terms are not adhered to, our independent registered public accounting firm may be suspended from practicing before the SEC which could in turn delay the timely filing of our financial statements with the SEC. In addition, it could be difficult for us to timely identify and engage another qualified independent auditor to replace our independent registered public accounting firm. A delinquency in our filings with the SEC may result in NASDAQ initiating procedures, which could adversely harm our reputation and have other material adverse effects on our overall growth and prospects.

We may fail to develop and maintain an effective system of internal controls over financial reporting.  As a result, we may not be able to accurately report our financial results or prevent fraud and current and potential shareholders could lose confidence in the integrity of our financial reports, which could harm our business and the trading price of our common stock.

Prior to our listing on the US stock exchange, we were a private company with all business operations within China. Our accounting and reporting system was designed to satisfy local statutory requirements and internal management needs. Since we became a public company, our business has grown significantly over the years. Management concluded that our internal controls over financial reporting were ineffective as of December 31, 2015, due to one material weakness which relates to the lack of sufficient accounting and financial reporting personnel to formalize certain key controls over the financial reporting process and report financial information based on US GAAP and SEC reporting requirements.
 
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Our management is committed to strengthening our internal controls and complying with Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"). Since 2014 when we were required to comply with SOX 404, our efforts to improve our internal control over financial reporting include:  (1) our accounting staff obtained external training of U.S. GAAP and SEC reporting by qualified entities, (2) having hired two third-party SOX 404 compliance consultants to help us improve our internal control system, (3) continuing to seek senior qualified people with requisite expertise and knowledge to help improve our internal control procedures, (4) having adopted internal policies and approval and supervision procedures governing financial reporting, (5) having adopted procedures to evaluate and assess performance of directors, officers and employees of the Company, and (6) continuing to hold internal meetings, discussions and seminars periodically to review and improve our internal control procedures.   

However, we cannot be certain that these measures we have undertaken will ensure that we will maintain adequate controls over our financial processes and reporting in the future. Furthermore, if we are able to rapidly grow our business, the internal controls that we will need may become more complex, and significantly more resources may be required to ensure our internal controls remain effective. Failure to implement required controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we fail to maintain an effective internal control system, our stockholders and other potential investors may lose confidence in our business operations and the integrity of our financial statements, and may be discouraged from future investments in our company, which may delay or hinder any future business development or expansion plans if we are unable to raise funds in future financings, and our current stockholders may choose to dispose of the shares of common stock they own in our company, which could have a negative impact on our stock price. In addition, non-compliance with SOX 404 could subject us to a variety of administrative sanctions, including the suspension of trading of our stock on the NASDAQ Global Market, ineligibility for listing on other national securities exchanges, and the inability of registered broker-dealers to make a market in our common stock, which could further reduce our stock price.

We may be subject to or be liable for US taxes, interest and penalties.

As of December 31, 2015, for U.S. federal income tax purposes, the Company has tax loss carryforwards of US$592,638 and did not owe any U.S. federal income taxes. There can be no assurance that the IRS will agree with this position, and therefore we ultimately could be held liable for U.S. federal income taxes, interest and penalties.  

Our inability or failure to protect our intellectual property rights may significantly and materially impact our business, financial condition and results of operations.

Protection of our proprietary processes, methods and other technology is important to our business. We generally rely on a combination of the patent, trademark and copyright laws of the PRC and laws protecting trade secret in the PRC, as well as licenses and non-disclosure and confidentiality agreements, to protect our intellectual property rights. The patent, trademark and copyright laws of the PRC, as well as laws protecting trade secret in the PRC, may not protect our intellectual property rights to the same extent as the laws of the U.S.

Failure to protect our intellectual property rights may result in the loss of valuable proprietary technologies. Additionally, some of our technologies are not covered by any patent or patent application and, even if a patent application has been filed, it may not result in an issued patent. If patents are issued to us, those patents may not provide meaningful protection against competitors or against competitive technologies. In addition, upon the expiration of patents issued to us, we will be unable to prevent our competitors from using or introducing products using the formerly-patented technology. As a result, we may be faced with increased competition and our results of operations may be adversely affected. We cannot assure you that our intellectual property rights will not be challenged, invalidated, circumvented or rendered unenforceable.

We also rely upon unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive position. While we generally enter into confidentiality/non-disclosure agreements with our employees and third parties to protect our intellectual property, we cannot assure you that our confidentiality/non-disclosure agreements will not be breached, that they will provide meaningful protection for our trade secrets and proprietary manufacturing expertise or that adequate remedies will be available in the event of an unauthorized use or disclosure of our trade secrets or manufacturing expertise.
 
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Our intellectual property rights may be challenged or infringed upon by third parties or we may be unable to maintain, renew or enter into new license agreements that are important to our business with third-party owners of intellectual property on reasonable terms. We could also face patent infringement claims from our competitors or others alleging that our processes or products infringe on their proprietary technologies. If we are found to be infringing on the proprietary technology of others, we may be liable for damages, and we may be required to change our processes, to redesign our products partially or completely, to pay to use the technology of others or to stop using certain technologies or producing the infringing product(s) entirely. Even if we ultimately prevail in an infringement suit, the existence of the suit could prompt customers to switch to products that are not the subject of infringement suits. We may not prevail in any intellectual property litigation and such litigation may result in significant legal costs or otherwise impede our ability to produce and distribute key products.

We may be unable to renew the leases for our factories on acceptable terms or these leases may be terminated.

As of December 31, 2015, HLJ Xinda Group operated three separate factories located at 9 Qinling Road (the "Qinling Road Factory"), 9 North Dalian Road (the "Dalian Road Factory") and 9 Jiangnan First Road (the "Jiangnan Road Factory"), respectively.  HLJ Xinda Group owns the titles to the land and premises of the Qinling Road Factory.  HLJ Xinda Group leases the land and premises of the Dalian Road Factory from Xinda High-Tech. HLJ Xinda Group is in the process of acquiring the titles to the land and premises at Jiangnan Road Factory. The Company expects the title transfer to be completed by the end of third quarter of 2016. HLJ Xinda Group's leases will expire on December 31, 2018. If we are unable to renew our lease on acceptable terms in due course or acquire the titles to the land and premises at Jiannan Road Factory or if our lease is terminated by the lessor unilaterally for the Dalian Road Factory:

we may be unable to find a new property with the amenities and in the location we require for our factories, which may result in a factory closure;

we may have to relocate to a less desirable location;

we may have to relocate to a location with facilities that do not meet our requirements;

our factories may experience significant disruption in operations and, as a result, we may be unable to produce products during the period of disruption.

Any of these events may materially and adversely affect our business, prospects, results of operations and financial condition.

Our ability to sell our products at current profit margin is subject to a number of risks and uncertainties, which are beyond our control; in particular, we may not be able to reflect raw material cost increases in the price of our products.

Our ability to sell our products at current profit margin is subject to a number of risks and uncertainties, which are beyond our control. For example, general slow-down in the Chinese or world economy may lessen the demand for our products, and we may be forced to sell our products at a lower price. See "Risks Relating to the PRC — Changes in political or economic policies of the PRC government and a slow-down in China's economy may have an adverse impact on our operations."
 
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Particularly, we may not be able to pass through raw material cost increases to our customers on a timely basis and reflect such increases in the price of our products. We purchase various plastic resins, which are derived from petroleum or natural gas, to produce our modified plastics products. Cost of raw materials made up a vast majority of our cost of revenues in 2014 and 2015. The market prices of plastic resins may fluctuate due to changes in supply and demand conditions in that industry. Any shortage in supply of or significant increase in demand for plastic resins and additives may result in higher market prices and thereby increase our cost of revenues, and we may not be able to pass on increases in the prices of raw materials to our customers. Under the terms of our distributor agreements, we will only be able to increase the sales prices for our products if the cost of our raw materials increases by more than 5% on a cumulative basis. As a result, we may not be able to adjust our selling prices in a timely manner, and our inability to increase the selling prices of our products sold during the period in which the cumulative increases of the cost of our raw materials is less than 5% may reduce our profitability. Furthermore, other adverse developments such as increased competition may not allow us to pass through cost increases to our distributors at all. Any of the foregoing could have a material adverse effect on our margins, results of operations and financial condition. When expanding into new regions, we have taken and may continue to take marketing initiatives from time to time to offer sales incentives, including discounts, to increase market share. Such initiatives and measures have put and may continue to put pressure on our margins.
 
Our assets are primarily located in China. So any dividends or proceeds from liquidation are subject to the approval of the relevant Chinese government agencies.

Our assets are primarily located inside China. Under the laws governing FIEs in China, dividend distribution and liquidation are allowed but subject to respective administrative procedures under the relevant laws and rules. Any dividend payment will be subject to the decision of the Board of Directors and be subject to foreign exchange rules governing such repatriation. Any liquidation is subject to the decision of the highest authority of the company, the relevant government agency's approval and supervision (including but not limited to the local branch of MOFCOM), as well as the whole process of liquidation under PRC laws and regulations, including without limitation personnel resettlement, assets disposition, settlement of debts and creditor's rights as well as deregistration, which process could be very time-consuming and complex. Since the dividend distribution procedure is subject to foreign exchange rules governing such repatriation, risks may arise for our investors when HLJ Xinda Group pays dividend to us through Xinda HK. Furthermore, the liquidation procedure is a complex and time consuming procedures subject to government approvals, additional risks and costs may arise for our investors in the process.

Governmental control of currency conversions may affect the value of your investment.

A majority of our revenue are earned in Renminbi. Any future restrictions on currency conversions may limit our ability to use revenue generated in Renminbi to make dividend or other payments in U.S. dollars. Although the PRC government introduced regulations in 1996 to allow greater convertibility of the Renminbi for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises like us may buy, sell or remit foreign currencies only after providing valid commercial documents at a PRC banks specifically authorized to conduct foreign-exchange business.

In addition, conversion of Renminbi for capital account items, including direct investment and loans, is subject to governmental approval in the PRC, and companies are required to open and maintain separate foreign-exchange accounts for capital account items. There is no guarantee that PRC regulatory authorities will not impose additional restrictions on the convertibility of the Renminbi. Such restrictions could prevent us from distributing dividends and thereby reduce the value of our stock.

The fluctuation of the exchange rate of the Renminbi against the dollar could reduce the value of your investment.

The value of our common stock will be affected by the foreign exchange rate between U.S. dollars and Renminbi. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into Renminbi for our operations, appreciation of the Renminbi against the U.S. Dollar could reduce the value in Renminbi of our funds. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of declaring dividends on our common stock or for other business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of our earnings from our subsidiaries in China would be reduced.
 
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On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. Dollar. Under the 2005 policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in fluctuation of the Renminbi against the U.S. dollar since July 21, 2005. 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.

The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the China. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi are to be converted into foreign currency and remitted out of the PRC to pay capital expenses, such as the repayment of bank loans denominated in foreign currencies.

The PRC government could also restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain expenses as they become due.

MSPEA Modified Plastics Holding Limited ("MSPEA") has significant influence over our affairs.

MSPEA currently owns 100% of our outstanding Series D Preferred Stock, representing approximately 24.5% of our issued and outstanding shares of common stock on an as converted basis. Pursuant to the Amended and Restated Certificate of Designation of Series D Preferred Stock, holders of Series D Preferred Stock have the right to elect, voting as a separate class, two directors to serve on the Board so long as at least 12,800,000 (adjusted for any dilutive corporate actions) shares of Series D Preferred Stock are outstanding, and one director to serve on the Board if the number of shares of Series D Preferred Stock outstanding at such time is less than 12,800,000 but more than 1,600,000 (in each case adjusted for any dilutive corporate actions). For so long as at least 1,600,000 (adjusted for any dilutive corporate actions) shares of Series D Preferred Stock remain outstanding, holders of Series D Preferred Stock have veto rights over certain material corporate actions of the Company and its subsidiaries as described in the Amended and Restated Certificate of Designation of Series D Preferred Stock. As such, MSPEA currently has significant influence over our affairs.

The terms of our senior notes financing include provisions on events of default that may require us to repay such notes, which may not be practicable at such time depending upon the circumstances.

On February 5, 2014, the Company's wholly owned subsidiary, Favor Sea Limited (the "Note Issuer"), completed the sale of US$150 million in aggregate principal amount of 11.75% guaranteed senior notes due on February 4, 2019 (the "Notes").  The Notes are guaranteed on a senior basis by the Company (the "Parent Guarantor") and Xinda Holding (HK) Company Limited, a subsidiary wholly owned by the Note Issuer (the "Subsidiary Guarantor") and secured by a pledge of the shares of the Note Issuer and the Subsidiary Guarantor. Events of default under the Notes include a breach by the Parent Guarantor or the Subsidiary Guarantor of certain provisions of the Notes and the indenture in connection with the issuance of the Notes, the commencement by the Company or any of its subsidiaries of any bankruptcy, insolvency, reorganization or the like, or the appointment of a custodian, receiver, liquidator, assignee, trustee or other similar officials of the Company or any of its subsidiaries for the winding up or liquidation of its affairs. Should any such event occur, the holders of the Notes may be entitled to repayment in full of such indebtedness, which we may be unable to repay and would need to seek a waiver from such holders, which they may be unwilling to provide. As a result, if we have insufficient cash available or do not have access to additional third-party financings on commercially reasonable terms or at all to repay the Notes, we may be required to liquidate assets to fund such repayment, which could have a material adverse effect on our business, financial condition and results of operations.
 
 
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Upon the occurrence of certain events, we may be required to redeem all or a portion of the Series D Preferred Stock.

On January 27, 2014, the Company adopted and filed the Amended and Restated Certificate of Designation of Series D Preferred Stock (the "Restated Certificate of Designation") with the Secretary of State of the State of Nevada, pursuant to which, the maturity date of the Series D Preferred Stock is extended to February 4, 2019, and, the performance target for the year ended December 31, 2013 the failure to meet which target could trigger the mandatory redemption of the Series D Preferred Stock, has been removed.

As of December 31, 2013, the Company concluded that it has met the actual profit targets under the Restated Certificate of Designation that could otherwise trigger mandatory redemption. The remaining trigger events pursuant to the terms of the Restated Certificate of Designation for such mandatory redemption include:

(i) a breach by the Company, XD Engineering Plastics Company Limited ("XD Engineering Plastics"), or Mr. Han of certain provisions of the financing documents in connection with the issuance and sale of the Series D Preferred Stock, if such breach would constitute a material adverse effect on the Company and its subsidiaries taken as a whole or which materially diminishes the value of the Series D Preferred Stock,

(ii) the commencement by the Company or any of its subsidiaries of any bankruptcy, insolvency, reorganization or the like, or

(iii) the appointment of a custodian, receiver, liquidator, assignee, trustee or other similar officials of the Company or any of its subsidiaries for the winding up or liquidation of its affairs.

If any of the events mentioned above occurs prior to February 4, 2019, or, in the event the Series D Preferred Stock remains outstanding as of February 4, 2019, we may be required to redeem such shares at a price per share equal to an amount that would yield a total (annualized) internal rate of return of 15% to the holder of such Series D Preferred Stock on the original issue price of US$6.25 per share, and, in the event we have insufficient cash available or do not have access to additional third-party financings on commercially reasonable terms or at all to complete such redemption, we may experience liquidity problems, which could have a material adverse effect on our ability to service our debt, including the Notes, and we may be required to liquidate assets to fund such redemption.
 

 
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ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

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 storage room, one transformer station, and two guard rooms. All the Company's properties are insured by China Pacific Property Insurances Co., Ltd.

The land on which our owned facility in Heilongjiang is located measures 14,715 square meters (158,391 square feet). The land use right was issued to HLJ Xinda Group by the City of Harbin and will expire in 2053. We also have a long-term lease of the production facilities with Harbin Xinda High-Tech Co., Ltd ("Xinda High-Tech"). The land on which our leased facility is located measures 16,537 square meters (178,009 square feet). The facility we rent includes three buildings with two office buildings attached by one workshop respectively and one guard room.

The two lands on which our owned facility in Sichuan are located measures 287,503 square meters (3,094,657 square feet) and 23,859 square meters (256,816 square feet), respectively. The land use right were issued to Sichuan Xinda by the City of Nanchong and will expire in 2065 and 2085, respectively.

The land on which our owned facility in Dubai is located measures 10,000 square meters (107,639 square feet ) issued to AL Composites by  Department of Planning & Development, Ports, Customs & Free Zone, Government of Dubai.

On May 9, 2011, Harbin Xinda, a subsidiary of China XD, entered into a purchase agreement with Harbin Shengtong Engineering Plastics Co. Ltd. ("Harbin Shengtong") as amended on June 1, 2011. The legal representative of Harbin Shengtong is a former employee of Harbin Xinda. Pursuant to the purchase agreement, Harbin Xinda will purchase from Harbin Shengtong land use rights and a plant consisting of five workshops, a building and certain ancillary facilities (the "Project"). Harbin Shengtong is responsible to complete the construction of the plant and workshops according to Harbin Xinda's specifications. Once the Project is fully completed and accepted by Harbin Xinda, Harbin Shengtong shall transfer titles of the Project to Harbin Xinda. During the year ended December 31, 2014, the Project was completed. The total cost for the Project was RMB501.5 million. The titles of the five workshops are expected to transfer to the Company in 2016.

As of December 31, 2015, we had approximately 392,500 metric tons of production capacity across 94 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwan conveyer systems, including the three additional workshops with 30 production lines completed the trial-run in December of 2012 and further expanded our annual capacity potential by approximately 135,000 metric tons and support our future growth in 2013. In December 2013, we broke ground on the construction of our fourth production base in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, expecting to bring total domestic installed production capacity to 690,000 metric tons with additional 70 new production lines at the completion of the construction of our fourth production base. In addition, during the three months ended June 30, 2014, we started the construction of Dubai Composites plant in Dubai, UAE, with additional 2,500 metric tons (“Dubai Phase 1”) targeting on high-end products for the overseas markets, which was completed in May 2015. In order to meet the increasing demand from the ROK and to support penetration in other potential overseas markets, on January 25, 2015, AL Composites Materials FZE obtained a leased property of approximately 10,000 square meters from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE with constructed building comprising a warehouse, office and service block with lease term granted 15 years. The Company is planning to complete installing 75 production lines with additional 14,000 metric tons ("Phase 2") of annual production capacity in that property at the beginning of 2017, bringing total production capacity in Dubai to 16,500 metric tons.  
 
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The process of manufacturing modified plastic consists of modifying a standard plastic (polypropylene, ABS, PA6, PA66, etc.) by adding various agents and additives that will alter the physical and/or functional characteristics of the plastic. Catalysts are added that facilitate the desired chemical reactions, all of which occurs in a specially designed equipment. The resulting plastics are then extracted from the equipment by an extraction technique that is proprietary to HLJ Xinda Group. Further processing may involve additional blending, extrusion, cooling and cutting, homogenizing and packing, as needed to meet the customer's requirements.

In addition to its unique extraction technology, HLJ Xinda Group has developed its own techniques and equipment for many of the steps in the production process. Among the aspects of production for which HLJ Xinda Group has proprietary technology are product formulae, a technique for combining extruder screws, and certain stuffing techniques. With these unique formulas and techniques, our products can satisfy clients' standard requirements at a lower cost than competitive products.

Our facilities have been certified under the following international qualifications criteria: ISO9001: 2000 quality management system certification and ISO/TS16949: 2002 international auto parts industry quality systems certification. The government of China has designated HLJ Xinda Group as a National Torch Project and a National Spark Plan Project, and has given HLJ Xinda Group the "Most Valuable High Tech in China" award. HLJ Xinda Group is an executive member of the Council of the Chinese Automobile Parts Association, a member of the Chinese Modified Plastics Professional Committee, a member of the Chinese Plastics Engineering Committee and Heilongjiang Province Postdoctoral Workstation.

ITEM 3.   LEGAL PROCEEDINGS

The Company and certain of its officers and directors have been named as defendants in two putative securities class action lawsuits filed in the United States District Court for the Southern District of New York.  These actions, which allege violations of Section 10(b) and Section 20(a) of the United States securities laws, were filed on July 15, 2014 and July 16, 2014 and are captioned Yang v. Han, et al., No. 14-cv-5308 (GBD) and Tompkins v. China XD Plastics Company Ltd., et al., No. 14-cv-5359 (GBD), respectively.  On November 21, 2014, the Court consolidated the actions and appointed lead plaintiffs.  On February 17, 2015, the lead plaintiffs filed a Consolidated Class Action Complaint on behalf of a class of all persons other than the defendants who purchased the common stock of China XD Plastics Company Limited between March 25, 2014 and July 10, 2014, inclusive.  Specifically, the lead plaintiffs allege that the Company and two of its officers made false or misleading statements and/or omitted material facts in the Company's Form 10-K for the year ended December 31, 2013 and the Company's Form 10-Q for the first quarter ended March 31, 2014. They also assert that the individual defendants are liable because they allegedly controlled the Company during the time the allegedly false and misleading statements and omissions were made.  The lead plaintiffs seek damages in unspecified amounts. On April 3, 2015, the Company moved to dismiss the Consolidated Class Action Complaint. The Court heard oral argument on the motion on October 22, 2015, and the motion remains pending.

Based on our initial review of the complaints, the management believes the lawsuits are without merit and intends to vigorously defend against them.
 
ITEM 4.   MINE SAFETY DISCLOSURES

Not applicable.


50

PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Prior to November 27, 2009, our common stock was quoted on the OTC Bulletin Board ("OTCBB") under the symbol "CXDC". On November 27, 2009, we terminated our listing on OTCBB and listed our common stock on NASDAQ Global Market, also under the symbol "CXDC." The following table sets forth, for the indicated periods, the high and low sales prices for our common stock, as reported on NASDAQ.

   
Common Stock
 
   
High
   
Low
 
 
Fiscal Year Ending December 31, 2015
       
First Quarter
   
5.62
     
3.76
 
Second Quarter
   
6.60
     
5.03
 
Third Quarter
   
6.45
     
4.18
 
Fourth Quarter
   
4.83
     
3.91
 
                 
Fiscal Year Ending December 31, 2014
               
First Quarter
   
5.74
     
4.58
 
Second Quarter
   
12.70
     
5.37
 
Third Quarter
   
8.31
     
5.05
 
Fourth Quarter
   
6.46
     
5.15
 

Number of Holders

As of March 10 2016, there were 454 record holders of our common stock.

Interwest Transfer Company Inc. is the registrar and transfer agent for our common stock. Its address is 1981 Murray Holladay Road, Suite 100, Salt Lake City, UT 84117 USA, telephone: (801) 272-9294.

Dividend Policy

We have not paid any cash dividends since our inception and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We expect to retain our earnings, if any, to provide funds for the expansion of our business. Future dividend policy will be determined periodically by the Board of Directors based upon conditions then existing, including our earnings and financial condition, capital requirements and other relevant factors.

Under current PRC regulations, wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, these foreign-invested enterprises are required to set aside certain amounts of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends. Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs.
 
Securities Authorized for Issuance under Equity Compensation Plans
 
The information set forth in Item 12 of this Annual Report on Form 10-K is incorporated herein by reference.
 
 
51

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On April 7, 2011, the Board of Directors approved a stock repurchase program that allows the Company to repurchase up to US$10 million of its stock until May 31, 2012. On September 28, 2011, the Company purchased 21,000 shares of its common stock in the public stock market for a total consideration of US$92,694. The stock repurchase program expired on May 31, 2012.


Stockholder Return Performance Graph

The following Performance Graph and related information shall not be deemed "soliciting material" or deemed to be "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that we specifically incorporate such information by reference into such filing.

The following graph compares the change in cumulative total stockholders' return on our common stock with (a) NASDAQ Composite Index and (b) Russell Small Cap Completeness Index, for each year from December 31, 2010 through December 31, 2015. The graph assumes an initial investment of $100 at the closing price on December 31, 2009 and assumes all dividends (if any) were reinvested. The figures for the chart and graph set forth below have been calculated based on the closing prices on the last trading day on the NASDAQ Global Market for each period indicated..
 

52



Adjusted Closing Stock Price Cumulative Change
 
   
12/31/2015
   
12/31/2014
   
12/31/2013
   
12/31/2012
   
12/31/2011
   
12/31/2010
 
China XD Plastics Co. Ltd.
 
$
81
   
$
100
   
$
97
   
$
70
   
$
98
   
$
100
 
Nasdaq Composite Index
 
$
189
   
$
179
   
$
157
   
$
114
   
$
98
   
$
100
 
Russell Small Cap Completeness Index
 
$
151
   
$
159
   
$
150
   
$
110
   
$
94
   
$
100
 


*$100 invested on 12/31/2010 in stock or index, including reinvestment of dividends. Data points are the last day of each fiscal year for the Company's common stock and December 31 of each year for indexes.

 

ITEM 6.   SELECTED FINANCIAL DATA

The tables below set forth selected historical financial information of the Company that has been derived from the audited financial statements as of December 31, 2011, 2012, 2013, 2014 and 2015, and for the last five years in the period ended December 31, 2015. The selected historical financial data should be read in conjunction with the consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations", included elsewhere in this Form 10-K.

(in millions, except number of shares and per share amounts).

             
   
2015
   
2014
   
2013
   
2012
   
2011
 
Revenues
 
$
999.2
   
$
1,110.6
   
$
1,050.8
   
$
599.8
   
$
381.6
 
Net income
 
$
83.7
   
$
120.7
   
$
133.8
   
$
85.9
   
$
60.5
 
Earnings per share
                                       
- basic
 
$
1.27
   
$
1.85
   
$
2.08
   
$
1.35
   
$
1.17
 
-diluted
 
$
1.27
   
$
1.85
   
$
2.08
   
$
1.35
   
$
1.16
 
Shares used in computing earnings per share
                                     
 
-basic
   
49,225,566
     
48,833,434
     
47,794,028
     
47,549,275
     
47,280,468
 
-diluted
   
49,229,460
     
48,833,434
     
47,794,028
     
47,549,275
     
47,286,375
 
Total cash, cash equivalents, restricted cash and time deposits
   
408.4
     
296.5
     
390.5
     
148.7
     
146.6
 
Total Assets
   
1,752.0
     
1,299.7
     
1,075.9
     
611.6
     
360.6
 
Long term bank loans
   
107.5
     
174.3
     
-
     
-
     
-
 
Notes payable
   
145.6
     
148.6
     
-
     
-
     
-
 
Total liabilities
   
1,076.4
     
676.8
     
566.0
     
249.6
     
89.1
 
Redeemable Series D Convertible Preferred Stock
   
97.6
     
97.6
     
97.6
     
97.6
     
97.6
 
Total Stockholder's equities
   
578.0
     
525.3
     
412.3
     
264.4
     
173.9
 

53

 

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We make forward-looking statements in this report, in other materials we file with the Securities and Exchange Commission (the "SEC") or otherwise release to the public, and on our website. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media and others. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings) and demand for our products and services, and other statements of our plans, beliefs, or expectations, including the statements contained in this Item 7, "Management's Discussion and Analysis or Plan of Operation," regarding our future plans, strategies and expectations are forward-looking statements. In some cases these statements are identifiable through the use of words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "will," "would" and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and in Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). You are cautioned not to place undue reliance on these forward-looking statements because these forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Thus, our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: global and domestic economic conditions generally and the automotive modified plastics market specifically, legislative or regulatory changes that affect our business, including changes in environmental regulations and control policies over the domestic automotive industry, the availability of working capital, the introduction of competing products and other risk factors described herein. These risks and uncertainties, together with the other risks described from time-to-time in reports and documents that we filed with the SEC should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

General

China XD Plastics Company Limited ("China XD", "we", and the "Company", and "us" or "our" shall be interpreted accordingly) is one of the leading specialty chemical companies engaged in the research, development, manufacture and sale of modified plastics primarily for automotive applications in China, and to a lesser extent, in Dubai, UAE. Through our wholly-owned operating subsidiaries in China and UAE we develop modified plastics using our proprietary technology, manufacture and sell our products primarily for use in the fabrication of automobile parts and components. We have 361 certifications from manufacturers in the automobile industry as of December 31, 2015. We are the only company certified as a National Enterprise Technology Center in modified plastics industry in Heilongjiang province. Our Research and Development (the "R&D") team consists of 362 professionals and 11 consultants, including one consultant who is a member of Chinese Academy of Engineering, and one consultant who is the former chief scientist of Specialty Plastics Engineering Institute of Jilin University. As a result of the integration of our academic and technological expertise, we have a portfolio of 278 patents, ten of which we have obtained the patent rights and the remaining 268 of which we have applications pending in China as of December 31, 2015.

Our products include eleven categories: Modified Polypropylene (PP), Modified Acrylonitrile Butadiene Styrene (ABS), Modified Polyamide 66 (PA66), Modified Polyamide 6 (PA6), Modified Polyoxymethylenes (POM), Modified Polyphenylene Oxide (PPO), Plastic Alloy, Modified Polyphenylene Sulfide (PPS), Modified Polyimide (PI), Modified Polylactic acid (PLA) and Poly Ether Ether Ketone (PEEK). Since not all the categories have achieved sales during the years of 2015, 2014 and 2013, we only presented the categories which have generated sales.
 
54

 

The Company's products are primarily used in the production of exterior and interior trim and functional components of more than 28 automobile brands and 80 automobile models manufactured in China, including Audi, Mercedes Benz, BMW, Buick, Chevrolet, VW Passat, Golf and Jetta, Mazda, and Toyota. Our research center is dedicated to the research and development of modified plastics, and benefits from its cooperation with well-known scientists from prestigious universities in China. We operate three manufacturing bases in Harbin, Heilongjiang in the PRC, with the construction of Sichuan plant underway. In addition, we completed and run the trial production in the plant in Dubai, UAE with additional 2,500 metric tons ("Phase 1") targeting high-end products for the overseas markets.  As of December 31, 2015, in domestic market, we had approximately 390,000 metric tons of production capacity across 84 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwanese conveyer systems. In December 2013, we broke ground on the construction of our fourth production base in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, expecting to bring total domestic installed production capacity to 690,000 metric tons with additional 70 new production lines at the completion of the construction of our fourth production base. Sichuan Xinda has supplied to its customers since 2013, backed by production capacity in our Harbin production base. To streamline the management in Sichuan, the Company completed a restructuring in July 2015 by merging its subsidiary in Nanchong City, the entire registered capital (US$99.99 million) of which was owned by Xinda (Heilongjiang) Investment Co., Ltd, into Sichuan Xinda.  The Company expects Sichuan facility to be completed around the middle of 2016. In order to meet the increasing demand from our customer in the ROK and to develop potential overseas markets, on January 25, 2015, AL Composites Materials FZE obtained a leased property of approximately 10,000 square meters from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE with constructed building comprising a warehouse, office and service block with lease term granted 15 years. The Company is planning to complete installing 75 production lines with additional 14,000 metric tons ("Phase 2") of annual production capacity in that property at the beginning of 2017, bringing total production capacity in Dubai to 16,500 metric tons.  

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (1) the reported amounts of our assets and liabilities; (2) the disclosure of our contingent assets and liabilities at the end of each reporting period; and (3) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these judgments, estimates and assumptions based on our own historical experience, knowledge and assessment of current business and other conditions and our expectations regarding the future based on available information which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.

When reading our consolidated financial statements, you should consider our selection of critical accounting policies, the judgment and other uncertainties affecting the application of such policies, and the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.

Long-Lived Assets

Our long-lived assets include property, plant and equipment and land use rights.

We depreciate and amortize our property, plant and equipment and land use rights, using the straight-line method of accounting over the estimated useful lives of the assets. We make estimates of the useful lives of property, plant and equipment, including the salvage values, and land use rights in order to determine the amount of depreciation and amortization expense to be recorded during each reporting period. The estimated useful life is the period over which the long-lived assets are expected to contribute directly or indirectly to the future cash flows of the Company.

We evaluate long-lived assets, including property, plant and equipment, and land use rights for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We assess recoverability by comparing carrying amount of a long-lived asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, we recognize an impairment charge based on the amount by which the carrying amount exceeds the estimated fair value of the asset or asset group. We estimate the fair value of the asset or asset group through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Assets to be disposed are reported at the lower of carrying amount or fair value less costs to sell, and are no longer depreciated.

No impairment on our long-lived assets was recognized in 2015, 2014 or 2013.
 
55

 

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In establishing the required allowance, we consider historical losses adjusted to take into account current market conditions, the amount of receivables in dispute, and the current receivables aging and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We do not have any off-balance-sheet credit exposure related to our customers.

We extend unsecured credit to customers with good credit history. We review our accounts receivable on a regular basis to determine if the bad debt allowance is adequate at each year-end. We have not experienced any material write-offs in history.

Valuation of Inventories
 
Our inventories are stated at the lower of cost or net realizable value (NRV). We routinely evaluate quantities and value of our inventories in light of current market conditions and market trends, and record a write-down against the cost of inventories for net realizable value below cost. Expected demand and anticipated sales price are the key factors affecting our inventory valuation analysis. For purposes of our inventory valuation analysis, we develop expected demand and anticipated sales prices primarily based on sales orders as well as industry trends and individual customer analysis. We also consider sales and sales orders after each reporting period-end but before the issuance of our financial statements to assess the accuracy of our inventory valuation estimates. Historically, actual demand and sales price have generally been consistent with or greater than expected demand and anticipated sales price used for purposes of the our inventory valuation analysis. The evaluation also takes into consideration new product development schedules, the effect that new products might have on the sale of existing products, product obsolescence, customer concentrations, product merchantability and other factors. Market conditions are subject to change and actual consumption of inventories could differ from forecasted demand. Our products have a long life cycle and obsolescence has not historically been a significant factor in the valuation of inventories. We have not experienced any material inventory write-downs before.
Income Tax Uncertainties and Realization of Deferred Income Tax Assets

Our income tax provision, deferred income tax assets and deferred income tax liabilities are recognized and measured primarily based on actual and expected future income, PRC statutory income tax rates, PRC tax regulations and tax planning strategies. Significant judgment is required in interpreting tax regulations in the PRC, evaluating uncertain tax positions, and assessing the realizability of deferred income tax assets. Actual results could differ materially from those judgments, and changes in judgments could materially affect our consolidated financial statements. As of December 31, 2015 and 2014, we had total gross deferred income tax assets of US$1,941,124 and US$727,711 respectively. We record a valuation allowance to reduce our deferred income tax assets if, based on the weight of available evidence, we believe expected future taxable income is not likely to support the use of a deduction or credit in that jurisdiction. We evaluate the level of our valuation allowances quarterly, and more frequently if actual operating results differ significantly from forecasted results. As of December 31, 2015 and 2014, our valuation allowance against deferred income tax assets was US$1,941,124 and US$727,711 respectively.

We recognize the impact of a tax position if we determine the position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based solely on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, it is presumed that the position will be examined by the appropriate tax authority that has full knowledge of all relevant information. In addition, a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than fifty percent (50%) likely of being realized upon settlement. The tax positions are regularly re-evaluated based on the results of the examination of income tax filings, statute of limitations expirations and changes in tax law that would either increase or decrease the technical merits of a position relative to the more-likely-than-not recognition threshold. In the normal course of business, we are regularly audited by the PRC tax authorities. The settlement of any particular issue with the applicable tax authority could have a material impact on our consolidated financial statements.
 
56


Stock Based Compensation

We measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award and recognize the cost over the period the employee is required to provide service in exchange for the award, which generally is the vesting period. We have elected to recognize the compensation cost for an award with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. However, the cumulative amount of compensation cost recognized at any date equals at least the portion of the grant date value of such award that is vested at that date.

We estimated the fair value of our share options using the Black-Scholes Option Pricing model. The model incorporates subjective assumptions. The expected volatility was based on implied volatilities from traded options and historical volatility of the Company's common stock. The risk free interest rate assumption is determined using the Federal Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. There is no expected dividend yield, as the Company has not paid dividend and does not anticipate paying dividend over the term of the grants.

Recently Issued Accounting Standards

In 2015, the Company elected to early adopt the Accounting Standards Update ("ASU") No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires the debt issuance costs be presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability, instead of reported on the balance sheet as an asset.  The costs will continue to be amortized to interest expense using the effective interest method.  Upon adoption of the guidance, the debt issuance costs in the amount of US$4,243,412 as of December 31, 2014, which were included in the other non-current assets, have been retrospectively adjusted as a direct deduction of an equivalent amount from the carrying amount of the notes payable as of December 31, 2014.

In 2015, the Company elected to early adopt the ASU No. 2015-11, Simplifying the Measurement of Inventory, which changes the measurement principle of inventory from the lower of cost or market to lower of cost and net realizable value, and requires prospective adoption.  Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.  The ASU eliminates the guidance that entities consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory when cost is determined on a first-in-first-out or average cost basis.  The Company applied this new measurement principle of inventory as of December 31, 2015. The adaption of ASU No. 2015-11 does not have any impact on the Company’s consolidated financial statements.

In 2015, the Company elected to early adopt the ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent.  The Company adopted this new guidance retrospectively.  The adoption of ASU No. 2015-17 does not have any impact on the Company’s consolidated financial statements.

The Financial Accounting Standards Board issued Accounting Standards Codification (“ASC”) Topic 842, Leases, in February 2016. ASC Topic 842 requires a lessee to recognize all leases, including operating leases, on balance sheet via a right-of-use asset and lease liability, unless the lease is a short-term lease (one with an accounting lease term of 12 months or less).  All (or a portion of) fixed payments by the lessee to cover lessor costs related to ownership of the underlying assets, or executory costs, that do not represent payments for a good or service will be considered lease payments and reflected in the measurement of lease assets and lease liabilities by lessees.  The new standard does not substantially change lessor accounting from current U.S. GAAP.  The new standard also requires lessees and lessors to disclose more qualitative and quantitative information about their leases than current U.S. GAAP does.  The standard is applied retrospectively, with elective reliefs.  The new standard is effective for annual and interim reporting periods beginning after December 15, 2018 for a public business entity.  Early adoption is permitted.   The Company has not yet determined the impact of the new standard on its current policies for leases.

The following table sets forth statements of comprehensive income data for the years ended December 31, 2015, 2014 and 2013 in millions of US$:
 
(millions of US$, except the percentage) 
 
For the Years Ended December 31,
 
   
2015
         
2014
         
2013
 
               
Change
               
Change
             
   
Amount
   
%
   
%
   
Amount
   
%
   
%
   
Amount
   
%
 
Revenues
   
999.2
     
100
%
   
(10.0)
%
   
1,110.6
     
100.0
%
   
5.7
%
   
1,050.8
     
100.0
%
Cost of revenues
   
(817.8)
     
(81.8
)%
   
(7.9)
%
   
(888.2
)
   
(80.0
)%
   
7.3
%
   
(827.4
)
   
(78.
7)%
Gross profit
   
181.4
     
18.2
%
   
(18.4)
%
   
222.4
     
20.0
%
   
(0.4)
%
   
223.4
     
21.3
%
Total operating expenses
   
(46.4)
     
(4.6)
%
   
(8.5)
%
   
(50.7
)
   
(4.6
)%
   
34.1
%
   
(37.8
)
   
(3.6
)%
Operating income
   
135.0
     
13.6
%
   
(21.4)
%
   
171.7
     
15.4
%
   
(7.5)
%
   
185.6
     
17.7
%
Income before income taxes
   
101.9
     
10.3
%
   
(26.7)
%
   
139.0
     
12.4
%
   
(23.0)
%
   
180.5
     
17.2
%
Income tax expense
   
(18.2)
     
(1.8)
%
   
(0.5
)%
   
(18.3
)
   
(1.6
)%
   
(60.8)
%
   
(46.7
)
   
(4.4
)%
Net income
   
83.7
     
8.5
%
   
(30.7)
%
   
120.7
     
10.8
%
   
(9.8)
%
   
133.8
     
12.8
%
 
 
57

 
Revenues

Fiscal 2015 Highlights

Revenues decreased by 10.0% or US$111.4 million in 2015 as compared to 2014. This was due to approximately 2.7% decrease in sales volume and 5.5% decrease in the average RMB selling price of our products.

(i) Domestic market

For the year ended December 31, 2015, revenue from domestic market decreased by US$42.9 million as a result of a decrease of 1.0% in sales volume and a decrease of 1.4% in the average RMB selling price of our products, as compared with those of last year.  However more sales were achieved in Southwest China and Central China, because of our marketing efforts to develop new customers.

 
Vehicle sales in China grew by 4.7% in 2015, a slower growth than that of 2014, and the slowest rate in approximately 25 years, missing the State-backed auto association's revised forecast amid the economy slowdown in the world's largest car market.  The Chinese government's anti-monopoly probe against luxury automobile manufacturers and dealers by the state backlashed against automakers contributed to the lower-than-expected growth rate. Further, both automakers and parts manufacturers in China experienced pricing pressure from 2014 to the present. The unusual volatility of the Chinese stock market since June 2015 also seemed to have certain negative impact on consumer sentiments. As a result, plastic fabricators have been seeking newer products utilizing lower cost raw materials and more cost-efficient formulations. The pricing of our products is determined with reference to the relatively lower average selling price in response to customer demand in China.

 
In order to stimulate the slowdown of the auto industry, on September 29, 2015, the Chinese government implemented a tax incentive policy of 50% reduction of the sales tax for eligible purchase of vehicles with engines of 1.6 liters and less.  This helped the recovery of vehicle sales in China for the fourth quarter of 2015.
 
(ii) Overseas market

For the year ended December 31, 2015, revenue from overseas market decreased by US$68.5 million, as a result of a decrease of 49.7% in sales volume mostly due to the ceasing supply during the second half of 2015 to the ROK customer, partially offset by 1.3% increase in the average USD selling price as compared with those of last year. The products sold in overseas market are mainly higher-end products such as PA66 and Plastic Alloys with much higher selling price for engine bonnet, oil pump, fuse hose and other higher-end auto engine related applications, high-end appliance components, and circuit boards etc. The Company expects continuing growth opportunities in oversea markets, including the ROK and Europe.

Fiscal 2014 Highlights

Revenues increased by 5.7% or US$59.8 million in 2014 as compared to 2013. This was due to approximately 0.6% increase in sales volume and 5.3 % increase in the average RMB selling price of our products.

In 2014, the Company developed its presence in the ROK by selling to a ROK customer primarily higher-end PA66 and plastic alloy products for an aggregate amount of US$140.1 million, which accounted for 12.6% of the total revenues for the year ended December 31, 2014.

The year-over-year increase of sales volume was primarily driven by the new business from the oversea market in the ROK.

Vehicle sales in China grew by 6.9% in 2014, missing the State-backed auto association's revised forecast amid the economy slowdown in the world's largest car market. The Chinese government's anti-monopoly probe against luxury automobile manufacturers by the state and dealers backlashed against automakers. Both contributed to the lower-than-expected growth rate. Further, both automakers and parts manufacturers in China experienced pricing pressure in 2014. As a result, plastic fabricators have been seeking newer products utilizing lower cost raw materials and more cost-efficient formulations. The pricing of the majority of our existing products remained stable while our newly launched products have relatively lower average selling price in response to customer demand in China. The Company has started marketing its higher-end products to customers overseas since early 2014 to better allocate its limited production capacity, diversify its business and reduce its concentration in the Chinese market. Although revenues from China declined in 2014 as compared to 2013, the increase of revenues from oversea market in the ROK more than offset such decline.

 
58


 
Fiscal 2013 Highlights

Revenue increased by 75.2% or US$451.0 million in 2013 as compared to 2012. This was due to approximately 51.6% increase in sales volume and 12.6% increase in the average RMB selling price of our products.

The increase of sales volume was driven by the strong demand of modified plastics in the PRC market and higher penetration of our business in our existing markets supported by our additional 30 production lines, which commenced production in December 2012, as well as the marketing efforts to develop new customers, in particular those in East and Southwest China. Such increase in demand was driven by increasing demand for middle and high-end automobiles by Chinese consumers, continuing substitution of imported modified plastics by domestic suppliers, as well as the increase of plastic content on the per-vehicle-basis in China with even higher adoption rate in higher-end automobile models than low-end ones. The increase of average RMB selling price was mainly due to the shift of product mix towards higher-end products.

The following table summarizes the breakdown of revenues by categories in millions of US$:

(millions of US$, except the percentage)
   
Revenues
For the Years Ended December 31,
 
 
     
2015
     
Change
     
2014
     
Change
     
2013
 
     
Amount
     
%
     
%
     
Amount
     
%
     
%
     
Amount
     
%
 
Modified Polyamide 66 (PA66)
   
219.1
     
21.9
%
   
13.9
%
   
192.4
     
17.4
%
   
(1.6
)%
   
195.5
     
18.6
%
Modified Polyamide 6 (PA6)
   
203.5
     
20.4
%
   
(8.8)
%
   
223.1
     
20.1
%
   
3.2
%
   
216.2
     
20.6
%
Plastic Alloy
   
350.6
     
35.1
%
   
(12.4)
%
   
400.3
     
36.0
%
   
35.0
%
   
296.6
     
28.2
%
Modified Polypropylene (PP)
   
164.8
     
16.5
%
   
(29.1)
%
   
232.4
     
21.0
%
   
(18.8
) %
   
286.3
     
27.2
%
Modified Acrylonitrile butadiene styrene (ABS)
   
40.5
     
4.1
%
   
10.1
%
   
36.8
     
3.3
%
   
13.6
%
   
32.4
     
3.1
%
Polyoxymethylenes (POM)
   
3.5
     
0.3
%
   
(2.8)
%
   
3.6
     
0.3
%
   
28.6
%
   
2.8
     
0.3
%
Polyphenylene Oxide (PPO)
   
13.0
     
1.3
%
   
(12.2)
%
   
14.8
     
1.3
%
   
8.8
%
   
13.6
     
1.3
%
Modified Polylactic Acid (PLA)
   
0
     
0
%
   
n/a
     
0.0
     
0.0
%
   
n/
a
   
-
     
-
%
Raw Materials
   
3.4
     
0.3
%
   
(52.8)
%
   
7.2
     
0.6
%
   
33.3
%
   
5.4
     
0.5
%
Others
   
0.8
     
0.1
%
   
n/a
     
-
       
-
   
-
     
-
       
-
Sub-total
   
999.2
     
100.0
%
   
(10.0)
%
   
1,110.6
     
100.0
%
   
5.9
%
   
1,048.8
     
99.8
%
                                                                 
After-sales Service
   
-
     
-
%
     
%
   
-
     
-
%
   
(100.0
)%
   
2.0
     
0.2
%
Total Revenues
   
999.2
     
100.0
%
   
(10.0)
%