CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
|
68,313,421
|
|
|
|
31,621,734
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
46,282,307
|
|
|
|
43,055,976
|
|
Stock-based compensation
|
|
|
3,353,811
|
|
|
|
553,512
|
|
Amortization of issuance cost of the Syndicate loan facility
|
|
|
1,736,535
|
|
|
|
3,750,028
|
|
Losses (gains) on foreign currency option contracts
|
|
|
(1,070,779
|
)
|
|
|
1,048,599
|
|
Foreign currency exchange losses (gains)
|
|
|
(5,425,545
|
)
|
|
|
6,038,799
|
|
Losses on disposals of property, plant and equipment
|
|
|
2,423,326
|
|
|
|
17,509
|
|
Losses on disposal of a subsidiary
|
|
|
214,557
|
|
|
|
-
|
|
Deferred income tax benefit
|
|
|
(1,917,993
|
)
|
|
|
(2,407,706
|
)
|
Accounts receivable
|
|
|
(5,147,409
|
)
|
|
|
120,443,715
|
|
Amounts due from a related party
|
|
|
-
|
|
|
|
243,779
|
|
Inventories
|
|
|
(228,481,188
|
)
|
|
|
(120,026,438
|
)
|
Prepaid expenses and other current assets
|
|
|
(39,949,682
|
)
|
|
|
(26,354,886
|
)
|
Value added tax in long-term prepayments to equipment suppliers
|
|
|
(50,794,483
|
)
|
|
|
(23,267,330
|
)
|
Other non-current assets
|
|
|
49,182
|
|
|
|
10,113,931
|
|
Bills payable
|
|
|
391,738,736
|
|
|
|
92,130,473
|
|
Accounts payable
|
|
|
(148,839,736
|
)
|
|
|
(108,053,082
|
)
|
Amounts due to related parties
|
|
|
-
|
|
|
|
(12,155
|
)
|
Income taxes payable
|
|
|
(1,701,689
|
)
|
|
|
16,581,508
|
|
Accrued expenses and other current liabilities
|
|
|
38,528,151
|
|
|
|
20,097,830
|
|
Deferred income
|
|
|
(4,917,452
|
)
|
|
|
(4,630,632
|
)
|
Other non-current liabilities
|
|
|
(3,000,815
|
)
|
|
|
64,895,667
|
|
Net cash provided by operating activities
|
|
|
61,393,255
|
|
|
|
125,840,831
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from maturity of time deposits
|
|
|
540,066,526
|
|
|
|
475,873,199
|
|
Purchase of time deposits
|
|
|
(255,518,597
|
)
|
|
|
(564,710,760
|
)
|
Purchase of land use rights
|
|
|
-
|
|
|
|
(8,279,334
|
)
|
Purchases of and deposits for property, plant and equipment
|
|
|
(429,205,807
|
)
|
|
|
(456,474,007
|
)
|
Proceeds from disposal of property, plant and equipment
|
|
|
416,968
|
|
|
|
-
|
|
Refund of deposit from equipment suppliers
|
|
|
120,532,191
|
|
|
|
280,814,137
|
|
Deposits for acquisition of equity
|
|
|
(3,506,048
|
)
|
|
|
(11,937,192
|
)
|
Refund of deposits for acquisition of equity
|
|
|
15,299,214
|
|
|
|
-
|
|
Government grant related to the construction of Sichuan plant
|
|
|
10,281,222
|
|
|
|
29,382,885
|
|
Cash disposed for sales of a subsidiary
|
|
|
(41,631
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(1,675,962
|
)
|
|
|
(255,331,072
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from bank borrowings
|
|
|
1,238,947,716
|
|
|
|
842,571,025
|
|
Repayment of bank borrowings
|
|
|
(1,255,214,637
|
)
|
|
|
(682,921,893
|
)
|
Proceeds from interest-free advances from related parties
|
|
|
22,145,247
|
|
|
|
-
|
|
Repayment of interest-free advances from related parties
|
|
|
(3,779,509
|
)
|
|
|
-
|
|
Investment received in advance from a related party
|
|
|
75,567,512
|
|
|
|
-
|
|
Refund investment received in advance from a related party
|
|
|
(75,567,512
|
)
|
|
|
-
|
|
Proceeds from exercise of stock options
|
|
|
120,000
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,218,817
|
|
|
|
159,649,132
|
|
Effect of foreign currency exchange rate changes on cash and cash equivalents and restricted cash
|
|
|
(15,035,935
|
)
|
|
|
18,356,927
|
|
Net increase in cash, cash equivalents and restricted cash
|
|
|
46,900,175
|
|
|
|
48,515,818
|
|
Cash, cash equivalents and restricted cash at beginning of year
|
|
|
320,091,665
|
|
|
|
271,575,847
|
|
Cash, cash equivalents and restricted cash at end of year
|
|
|
366,991,840
|
|
|
|
320,091,665
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid, net of US$2,416,818 and US$2,893,631 capitalized for the years ended December 31, 2018 and 2017, respectively
|
|
|
43,664,817
|
|
|
|
38,695,738
|
|
Income taxes paid
|
|
|
17,982,507
|
|
|
|
13,030,643
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Consideration receivable for the disposal of a subsidiary
|
|
|
7,285,231
|
|
|
|
-
|
|
Accrual for purchase of equipment and construction included in accrued expenses and other current liabilities
|
|
|
6,188,847
|
|
|
|
5,144,134
|
|
The following table shows a reconciliation of cash, cash equivalents and restricted cash on the consolidated balance sheets to that presented in the above consolidated statements of cash flows.
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
US$
|
|
US$
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
41,301,817
|
|
|
|
190,392,211
|
|
Restricted cash
|
|
|
325,690,023
|
|
|
|
129,699,454
|
|
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
|
|
|
366,991,840
|
|
|
|
320,091,665
|
|
See accompanying notes to consolidated financial statements.
Note 1 – Description of business and significant concentrations and risks
China XD Plastics Company Limited ("China XD") is a holding company that is incorporated in Nevada of the United States of America. China XD and its subsidiaries (collectively referred to hereinafter as the "Company"), is primarily engaged in the research and development, production and sales of modified plastics products. The plastics products, which are manufactured by the Company, are primarily for use in the fabrication of automobile parts and components and secondarily for applications in high-speed railway, airplanes and ships and consist of the following major products categories: Polypropylene ("PP"), Acrylonitrile Butadiene Styrene ("ABS"), Polyamid6 ("PA6"), Polyamid66 ("PA66"), Polyformaldehyde ("POM"), Polyphenylene Oxide ("PPO"), Plastic Alloy, Polyphenylene Sulfide ("PPS"), Poly Imide ("PI"), Polylactide Acid ("PLA") , Poly Ether Ether Ketone ("PEEK") and Polyethylene ("PE") .
The Company's operations are primarily conducted through its subsidiaries in the People's Republic of China ("PRC") and Dubai, United Arab Emirates ("UAE"). The Company's other subsidiaries in the US, the British Virgin Islands ("BVI") and Hong Kong Special Administrative Region ("SAR"), do not have significant operations.
Sales concentration
The Company sells its products primarily through approved distributors in the People's Republic of China (the "PRC"). To a lesser extent, the Company also sells its products to two overseas customer in the Republic of Korea (the "ROK") and
Ras Al Khaimah, UAE. The Company's sales are highly concentrated. Sales to distributors individually exceeded 10% of the Company's revenues, for the years ended December 31, 2018 and 2017, are as follows:
(in millions, except percentage)
|
|
Years Ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
US$
|
|
|
%
|
|
|
US$
|
|
|
%
|
|
|
Distributor A, located in PRC
|
|
|
195.2
|
|
|
|
15.3
|
%
|
|
|
186.8
|
|
|
|
14.5
|
%
|
|
Distributor B, located in PRC
|
|
|
152.4
|
|
|
|
12.0
|
%
|
|
|
136.5
|
|
|
|
10.6
|
%
|
|
Distributor C, located in PRC
|
|
|
139.8
|
|
|
|
11.0
|
%
|
|
|
106.5
|
|
|
|
8.3
|
%
|
|
Total
|
|
|
487.4
|
|
|
|
38.3
|
%
|
|
|
429.8
|
|
|
|
33.4
|
%
|
|
The Company expects revenues from these distributors to continue to represent a substantial portion of its revenue in the future. Any factor adversely affecting the automobile industry in the PRC or the business operations of these customers will have a material effect on the Company's business, financial position and results of operations.
Purchase concentration of raw materials
The principal raw materials used for the Company's production of modified plastics products are plastic resins, such as polypropylene, ABS and nylon. The Company purchases substantially all of its raw materials through a limited number of distributors. Raw material purchases from these distributors, which individually exceeded 10% of the Company's total raw material purchases, accounted for approximately
21.3% (two distributors) and 35.9% (three distributors)
of the Company's total raw material purchases for the years ended December 31, 2018 and 2017, respectively. Management believes that other suppliers could provide similar raw materials on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect the Company's business, financial position and results of operations.
Cash concentration
Cash and cash equivalents, restricted cash and time deposits mentioned below maintained at banks consist of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
RMB denominated bank deposits with:
|
|
|
|
|
|
|
Financial Institutions in the PRC
|
|
|
366,773,172
|
|
|
|
605,125,974
|
|
Financial Institutions in Hong Kong Special Administrative Region ("Hong Kong SAR")
|
|
|
8,134
|
|
|
|
8,280
|
|
U.S. dollar denominated bank deposits with:
|
|
|
|
|
|
|
|
|
Financial Institution in the U.S.
|
|
|
40,390
|
|
|
|
121,756
|
|
Financial Institutions in the PRC
|
|
|
17,050
|
|
|
|
17,772
|
|
Financial Institution in Hong Kong SAR
|
|
|
131,892
|
|
|
|
1,895,508
|
|
Financial Institution in Macau Special Administrative Region ("Macau SAR")
|
|
|
6,144
|
|
|
|
55,206
|
|
Financial Institution in Dubai, UAE
|
|
|
14,464
|
|
|
|
879,012
|
|
HK dollar denominated bank deposits with:
|
|
|
|
|
|
|
|
|
Financial institution in Hong Kong SAR
|
|
|
156
|
|
|
|
131
|
|
Dirham denominated bank deposits with:
|
|
|
|
|
|
|
|
|
Financial institution in Dubai, UAE
|
|
|
438
|
|
|
|
11,043
|
|
The bank deposits with financial institutions in the PRC are insured by the government authority for up to RMB500,000. The bank deposits with financial institutions in the Hong Kong SAR are insured by the government authority for up to HK$500,000. The bank deposits with financial institutions in the Macau SAR are insured by the government authority for up to MOP$500,000. The bank deposits with financial institutions in the Dubai, UAE are not insured by the government authority. Total bank deposits amounted to $1,442,481 and $1,505,747 are insured as of December 31, 2018 and 2017, respectively. The Company has not experienced any losses in uninsured bank deposits and does not believe that it is exposed to any significant risks on cash held in bank accounts. To limit exposure to credit risk, the Company primarily places bank deposits with large financial institutions in the PRC, Hong Kong SAR, Macau SAR and Dubai, UAE with acceptable credit rating.
Note 2 – Summary of significant accounting policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
(b) Consolidation
The accompanying consolidated financial statements include the financial statements of China XD and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.
(c) Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the recoverability of the carrying amounts of property, plant and equipment, the realizability of inventories, the useful lives of property, plant and equipment, the collectability of accounts receivable, the fair values of stock-based compensation awards and the accruals for tax uncertainties and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.
(d) Foreign Currency
The Company's reporting currency is the U.S. dollar (US$). The functional currency of China XD Plastics and its subsidiaries in the United States, BVI, Hong Kong and Dubai, UAE is the US$. The functional currency of China XD's subsidiaries in the PRC is Renminbi (RMB).
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using the applicable exchange rates at the balance sheet date. The resulting exchange differences are recorded in foreign currency exchange gains (losses) in the consolidated statements of comprehensive income.
Assets and liabilities of subsidiaries with functional currencies other than US$ are translated into US$ using the exchange rate on the balance sheet date. Revenues and expenses are translated into US$ at average rates prevailing during the reporting period. The differences resulting from such translation are recorded as a separate component of accumulated other comprehensive loss within stockholders' equity.
Since the RMB is not a fully convertible currency, all foreign exchange transactions involving RMB must take place either through the People's Bank of China or other institutions authorized to buy and sell foreign exchange.
(e) Cash and cash equivalents, time deposits and restricted cash
Cash and cash equivalents consists of cash on hand, cash in bank and interest-bearing certificates of deposit with an initial term of three months or less when purchased.
Time deposits represent certificates of deposit with initial terms of six or twelve months when purchased. As of December 31, 2018 and 2017, the Company's time deposits bear a weighted average interest rate of nil
and 1.3% per annum, respectively.
Cash deposits in bank that are restricted as to withdrawal or usage for up to 12 months are reported as restricted cash in the consolidated balance sheets.
Short-term bank deposits that are pledged as collateral for bills payable relating to purchases of raw materials are reported as restricted cash and amounted to US$202,568,664 and US$65,766,735 as of December 31, 2018 and 2017, respectively. Upon maturity and repayment of the bills payable, which is generally within 6 months, the cash becomes available for use by the Company.
Short-term bank deposits that are related to government grant are reported as restricted cash and amounted to US$1,469,935 and US$1,537,935 as of December 31, 2018 and 2017, respectively. On February 11, 2017, the Company entered into a fund support agreement with the People's Government of Shunqing District, Nanchong City, Sichuan Province, pursuant to which the Company was granted RMB10 million (equivalent to US$1.5 million) to support the construction of the Sichuan plant. Such amount has been received in full in the Company's bank account with reimbursement be subject to the Government's pre-approval and will be released by the Government when the construction progress of the plant is 60%. Such balance is reported as restricted cash.
Short-term bank deposits that are pledged as collateral for foreign currency option contract are reported as restricted cash and amounted to nil and US$2,509,871 as of December 31, 2018 and 2017, respectively.
Short-term bank deposits that are pledged as collateral for issuance of letter of guarantee are reported as restricted cash amounted to US$70,885,301 and US$59,884,913 as of December 31, 2018 and 2017, respectively.
Short-term bank deposits that are pledged as repayment to settle US$45.0 million of syndicated loans obtained from Standard Chartered Bank are reported as restricted cash and amounted to US$50,766,123 and nil as of December 31, 2018 and 2017, respectively.
(f) Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. In establishing the required allowance, management considers historical losses, the amount of accounts receivables in dispute, the accounts receivables aging and the customers' payment patterns. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.
(g) Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average cost method. Work-in-progress and finish goods comprise direct materials (including purchasing, receiving and inspection costs), direct labor and an allocation of related manufacturing overhead based on normal operating capacity.
(h) Long-lived Assets
Property, plant and equipment
Property, plant and equipment are initially recorded at cost. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. The estimated useful lives of property, plant and equipment are as follows:
|
Estimated
Useful Life
|
Workshops and buildings
|
39 years
|
Machinery, equipment and furniture
|
5-10 years
|
Motor vehicles
|
5 years
|
An appropriate allocation of depreciation expense of property, plant and equipment attributable to manufacturing activities based on normal capacity is capitalized as part of the cost of inventory, and expensed in cost of revenues when the inventory is sold. Costs incurred in the construction of property, plant and equipment, including an allocation of interest expense incurred, are capitalized and transferred into their respective asset category when the assets are ready for their intended use, at which time depreciation commences. Ordinary maintenance and repairs are charged to expenses as incurred, while replacements and betterments are capitalized. When items are retired or otherwise disposed of, income is charged or credited for the difference between net book value of the item disposed and proceeds realized thereon.
Land Use Rights
A land use right in the PRC represents an exclusive right to occupy, use and develop a piece of land during the contractual term of the land use right. The cost of a land use right is usually paid in one lump sum at the date the right is granted. The prepayment usually covers the entire period of the land use right. The lump sum advance payment is capitalized and recorded as land use right and then charged to expense on a straight-line basis over the period of the right, which is normally 50 years.
Amortization expense of land use rights was US$638,773 and US$522,153 for the years ended December 31, 2018 and 2017, respectively, and is included in general and administrative expenses.
(i) Impairment of Long-lived Assets
Long-lived assets, such as property, plant and equipment, and land use rights, are reviewed for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability of a long-lived asset or asset group to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying value of an asset or asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount that the carrying value exceeds the estimated fair value of the asset or asset group. Fair value is determined 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 of long-lived assets was recognized for any of the years presented.
(j) Derivative Financial Instruments
The Company recognizes all derivative instruments as either assets or liabilities at their respective fair values. Changes in the fair value of derivative instruments not designated for hedge accounting are recognized in earnings.
(k) Revenue Recognition
Effective January 1, 2018, the Company adopted the new guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Topic 606 requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company applies the following steps to recognize revenues: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation.
Products sales
The Company recognizes revenue upon transfer of control of its products to the customers, which typically occurs upon delivery. The Company’s main performance obligation to its customers is the delivery of products in accordance with purchase orders. Each purchase order defines the transaction price for the products purchased under the arrangement. The Company sells its products primarily to the distributors and to a lesser extent to the direct customers. For sales in the People’s Republic of China (“PRC”), acceptance of delivery of the products by the distributors is evidenced by goods receipt notes signed by the distributors’ customers (or end users). The distributors accept the products at the time they are delivered to the distributors’ customers (or end customers). Delivery acceptance is evidenced by signed goods receipt notes. The Company has no remaining obligations after the distributors’ acceptance of the products. Under the terms of the contracts or purchase orders between the Company and the distributors, the control of the products is transferred to the distributor upon the signing of the goods receipt notes and the distributor has no rights to return the products (other than for defective products). For sales to the overseas customers, delivery of the products occurs at the point in time the product is delivered to the named port of shipment, which is when the control of the products is transferred to the customer.
The selling price, which is specified in the purchase orders, is fixed. Under the terms of the purchase orders, upon the sale of the products to the distributors and the signing of the good receipts notes, the Company has the legal enforceable right to receive full payment of the sales price. The distributors’ obligation to pay the Company is not dependent on the distributors selling the products or collecting cash from their customers (or end customers). The customer is required to pay under normal sales terms. The Company’s normal payment terms in most cases are 90 days and its sales arrangements do not have any material financing components. In addition, the Company’s customer arrangements do not produce contract assets or liabilities that are material to its consolidated financial statements.
Incremental costs to fulfill the Company’s customer arrangements are expensed as incurred, as the amortization period is less than one year.
The Company’s sales are net of value added tax (“VAT”) and business tax and surcharges collected on behalf of tax authorities in respect of product sales. VAT and business tax and surcharges collected from customers, net of VAT paid for purchases, is recorded as a liability in the consolidated balance sheets until it is paid to the tax authorities.
Outbound freight and Handling costs:
The company accounts for product outbound freight and handling costs as fulfillment activities and present the associated costs in costs of goods sold in the period in which it sells the product.
Disaggregation of Revenues:
The company manufactures and sells modified plastics primarily for automotive applications in China and to a lesser extent, in Dubai, United Arab Emirates (“UAE”). The Company disaggregates revenue based on its major customer grouping as this category represents the most appropriate depiction of how the nature, amount, and timing of revenues and cash flows are affected by economic factors. Sales by major customer group are as follows:
Distributors
– represents sales to the distributors, who re-sell our products to end customers. Geographically, this category only includes sales in China.
Direct customers
– represents sales sold directly to customers in automotive applications and electrical appliances industry. Geographically, this category mainly includes sales to Ras Al Khaimah, UAE and Republic of Korea (“ROK”) and to a lesser extent, in PRC.
Others
– mainly represents agent fee of raw material trading.
The following tables provide sales by major customer group for years ended December 31, 2018 and 2017:
|
|
Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Distributors
|
|
|
1,241,373,690
|
|
|
|
1,125,772,567
|
|
Direct customers
|
|
|
32,679,238
|
|
|
|
163,626,112
|
|
Others
|
|
|
780,354
|
|
|
|
1,049,069
|
|
Total
|
|
|
1,274,833,282
|
|
|
|
1,290,447,748
|
|
(l) Cost of Revenues
Cost of revenues represents costs of raw materials (including purchasing, receiving and inspection costs), packaging materials, labor, utilities, depreciation and amortization of manufacturing facilities and warehouses, handling costs, outbound freight and inventory write-down. Depreciation and amortization of manufacturing facilities and warehouses attributable to manufacturing activities is capitalized as part of the cost of inventory, and expensed in costs of revenues when the inventory is sold.
(m) Selling, General and Administrative Expenses
Selling expenses represents primarily costs of payroll, benefits, commissions for sales representatives and advertising expenses. General and administrative expenses represents primarily payroll and benefits costs for administrative employees, rent and operating costs of office premises, depreciation and amortization of office facilities, and other administrative expenses.
(n) Research and Development Expense
Research and development costs are expensed as incurred.
(o) Government Grants
Government grants are recognized when there is reasonable assurance that the Company will comply with the conditions attaching to them and the grants will be received. Government grants for the purpose of giving immediate financial support to the Company with no future related costs are recognized as other income in the Company's consolidated statements of comprehensive income. Government grants related to the acquisition of assets are recorded as deferred income on the consolidated balance sheets when the grants become receivable, and recognized as other income in the consolidated statements of comprehensive income on a straight-line basis over the estimated useful lives of those assets.
(p) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates or tax laws on deferred income tax assets and liabilities is recognized in the consolidated statements of comprehensive income in the period the change in tax rates or tax laws is enacted. A valuation allowance is provided to reduce the carrying amount of deferred income tax assets if it is considered more likely than not that some portion or all of the deferred income tax assets will not be realized.
The Company recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of interest expense, and general and administration expenses, respectively in the consolidated statements of comprehensive income.
(q) Bills Payable
Bills payable represent bills issued by financial institutions to the Company's raw material suppliers. The Company's suppliers receive payments from the financial institutions upon maturity of the bills and the Company is obliged to repay the face value of the bills to the financial institutions.
(r) Employee Benefit Plans
Pursuant to relevant PRC regulations, the Company is required to make contributions to various defined contribution plans organized by municipal and provincial PRC governments. The contributions are made for each PRC employee at rate of approximately 40% on a standard salary base as determined by local social security bureau. Contributions to the defined contribution plans are charged to the consolidated statements of comprehensive income when the related service is provided. For the years ended December 31, 2018 and 2017, the costs of the Company's contributions to the defined contribution plans amounted to US$6,451,997 and US$6,223,903, respectively.
For the years ended December 31, 2018 and 2017, 51% and 64% of costs of employee benefits were recorded in general and administration expenses, respectively, with the remaining portion of costs of employee benefits in selling expenses, research and development expenses and cost of revenues each year.
The Company has no other obligation for the payment of employee benefits associated with these plans beyond the contributions described above.
(s) Stock Based Compensation
The Company measures 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 recognizes the cost over the period during which the employee is required to provide service in exchange for the award, which generally is the vesting period. The amount of cost recognized is adjusted to reflect any expected forfeitures prior to vesting. The Company recognizes compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award, provided that the cumulative amount of compensation cost recognized at any date at least equals the portion of the grant-date value of such award that is vested at that date.
(t) Commitments and Contingencies
In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product and environmental liability, and non-income tax matters. An accrual for a loss contingency is recognized when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.
(u) Earnings per Share
Basic earnings per share ("EPS") is computed by dividing net income attributable to common stockholders by the weighted average number of common stock outstanding during the year using the two-class method. Under the two-class method, net income attributable to common stockholders is allocated between common stock and other participating securities based on participating rights in undistributed earnings. Nonvested shares and redeemable Series D convertible preferred stock are participating securities since the holders of these securities participate in dividends on the same basis as common stockholders. Diluted EPS is calculated by dividing net income attributable to common stockholders as adjusted for the effect of dilutive common stock equivalent, if any, by the weighted average number of common stock and dilutive common stock equivalent outstanding during the year. Potential dilutive securities are not included in the calculation of diluted earnings per share if the impact is anti-dilutive.
(v) Segment Reporting
The Company uses the management approach in determining reportable operating segments. The management approach consider the internal reporting used by the Company's chief operating decision maker for making operating decisions about the allocation of resources of the segment and the assessment of its performance in determining the Company's reportable operating segments. Management has determined that the Company has one operating segment, which is the modified plastics segment.
(w) Fair Value Measurements
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
-
Level 1
Inputs:
Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
-
Level 2
Inputs
: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
-
Level 3
Inputs
: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
-
The fair value of restricted cash and time deposits as of December 31, 2018 and 2017 are categorized as Level 2 measurement.
-
The fair value of foreign currency contracts as of December 31, 2017 is categorized as Level 3 measurement.
The Company did not have any financial assets and liabilities or nonfinancial assets and liabilities that are measured and recognized at fair value on a recurring or nonrecurring basis as of December 31, 2018 and 2017. Management used the following methods and assumptions to estimate the fair values of financial instruments at the balance sheet dates:
-
Short-term financial instruments, including cash and cash equivalents, restricted cash, time deposits, accounts receivable, amounts due from a related party, short-term bank loans, bills payable, accounts payable, amounts due to a related party and accrued expenses and other current liabilities- carrying amounts approximate fair values because of the short maturity of these instruments.
-
Long-term bank loans-fair value is based on the amount of future cash flows associated with each loan discounted at the Company's current borrowing rate for similar debt instruments of comparable terms. The carrying value of the long-term bank loans approximate their fair values as the long-term bank loans carry interest rates which approximate rates currently offered by the Company's banks for similar debt instruments of comparable maturities.
-
Derivative liabilities on foreign currency option contracts-fair values are determined using Black-Scholes model. It considers the following significant inputs: risk-free rate, foreign exchange rate and volatility.
(x) Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. The original effective date for ASU 2014-09 would have required the Company to adopt beginning in its first quarter of 2017. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for one year and permits early adoption as early as the original effective date of ASU 2014-09. The new revenue standard may be applied retrospectively to each prior period presented ("full retrospective method) or retrospectively with the cumulative effect recognized as of the date of adoption ("modified retrospective method"). The Company applied the modified retrospective method to those contracts that are not completed contracts on January 1, 2018 upon adoption of ASU 2014-09 Results for reporting periods beginning after January 1, 2018 are presented under the new revenue recognition, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605. The adoption of new revenue standard did not impact retained earnings as of January 1, 2018, and there would be no nuances of total revenue for the year of 2018 either the Company adopted ASC 605 or ASC 606. There is no material impact on its consolidated financial statements and related disclosures as a result of the new adoption of the guidance.
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. ASU 2016-02 is effective for public companies for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company will adopt this ASU on January 1, 2019 with an immaterial cumulative adjustment to retained earnings rather than retrospectively adjusting prior periods. This adoption approach will result in a balance sheet presentation that will not be comparable to the prior period in the first year of adoption.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which addressed and provided guidance for each of eight specific cash flow issues with the objective of reducing the existing diversity in practice. This standard is effective for public companies for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has early adopted ASU 2016-15 on its consolidated financial statements and there was no impact as a result of the adoption.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This standard required that companies recognize the income tax consequences of an intra-entity transfer of an asset (other than inventory) when the transfer occurs. Current guidance prohibits companies from recognizing current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This standard is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within that reporting period. The Company has early adopted ASU 2016-16 on its consolidated financial statements and there was no impact as a result of the adoption.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires that entities show the changes in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The Company has retrospectively adopted ASU 2016-18 on January 1, 2018, and there was no material impact on its consolidated financial statements as a result of the adoption.
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. ASU 2018-02 is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year, with early adoption permitted. The Company will adopt the standard on January 1, 2019, and do not expect the adoption of this guidance will have a material impact on its financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The new guidance largely aligns the accounting for share-based awards issued to employees and nonemployees. Existing guidance for employee awards will apply to non-employee share-based transactions with limited exceptions. The new guidance also clarifies that any share- based payment awards issued to customers should be evaluated under ASC 606, Revenue from Contracts with Customers. ASU 2018-07 is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year, with early adoption permitted. The Company will adopt the standard on January 1, 2019, and do not expect the adoption of this guidance will have a material impact on its financial statements.
Note 3 – Accounts receivable
Accounts receivable consists of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Accounts receivable
|
|
|
294,726,804
|
|
|
|
298,909,440
|
|
Allowance for doubtful accounts
|
|
|
(38,516
|
)
|
|
|
(40,456
|
)
|
Accounts receivable, net
|
|
|
294,688,288
|
|
|
|
298,868,984
|
|
As of December 31, 2018 and 2017, the accounts receivable balances also include notes receivable in the amount of US$27,392 and US$1,181,029, respectively. As of December 31, 2018 and 2017, US$94,581,170 and
US$99,526,978
, respectively of accounts receivable are pledged for the short-term bank loans.
The following table provides an analysis of the aging of accounts receivable as of December 31, 2018 and 2017:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Aging:
|
|
|
|
|
|
|
– current
|
|
|
218,458,862
|
|
|
|
259,870,056
|
|
– 1-3 months past due
|
|
|
31,386,341
|
|
|
|
8,299,000
|
|
– 4-6 months past due
|
|
|
109,412
|
|
|
|
30,699,928
|
|
– 7-12 months past due
|
|
|
42,532,170
|
|
|
|
-
|
|
– greater than one year past due
|
|
|
2,240,019
|
|
|
|
40,456
|
|
Total accounts receivable
|
|
|
294,726,804
|
|
|
|
298,909,440
|
|
The movements of the allowance for doubtful accounts are as follows:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Balance at the beginning of the year
|
|
|
(40,456
|
)
|
|
|
(38,107
|
)
|
Effect of foreign currency exchange rate changes
|
|
|
1,940
|
|
|
|
(2,349
|
)
|
Balance at the end of the year
|
|
|
(38,516
|
)
|
|
|
(40,456
|
)
|
Note 4 – Inventories
Inventories consist of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Raw materials and work in progress
|
|
|
612,701,274
|
|
|
|
405,750,206
|
|
Finished goods
|
|
|
7,331,921
|
|
|
|
15,986,476
|
|
Total inventories
|
|
|
620,033,195
|
|
|
|
421,736,682
|
|
There were no write down of inventories during the years ended December 31, 2018 and 2017.
Note 5 – Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Receivables from Hailezi (i)
|
|
|
-
|
|
|
|
68,430,244
|
|
Value added taxes receivables (ii)
|
|
|
4,700,702
|
|
|
|
6,840,774
|
|
Advances to suppliers (iii)
|
|
|
104,469,023
|
|
|
|
62,376,588
|
|
Interest receivable (iv)
|
|
|
826,729
|
|
|
|
2,235,902
|
|
Consideration for sales of Shanghai Sales (v)
|
|
|
7,285,231
|
|
|
|
-
|
|
Others (vi)
|
|
|
14,936,843
|
|
|
|
4,442,643
|
|
Total prepaid expenses and other current assets
|
|
|
132,218,528
|
|
|
|
144,326,151
|
|
(i) In March 2017, Sichuan Xinda Enterprise Group Co., Ltd ("Sichuan Xinda") signed a series of contracts with Harbin Hailezi Science and Technology Co., Ltd. (“Hailezi”) to purchase production equipment, and prepaid RMB1,728.9 million (equivalent to US$251.9 million ) to Hailezi, which was recognized in investing activities in the statements of cash flows. In June 2017, the two parties agreed to partially terminate the contracts and Hailezi agreed to refund the prepayment amounting to RMB1,704.9 million (equivalent to US$248.4 million) by the end of March 2018. As of March 31, 2018, Hailezi has refunded the above-mentioned prepayment to Sichuan Xinda. For details, please refer to Note 7.
(ii) Value added taxes receivables mainly represent the input taxes on purchasing equipment by Heilongjiang Xinda Enterprise Group Company Limited (“HLJ Xinda Group”) and Sichuan Xinda, which are to be net off with output taxes. Value added taxes receivables were recognized in operating activities in consolidated statements of cash flows.
(iii) Advances to suppliers are the advances to purchase raw materials as of December 31, 2018.
(iv) Interest receivable mainly represents interest income accrued from time deposits and restricted cash.
(v) On December 18, 2018, HLJ Xinda Group entered into an agreement with Mr. Xiaohui Gao, General Manager of Heilongjiang Xinda Enterprise Group Shanghai New Materials Sales Company Limited (“Shanghai Sales”), to transfer the wholly owned equity from HLJ Xinda Group to Mr. Gao for a total consideration of RMB50.0 million (equivalent to US$7.3 million). Pursuant to the contract, the Company completed the legal transfer on December 19, 2018 and will receive the full consideration of $7.3 million subsequent on April 11, 2019.
(vi) Others mainly include prepaid miscellaneous service fee, staff advance and prepaid rental fee.
Note 6 – Property, plant and equipment, net
Property, plant and equipment consist of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Machinery, equipment and furniture
|
|
|
580,735,482
|
|
|
|
413,551,963
|
|
Motor vehicles
|
|
|
2,658,487
|
|
|
|
2,838,540
|
|
Workshops and buildings
|
|
|
157,976,839
|
|
|
|
146,595,501
|
|
Construction in progress
|
|
|
217,194,285
|
|
|
|
439,116,574
|
|
Total property, plant and equipment
|
|
|
958,565,093
|
|
|
|
1,002,102,578
|
|
Less: accumulated depreciation
|
|
|
(182,623,813
|
)
|
|
|
(166,540,839
|
)
|
Property, plant and equipment, net
|
|
|
775,941,280
|
|
|
|
835,561,739
|
|
The Company capitalized US$2,416,818 and US$2,893,631 of interest costs as a component of the cost of construction in progress for the years ended December 31, 2018 and 2017 respectively.
Depreciation expense on property, plant and equipment was allocated to the following expense items:
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
38,999,223
|
|
|
|
35,758,544
|
|
General and administrative expenses
|
|
|
2,692,329
|
|
|
|
2,723,839
|
|
Research and development expenses
|
|
|
3,946,556
|
|
|
|
4,047,893
|
|
Selling expenses
|
|
|
5,426
|
|
|
|
3,546
|
|
Total depreciation expense
|
|
|
45,643,534
|
|
|
|
42,533,822
|
|
Note 7 – Prepayments to equipment and construction suppliers
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Hailezi (i)
|
|
|
502,087,116
|
|
|
|
157,358,774
|
|
Shanghai Green River (iii)
|
|
|
15,778,057
|
|
|
|
16,572,489
|
|
Beijin Construction (iv)
|
|
|
6,867,269
|
|
|
|
10,001,333
|
|
Sichuan Construction (v)
|
|
|
5,539,471
|
|
|
|
6,177,647
|
|
Others
|
|
|
364,406
|
|
|
|
517,271
|
|
Total prepayments to equipment and construction suppliers
|
|
|
530,636,319
|
|
|
|
190,627,514
|
|
(i) On September 26, 2016 and February 28, 2017, HLJ Xinda Group entered into equipment purchase contracts with Hailezi for a total consideration of RMB782.2 million (equivalent to US$114.0 million) to purchase storage facility and other equipment, which will be used for upgrading the storage system of warehouse located in Harbin, China. Pursuant to the contract with Hailezi, HLJ Xinda Group prepaid RMB621.6 million (equivalent to US$90.6 million) during the first quarter of 2017. Due to a redesign of outdoor storage facility in June 2017, HLJ Xinda Group entered into a supplementary agreement with Hailezi, which decreased the original contract amount to RMB283.7 million (equivalent to US$41.3 million). Hailezi refunded RMB369.1 million (equivalent to US$53.8 million) to HLJ Xinda Group on June 22, 2017. As of December 31, 2018, HLJ Xinda Group has prepaid RMB252.5 million (equivalent to US$36.8 million).
On July 21, 2017, HLJ Xinda Group entered into three investment agreements with the Management Committee of Harbin Economic- Technological Development Zone with respect to the industrial project for 300,000 metric tons of biological composite materials, the industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics and the industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory (the "HLJ Project"). In order to fulfill the agreements, HLJ Xinda Group entered into an equipment purchase contract with Hailezi to purchase production equipment in November 2017, which will be used for 100,000 metric tons of engineering plastics located in Harbin, for a consideration of RMB939.7 million (equivalent to US$136.9million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB920.9 million (equivalent to US$134.2 million) as of December 31, 2018.
In connection with the HLJ project, on June 25, 2018, HLJ Xinda Group entered into another equipment purchase contract with Hailezi to purchase production equipment, which will be used for 300,000 metric tons of biological based composite material, located in Harbin, for a consideration of RMB749.8 million (equivalent to US$109.2 million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB300.7 million (equivalent to US$43.8 million) as of December 31, 2018.
In connection with the HLJ Project, on July 12, 2018, HLJ Xinda Group entered into an equipment purchase contract with Hailezi to purchase production equipment, which will be used for 300,000 metric tons of biological based composite material, located in Harbin, for a consideration of RMB1,157.0 million (equivalent to US$168.6 million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB240.8 million (equivalent to US$35.1 million) as of December 31, 2018.
On March 17, 2017, Sichuan Xinda entered into a definitive agreement with the People's Government of Shunqing District, Nanchong City of Sichuan Province for the production of 300,000 metric tons of bio-composite materials and additive manufacturing and 20,000 metric tons of functional masterbatch, a high-end color additive process in plastics manufacturing (the "Nanchong Project"). The Nanchong Project will be located in a land area of 250 mu (equivalent to 41.2 acres), with 215 mu designated for bio-composite materials and additive manufacturing production and 35 mu to be designated for functional masterbatch production. The projected total capital expenditures for the project is approximately RMB2.5 billion (equivalent to US$364.3 million).
In connection with the Nanchong Project, Sichuan Xinda entered into equipment purchase contracts with Hailezi to purchase production equipment and testing equipment. Pursuant to the contracts with Hailezi, Sichuan Xinda prepaid RMB1,728.9 million (equivalent to US$251.9 million) in the first quarter of year 2017. In 2017, in order to ensure the traceability of the product and management of supply chain, Sichuan Xinda expected to launch an integrated ERP system, which resulted in the equipment to be purchased under the original contracts with Hailezi not meeting the production requirements. Hailezi agreed to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$248.4 million) by the end of March 2018, the remaining uncancelled amount is RMB24.0 (equivalent to US$3.5 million). As of December 31, 2017, Sichuan Xinda signed a supplementary agreement with Hailezi, pursuant to the agreement, Sichuan Xinda agreed to pay RMB12.4 million (equivalent to US$1.9 million) to Hailezi for the compensation of Hailezi due to the termination of the purchase contracts. As of December 31, 2018, Hailezi has refunded the above-mentioned prepayment. The Company received the testing equipment in the amount of RMB3.2 million (equivalent to US$0.5 million) in November 2018, the remaining balance of the uncancelled prepayment as of December 31, 2018 is RMB20.8 million (equivalent to US$3.0 million).
In connection with the Nanchong Project, on June 21, 2018, Sichuan Xinda entered into another equipment purchase contract with Hailezi to purchase production equipment and testing equipment for a consideration of RMB1,900 million (equivalent to US$276.9 million). Pursuant to the contracts with Hailezi, Sichuan Xinda has prepaid RMB1,710 million (equivalent to US$249.2 million) as of December 31, 2018.
The table below summarized the balance of prepayments to Hailezi for each of the projects as of December 31, 2018 and 2017, and the movements of the prepayments:
(in millions US$)
|
|
Year
|
|
Projects
|
|
Balance as of
December 31, 2017
|
|
|
Prepaid
/
(Utilized) in 2018
|
|
|
Effect of foreign currency exchange rate changes
|
|
|
Balance as of
December 31, 2018
|
|
2017
|
|
Storage system
|
|
|
38.6
|
|
|
|
-
|
|
|
|
(1.8
|
)
|
|
|
36.8
|
|
2017
|
|
HLJ project
|
|
|
115.1
|
|
|
|
24.7
|
|
|
|
(5.6
|
)
|
|
|
134.2
|
|
2018
|
|
HLJ project
|
|
|
-
|
|
|
|
43.8
|
|
|
|
-
|
|
|
|
43.8
|
|
2018
|
|
HLJ project
|
|
|
-
|
|
|
|
35.1
|
|
|
|
-
|
|
|
|
35.1
|
|
2017
|
|
Nanchong project
|
|
|
3.7
|
|
|
|
(0.5
|
)
|
|
|
(0.2
|
)
|
|
|
3.0
|
|
2018
|
|
Nanchong project
|
|
|
-
|
|
|
|
249.2
|
|
|
|
-
|
|
|
|
249.2
|
|
Total
|
|
|
157.4
|
|
|
|
352.3
|
|
|
|
(7.6
|
)
|
|
|
502.1
|
|
(ii) In connection with the HLJ project, on June 25, 2018, HLJ Xinda Group entered into an equipment purchase contract with Ningbo Junzuo Trading Co., Ltd. ("Ningbo Junzuo") and Ningbo Junhu Trading Co., Ltd. ("Ningbo Junhu") to purchase production equipment, which will be used for 300,000 metric tons of biological based composite material, located in Harbin, for a total consideration of RMB1,156.4 million (equivalent to US$174.8 million). Pursuant to the contract with Ningbo Junzuo and Ningbo Junhu, HLJ Xinda Group has prepaid RMB400.0 million (equivalent to US$60.4 million) as of June 30, 2018. On July 10, 2018, the Company signed supplemental contracts with Ningbo Junzuo and Ningbo Junhu to cancel the equipment purchase at the full price due to the equipment not meeting the requirements of the Company. On July 31, 2018, the Company received the full refund of RMB400.0 million (equivalent to US$60.4 million).
(iii) In December 2017, HLJ Xinda Group entered into a building purchase contract with Shanghai Caohejing Kangqiao Science & Green River Construction & Development Co., Ltd. ("Green River") for a total consideration of RMB216.6 million (equivalent to US$31.6 million), with a total area of 13,972.64 square meters with a prepaid RMB108.3 million (equivalent to US$15.8 million). In March 2019, HLJ Xinda Group entered into an agreement with Shanghai Sales, to transfer the proprietorship of the prepaid RMB108.3 million (equivalent to US$15.8 million) to Shanghai Sales. Pursuant to the agreement, Shanghai Sales will pay the RMB108.3 million (equivalent to US$15.8 million) to HLJ Xinda Group by the end of the second quarter of 2019.
(iv) Since November 15, 2016, Sichuan Xinda entered into decoration contracts with Sichuan Beijin Construction Engineering Company Limited ("Beijin Construction") to perform indoor and outdoor decoration work for a consideration of RMB237.6 million (equivalent to US$34.6 million). On February 20, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform outdoor decoration work for a consideration of RMB2.9 million (equivalent to US$0.4 million). On September 10, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform ground decoration work for a consideration of RMB23.8 million (equivalent to US$3.5 million). Pursuant to the contracts with Beijin Construction, Sichuan Xinda has prepaid RMB119.8 million (equivalent to US$17.6 million) as of December 31, 2018, of which RMB74.0 million (equivalent to US$10.7 million) was transferred to construction in progress. The prepayment was recognized in investing activities in the statements of cash flows.
(v) As of December 31, 2018, Sichuan Construction primarily consisted of prepayments made to Peaceful Treasure Limited ("Peaceful"). On October 20, 2016, Sichuan Xinda entered into an equipment purchase contract with Peaceful for a total consideration of RMB89.8 million (equivalent to US$13.1 million) to purchase certain production and testing equipment. The Company prepaid RMB33.9 million (equivalent to US$4.9 million) as of December 31, 2018.
Note 8 – Other non-current assets
On November 21, 2017, HLJ Xinda Group signed a purchase contract with Xinda High-Tech Co.,Ltd. ("Xinda High-Tech") on 100% equity transfer of Xinda High-Tech for a total consideration of RMB105.0 million (equivalent to US$16.1 million). Pursuant to the contract, HLJ Xinda Group prepaid deposits of RMB78.0 million (equivalent to US$11.9 million) during year 2017 and prepaid deposits of RMB23.2 million (equivalent to US$3.7 million) during the first half of year 2018, with the remaining RMB3.8 million (equivalent to US$0.5 million) to be paid within thirty days after the completion of the legal transfer. In September, 2018, the management found the related tax burden of this transaction amounting to RMB12.5 million (equivalent to US$1.8 million) was relatively high and they would like to find other way to acquire the office building of Xinda High-Tech, therefore, this transaction was suspended and Xinda High-Tech refunded all the prepayment amounting to RMB101.2 million (equivalent to US$15.6 million) to HLJ Xinda Group in the third quarter of 2018.
Note 9 – Losses on foreign currency option contracts
On February 24, 2017, the Company entered into two foreign currency option contracts with Bank of China ("BOC"), Harbin Branch, pursuant to which the Company and BOC both have options to excise the foreign currency contracts depending on the future currency fluctuation, and the nominal values are US$5.0 million and US$10.0 million, respectively, with the defined exchange rates for settlement on March 15, 2018. The Company recognized losses on the above foreign currency option contracts amounting to US$0.5 million in the twelve-month period ended December 31, 2018.
Note 10 – Borrowings
The Company has credit facilities with several banks under which they draw short-term and long-term bank loans as described below.
(a) Current
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Unsecured loans
|
|
|
418,198,508
|
|
|
|
363,319,152
|
|
Loans secured by accounts receivable
|
|
|
65,567,082
|
|
|
|
68,868,415
|
|
Loans secured by restricted cash
|
|
|
69,500,000
|
|
|
|
41,500,000
|
|
Loans secured by land use right
|
|
|
-
|
|
|
|
30,608,184
|
|
Current portion of long-term bank loans (note b)
|
|
|
176,401,330
|
|
|
|
271,101,178
|
|
|
|
|
|
|
|
|
|
|
Total short-term loans, including current portion of long-term bank loans
|
|
|
729,666,920
|
|
|
|
775,396,929
|
|
As of December 31, 2018 and 2017, the Company's short-term bank loans (including the current portion of long-term bank loans) bear a weighted average interest rate of 4.7% and 4.1% per annum, respectively. All short-term bank loans mature at various times within one year and contain no renewal terms.
During year 2017, the Company obtained fifty-six loans in a total amount of RMB1,351.0 million (equivalent to US$206.8 million) secured by accounts receivables of RMB1,762.3 million (equivalent to US$269.7 million) at an annual interest rate of 4.350%. The Company repaid thirty-seven loans in total RMB901.0 million (equivalent to US$137.9 million) in year 2017, and retrieved accounts receivables of RMB1,112.0 million (equivalent to US$170.2 million). The Company repaid the above loans in year 2018. During year 2018, the Company obtained thirty-four loans in a total amount of RMB1,350.0 million (equivalent to US$196.7 million) secured by accounts receivables of RMB1,948.9 million (equivalent to US$284.0 million) at an annual interest rate of 4.350%. The Company repaid twenty-one loans in total RMB900.0 million (equivalent to US$131.1 million), and retrieved accounts receivables of RMB1,299.8 million (equivalent to US$189.4 million).
In February 2017, the Company obtained a one-year secured loan of US$17.0 million from Bank of China (Abu Dhabi Branch) at an annual interest rate of 2.3%. The loan was secured by restricted cash of RMB136.0 million (equivalent to US$21.6 million) in Bank of China in Harbin, China. The Company repaid the loan in February 2018.
In July 2017, the Company obtained a one-year secured loan of US$14.0 million from Bank of China (Paris Branch) at an annual interest rate of 2.5%. The loan was secured by restricted cash of RMB107.0 million (equivalent to US$15.6 million) in Bank of China in Harbin, China. In accordance with the renewal agreement on July 19, 2018, the repayment term of the loan was extended and the loan will be due on July 20, 2019.
In October 2017, the Company obtained a one-year secured loan of US$5.0 million from Bank of China (Paris Branch) at an annual interest rate of 2.5%. The loan was secured by restricted cash of RMB37.5 million (equivalent to US$5.5 million) in Bank of China in Harbin, China. In accordance with the renewal agreement on July 19, 2018, the repayment term of the loan was extended and the loan will be due on July 20, 2019.
In October 2017, the Company obtained a one-year secured loan of US$5.5 million from Bank of China (Paris Branch) at an annual interest rate of 2.5%. The loan was secured by restricted cash of RMB42.0 million (equivalent to US$6.1 million) in Bank of China in Harbin, China. In accordance with the renewal agreement on July 19, 2018, the repayment term of the loan was extended and the loan will be due on July 20, 2019.
In November 2017, the Company obtained a three-month secured short-term loan of RMB200.0 million (equivalent to US$30.6million) from Nanchong Shuntou Development Group Co., Ltd. at an annual interest rate of 4.35%. The loan was secured by one of the land use rights of RMB43.5 million (equivalent to US$6.9 million). The Company repaid the loan in January 2018.
In May 2018, the Company obtained a three-month secured short-term loan of US$45.0 million from Standard Chartered Bank with the interest rate at 1.5% per annum over LIBOR payable on the last day of its interest period. The loan was secured by restricted cash of RMB300.0 million (equivalent to US$43.7 million) in Standard Chartered Bank in Harbin, China. The Company did not repay the loan on time which is due on August 17, 2018 due to the stricter foreign exchange control in the PRC. Management had obtained the agreement from Standard Chartered Bank to extend the term till April 15, 2019.
(b) Non-current
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Secured loans
|
|
|
2,177,985
|
|
|
|
30,400,000
|
|
Unsecured loans
|
|
|
196,031,589
|
|
|
|
199,146,032
|
|
Syndicate loan facility
|
|
|
90,000,000
|
|
|
|
155,763,465
|
|
Less: current portion
|
|
|
(176,401,330
|
)
|
|
|
(271,101,178
|
)
|
Total long-term bank loans, excluding current portion
|
|
|
111,808,244
|
|
|
|
114,208,319
|
|
In October and November 2015, the Company obtained three long term unsecured loans of RMB260.0 million (equivalent to US$37.9 million) from Bank of China at an annual interest rate of 4.75%. In January 2016, the Company obtained a long term unsecured loan of RMB80.0 million (equivalent to US$11.6 million) from Bank of China at an annual interest rate of 4.75%. On December 9, 2016, the Company obtained a long term unsecured loan of RMB30.0 million (equivalent to US$4.4 million) from Bank of China at an annual interest rate of 4.75%. On March 23, 2017, the Company obtained a long term unsecured loan of RMB25.0 million (equivalent to US$3.6 million) from Bank of China at an annual interest rate of 4.75%. The Company repaid RMB10.0 million (equivalent to US$1.5 million) on April 28, 2017, RMB40.0 million (equivalent to US$5.7 million) on October 28, 2017 and RMB25.0 million (equivalent to US$3.6 million) on April 28, 2018. RMB100.0 million (equivalent to US$14.6 million) on October 28, 2018. RMB25.0 million (equivalent to US$3.6 million), RMB100.0 million (equivalent to US$14.6 million), RMB20.0 million (equivalent to US$2.9 million), and RMB75.0 million (equivalent to US$11.0 million) will be repaid on April 28, 2019, October 28, 2019, April 28, 2020 and October 28, 2020, respectively.
On May 13, 2016, the Company obtained two two-year secured loans of US$14.3 million from China Construction Bank (Dubai) at an interest of three-month LIBOR (2.3118% as of March 31, 2018) plus 1.6%. On May 17, 2016, the Company obtained two two-year secured loans of US$12.3 million from China Construction Bank (Dubai) at an interest of three-month LIBOR (2.3118% as of March 31, 2018) plus 1.6%. On May 22, 2016, the Company obtained a two-year secured loan of US$3.8 million from China Construction Bank (Dubai) at an interest of three-month LIBOR (2.3118% as of March 31, 2018) plus 1.6%. The interest rate is reset every three months. These loans are secured by restricted cash of RMB68.8 million (equivalent to US$10.9 million). All of these loans were repaid in April 2018.
On August 22, 2016, Xinda Holding (HK) Company Limited ("Xinda Holding (HK)") a wholly owned subsidiary of the Company, entered into a facility agreement for a loan facility in an aggregate amount of US$180.0 million with a consortium of banks and financial institutions led by Standard Chartered Bank (Hong Kong) Limited. The Company paid arrangement fees and legal fees in the amount of US$6.77 million for the related loan, which were all amortized as of December 31, 2018. Debt issuance costs are presented on the consolidated balance sheets as a direct deduction from the carrying amount of the loan and amortized to interest expense using the effective interest rate of 6.205% as of December 31, 2018. The Company repaid US$22.5 million, US$22.5 million and US$45.0 million on November 22, 2017, February 22, 2018 and May 22, 2018, respectively. US$90.0 million of the principal amount should be repaid on August 22, 2018. The loans were not repaid on time due to the stricter foreign exchange control in the PRC. As of December 31, 2018, the Company totally pledged RMB348.4 million (equivalent to US$50.8 million) restricted cash to secure the repaymemnt of the above loan. In accordance with the renewal agreement in March 2019, the repayment term of the above loan was extended and the loan will be due on April 15, 2019.
During 2017, the Company obtained four long-term unsecured loans of RMB430.0 million (equivalent to US$62.7 million) from Nanchong Shuntou Development Group Co., Ltd. at an annual interest rate of 4.35%. In accordance with the renewal agreements on April 02, 2019, the repayment terms of the four loans were extended and the loans will be due on September 30, 2019.
On December 1, 2017, the Company obtained a seven-year unsecured loan of RMB526.3 million (equivalent to US$76.7 million) from Longjiang Bank, Harbin Branch at an annual interest rate of 4.9%. The Company borrowed another long-term loan in amount of RMB169.1 million (equivalent to US$24.6 million) in January 2018 at an annual interest rate of 4.9%. RMB15.0 million (equivalent to US$2.2 million), RMB20 million (equivalent to US$2.9 million), RMB35 million (equivalent to US$5.1 million), RMB35.0 million (equivalent to US$5.1 million), RMB70.0 million (equivalent to US$10.2 million), RMB70.0 million (equivalent to US$10.2 million) and RMB450.4 million (equivalent to US$65.6 million) will be repaid on June 30, 2019, December 30, 2019, June 30, 2020, December 30, 2020, June 30, 2021, December 30, 2021, and after 2021, respectively.
On December 26, 2018, the Company obtained a five-year secured loan of AED8.0 million (equivalent to US$2.2 million) from National Bank of Umm Al Qaiwain at an interest rate of three-month EBOR (2.84% as of December 31,2018) plus 3.75%. The long-term loan was secured by an undated cheque of AED8.8 million (US$2.4 million) favouring the bank provided by Dubai Xinda. The cheque would not be cashed by the bank unless Dubai Xinda defaults. Principal will be repaid in ten half-yearly installments of AED0.8 million (equivalent to US$0.22 million) each.
Maturities on long-term bank loans (including current portion) are as follows:
|
|
December 31, 2018
|
|
|
|
US$
|
|
2019
|
|
|
176,401,330
|
|
2020
|
|
|
24,476,863
|
|
2021
|
|
|
20,834,247
|
|
2022
|
|
|
26,662,432
|
|
After 2022
|
|
|
39,834,702
|
|
Total
|
|
|
288,209,574
|
|
Note 11 – Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consist of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Payables for purchase of property, plant and equipment
|
|
|
53,059,897
|
|
|
|
98,791,115
|
|
Accrued freight expenses
|
|
|
25,908,990
|
|
|
|
10,491,635
|
|
Accrued interest expenses
|
|
|
8,873,532
|
|
|
|
3,997,036
|
|
Contract liabilities (i)
|
|
|
16,105,245
|
|
|
|
8,843,649
|
|
Non income tax payables
|
|
|
6,425,236
|
|
|
|
4,002,092
|
|
Others (ii)
|
|
|
16,553,998
|
|
|
|
12,479,982
|
|
Total accrued expenses and other current liabilities
|
|
|
126,926,898
|
|
|
|
138,605,509
|
|
(i) Contract liabilities mainly represent the advance received from six customers in the PRC for the raw material purchases during the twelve-month ended December 31, 2018. The change in contract liabilities primarily represents the cash received, less amounts recognized as revenues during the year.
(ii) Others mainly represent accrued payroll and employee benefits, accrued audit and consulting fees, electricity fee and other accrued miscellaneous operating expenses.
Note 12 – Related party transactions
The related party transactions are summarized as follows:
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Transactions with related parties:
|
|
|
|
|
|
|
Investment received in advance from Changmu (i)
|
|
|
75,567,512
|
|
|
|
-
|
|
Refund of investment received in advance to Changmu (i)
|
|
|
(75,567,512
|
)
|
|
|
-
|
|
Proceeds of interest-free advances from Changmu
|
|
|
3,779,509
|
|
|
|
-
|
|
Repayment of interest-free advances to Changmu
|
|
|
(3,779,509
|
)
|
|
|
-
|
|
Proceeds of interest-free advances from three senior management employees of Sichuan Xinda (ii)
|
|
|
4,371,139
|
|
|
|
-
|
|
Proceeds of interest-free advances from Mr. Jie Han (iii)
|
|
|
9,907,915
|
|
|
|
-
|
|
Proceeds of interest-free advances from Mr. Jie Han’s wife (iii)
|
|
|
3,180,965
|
|
|
|
-
|
|
Proceeds of interest-free advances from Mr. Jie Han’s son (iii)
|
|
|
728,523
|
|
|
|
-
|
|
Proceeds of interest-free advances from a senior management employee of HLJ Xinda Group (iii)
|
|
|
177,196
|
|
|
|
-
|
|
Consideration for sales of Shanghai Sales (iv)
|
|
|
7,285,231
|
|
|
|
-
|
|
(i) On July 14, 2018, Xinda Holding (HK) entered into a subscription intent agreement with Changmu Investment (Beijing) Company Limited (“Changmu”), a company wholly controlled by Mr. Tiexin Han, the son of Mr. Jie Han, the Chief Executive Officer and Chairman of the Company. Pursuant to the terms of the agreement, HLJ Xinda Group received RMB500.0 million (equivalent to US$75.6 million) from Changmu on June 29, 2018 as deposits in order to subscribe newly authorized registered capital of HLJ Xinda Group subject to further negotiations. Due to the inability to reach agreement on the terms, both parties agreed not to proceed with any definitive agreement. Therefore, HLJ Xinda Group refunded the investment received in advance from Changmu in September 2018.
(ii) In August 2018, the Company also received RMB10.0 million (equivalent to US$1.5 million) each from three senior management employees (Messers Junjie Ma, Yuchong Jia, Guangjun Jiao) of Sichuan Xinda as interest-free advances to Sichuan Xinda.
(iii) During the year ended December 31, 2018, the Company also received RMB68.0 million (equivalent to US$9.9 million) from Mr. Jie Han, the Chairman of the Company, RMB21.8 million (equivalent to US$3.2 million) from Ms. Limei Sun, the wife of Mr. Jie Han, RMB5.0 million (equivalent to US$0.7 million) from Mr. Tiexin Han, and RMB1.2 million (equivalent to US$0.2 million) from a senior management employee (Mr. Rujun Dai) of HLJ Xinda Group as interest-free advances to HLJ Xinda Group.
(iv) On December 18, 2018, the Company entered into an agreement with Mr. Xiaohui Gao, General Manager of Heilongjiang Xinda Enterprise Group Shanghai New Materials Sales Company Limited (“Shanghai Sales”), to transfer the wholly owned equity from HLJ Xinda Group to Mr. Gao for a consideration of RMB50.0 million (equivalent to US$7.3 million). On December 19, 2018 the legal transer was completed and the Company received the full consideration of US$7.3 million subsequent on April 11, 2019.
On December 25, 2018, HLJ Xinda Group, Sichuan Xinda and Mr. Jie Han pledged for Shanghai Sales obtaining a one-year loan of RMB500.0 million (equivalent to US$74.8) from Longjiang Bank, Harbin Branch with an annual interest rate of 6.09% from December 25, 2018 to December 24, 2019.
Shanghai Sales is in the process of arranging a third party to take over the guarantee.
The related party balances are summarized as follows:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Amounts due to related parties:
|
|
|
|
|
|
|
Mr. Jie Han
|
|
|
9,907,915
|
|
|
|
-
|
|
Mr. Jie Han’s wife
|
|
|
3,180,965
|
|
|
|
-
|
|
Mr. Jie Han’s son
|
|
|
728,523
|
|
|
|
-
|
|
Senior management employees in HLJ Xinda Group and Sichuan Xinda
|
|
|
4,548,335
|
|
|
|
-
|
|
Total amounts due to related parties
|
|
|
18,365,738
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note 13 – Income Taxes
China XD is subject to a tax rate of 34% before 2018 and 21% per the new tax rules beginning 2018, and files a U.S. federal income tax return.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted. The Tax Act has made significant changes to the U.S. Internal Revenue Code, including the taxation of U.S. corporations, by, among other things, limiting interest deductions, reducing the U.S. corporate income tax rate, disallowing certain deductions that had previously been allowed, altering the expensing of capital expenditures, adopting elements of a territorial tax system, assessing a repatriation tax or "toll-charge" on undistributed earnings and profits of U.S.-owned foreign corporations, and introducing certain anti-base erosion provisions.
The Company recorded a charge of approximately $71.0 million as a provisional amount for the repatriation tax on deemed repatriation to the United States of accumulated earnings in the Company’s consolidated statement of comprehensive income for the year ended December 31, 2017. As of December 31, 2018, the Company finalized the calculations and tax positions used in the analysis of the impact of the Tax Act in consideration of proposed regulations and other guidance issued during 2018, and no adjustment was made to the provisional amount.
Under the current laws of the British Virgin Island ("BVI"), Favor Sea (BVI) and Xinda Deluxe Faith Limited, subsidiaries of China XD, these two are not subject to tax on its income or capital gains.
No provision for Hong Kong Profits Tax was made for Xinda Holding (HK) Co., Ltd. ("Xinda Holding (HK) "), (formerly known as Hong Kong Engineering Plastics Co., Ltd.), Xinda (HK) International Trading Co., Ltd. ("Xinda Trading", liquidated in February 2015), Xinda (HONGKONG) Macromolecule Material Limited and Xinda (HK) Trading as they did not have any assessable profits arising in or derived from Hong Kong for any of the periods presented.
Under the current laws of Dubai, AL Composites Materials FZE ("Dubai Xinda"), a subsidiary of China XD, is exempted from income taxes.
The Company's PRC subsidiaries file separate income tax returns in the PRC. Effective from January 1, 2008, the PRC statutory income tax rate is 25% according to the Corporate Income Tax ("CIT") Law which was passed by the National People's Congress on March 16, 2007.
Pursuant to an approval from the local tax authority in July 2013, Sichuan Xinda, a subsidiary of China XD, became a qualified enterprise located in the western region of the PRC, which entitled it to a preferential income tax rate of 15% from January 1, 2013 to December 31, 2020.
The CIT Law and its implementation rules impose a withholding income tax at 10%, unless reduced by a tax treaty or arrangement, on the amount of dividends distributed by a PRC-resident enterprise to its immediate holding company outside the PRC that are related to earnings accumulated beginning on January 1, 2008. Dividends relating to undistributed earnings generated prior to January 1, 2008 are exempt from such withholding income tax.
China XD earnings from its subsidiaries in PRC and Dubai are subject to the U.S. federal income tax at 21%, less any applicable foreign tax credits. Due to its plan to indefinitely reinvest its earnings in the PRC, the Company has not provided for deferred income tax liabilities related to PRC withholding income tax on undistributed earnings of US$732,515,443 and US$673,784,710 as of December 31, 2018 and 2017, respectively. In addition, due to its plan to indefinitely reinvest its earnings in Dubai, the Company has not provided for deferred income tax liabilities related to Dubai on undistributed earnings of US$201,787,664 and US$206,128,306 as of December 31, 2018 and 2017, respectively. The undistributed earnings as of December 31, 2017 were subject to the one-time repatriation tax under the Tax Act as a deemed repatriation of accumulated undistributed earnings from the foreign subsidiaries.
However,
the Company continues to plan to indefinitely reinvest its earnings in PRC and Dubai subsequent to the Tax Act. It is not practicable to estimate the amounts of unrecognized deferred income tax liabilities thereof.
The components of income (loss) before income taxes are as follows:
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
US
|
|
|
(4,499,127
|
)
|
|
|
(2,490,668
|
)
|
BVI
|
|
|
2,578
|
|
|
|
(394
|
)
|
Hong Kong SAR
|
|
|
(10,611,927
|
)
|
|
|
(12,544,625
|
)
|
Dubai
|
|
|
(4,340,642
|
)
|
|
|
33,354,059
|
|
PRC, excluding Hong Kong SAR
|
|
|
95,475,652
|
|
|
|
103,827,741
|
|
Total income before income taxes
|
|
|
76,026,534
|
|
|
|
122,146,113
|
|
The Company's income tax expense (benefit) recognized in the consolidated statements of comprehensive income consists of the following:
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Current income tax expense-PRC
|
|
|
8,638,230
|
|
|
|
21,966,937
|
|
Current income tax expense-US
|
|
|
992,876
|
|
|
|
70,965,148
|
|
Deferred income tax benefit-PRC
|
|
|
(1,917,993
|
)
|
|
|
(2,407,706
|
)
|
Total income tax expense
|
|
|
7,713,113
|
|
|
|
90,524,379
|
|
The effective income tax rate based on income tax expense and income before income taxes reported in the consolidated statements of comprehensive income differs from the PRC statutory income tax rate of 25% due to the following:
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
PRC statutory income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
Increase (decrease) in effective income tax rate resulting from:
|
|
|
|
|
|
|
|
|
Tax rate differential on HK entities not subject to PRC income tax
|
|
|
1.1
|
%
|
|
|
0.9
|
%
|
Tax rate differential on BVI entities not subject to PRC income tax
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
Tax rate differential on US entities not subject to PRC income tax
|
|
|
(0.2
|
)%
|
|
|
0.0
|
%
|
Tax rate differential on UAE entities not subject to PRC income tax
|
|
|
1.4
|
%
|
|
|
(6.9
|
)%
|
Non-deductible expenses
|
|
|
1.2
|
%
|
|
|
0.2
|
%
|
Preferential tax rate
|
|
|
(6.6
|
)%
|
|
|
(4.5
|
)%
|
Change in valuation allowance
|
|
|
4.0
|
%
|
|
|
3.1
|
%
|
R&D additional deduction
|
|
|
(15.0
|
)%
|
|
|
(3.9
|
)%
|
Reversal of unrealized tax benefits
|
|
|
(3.8
|
)%
|
|
|
0.0
|
%
|
Repatriation tax
|
|
|
0.0
|
%
|
|
|
58.1
|
%
|
Others
|
|
|
3.0
|
%
|
|
|
2.0
|
%
|
Effective income tax rate
|
|
|
10.1
|
%
|
|
|
74.1
|
%
|
The principal components of the Company's deferred income tax assets and deferred income tax liabilities are as follows:
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
US$
|
|
US$
|
|
|
|
|
|
|
Deferred income tax assets:
|
|
|
|
|
Tax loss carry forwards
|
|
|
10,559,911
|
|
|
|
7,818,069
|
|
Foreign currency contracts
|
|
|
-
|
|
|
|
270,964
|
|
Less: valuation allowance
|
|
|
(10,559,911
|
)
|
|
|
(7,818,069
|
)
|
Deferred income tax assets, net (included in other non-current assets)
|
|
|
-
|
|
|
|
270,964
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities (included in other non-current liabilities):
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
6,716,921
|
|
|
|
9,267,501
|
|
The Research Institute was established with a registered capital of approximately US$0.4 million in 2007. The Research Institute provided research and development services to the Company's ultimate end customers. In December 2010, for tax purposes and because the Research Institute could not meet the Company's development needs, the Company dissolved the Research Institute and formed a new legal entity, Heilongjiang Xinda Enterprise Group Macromolecule Materials R&D Center Company Limited ("Xinda Group Material Research"). Based on applicable regulations promulgated by the local Civil Affairs Bureau, only the local government has the authority for the distribution of the assets of the Research Institute upon liquidation. Therefore, the Company dissolved the Research Institute by distributing the net assets of the Research Institute in the amount of US$84.0 million to the local government. The difference between the net assets in the amount of US$84.0 million and the amount of the initial registered capital of US$0.4 million represents undistributed accumulated profit generated by the Research Institute from its inception date to its liquidation date. Simultaneously, the local government granted the net assets back to the Research Center, the newly established subsidiary of Harbin Xinda in December 2010. The Research Center was established with a registered capital of approximately US$0.5 million funded by cash. A loss equal to the net assets of the Research Institute distributed to the local government was recognized in other expenses and a government grant for the receipts of the same assets back from the local government was recognized as other income in the consolidated statements of comprehensive income. Pursuant to the local tax regulations, the net assets granted to the Research Center are not subject to income tax to the extent the Research Center spends a total of US$84.0 million in five years from the date of grant. The expenditures of US$84.0 million will not be deductible for income tax purposes. As a result, the Company recognized a deferred income tax liability in the amount of US$21.5 million in connection with the net assets granted to the Research Center as of December 31, 2010. To the extent that the Company has spent on research and development equipment during the five years from the date of grant, deferred income tax liabilities relating to the net assets of Research Institute granted to Research Center will be reclassified to deferred income tax liabilities relating to property, plant and equipment, and recognized in profit or loss over the useful life of the asset. The Company spent a total of US$84.0 million on research and development equipment by the end of December 31, 2015, and the deferred income tax liabilities was US$6,716,921 and US$9,267,501 as of December 31, 2018 and 2017, respectively.
The movements of the valuation allowance are as follows:
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year
|
|
|
7,818,069
|
|
|
|
3,951,012
|
|
Expiration due to liquidation
|
|
|
(240
|
)
|
|
|
(86,139
|
)
|
Additions of valuation allowance
|
|
|
3,108,747
|
|
|
|
3,960,392
|
|
Reduction of valuation allowance
|
|
|
(366,665
|
)
|
|
|
(7,196
|
)
|
Balance at the end of the year
|
|
|
10,559,911
|
|
|
|
7,818,069
|
|
The valuation allowance as of December 31, 2018 and 2017 was primarily provided for the deferred income tax assets of certain entities, which were at cumulative loss positions. As of December 31, 2018, for U.S. federal income tax purposes, the Company had tax loss carry forwards of (i) US$520,617 from US Entity, of which US$520,617, nil and nil would expire by 2036, 2037 and 2038, respectively, if unused, (ii) US$20,812,578 from subsidiaries in the PRC, of which US$6,900,933, US$8,480,529 and US$5,431,116 would expire by 2021, 2022 and 2023, respectively, if unused, and (iii) US$28,603,895 from subsidiaries in HK, which could be carried forward indefinitely to be offset against future profits. In view of the cumulative losses for the entities concerned, 100% valuation allowances were provided against their deferred income tax assets as of December 31, 2018 and 2017, which in the judgment of the management, are not more likely than not to be realized.
A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows:
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year
|
|
|
34,197,070
|
|
|
|
25,929,112
|
|
Increase related to current year tax positions
|
|
|
1,645,734
|
|
|
|
8,267,958
|
|
Decrease related to prior year tax positions
|
|
|
(2,794,165
|
)
|
|
|
-
|
|
Balance at the end of the year
|
|
|
33,048,639
|
|
|
|
34,197,070
|
|
At December 31, 2018 and 2017, there are US$26,882,183 and US$28,149,386 of unrecognized tax benefits that if recognized, would affect the annual effective tax rate.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and does not recognize penalties. During the years ended December 31, 2018 and 2017, the Company recognized approximately US$2,413,440 and US$4,092,605 interest expense. The Company had approximately US$12,172,418 and US$10,342,390 for the interest accrued related to unrecognized tax benefits amounting to US$32,981,190 and US$34,045,550 as of December 31, 2018 and 2017, respectively. US$2,794,165 previously unrecognized tax benefits accrued in year 2012 and the related accrued interest amounting to US$2,525,926 were reversed due to the expiration of five-year tax assessment period on May 31, 2018. The unrecognized tax benefits in year 2013 amounting to US$3,681,796 and related accrued interest amounting to US$2,944,256 were classified as current liabilities as the five-year tax assessment period will expire on May 31, 2019. US$67,449 of unrecognized tax benefit were presented as a reduction of the deferred income tax assets for tax loss carry forwards since the uncertain tax position would reduce the tax loss carry forwards under the tax law. The unrecognized tax benefits represent the estimated income tax expenses the Company would be required to pay, should the income tax rate used, taxable income and deductible expenses for tax purpose recognized in accordance with tax laws and regulations. The Company is currently unable to provide an estimate of a range of the total amount of unrecognized tax benefits that is reasonably possible to change significantly within the next twelve months.
The tax returns of the U.S. Entities are subject to U.S. federal income tax examination by tax authorities for the years from 2017 to 2018. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under special circumstances where the underpayment of taxes is more than US$15,000. In the case of transfer pricing issues, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. The tax returns of the Company's PRC subsidiaries for the years from 2016 to 2018 are open to examination by the PRC tax authorities.
Note 14 – Deferred Income
On January 26, 2015, the Company entered into a memorandum and a fund support agreement (the "Agreement") with the People's Government of Shunqing District, Nanchong City, Sichuan Province ("Shunqing Government") pursuant to which Shunqing Government, through its investment vehicle, extended to the Company RMB350 million (equivalent to US$51.0 million) to support the construction of the Sichuan plant, which has been received in full in the form of government repayment of bank loans on behalf of the Company.
In addition, the Company has received RMB332.2 million (equivalent to US$48.4 million) from Shunqing Government and RMB6.4 million (equivalent to US$0.9 million) from Ministry of Finance of the People's Republic of China to support the construction and RMB2.2 million (equivalent to US$0.3 million) special funds of ministerial key research projects from Ministry of Science and Technology of PRC as of December 31, 2018.
The Company has also received RMB45.0 million (equivalent to US$6.6 million) from Harbin Bureau of Finance for Biomedical composites project as of December 31, 2018.
Since the funding is related to the construction of long-term assets, the amounts were recognized as government grant, which is included in deferred income on the consolidated balance sheets, and to be recognized as other income in the consolidated statements of comprehensive income over the periods and in the proportions in which depreciation expense on the long-term assets is recognized.
The Sichuan factory has been operational since July 2016. A cumulative RMB71.9 million (equivalent to US$10.5 million) government grants have been amortized as other income proportionate to the depreciation of the related assets, of which RMB32.5 million (equivalent to US$4.9 million) was amortized in the year ended December 31, 2018.
The Company also received RMB36.0 million (equivalent to US$5.2 million) from Shunqing Government with respect to interest subsidy for bank loans. A cumulative RMB16.4 million (equivalent to US$2.3 million) government grants have been amortized as other income in line with the amount of related loan interest accrued.
Note 15 – Other non-current liabilities
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Income tax payable-noncurrent (i)
|
|
|
92,461,068
|
|
|
|
98,630,817
|
|
Deferred income tax liabilities (Note 13)
|
|
|
6,716,921
|
|
|
|
9,267,501
|
|
Others
|
|
|
2,395,783
|
|
|
|
-
|
|
Total other non-current liabilities
|
|
|
101,573,772
|
|
|
|
107,898,318
|
|
(i) Income tax payable-noncurrent represents the repatriation tax, the accumulative balance of unrecognized tax benefits since 2013 and related accrued interest. According to the Tax Cuts and Jobs Act enacted on December 22, 2017, the management recognized the amount of U.S. tax corporate income tax is US$70,965,148 based on the deemed repatriation to the United States of accumulated earnings mandated by the U.S. tax reform, US$17,031,636 of which due payable in 2018 and 2019 was classified as current liabilities.
Note 16 – Common Stock
Pursuant to the amended Article of Incorporation dated March 12, 2009, the Company's authorized share capital is 550,000,000 shares, consisting of 500,000,000 shares of common stock (US$0.0001 par value), and 50,000,000 shares of all classes of preferred stock (US$0.0001 par value).
Note 17 – Preferred Stock
Series B preferred stock
The Company issued 1,000,000 shares of Series B preferred stock to XD Engineering Plastics in December 2008. The Series B preferred stock is not convertible or redeemable. The holder of Series B preferred stock has 40% of the total voting power of the Company on a fully diluted basis. Holders of Series B preferred stock are not entitled to receive dividends. In the event of any liquidation, dissolution or winding up, whether voluntary or involuntary, the holders of issued and outstanding shares of Series B preferred stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the common stockholders and any other series of preferred stock ranking junior to the Series B preferred stock with respect to liquidation, US$1.00 per share in cash. The holders of Series B preferred stock will not be entitled to any further participation in any distribution of assets by the Company.
Redeemable Series D convertible preferred stock
On August 15, 2011, China XD entered into a securities purchase agreement (the "Securities Purchase Agreement") with MSPEA Modified Plastics Holding Limited, a Cayman Islands company and an affiliate of Morgan Stanley Private Equity Asia III Holdings (Cayman) Ltd, a Cayman Islands limited liability company ("MSPEA"), XD Engineering Plastics and Mr. Han, pursuant to which MSPEA purchased 16,000,000 shares of the Company's Series D convertible preferred stock with par value of US$0.0001 per share (the "Series D Preferred Stock"), for a total consideration of US$100 million or US$6.25 per share. On September 28, 2011, China XD issued 16,000,000 shares of Series D Preferred Stock and received total gross proceeds of US$100 million in cash. Net proceeds after issuance cost were approximately US$99.1 million.
The significant terms of Series D Preferred Stock are as follows:
(i) Conversion
The holders of the Series D Preferred Stock have the right to convert all or any portion of their holdings into common stock at a price of US$6.25 per share from January 1, 2012 through January 1, 2022, subject to adjustments for stock splits, combinations, dividends or distributions of common stock, merger and reorganization. In addition, if the Company achieves net income as adjusted to exclude (i) all extraordinary or non-recurring gains or losses for the relevant period, (ii) all gains or losses derived from any business operation other than the principal business of the Company or otherwise derived outside the ordinary course of business of the Company for the relevant period, and (iii) all gains or losses attributable to the Series D Preferred Stock ("Actual Profit"), at least RMB360 million, RMB520 million and RMB800 million in 2011, 2012 and 2013, respectively, each outstanding Series D Preferred Stock will be converted into common stock from September 28, 2014 upon the delivery of a written notice from the Company to the holders of Series D Preferred Stock. The Company determined that there was no embedded beneficial conversion feature attributable to the Series D Preferred Stock at the commitment date since the initial conversion price of the Series D Preferred Stock was greater than the price of China XD's common stock.
(ii) Voting
The holders of Series D Preferred Stock have the same voting rights as the common stockholders on an "if-converted" basis. In addition, if 1,600,000 shares or more (adjusted for any dilutive corporate actions) of Series D Preferred Stock remain outstanding, holders of Series D Preferred Stock have veto rights over certain material corporate actions of the Company.
(iii) Dividends
Each share of Series D Preferred Stock shall be entitled to dividend or other distribution simultaneously with any dividend or distribution on any shares of the Company's common stock as if each share of Series D Preferred Stock has been converted to common stock.
(iv) Liquidation preference
In the event of the liquidation, dissolution or winding-up of the affairs of the Company, whether voluntary or involuntary (a "Liquidation"), the holders of Series D Preferred Stock then outstanding shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders before any payment shall be made to the holders of shares of common stock by reason of their ownership thereof, but after any payment shall be made to the holders of any Series B preferred stock by reason of their ownership thereof, with respect to each share of Series D Preferred Stock, an amount equal to the greater of (i) an amount per share that would yield a total internal rate of return of 15% on the Series D Original Issuance Price, taking into account all cash dividends and/or distributions paid by the Company and received by the holder in respect of his or her share of Series D Preferred Stock (the IRR Price); and (ii) an amount per share as would have been payable had all shares of Series D Preferred Stock been converted into the Company's common stock pursuant to a voluntary conversion or a mandatory conversion immediately prior to such Liquidation (without taking into account any limitations or restrictions on the convertibility of the shares of Series D Preferred Stock).
(v) Redemption
Upon the occurrence of a triggering event as defined below, the holders of the Series D Preferred Stocks have the option to redeem the Series D Preferred Stock at a price equal to the IRR Price (the "Redemption Price"), by delivery of written notice to the Company (the "Redemption Request") at least 6 months prior to the proposed date of redemption (the "Redemption Date").
A triggering event means any of the following events: (I) the occurrence of any of the following: (i) the Actual Profit for the Financial Year ended December 31, 2011 is less than RMB360 million, or (ii) the Actual Profit for the Financial Year ended December 31, 2012 is less than RMB468 million, or (iii) the Actual Profit for the Financial Year ending December 31, 2013 is less than RMB608 million, which Actual Profit target has been removed pursuant to the Restated Certificate of Designation filed as of January 27, 2014 (such targets under (I) collectively, the "Actual Profit Targets"); (II) any breach by any of the Company, XD Engineering Plastics and Mr. Han (the "Principal Stockholders") of any representation, warranty, covenant or other agreement in the Securities Purchase Agreement, the Certificate of Designation, the Registration Rights Agreement, the Stockholders' Agreement, the Pledge Agreement and the Indemnification Agreements (collectively, the "Transaction Document") that (i) in the case of a breach of a covenant or agreement that is curable, has remained uncured for 30 days after the holder of Series D Preferred Stock has given written notice of such breach to the Company' Principal Stockholders and (ii) has had or could reasonably be expected to have a material adverse impact on (a) the business, operations, properties, financial position (including any material increase in provisions), earnings or condition of the Company, or (b) the value, marketability or liquidity of the Series D Preferred Stock taking into account any remedies already sought and received in connection with such breach; or (III) the commencement by the Company or any other member of the Company of any bankruptcy, insolvency, reorganization or of any other case or proceeding to be adjudicated a bankruptcy or insolvency, or the consent by it to the entry of a decree or order for relief in respect of the Company or any other member of the Company in an involuntary case; or the appointment of a custodian, receiver, liquidator, assignee, trustee, sequestrator other similar officials of the Company or any other member of the Company for the winding up or liquidation of its affairs.
On March 11, 2019, the board of directors of China XD Plastics Company Limited (the “Company”) and MSPEA Modified Plastics Holding Limited, the sole holder of all outstanding shares of Series D Junior Convertible Preferred Stock of the Company, approved the amendment of the Amended and Restated Certificate of Designation, Preferences and Rights of Series D Junior Convertible Preferred Stock of the Company (“Amended and Restated Certificate”) to amend “Maturity Date” set forth therein from the maturity date of the U.S. dollar denominated senior notes in an aggregate principal amount of up to US$300,000,000 issued in 2014 by Favor Sea Limited to January 1, 2022 (the “Amendment of the Series D Certificate of Designation”). Following such amendment, the trigger with respect to the mandatory redemption of the Series D Preferred Stock as described in Section 8 of the Amended and Restated Certificate, and the period for Voluntary Conversion (as defined in the Amended and Restated Certificate) as described in Section 6(A) of the Amended and Restated Certificate are extended to the amended Maturity Date.
If any shares of Series D Preferred Stock remain outstanding on January 1, 2022, the holders of such shares shall require the Company to redeem each share of Series D Preferred Stock at a price equal to the IRR Price (the "Mandatory Redemption Price") no later than six months after the Maturity Date. The Mandatory Redemption Price per share was US$17.54 and US$15.25 as of December 31, 2018 and 2017, respectively.
The Company concluded that it has met the Actual Profit Targets and that it is not probable any of the triggering events has occurred or is expected to occur. In addition, the Company concluded that it has met the performance target of RMB360 million, RMB520 million and RMB800 million in 2011, 2012 and 2013, respectively and accordingly it has the right to request the conversion of Series D Preferred Stock into common stock. As a result, it was not probable that the Series D Preferred Stock is redeemable as of December 31, 2018. Therefore no changes in the redemption value were recognized for any of the periods presented. The Company will assess the probability of whether the Series D Preferred Stock is redeemable at each reporting period end.
Pursuant to the Stockholders' Agreement between MSPEA and the Principal Stockholders, if the Company shall at any time issue or sell any shares of common stock or equity securities, other than an issuance or sale in an exempted issuance, at a price per share, or in the case other equity securities exchangeable or convertible into shares of common stock, at a conversion or exercise price for a share of common stock (in each case, the "New Issue Price") that is less than the then effective conversion price of Series D Preferred Stock, the holders of Series D Preferred Stock shall have the right to purchase from the Principal Stockholders, and Principal Stockholders shall sell and transfer to the holders of Series D Preferred Stock, at par value per share, a number of shares of common stock that is equal to (i) the number of shares of common stock that the Series D Preferred Stock held by the holders of Series D Preferred Stock would have been convertible into as if the then effective conversion price is equal to the New Issue Price, minus (ii) the number of shares of common stock that the outstanding Series D Preferred Stock held by the holders of Series D Preferred Stock are convertible into under the then effective conversion price. The exempted issuance refers to (a) any issuance of common stock upon the conversion of the Series D Preferred Stock; (b) the conversion, exercise or exchange of options, warrants or convertible securities of the Company that are outstanding and have been fully disclosed to MSPEA as of September 28, 2011; (c) any issuance of shares of common stock or options to employees, officers, directors or other service providers of the Company pursuant to any stock or option plan duly approved for such purpose including the board of directors; (d) any issuance of common stock, options, warrants or convertible securities of the Company pursuant to acquisitions or other strategic transactions, in each case approved by the board of directors and (e) any issuance of adjustment shares that the Principal Stockholders shall sell and transfer to the holders of Series D Preferred Stock if the Company is unable to achieve the Actual Profit as defined below.
In addition, the Principal Stockholders entered into a pledge agreement with the holders of Series D Preferred Stock to secure the payment and performance of the following obligations (collectively, the "Secured Obligations"), which are secured by the collateral under the Pledge Agreement between the holders of Series D Preferred Stock and the Principal Stockholders: (a) the full and prompt payment when due (whether at stated maturity, by redemption or acceleration or otherwise) of all debts, obligations and liabilities of Principal Stockholders owing to the holders of Series D Preferred Stock; (b) all reasonable costs and expenses incurred by the holders of Series D Preferred Stock to enforce this Agreement and maintain, preserve, collect and realize upon the collateral. The collateral refers to 16,000,000 shares of common stock, par value $0.0001, of China XD registered in the name of XD Engineering Plastic.
The holders of Series D Preferred Stock have an option to purchase common stock at par value from the Principal Stockholders if the Company is unable to achieve the Actual Profit of RMB360 million, RMB520 million and RMB800 million in 2011, 2012 and 2013, respectively. The number of common stock to be purchased is based on a pre-set formula as specified in the Stockholders' Agreement.
The Stockholders' Agreement was an inducement made to facilitate the investment in the Series D Preferred Stock on behalf of the Company. Therefore, the fair value of the options issued by the Principal Stockholders to the holders of the Series D Preferred Stock was recognized as additional paid-in capital and reflected as a reduction of the proceeds allocated to the Series D Preferred Stock. As of September 28, 2011, the fair value of the options was determined to be US$1,501,000 based on the Company's common stock price on September 28, 2011, and the probability of the Company's future financial projection and the expected volatility of the Company's common stock.
Note 18 – Stock based compensation
Stock options issued to employees, directors and consultants
On May 26, 2009, the Board of Directors approved the adoption of the 2009 Stock Incentive Plan (the "2009 Plan"), which provides for the granting of stock options and other stock-based awards to key employees, directors and consultants of the Company. The aggregate number of common stock which may be issued under the 2009 Plan may not exceed 7,800,000 shares.
Nonvested shares
A summary of the nonvested shares activity for the years ended December 31, 2018 and 2017 is as follows:
|
|
Number of Nonvested
Shares
|
|
|
Weighted Average
Grant date Fair Value
|
|
|
|
|
|
|
US$
|
|
Outstanding as of December 31, 2016
|
|
|
402,210
|
|
|
|
6.10
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(216,190
|
)
|
|
|
5.12
|
|
Forfeited
|
|
|
(24,910
|
)
|
|
|
5.60
|
|
Outstanding as of December 31, 2017
|
|
|
161,110
|
|
|
|
7.49
|
|
Granted
|
|
|
560,000
|
|
|
|
4.40
|
|
Vested
|
|
|
(721,110
|
)
|
|
|
4.76
|
|
Outstanding as of December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
Expected to vest as of December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
The total fair value of shares vested during the years ended December 31, 2018 and 2017 was and US$3,432,484 and US$1,106,893, respectively.
The Company recognized US$2,678,811 and US$553,512 of compensation expense in general and administrative expenses relating to nonvested shares for the years ended December 31, 2018 and 2017, respectively.
As of December 31, 2018, there was nil unrecognized compensation cost relating to nonvested shares.
Stock options
On June 30, 2018, the Company's Board of Directors approved the grant of stock options to purchase 500,000 shares of the
Company's common stock to a consultant at an exercise price of US$0.24. The options have a performance condition which requires the consultant providing capital market advisory services to the company, including but not limited to financing for the going private transaction during the service period of six month. The options can be vested at the end of the service period of six months if the performance condition is met. The awards will be forfeited if such performance condition is not met at the end of the service period. General and administrative expenses are recognized through the period of service as the service is performed and adjusted for changes in fair value until performance is complete.
During the year ended December 31, 2018, the performance condition was met and the options of 500,000 shares were vested. General and administrative expenses were recorded for the twelve months ended December 31, 2018.
A summary of stock options activity for the years ended December 31, 2018 and 2017 is as follows.
|
|
Number of Options
Outstanding
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
US$
|
|
Outstanding as of December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
500,000
|
|
|
|
0.24
|
|
Exercised
|
|
|
(500,000
|
)
|
|
|
0.24
|
|
Outstanding as of December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
The Company recognized US$675,000 and nil of share-based compensation expense in general and administration expenses relating to stock options for the years ended December 31, 2018 and 2017, respectively.
Note 19 – Earnings per share
Basic and diluted earnings per share are calculated as follows:
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Numerator:
|
|
|
|
|
|
|
Net income
|
|
|
68,313,421
|
|
|
|
31,621,734
|
|
Less:
|
|
|
|
|
|
|
|
|
Earnings allocated to participating Series D convertible preferred stock
|
|
|
(16,459,431
|
)
|
|
|
(7,678,801
|
)
|
Earnings allocated to participating nonvested shares
|
|
|
(119,506
|
)
|
|
|
(139,318
|
)
|
Net income for basic and diluted earnings per share
|
|
|
51,734,484
|
|
|
|
23,803,615
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
50,290,425
|
|
|
|
49,598,609
|
|
Dilutive effect of outstanding share options
|
|
|
-
|
|
|
|
-
|
|
Denominator for diluted earnings per share
|
|
|
50,290,425
|
|
|
|
49,598,609
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per common share
|
|
|
1.03
|
|
|
|
0.48
|
|
The following table summarizes potentially dilutive securities excluded from the calculation of diluted earnings per share for the years ended December 31, 2018 and 2017, because their effects are anti-dilutive:
|
Years Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
|
|
US$
|
|
US$
|
|
|
Numerator:
|
|
|
|
|
|
Shares issuable upon conversion of Series D convertible preferred stocks
|
|
|
16,000,000
|
|
|
|
16,000,000
|
|
|
Note 20 – Statutory reserves
Under PRC rules and regulations, all subsidiaries of China XD in the PRC are required to appropriate 10% of their net income, as determined in accordance with PRC accounting rules and regulations, to a statutory surplus reserve until the reserve balance reaches 50% of their registered capital. The appropriation to this statutory surplus reserve must be made before distribution of dividends to China XD can be made. The statutory reserve is non-distributable, other than during liquidation, and can be used to fund previous years losses, if any, and may be converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently outstanding, provided that the remaining balance of the statutory reserve after such issue is not less than 25% of the registered capital.
For the years ended December 31, 2018 and 2017, China XD's subsidiaries in the PRC made appropriations to the reserve fund of RMB72,254,327 (equivalent to US$10,924,452) and RMB61,532,122 (equivalent to US$9,110,606), respectively. As of December 31, 2018 and 2017, the accumulated balance of the statutory surplus reserve was RMB320,739,132 (equivalent to US$ 49,683,438) and RMB248,484,805 (equivalent to US$38,758,986), respectively.
Note 21 – Commitments and contingencies
(1) Lease commitments
Future minimum lease payments under non-cancellable operating leases agreements as of December 31, 2018 were as follows. The Company's leases do not contain any contingent rent payments terms.
|
|
US$
|
|
Years ending December 31,
|
|
|
|
2019
|
|
|
2,174,439
|
|
2020
|
|
|
1,486,007
|
|
2021
|
|
|
1,486,007
|
|
2022
|
|
|
1,446,251
|
|
2023
|
|
|
1,482,593
|
|
2024 and thereafter
|
|
|
21,176,139
|
|
Rental expenses incurred for operating leases of plant and equipment and office spaces were US$2,455,509 and US$2,431,139, in 2018 and 2017, respectively. There are no step rent provisions, escalation clauses, capital improvement funding requirements, other lease concessions or contingent rent in the lease agreements. The Company has no legal or contractual asset retirement obligations at the end of leases. The Company's leases do not contain any contingent rent payments terms.
(2) Sichuan plant construction and equipment purchase
On March 8, 2013, Xinda Holding (HK) entered into an investment agreement with Shunqing Government, pursuant to which Xinda Holding (HK) will invest RMB1,800 million (equivalent to US$262.3 million) in property, plant and equipment and approximately RMB600 million (equivalent to US$87.4 million) in working capital, for the construction of Sichuan plant. As of December 31, 2018, the Company has a remaining commitment of RMB54.8 million (equivalent to US$8.0 million) mainly for facility construction.
In September 2016, Sichuan Xinda entered into equipment purchase contracts with Hailezi for a consideration of RMB17.0 million (equivalent to US$2.5 million) to purchase storage facility and testing equipment. Afterward, Sichuan Xinda cancelled two contracts with Hailezi for a consideration of RMB1.6 million (equivalent to US$0.2 million). As of December 31, 2018, Sichuan Xinda prepaid RMB6.0 million (equivalent to US$0.9 million) and has a remaining commitment of RMB9.4 million (equivalent to US$1.4 million).
On October 20, 2016, Sichuan Xinda entered into an equipment
purchase contract with Peaceful for a total consideration of RMB89.8 million (equivalent to US$13.1 million) to purchase certain production and testing equipment. As of December 31, 2018, the Company has a commitment of
RMB55.9 million (equivalent to
US$8.2 million).
On November 15, 2016, Sichuan Xinda entered into decoration contract with Beijin Construction to perform indoor and outdoor decoration work for a consideration of RMB237.6 million (equivalent to US$34.6 million). On February 20, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform outdoor decoration work for a consideration of RMB2.9 million (equivalent to US$0.4 million). On June 10, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform ground decoration work for a consideration of RMB23.8 million (equivalent to US$3.5 million). As of December 31, 2018, Sichuan Xinda prepaid RMB120.9 million (equivalent to US$17.6 million) of which RMB70.4 million (equivalent to US$10.7 million) was transferred to construction in progress and has a remaining commitment of RMB143.4 million (equivalent to US$20.9 million).
In connection with the Nanchong Project mentioned in Note 7 (i), Sichuan Xinda entered into equipment purchase contracts with Hailezi for a consideration of RMB2,242.8 million (equivalent to US$326.8 million) to purchase production equipment and testing equipment in March 2017. By the end of June 2017, Sichuan Xinda expected to launch an integrated ERP system, which resulted in the equipment to be purchased under the original contracts with Hailezi not meeting the production requirements. Thus the original contracts have been terminated with the amount of RMB2,222.9 million (equivalent to US$323.9 million), and Hailezi agreed to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$248.4 million) by the end of March 2018, out of the total prepayment made by Sichuan Xinda of RMB1,722.9 million (equivalent to US$251.0 million). As of June 30, 2018, Hailezi has refunded the prepayment in the amount of RMB1,704.9 million (equivalent to US$248.4 million). As of December 31, 2018, Sichuan Xinda prepaid RMB18.0 million (equivalent to US$2.6 million) and has a remaining commitment of RMB1.9 million (equivalent to US$0.3 million).
In connection with the Nanchong Project, on June 21, 2018, Sichuan Xinda entered into another equipment purchase contracts with Hailezi to purchase production equipment and testing equipment for a consideration of RMB1,900 million (equivalent to US$276.9 million). Pursuant to the contracts with Hailezi, Sichuan Xinda have prepaid RMB1,710 million (equivalent to US$249.2 million) at the end of December 2018, and has a remaining commitment of RMB190 million (equivalent to US$27.7 million).
(3) Heilongjiang plant construction and equipment purchase
In connection with the equipment purchase contracts with Hailezi signed on September 26, 2016 and February 28, 2017 mentioned in Note 7 (i), HLJ Xinda Group has a remaining commitment of RMB31.2 million (equivalent to US$4.5 million) as of December 31, 2018.
In connection with the "HLJ Project" mentioned in Note 7 (i), pursuant to the three investment agreements, the project total capital expenditure will be RMB4,015.0 million (equivalent to be US$585.0million), among which the investment in fixed assets shall be no less than RMB3,295.0 million (equivalent to US$480.0 million) in total. Pursuant to the contracts with Hailezi signed in November 2017 mentioned in Note 7 (i), HLJ Xinda Group has a remaining commitment of RMB18.8 million (equivalent to US$2.7 million) as of December 31, 2018.
In connection with the HLJ project, on June 25, 2018, HLJ Xinda Group entered into another equipment purchase contract with Hailezi to purchase production equipment, which will be used for 300,000 metric tons of biological based composite material, located in Harbin, for a consideration of RMB749.8 million (equivalent to US$109.2 million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB300.7 million (equivalent to US$43.8 million) as of December 31, 2018, and has a remaining commitment of RMB449.1 million (equivalent to US$65.4 million).
In connection with the HLJ Project, on July 12, 2018, Heilongjiang Xinda Enterprise Group Company Limited (“HLJ Xinda Group”) entered into an equipment purchase contract with Hailezi to purchase production equipment, which will be used for 300,000 metric tons of biological based composite material, located in Harbin, for a consideration of RMB1,157.0 million (equivalent to US$168.6 million). Pursuant to the contract with Hailezi, HLJ Xinda has prepaid RMB240.8 million (equivalent to US$35.1 million) as of December 31, 2018, and has a remaining commitment of RMB916.2 million (equivalent to US$133.5 million).
In connection with the building purchase contract mentioned in Note 7 (iii), HLJ Xinda Group has a remaining commitment of RMB108.3 million (equivalent to US$15.8 million) as of December 31, 2018.
(4) Dubai plant construction and equipment
On April 28, 2015, Dubai Xinda entered into a warehouse construction contract with Falcon Red Eye Contracting Co. L.L.C. for a total consideration of AED6.7 million (equivalent to US$1.8 million). As of December 31, 2018, the Company has a remaining commitment of AED1.6 million (equivalent to US$0.4 million).
(5) Xinda CI (Beijing) office building decoration
On March 30, 2017, Xinda CI (Beijing) Investment Holding Co., Ltd. ("Xinda Beijing Investment") entered into a decoration contract with Beijing Fangyuan Decoration Engineering Co., Ltd. for a total consideration of RMB5.8 million (equivalent to US$0.8 million) to decorate office building. As of December 31, 2018, the decoration work in the amount of RMB2.0 million (equivalent to US$0.3 million) was recorded in construction in progress. As of December 31, 2018, the Company has a remaining commitment of RMB3.8 million (equivalent to US$0.6 million).
On June 9, 2017, Xinda CI (Beijing) entered into a decoration contract with Beijing Zhonghongwufang Stone Co., Ltd for a total consideration of RMB1.2 million (equivalent to US$0.2 million) to decorate office building. As of December 31, 2018, the decoration work in the amount of RMB0.6 million (equivalent to US$0.1 million) was recorded in construction in progress. As of December 31, 2018, the Company has a remaining commitment of RMB0.6 million (equivalent to US$0.1 million).
Note 22 – Revenues
Revenues consist of the following:
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Modified Polyamide 66 (PA66)
|
|
|
316,646,777
|
|
|
|
286,526,792
|
|
Modified Polyamide 6 (PA6)
|
|
|
243,889,834
|
|
|
|
224,086,830
|
|
Plastic Alloy
|
|
|
324,741,846
|
|
|
|
363,319,049
|
|
Modified Polypropylene (PP)
|
|
|
223,388,535
|
|
|
|
231,255,726
|
|
Modified Acrylonitrile butadiene styrene (ABS)
|
|
|
32,232,757
|
|
|
|
43,333,667
|
|
Polyoxymethylenes (POM)
|
|
|
10,587,174
|
|
|
|
12,008,089
|
|
Polyphenylene Oxide (PPO)
|
|
|
17,070,145
|
|
|
|
17,468,208
|
|
Polylactide (PLA)
|
|
|
94,483,496
|
|
|
|
88,644,132
|
|
Polyethylene (PE)
|
|
|
11,012,364
|
|
|
|
22,756,186
|
|
Raw materials
|
|
|
780,354
|
|
|
|
1,049,069
|
|
Total Revenue
|
|
|
1,274,833,282
|
|
|
|
1,290,447,748
|
|
Note 23 - Losses on disposal of a subsidiary
On December 18, 2018, HLJ Xinda Group entered into an agreement with Mr. Xiaohui Gao, the General Manager of Shanghai Sales, to transfer the wholly owned equity of Shanghai Sales from HLJ Xinda Group to Mr. Gao for a cash consideration of RMB50.0 million (equivalent to US$7.3 million) as a result of group restructuring to streamline resources and improve operating efficiency.
The legal transfer was completed on December 19, 2018 and the Company recorded a loss of US$0.2 million on disposal of Shanghai Sales for the year ended December 31, 2018.
Note 24 – Selected Quarterly Financial Information (Unaudited)
The following tables show a summary of the Company's quarterly financial information for each of the four quarters of 2018 and 2017 (in millions, except gross margin and per share amounts):
|
|
Fourth Quarter
|
|
|
Third Quarter
|
|
|
Second Quarter
|
|
|
First Quarter
|
|
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
349.8
|
|
|
$
|
297.2
|
|
|
$
|
317.3
|
|
|
$
|
310.5
|
|
Gross profit
|
|
$
|
62.4
|
|
|
$
|
47.2
|
|
|
$
|
56.1
|
|
|
$
|
53.9
|
|
Net income
|
|
$
|
13.0
|
|
|
$
|
9.0
|
|
|
$
|
27.2
|
|
|
$
|
19.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.20
|
|
|
$
|
0.13
|
|
|
$
|
0.41
|
|
|
$
|
0.29
|
|
Diluted
|
|
$
|
0.20
|
|
|
$
|
0.13
|
|
|
$
|
0.41
|
|
|
$
|
0.29
|
|
|
|
Fourth Quarter
|
|
|
Third Quarter
|
|
|
Second Quarter
|
|
|
First Quarter
|
|
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
427.6
|
|
|
$
|
311.4
|
|
|
$
|
313.6
|
|
|
$
|
237.8
|
|
Gross profit
|
|
$
|
91.5
|
|
|
$
|
47.3
|
|
|
$
|
63.1
|
|
|
$
|
34.8
|
|
Net income
|
|
$
|
(20.5
|
)
|
|
$
|
14.1
|
|
|
$
|
28.1
|
|
|
$
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.31
|
)
|
|
$
|
0.21
|
|
|
$
|
0.43
|
|
|
$
|
0.15
|
|
Diluted
|
|
$
|
(0.31
|
)
|
|
$
|
0.21
|
|
|
$
|
0.43
|
|
|
$
|
0.15
|
|
Note 25 – Geographic Information
The following summarizes the Company's revenues from the following geographic areas (based on the location of the operating units):
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Revenues (in US$ millions)
|
|
|
|
|
|
|
PRC
|
|
|
1,259.8
|
|
|
|
1,207.9
|
|
Dubai, UAE
|
|
|
15.0
|
|
|
|
82.5
|
|
Total
|
|
|
1,274.8
|
|
|
|
1,290.4
|
|
The following summarizes the Company's Long-lived assets (including Property, plant and equipment, net, Land use rights, net, Long-term prepayments to equipment and construction suppliers and Other non-current assets) from the following geographic areas (based on the location of the operating units):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Long-lived assets (in US$ millions)
|
|
|
|
|
|
|
PRC
|
|
|
966.3
|
|
|
|
694.9
|
|
Dubai, UAE
|
|
|
373.3
|
|
|
|
376.2
|
|
Total
|
|
|
1,339.6
|
|
|
|
1,071.1
|
|