EDGAR 10-K Filing

Company CIK: 1353970
Filing Year: 2021
Filename: 1353970_10-K_2021_0001493152-21-028658.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS.
Our Business
China XD Plastics Company Limited (“China XD”, “we”, and the “Company”, and “us” or “our” shall be interpreted accordingly) is one of the leading specialty chemical companies engaged in the research, development, manufacture and sale of modified plastics primarily for automotive applications in China and to a lesser extent, in Dubai, United Arab Emirates (“UAE”). Through our wholly-owned subsidiaries Heilongjiang Xinda Enterprise Group Company Limited (“HLJ Xinda Group”), Sichuan Xinda Enterprise Group Company Limited (“Sichuan Xinda”), and AL Composites Materials FZE (“Dubai Xinda”), we manufacture and sell polymer composite materials (a broader category including modified plastics), primarily for automotive applications. We develop our products using our proprietary technology through our wholly-owned research laboratory owned by HLJ Xinda Group. We had 688 certifications from manufacturers in the automobile industry as of December 31, 2020. We are the only company certified as a National Enterprise Technology Center in modified plastics industry in Heilongjiang Province. Our research and development (the “R&D”) team consisted of 127 professionals and 7 consultants as of December 31, 2020. As a result of the combination of our academic and technological expertise, we had a portfolio of 647 patents, among which we have obtained 63 patent registrations in China, and the applications for the remaining 584 were pending in China as of December 31, 2020.
Modified plastics are produced by changing the physical and/or chemical characteristics of ordinary resin materials. In order for plastics to be used to produce automobile parts and components, they must satisfy certain physical criteria in terms of mechanical functionality, stability under light and heat, durability, flame resistance, and environmental friendliness. Our unique proprietary formulas and processing techniques enable us to produce low-cost high-quality modified plastic materials, which have been certified by many of the major domestic and international automobile manufacturers in China. In addition, we also provide specially engineered plastics and environment-friendly plastics for use in oil-field equipment, mining equipment, vessel-propulsion systems and power station equipment.
China XD’s primary end-market is the Chinese automotive industry that has been rapidly growing for the past few years where our modified plastics are used by our customers to fabricate the following auto components: exteriors (automobile bumpers, rearview and sideview mirrors, license plate parts), interiors (door panels, dashboard, steering wheel, glove compartment and safety belt components), and functional components (air conditioner casing, heating and ventilation casing, engine covers, and air ducts). Our specialized plastics are utilized in more than 31 automobile brands manufactured in China, including leading brands such as Audi, Mercedes Benz, BMW, Toyota, Buick, Chevrolet, Mazda, Volvo, Ford, Citroen, Jinbei, VW Passat, Golf, Jetta, etc. As of December 31, 2020, 688 of HLJ Xinda Group’s automotive-specific modified plastic products were certified by one or more of the automobile manufacturers in China and are in commercial production. As of December 31, 2020, 347 of our products were in the process of product certification by automobile manufacturers. Due to the global COVID-19 pandemic and outbreaks in Dubai, our Dubai’s operation has been suspended since early February in 2020, creating uncertainty of our oversea business in the foreseeable future.
We operate three manufacturing bases in Harbin, Heilongjiang and one manufacturing base in Nanchong, Sichuan Province, in the People’s Republic of China (the “PRC”), as well as a manufacturing base in Dubai, UAE. As of December 31, 2020, in domestic market, we had approximately 331,245 metric tons of production capacity across 91 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwanese conveyer systems. Prior to December 2012, we had approximately 255,000 metric tons of annual production capacity across 58 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwan conveyer systems. In December 2012, we further expanded our third production base in Harbin with additional 135,000 metric tons of annual production capacity, bringing total installed production capacity in our three production bases to 390,000 metric tons with additional 30 new production lines.
In July 2017, our Harbin campus launched a new industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics. As a result, the production capacity in Harbin, Heilongjiang was downgraded to 290,000 MT. In 2019, our Harbin campus started another two equipment projects totaling 155,000 MT in Qinling Road Factory (“Qinling Road Project”) and Jiangnan Road Factory (“Jiangnan Road Project”) for equipment upgrade and overhaul progress, which further downgraded our production capacity to 135,000 MT. The industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics is expected to be completed by the end of second quarter of 2020, and Qinling Road Project and Jiangnan Road Project was completed by the end of the third quarter of 2020, bringing the production capacity back to 390,000 MT. In addition, in July 2017, HLJ Xinda Group also started an industrial project for 300,000 metric tons of biological composite materials, an industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory, which was broken ground in December 2019 with four workshops. The Company expects the gradual trial out by the end of 2022 and put into production by the end of 2023, thus expanding the total production capacity to 590,000 MT.
In December 2013, we broke ground on the construction of our fourth production plant in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, which we expect will bring total domestic installed production capacity to 590,000 metric tons with the addition of 70 new production lines upon the completion of the construction of our fourth production plant. Sichuan Xinda has been supplying to its customers since 2013. We installed 50 production lines in the second half of 2016 in our Sichuan plant with production capacity of 216,000 metric tons during the year of 2017 and an additional 10 production lines in July 2018, bringing the total capacity to 259,200 metric tons. As of December 31, 2020, there is still construction ongoing on the site of our Sichuan plant which is expected to be completed by the end of the third quarter of 2022 .
In order to develop potential overseas markets, Dubai Xinda obtained one leased property and two purchased properties, approximately 52,530 square meters in total, including one leased 10,000 square meters, and two purchased 20,206 and 22,324 square meters on January 25, 2015, June 28, 2016 and September 21, 2016, respectively, from Jebel Ali Free Zone Authority (“JAFZA”) in Dubai, UAE, with constructed building comprising warehouses, offices and service blocks. In addition to the earlier 10 trial production lines in Dubai Xinda, the Company completed installing 45 production lines with 11,250 metric tons of annual production capacity by the end of November 2018, and an additional 30 production lines with 7,500 metric tons of annual production capacity. The Company previously estimated 22 production lines to be put into production in the fourth quarter of 2021, and 8 production lines in the second quarter of 2022. Due to the negative impact of COVID-19, this project was suspended and the Company hopes to resume the installation process by the second half of 2021 .
The Company estimates 22 production lines will be put into production in the fourth quarter of 2021 and 8 production lines will be put into production in the third quarter of 2022, thus increasing the total production capacity in Dubai Xinda to 21,250 metric tons, targeting high-end products for the overseas market .
Due to the COVID-19 pandemic, the Company’s manufacturing facilities in Harbin and Sichuan were temporarily shut down from early February 2020 to early March 2020 while our Dubai facilities suspended operation since early February 2020 in accordance with the requirement of the local governments. The Company’s business both in China and overseas was negatively impacted and generated lower revenue and net income during the period from February to April 2020. The extent of the impact of COVID-19 on the Company’s results of operations and financial condition will depend on the virus’ future developments, including the duration and spread of the outbreak and the impact on the Company’s customers, which are still uncertain and cannot be reasonably estimated at this point of time.
Our History
China XD, formerly known as NB Payphones Ltd. and NB Telecom, Inc., was originally incorporated under the laws of the state of Pennsylvania on November 16, 1999. On December 27, 2005, we migrated to the state of Nevada.
On December 24, 2008, we acquired Favor Sea Limited (“Favor Sea (BVI)”), a British Virgin Islands corporation, which is the holding company for Harbin Xinda Macromolecule Material Co., Ltd. (“Harbin Xinda”) and Harbin Xinda’s wholly-owned subsidiary, Harbin Xinda Macromolecule Material Research Institute (“Research Institute”). Harbin Xinda is a high-tech manufacturer and developer of modified plastics, which was established in September 2004 under the laws of the PRC. In December 2010, our management determined that the Research Institute could not meet the Company’s development needs, including meeting the criteria to be a National Enterprise Technology Center. As a result, the Research Institute was deregistered.
On October 14, 2010, Harbin Xinda established Heilongjiang Xinda Software Development Company Limited (“Xinda Software”) to develop software applications that provide certain standard and programmable technical services remotely. Xinda Software was deregistered on December 5, 2016.
On March 31, 2011, Harbin Xinda established a wholly-owned subsidiary, Harbin Xinda Macromolecule Material Testing Technical Co., Ltd. (“Xinda Testing”), to develop a nationally recognized testing laboratory and provide testing services of macromolecule materials, engineering plastics and other products.
In response to our rapid business expansion and in order to be eligible for certain beneficial tax policies for certain regions in China, we undertook a group restructuring plan.
From August 2011 to December of 2012, Harbin Xinda established (i) Harbin Meiyuan Enterprise Management Service Company Limited (“Meiyuan Training”) in Harbin to provide all year round training to both our existing and new employees, accommodate our customers and business partners as well as host industry conferences; and (ii) Heilongjiang Xinda Enterprise Group Technology Center Company Limited (“Xinda Group Technology Center”) in Harbin to focus on long-term research and development projects. Meiyuan Training ceased business in the third quarter of 2016 and Xinda Group Technology Center was deregistered in 2016.
HLJ Xinda Group, a wholly-owned subsidiary of Xinda HK Company Limited and the proposed direct parent company of all of our PRC-based operating subsidiaries after the group restructuring was established in December 2011. Harbin Xinda Plastics Material Research Center Company Limited (“Xinda Material Research Center”) was established in December 2011 to focus on research and development of products close to commercialization phase.
Xinda Group Material Research was established in December 2012.
During the year ended December 31, 2013, following the overall reorganization plan, the Company completed the deregistration of Haikou New Materials, Haikou Technical Center and Haikou Software and merged Xinda Testing and Xinda Material Research Center into Heilongjiang Xinda Enterprise Group Macromolecule Material Research Center Co., Ltd. (“Xinda Group Material Research”) in 2013, whose major functions included technical support for our production bases, research and development of modified plastic products for applications in areas such as automotive, high-speed rail, aircraft and others, customer post-sales support, and collaboration with industry leading universities and institutions. Xinda Group Material Research was deregistered in 2016 as a result of group restructuring.
On March 19, 2013, HLJ Xinda Group established Sichuan Xinda, which subsequently established Sichuan Xinda Enterprise Group Meiyuan Training Center Co., Ltd. (“Sichuan Meiyuan”), Sichuan Xinda Enterprise Group Software Development Co., Ltd. (“Sichuan Software”), and Sichuan Xinda Enterprise Group Sales Co., Ltd (“Sichuan Sales”) in April 2013, in order to expand our business in Southwest China. In 2016, Sichuan Meiyuan and Sichuan Software were deregistered and Sichuan Sales merged into Sichuan Xinda as a result of group restructuring.
On April 23, 2013, Xinda Holding (HK) Co, Ltd. (“Xinda Holding (HK)”), formerly known as Hong Kong Engineering Plastics Co., Ltd., set up Xinda (HK) International Trading Company Ltd (“Xinda (HK) Int’l Trading”) for import and export business through Hong Kong. In February 2015, Xinda (HK) Int’l Trading was deregistered.
Heilongjiang Xinda Composite Material Co., Ltd. (“Xinda Composite”) was established on November 27, 2013.
On January 8, 2014, Xinda Holding (HK) set up AL Composites Materials FZE (“Dubai Xinda”) for international expansion business.
On March 5, 2014, Xinda Holding (HK) set up Xinda (HK) Trade Co., Ltd (“Xinda (HK) Trading”) for import and export business through Hong Kong.
On June 17, 2014, Xinda Holding (HK) set up Xinda (Heilongjiang) Investment Co., Ltd. (“Heilongjiang Investment”) for its domestic investment activities in PRC. On October 19, 2016, Heilongjiang Investment was deregistered.
On August 1, 2014, Heilongjiang Investment set up Nanchong Xinda Composite Materials Co., Ltd (“Nanchong Composite Materials”) in order to expand our business in Southwest China and other regions in its proximity. In July 2015, Nanchong Composite Materials merged into Sichuan Xinda as part of the efforts to streamline the Company’s management in Sichuan.
On November 12, 2014, Heilongjiang Investment set up Heilongjiang Xinda Meiyuan Tennis Club Co., Ltd. (“Meiyuan Tennis Club”) in order to replace the Meiyuan Training.
On October 16, 2015, Xinda Holding (HK) set up Xinda CI (Beijing) Investment Holding Co., Ltd. (“Xinda Beijing Investment”) in order to manage domestic companies in mainland China. Pursuant to the agreement of shareholders of Xinda Beijing Investment signed on December 1, 2017, 100% equity of Xinda Beijing Investment was transferred to HLJ Xinda Group at the cost of RMB1.00 (equivalent to US$0.15). On December 27, 2017, Xinda Beijing Investment was renamed as Xinda CI (Beijing) Enterprise Management Co., Ltd. (“Xinda CI (Beijing)”).
In 2016, as a result of group restructuring, Heilongjiang Investment and Meiyuan Tennis Club were dissolved.
On August 29, 2016, Xinda Holding US, a subsidiary of Xinda Holding (HK), was dissolved in New York.
Harbin Xinda Plastics New Materials Co., Ltd. (“Xinda Plastics New Materials”) ceased business in the third quarter of 2016 and dissolved in 2018.
On September 5, 2016, Sichuan Xinda set up Chongqing Wanshengxiang Macromolecule Materials Co., Ltd. (“Chongqing Wanshengxiang”) in order to engage in import and export business in the free-trade zone in Chongqing and to expand our business in Southwest China. In August 2018, Chongqing Wanshengxiang was dissolved.
On February 16, 2017, the Board received a preliminary nonbinding proposal letter from Mr. Jie Han (“Mr. Han”), the Chairman and Chief Executive Officer, XD. Engineering Plastics Company Limited, a company incorporated in the British Virgin Islands and wholly owned by Mr. Han, and MSPEA Modified Plastics Holding Limited, an affiliate of Morgan Stanley Private Equity Asia III, Inc. (collectively, the “Buyer Consortium”), to acquire all of the outstanding shares of common stock of the Company not already beneficially owned by the Buyer Consortium in a “going-private” transaction for US$5.21 per share of common stock of the Company in cash. The proposal letter states that the Buyer Consortium expects that the Board will appoint a special committee of independent directors to consider the proposal and make a recommendation to the Board. The proposal letter also states that the Buyer Consortium will not move forward with the proposed Transaction unless it is approved by such a special committee, and the proposed transaction will be subject to a nonwaivable condition requiring approval by majority shareholder vote of shareholders other than the Buyer Consortium members. A special committee was previously established by the Board; however, the proposed transaction did not proceed.
In June 2017, HLJ Xinda Group set up Xinda (Hong Kong) Macromolecule Material Ltd. (HK Macromolecule) and Xinda Deluxe Faith Ltd. (Xinda Faith) in order to expand the international business in Hong Kong.
In December 2017, HLJ Xinda Group set up (i) Heilongjiang Xinda Enterprise Group Shanghai New Materials Sales Co., Ltd. (“Shanghai Sales”); (ii) Heilongjiang Xinda Enterprise Group (Shanghai) New Materials Research and Development Co., Ltd. (“Shanghai New Materials R&D”); (iii) Heilongjiang Xinda Enterprise Group (Daqing) New Materials Industry and Trade Co., Ltd. (“Daqing New Materials); and (iv) Sichuan Xinda Composite Materials Co., Ltd. (“Sichuan Composite Materials”), in order to promote sales, engage in & research & development in new materials such as biological composite materials, ships, airplanes, high-speed rail, 3D printing materials, biodegradable plastics, and medical devices. In January 2019, Sichuan Composite Materials was dissolved.
In December 2018, Shanghai Sales was disposed as a result of group restructuring to streamline resources and improve operating efficiency.
In February 2019, Shanghai New Materials R&D was disposed as a result of group restructuring to streamline resources and improve operating efficiency.
In September 2019, HLJ Xinda Group set up Nanchong Municipal Xinxin Macromolecular Composite Materials Company Ltd. (“Nanchong Xinxin”) in order to promote sales, engage in & research & development in engineering plastics and macromolecular materials.
In December 2019, HLJ Xinda Group set up Heilongjiang Xinda New Materials Co., Ltd. (“Xinda New Materials”) in order to engage in sales, research and development in bio-based materials, composite materials, engineering materials and synthetic resins in domestic markets. As of December 31, 2020, the Company holds 61.92% equity interests of Xinda New Materials.
On January 9, 2020, HLJ Xinda Group set up Heilongjiang Xinda Bio-Based Composite Materials Company Ltd. (“Xinda Bio-Based Composite Materials”) in order to engage in sales, research and development, technology consulting, service and transfer in bio-based materials, macromolecule material, plastics and related products in domestic markets. As of December 31, 2020, the Company holds 65.62% equity interests of Xinda Bio-Based Composite Materials.
On February 27, 2020, HLJ Xinda Group set up Sichuan Xinda Marcromolecule Composite Materials Co., Ltd. (“Sichuan Marcromolecule”) in order to engage in sales engage in sales, research and development, technology consulting, service and transfer in bio-based materials, macromolecule material, plastics and related products in Southwest China. In May 2021, Sichuan Marcromolecule was renamed as Sichuan Xinda Bio-Based Composite Materials Co., Ltd. (“Sichuan Bio-Based Composite Materials”).
On July 14, 2020, HLJ Xinda Group set up Heilongjiang Xinchuangjing Conference Service Co., Ltd. (“Xinchuangjing”) in order to engage in conference management in Harbin.
On October 10, 2020, HLJ Xinda Group set up Heilongjiang Xinda Enterprise Management Co., Ltd.(“Xinda Enterprise Management”) in order to engage in enterprise management services in domestic market.
On October 10, 2020, HLJ Xinda Group set up Heilongjiang Xinda New Material Co., Ltd. (“Heilongjiang New Materials”) in order to engage in sales, research and development, technology consulting, service and transfer of engineering plastics, composite materials and related products in Northeast China.
On November 4, 2020, HLJ Xinda Group set up Shanghai Xingsu New Materials Co., Ltd. (“Shanghai Xingsu”) in order to engage in technology consulting, service and transfer in new materials in China.
On May 8, 2020, the Board received a preliminary nonbinding proposal letter from Mr. Han, the Chairman and Chief Executive Officer, XD. Engineering Plastics Company Limited (together with Mr. Han, the “Buyer Group”), a company incorporated in the British Virgin Islands and wholly owned by Mr. Han, proposing to acquire all of the outstanding shares of common stock of the Company not already beneficially owned by the Buyer Group in a “going-private” transaction for US$1.1 per share of common stock of the Company in cash, subject to certain conditions. The proposal letter states that the Buyer Group expects that the Board will appoint a special committee of independent and disinterested directors to consider the proposal and make a recommendation to the Board. As of the date of the proposal letter, the Buyer Group beneficially owns the Shares representing approximately 70% of the voting power and approximately 50.1% of the share capital of the Company. The Board has established a special committee (the “Special Committee”), consisting of the following independent directors of the Company: Mr. Linyuan Zhai, Mr. Huiyi Chen and Mr. Guanbao Huang, with Mr. Huiyi Chen serving as chairperson of the Special Committee. The Special Committee will be responsible for evaluating, negotiating and recommending to the Board any proposals involving a strategic transaction by the Company with one or more third parties. On May 15, 2020, the Special Committee has retained Duff & Phelps, LLC as its financial advisor and Hogan Lovells as its legal counsel to assist it in its review and evaluation of the proposed transaction. There can be no assurance that any definitive offer will be made, that any agreement will be executed or that a transaction with the Buyer Group or any other transaction will be approved or consummated.
On June 15, 2020, the Company entered into an agreement and plan of merger (the “Merger Agreement”) with Faith Dawn Limited, an exempted company incorporated with limited liability under the laws of the Cayman Islands (“Parent”) and Faith Horizon Inc., a Nevada corporation (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company (the “Merger”) and cease to exist, with the Company continuing as the surviving corporation (the “Surviving Corporation”) and becoming a wholly owned subsidiary of Parent. On November 5, 2020 (Beijing time), a special meeting (“Special Meeting”) of the stockholders of the Company, was held. The Company’s stockholders voted, among other things, in favor of the proposal to adopt the Merger Agreement, dated as of June 15, 2020, by and among the Company, Parent, and Merger Sub, providing for Merger.
On December 13, 2020, the Company entered into an amendment No.1 (the “Amendment”) to the Merger Agreement. The Amendment extends the Termination Date (as defined in the Merger Agreement) to February 7, 2021. The special committee of the board of directors of the Company and the board of directors of the Company both approved the Amendment to permit additional time for the parties to the Merger Agreement to complete the Merger.
On February 7, 2021, the Company entered into an amendment No.2 (the “Second Amendment”) to the Merger Agreement. The Second Amendment extends the Termination Date (as defined in the Merger Agreement) to May 10, 2021. The special committee of the board of directors of the Company and the board of directors of the Company both approved the Second Amendment to permit additional time for the parties to the Merger Agreement to complete the Merger.
On May 8, 2021, the Company issued a notice of termination to Parent (the “Notice of Termination”) notifying Parent that the Company terminated the Merger Agreement pursuant to Section 9.1(c)(i) of the Merger Agreement, based on Parent and Merger Sub’s breaches of the Merger Agreement, which have given rise to the failure of several conditions set forth in Section 8.1 and Section 8.3 of the Merger Agreement. These breaches are not capable of being cured prior to the Termination Date of the Merger Agreement. Pursuant to the Notice of Termination, as a result of such termination, the Parent Termination Fee becomes due and payable to the Company by Parent. On May 12, 2021, Parent sent a response letter, dated May 11, 2021 (the “Response Letter”), to the Company that while it disagreed with the allegations made in the Notice of Termination, Parent acknowledges that the Company may terminate the Merger Agreement pursuant to Section 9.1(c)(iii) and thus agreed to pay the Parent Termination Fee pursuant to Section 9.3(b) of the Merger Agreement under that basis. As a result of the termination of the Merger Agreement, the Merger will not be completed.
Corporate Structure
The following table sets forth our group structure as of December 31, 2020:
Our Industry
According to a research report prepared exclusively for the Company and issued by Frost & Sullivan in 2021, China is estimated to have consumed approximately 25.6 million Metric Tons (“MT”) of modified plastic products in 2020, representing an increase of 2.8 % compared to 2019. With China being the world’s leading manufacturing center and with rising domestic individual consumption, we believe that demand for modified plastics from China will continue to increase in the foreseeable future. As shown in Figure 1, the market demand for modified plastics will reach 33.2 million MT in 2023, representing compound annual growth rates (“CAGR”) of 7.0% and 6.0% by sales volume and revenues from 2019 to 2023. Currently, demand for our products is primarily driven by the Chinese automotive industry. In order for plastics to be used in automobile parts and components, they must satisfy specific physical criteria in terms of mechanical functionality, stability under light and heat, durability, flame resistance, and environmental friendliness. Modified plastics are usually found in interior materials, door panels, dashboards, mud flaps, chassis, bumpers, oil tanks, gas valves, grilles, unit heater shells, air conditioner shells, heat dissipating grids, wheel covers, and other components.
Figure 1: Analysis of Chinese Modified Plastics Market: Sales Volume and Revenue, China 2014-2024E
According to Frost & Sullivan’s report, stimulated by the development of China’s automotive industry, the Chinese automotive modified plastics market has gained solid development from 2014 to 2019, with a CAGR of 5.9% in sales volume and 8.1% in sales revenue during this period. In 2020, given the slow-down of China’s automotive production, sales volume of modified plastics will be negatively affected. Going onwards, considering the lightweight trend of automotive development and demand on using modified plastics to replace steel, the market is expected to maintain a moderate increase in terms of both sales volume and sales revenue, with CAGRs of 7.8% and 8.5% from 2021 to 2024, respectively.
Source: Frost & Sullivan
The production capacity is expected to reach 7.7 million MT in 2024, with a growth of 32.4% from 5.9 million MT in 2019. In terms of different manufacturer types, domestic manufacturers expanded their production more rapidly than non-local manufacturers, which accounted for 75.4% of the total production capacity in 2019 and is expected to take up to 77.7% by the end of 2024.
Since the growth of China’s automotive industry is slowing, automotive modified plastics manufacturers have also decreased the expansion rate of their production capacities. Overall, the total production capacity of Chinese automotive modified plastics industry increased significantly in the past and is believed to continue its growth in the future.
Source: Frost & Sullivan
As illustrated in Figure 2, the Chinese automotive modified plastics market is expected to maintain an increase, with CAGR of 8.0% and 9.0% in terms of both sales volume and sales revenue from 2020 to 2024, respectively. In terms of different manufacturer types, domestic manufacturers expanded their production more rapidly than non-local manufacturers, which accounted for 75.4% of the total production capacity in 2019 and is expected to take up to 77.7% by the end of 2024. We believe that the demand for automotive modified plastic in China will grow continuously due to the fast growing Chinese automotive market, the increasing use per unit of plastic content in automobiles and favorable government incentives and regulations. Moreover, domestic producers will likely gain larger market share from imports as they are able to manufacture products with comparable quality at highly competitive prices and close proximity to their customers. We believe that the following are the key drivers for the automotive modified plastic industry in China.
Figure 2: Analysis of Chinese Automotive Modified Plastics Market: Sales Volume and Revenue (China), 2014-2024E
Source: Frost & Sullivan
Source: Frost & Sullivan
According to statistics by the China Association of Automobile Manufacturers (“CAAM”) in 2018, the production volume of automobiles in China increased from 22,116.8 thousand units in 2013 to 27,809.2 thousand units in 2018. Decline in automotive production is noted in 2018 and 2019 due to the weakened market demand as well as the reducing incentives granted by the Chinese government to automotive manufacturers especially for EV manufacturers. The outbreak of COVID-19 in early 2020 created future disturbance to the market, and affects normal business operation of automotive manufacturers. Production volume is anticipated to recover from the second quarter of 2020 as the disease gradually becomes under control. The growth of the Chinese automotive industry is expected to slow down after several years’ rapid development and the CAGR of automotive production will be around 2.2% during the period from 2019 to 2023. Passenger cars accounted for 85% of the total production volume in 2018. The production volume of passenger cars and commercial cars will grow at a CAGR of 2.1% and 2.2% respectively during the period from 2019 to 2023. China has exceeded the United States to become the world’s largest auto market as measured by the number of automobiles sold. We believe the growth momentum in China’s auto sales will remain strong over the next four years. The automotive industry in China is still in its infancy with passenger car ownership of 166 vehicles per 1,000 inhabitants in 2018, which is significantly below Europe’s average of 526 and United States’ average of 781 according to National Bureau of Statistics, US Department of Energy, Eurosta, Frost & Sullivan.
From 2014 to 2019, vehicles per 1,000 people in China has experienced a significant growth from 106 in 2014 to 178 in 2019, with the highest CAGR of 10.9% among three regions. The significant gap of automobile ownership per 1,000 people among China, United States and Europe indicates that the Chinese auto industry is still of huge growth potential. The gap is expected to be further narrowed with China’s vehicle per 1,000 people growing to 233 in 2024. vehicles per 1,000 people in U.S. and Europe exhibit a n anticipated moderate growth in the future, considering the increasing demand on new energy vehicles.
Figure 3: Overview of Chinese Macro Economy:
Vehicle Per 1000 People Comparison (Units per 1,000 people), 2014-2024E
Overview of Chinese Macro Economy :
Vehicle Per 1000 People Comparison (Units per 1,000 people), 2014-
2024E
Source: National Bureau of Statistics , US Department of Energy, Eurostat, Frost & Sullivan
According to the National Bureau of Statistics, the total number of Chinese automobile parts has experienced a rapid growth because of economic development and the incentive policies issued by the government. With the continuous development of the Chinese auto manufacturing industry and expansion of auto consumption market, parts of automobiles increased from 144,750.0 thousand units in 2014 to 248,934.3 thousand units in 2019 at a CAGR of 11.5%. It is expected that the number will keep growing and hit a record of 330,422.9 thousand units in 2024, with a CAGR of 5.7% during the period from 2020 to 2024.
Figure 4: Overview of Chinese Macro Economy: Growth of Automotive Parts (China), 2014-2024E
Overview of Chinese Macro Economy:
Growth of Parc of Automobiles, China, 2014-2024E
Source: National Bureau of Statistics, Frost & Sullivan
China has achieved long-term economic growth and the nominal GDP per capita increased from RMB 47,314.8 in 2014 to RMB 68,469.2 in 2019. It is predicated that China’s nominal GDP per capita is expected to undergo a slower growth in 2020, due to the impact of COVID-19. With the effective control of pandemic spread and optimistic vaccine development progress so far, the economy is expected to recover in 2021 and grow steadily from 2021 to 2024.
The Chinese government is attempting to stimulate domestic consumption and has introduced a series of related incentive policies. The per capita consumption expenditure of urban household in China increased from RMB 19,968.0 in 2014 to RMB 28,063.0 in 2019, and is expected to decline slightly to RMB27,605.2 in 2020 due to the outbreak of the pandemic. Further growth can be expected in the coming years considering the economy’s recovery.
Figure 5: Overview of Chinese Macro Economy and Chinese Auto Market: Nominal GDP Per Capita and Per Capita Consumption Expenditure of Urban Household, China, 2014-2024E
Source: National Bureau of Statistics, Frost & Sullivan
Figure 6 : Overview of Chinese Macro Economy and Chinese Auto Market:
Growth of Automotive Production, China, 2014-2024E
Overview of Chinese Macro Economy and Chinese Auto Market:
Growth of Automotive Production, China, 2014-2024E
Source: China Association of Automobile Manufacturers, Frost & Sullivan
Moreover, cars have become more affordable in China as local or joint venture automobile manufacturers continuously expand their production to achieve economies of scale to lower production cost and source cheaper auto parts locally. Growing income and decreasing vehicle prices will continue to make car ownership more affordable for China’s rising middle class.
As illustrated in Figure 6, the production volume of automobiles in China increased from 23,722.9 thousand units in 2014 to 25,720.0 thousand units in 2019. Decline in automotive production is noted in years 2018 and 2019 due to the weakened market demand as well as the reducing incentives granted by the Chinese government to automotive manufacturers especially for EV manufacturers.
The outbreak of COVID-19 in early 2020 created future disturbance to the market, and affected normal business operations of automotive manufacturers. Production volume is anticipated to recover in 2021 as the disease is slowly under control. The growth of the Chinese automotive industry is expected to slow down after several years’ rapid development and the CAGR of automotive production will be around 3.5% during the period from 2020 to 2024.
Passenger cars accounted for 83% of the total production volume in 2019, and its production volume is anticipated to decline in 2020, as influenced by COVID-19, and will grow at a CAGR of 4.6% from 2020 to 2024. The production volume of commercial cars is to increase rapidly due to increasing demand from logistics and replacement due to the national standard upgrade in 2020, and return back to normal in 2021 and onwards.
Benefit and Increasing Use of Plastics in Automobiles
(1) Cost Reduction: The primary demand driver for modified automotive plastics arises out of the cost-reduction characteristics evidenced by the plastics material inclusion in the automobile manufacturing process. Modified plastics can deliver the same performance as metallic materials at approximately a tenth of the cost. In addition, modified plastics can substitute some kinds of more expensive engineering plastics. This benefit of modified plastics will become more significant with the increasing competition in automobile manufacturing industry to improve efficiency and reduce costs.
(2) Vehicle Emissions Reduction: Plastic components impact fuel efficiency by saving approximately 2.5 liters of fuel per kilograms (“kg”) used (equivalent to 6 kg of CO2 emissions) over the lifetime of the vehicle. Automobile manufacturers have been reducing vehicle weights in an attempt to reduce emissions and increase efficiencies. Modified plastics reduce the weight of components by 40% compared with traditional metallic materials.
(3) Performance and Safety Improvement: The development of advanced plastics applications lead to the improvement in performance through reducing the number and weight of the vehicle parts, causing the fuel consumption per vehicle to drop significantly. In addition, the lower net weight of the vehicles improves handling performance and thereby eliminates the likelihood of losing control in case of emergency stops. The involvement of modified plastics in automotive applications results in significant improvement of the safety features of the vehicle parts, like seat belts, air bags, and air bag containers in the recent years.
(4) New Applications: Plastics reduce the number of the required parts used in automobile manufacturing and introduce new design possibilities. Conventional materials struggle to compete against this open innovation platform associated with the plastics industry. In addition, the performance benefits associated with plastic materials continue to create a competitive advantage for the plastics industry.
(5) Increasing Use of Plastics per Vehicle: Weight of modified plastics per vehicle in China continually increased from 2008 to 2012 , and is forecasted to reach 169.8 kg by the end of 2017, with a growth rate of 40.2% according to Frost & Sullivan’s Report. Although the weight of modified plastics per vehicle in China will still be less than that in North America and Europe, the highest growth rate indicates the huge potential for market growth. In 2012, plastic use in China is estimated to be about 128.6 kg per vehicle, whereas models imported from Europe contain on average as much as 219 kg per vehicle. In addition, the Chinese government’s goals regarding electric and hybrid vehicles may also push the market further as weight concerns are more important for these vehicles than for traditional passenger cars.
● Production volume of electric vehicles (EV) in China grew from 78.5 thousand units in 2014 to 1,277.4 thousand units in 2010 dramatically, with a CAGR of 74.7%. China is leading the development of the EV industry and the largest market of EV in the world in 2019. Guided by the supportive policies, the EV industry will continue to be a development focus of the auto industry in China .
● The development of EV is a strong driver of auto modified plastics market since the production of battery packs for EV brings the demand for automotive modified plastics and the level of light-weight designs for EV is high.
Increasing Substitution of Imports
Though China’s automotive plastic market has been dominated by foreign or joint venture (“JV”) companies, Chinese suppliers are continually gaining market share. It is estimated that automotive plastics imported and manufactured by multinational and JV companies accounted for 24.6% of the total China automotive plastic supply in 2019, decreasing from 31.5% in 2014 according to a report by Frost & Sullivan. Compared to foreign competitors including JV companies, local manufacturers can largely benefit from the lower cost and geographical convenience in China and their product sales can be customized with time-efficient after sales services and technical supports. As the local production capacity of both domestic and foreign companies has been expanding, share of imports and multiple national companies is expected to decrease to 22.3% by the end of 2024 , while the share of domestic manufacturers is forecast to rise to 77.7% in 2024 as they expand at a greater rate than MNC and JV in China.
Favorable National Government Policies
In the past decade, the Chinese government has adopted a number of policies and initiatives intended to encourage the development of the Chinese modified plastics industry and stimulate the growth of the Chinese automobile industry.
Since 2000, modified plastics, including engineering plastics, have been categorized as a prioritized industrialization area by a series of government guidelines or development plans. Some of these policies include:
● Guiding Catalogue for Major New Materials Applications (2019) was announced by Ministry of Industry and Information Technology in November 2019, which clarified major new materials application into 23 categories of engineering plastics, special rubbers into the products eligible for insurance and subsidy.
● Guiding Catalogue of Industrial Structure Adjustment (2019) was announced by announced by the National Development and Reform Commission of the People’s Republic in November 2019, which encouraged the development, production and application of engineering plastics modification.
● Guiding Catalogue for Key Products and Services in Strategic Emerging Industries (2016) was announced by the National Development and Reform Commission of the People’s Republic in January 2017, which categorized new engineering plastics, plastic alloy, fire-retardant modified plastics, ABS, HIPS, high performance carbon fiber, etc.. as prior development fields in new material industry.
● The 13th Five Year Plan for Development of Strategic Emerging Industries in China launched in 2016 included favorable policies toward advanced technologies in developing new aviation and space materials, encouraging the application of biodegradable plastics and the development of high-performance plastics used for additive manufacturing, as well as encouraging the development of new material industries
● The “Made in China 2025” initiative launched on May 8, 2015 by State Council, encouraged development of new materials, energy-saving and new energy vehicles, power equipment, aerospace and aeronautical equipment, marine engineering and high-tech ships, modern railway equipment and agricultural machinery.
● The “Development Plan of Additive Manufacturing (2015-2016)” initiative promulgated by the National Development and Reform Commission, Ministry of Industry and Information Technology and Ministry of Finance of People’s Republic of China on February 28, 2015, advocated domestic production of several types of plastics with high heat resistance and high strength for additive manufacturing industry .
● It was stated in the “Outline of China’s Thirteenth Five-year Plan (2016)” that new functional materials, advanced structural materials, common base materials, fiber of high performance and its compounded material are key development directions of new material industry.
● It was stated in the “Catalogue for Guidance on Adjustment of Industrial Structure (2011)” promulgated by the National Development and Reform Commission on March 27, 2011, that the country is currently promoting (i) the development of production equipment of polycarbonate by the use of non-phosgene method, with annual output of 60000t/year and above, (ii) the production of engineering plastic including liquid crystalline polymer (LCP) and development and application of bleeding modification and alloying; (iii) the development and production of water absorbed resin, conductible resin and biodegradable polymers; (iv) the development and production of new polyamide including nylon 11, nylon 1414 and nylon 46, nylon with long carbon chain and heat resistant nylon.
● It was stated in the “Guidance on Key Areas of Industrialization of High Technology with Current Priority in Development (2011)” jointly promulgated by the National Development and Reform Commission, the Ministry of Science and Technology, the Ministry of Commerce and the State Intellectual Property Office on June 23, 2011 that modified technologies applied to general plastics, including new engineering plastics and plastic alloy, new special engineering plastics, fire resistant modified plastics, and modified technology of general plastics, are currently prioritized areas to develop and industrialize in China’s macromolecule materials sector.
It was stated in the “Investment Guide for Industrial Transforming and Upgrading” (2011) promulgated by the Ministry of Industry and Information Technology of the People’s Republic of China that the country promoted the modification of waste plastics via the comprehensive utilization of related technologies and suggested the future trend of the application of new materials in the industrial area, including biodegradable plastics, engineering plastics, etc.
● A series of modified plastics technologies have been listed in the “National Support for Key High-tech Fields” as stated in the Circular on the Issuance of the Administrative Measure for the Recognition of High-tech Enterprise jointly promulgated by the Ministry of Science and Technology, Ministry of Finance, the State Administration of Taxation in April 2008. These technologies include special engineering plastics, macromolecular compound or new synthetic modified, etc.
● Determining the detailed standards for average fuel consumption for passenger car manufacturers: 1) In 2015 average fuel consumption for passenger car reach 0.069L per kilometer; 2) In 2020 average fuel consumption for passenger car reach 0.05L per kilometer. Such standards will accelerate progress in the automobile weight reduction.
In addition, with the Chinese government strongly encouraging the production of more fuel-efficient and environmentally friendly vehicles, as one means to help resolve the nation’s worsening air pollution problem, especially in big cities, opportunities abound for suppliers of plastics materials and auto components.
We believe that the above government measures and programs will continue to accelerate the demand for automotive modified plastics in China.
Tightening Trend and Local Government Policies
Despite the favorable national government policies as set forth above, in the past couple of years, the Chinese government has implemented certain measures to control the pace of economic growth and discontinued certain stimulus measures implemented to deal with the recent global financial crisis, including incentives for consumers to purchase automobiles.
Since 2011, in order to resolve the extreme traffic congestion, Beijing government has been implementing a vehicle purchase quota policy, which limits the maximum vehicles sold in Beijing per month to 20,000. Other cities which have begun to show signs of traffic congestion have also begun to implement similar measures to control traffic congestion, including the limited automobile licenses policy implemented in Shanghai and Tianjin and the imposition of congestion charges in Shenzhen. The termination of nation-wide preferential policies can negatively affect consumer demand for new vehicles, and local restrictive measures over automobile purchases in major cities may result in the reduction in the sale of vehicles nationwide.
Our Products
Modified plastic is processed by adding chemical agents and other additives to basic plastic resins to generate or improve certain physical and/or chemical characteristics of plastic, such as heat resistance, hardness, tensile strength, wear resistance, and flame retardance. Based on the type of materials, our products include twelve categories: Modified Polypropylene (PP), Modified Acrylonitrile Butadiene Styrene (ABS), Modified Polyamide 66 (PA66), Modified Polyamide 6 (PA6), Modified Polyoxymethylenes (POM), Modified Polyphenylene Oxide (PPO), Plastic Alloy, Modified Polyphenylene Sulfide (PPS), Modified Polyimide (PI), Modified Polylactic acid (PLA), Poly Ether Ether Ketone (PEEK), and Polyethylene (PE).
Our products are organized into twelve product groups, based on their physical characteristics, as set forth below:
Product Group
Number of Products Certified
Characteristics
Automotive or Other
Application
Modified Polyamide 66 (PA66)
Abrasive resistance, self-lubrication, high strength, high temperature resistance, and flame resistance
Roof handles, door knobs, transmission connection plates, fan shrouds, glovebox assembles, engine hoods, stents baffle blocks, trajectory, fasteners, etc.
Modified Polyamide 6 (PA6)
High temperature resistance, weather resistance, high strength
Inner door knobs, door knobs, hand shanks, transmission connection plates, visor bases, etc.
Plastic Alloy
High impact resistance, high temperature resistance, flame resistance, palatable
Instrument panels, instrument frames, shields, automotive center stacks, speaker covers, grids, fog light shells, battery bases, seat armrests, luggage holders, etc.
Modified Polypropylene (PP)
Non-toxic, odorless, low density, insulated, and low moisture uptake
Instrument panels, inner panels, columns, bumpers, air conditioner shells, door knobs, mudguards, etc.
Modified Acrylonitrile butadiene styrene (ABS)
High rigidity, low density, rigidity toughness balance, slow burn, and corrosion resistance
Heat dissipating grids, steering wheel shells, cup holders, seal banks, instrument panels, inner door knobs, wheel covers, etc.
Polyoxymethylene (POM)
High strength, low moisture uptake, size stability, high glass, high temperature resistance, fatigue resistance
Heater fans, signal lamps switches, gas reservoir covers, door knobs, hand shanks, fuel pumps, dynamic valves, accelerator pedals, rampetior elements, etc.
Polyphenylene Oxide (PPO)
High rigidity, flame retardant, abrasive resistance, pollution resistance, high temperature resistance
Battery plants, lamp holder insulation parts, anti-freezer grids, booms, instrument panels, window frames, tool cabinet covers, handwheel boxes, heater holders, heater baffles, cooling system connections, pump strainer nets, ammeter frameworks, rearview, etc.
Modified Polyphenylene Sulfide (PPS)
High temperature resistance, corrosion resistance, radiation resistance, flame resistance, size stability
Air bleed control valves, pneumatic signal conditioners, sparks plug wire insulation covers, tachometer sensor covers, electrical pumps, fuel pump impellers and covers, air cylinder covers, water pump impellers, etc.
Modified Polylactic Acid (PLA)
-
Reproducible, good biological compatibility and totally degraded
Glove box handle, seat cover, rearview mirror shell, etc.
Modified Polyimide (PI)
-
Flame resistance, high strength, high temperature resistance, corrosion resistance
Compressor blade, piston ring, sealing washer, bushing, gear, brake block, etc.
PEEK*
N/A
Excellent mechanical and chemical resistance and temperature tolerance
Used in communications and transport electronics and electrical appliances, machinery, medical and analytical equipment
Polyethylene
-
Resistance to shock, low temperature resistance, excellent electrical insulation, corrosion resistance
Agricultural film, screw cap, water pipe, gear, food package
Total
*PEEK is primarily used in applications that are unrelated to automotive applications, which does not require certifications and is in the product development stage.
For the years ended December 31, 2020 and 2019, the Company product categories that accounted for 10 percent or more of consolidated revenue are set forth below:
Years Ended December 31,
US$ % US$ %
(in millions, except percentage)
Modified Polyamide 66 (PA66) 605.2 46.1 % 427.0 29.5 %
Modified Polyamide 6 (PA6) 394.0 30.0 % 338.3 23.4 %
Plastic Alloy 78.4 6.0 % 245.3 16.9 %
Semi-finished goods 58.8 4.5 % 144.4 10.0 %
Total 1,136.4 86.6 % 1,155.0 79.8 %
We are exposed to risks inherent in any foreign operation, including foreign exchange rate fluctuations. For more details, please see “Item 1A Risk Factors - The fluctuation of the exchange rate of the Renminbi against the dollar could reduce the value of your investment”.
Raw Materials
The principal raw materials used for the production of our modified plastic products are plastic resins such as polypropylene, ABS and nylon. Polypropylene is a chemical compound manufactured from petroleum. ABS is a common thermoplastic used to make light, rigid, molded products such as automotive body parts and wheel covers. Nylon is a thermoplastic silky material. Approximately 1.6% of our total raw materials purchased by volume are sourced from overseas petrochemical enterprises and 98.4% from domestic petrochemical enterprises during the year ended December 31, 2020.
The Company has one-year renewable contracts with its major suppliers, which are distributors of petrochemical enterprises. Because the raw materials used in our products are primarily petroleum products, the rise or fall in oil prices directly affects the cost of the raw materials. We attempt to mitigate the increase or decrease in our raw materials prices by appropriately raising or lowering the price for our products to pass the cost or savings to our customers as part of our pricing policy.
Because raw materials constitute a substantial part of the cost of our products, we seek to reduce costs by dealing with major suppliers. During the year ended December 31, 2020, the Company purchased approximately 14.7% of the Company’s raw materials from one major supplier. By dealing in large quantities with these major suppliers, we obtain reduced prices for raw materials, therefore reducing the cost of our products. If we were unable to purchase from these suppliers, we believe we would still have adequate sources of raw materials from other petrochemical distributors without material impact on the cost of our products.
Intellectual Property
Patents
As a result of our collection of academic and technological expertise, as of December 31, 2020, we had 63 approved patents and 584 pending patent applications in China, as set forth in the following table:
No
Application No
Patent Name
Date
Status
200910073402.3
Supercritical fluid rapid diffusion synthesis of nano calcium carbonate enhanced microcrystalline polypropylene composites
December 11, 2009
Authorized
201010258937.0
A method for automotive interior low odor, low VOC, high performance polypropylene composites
August 20, 2010
Authorized
201010508149.2
A high heat-resistant PC / ASA alloy material and its preparation method
October 15, 2010
Authorized
201010508149.2
A high heat-resistant PC / ASA alloy material and its preparation method
October 15, 2010
Authorized
201110035716.1
A preparation method of polylactic acid used in auto dashboard
February 11, 2011
Authorized
201110094454.6
A rapid detection method of the tensile propertie of modified PP used in auto specially by non-standard situation
April 15, 2011
Authorized
201110196209.6
A high-powered aircraft tail composite material and its preparation process
July 13, 2011
Authorized
201110230302.4
A preparation method of polypropylene resin foam particles with supercritical CO2 act
August 12, 2011
Authorized
201110235189.9
A high toughness,low warpage and high-mobility PET/PBT/PC alloy renforced by glass fiber and its preparation method
August 17, 2011
Authorized
201110268625.2
A high impact and high heat-resistant flame retardant ABS composite material reinforce by glass fiber and its preparation process
September 13, 2011
Authorized
201210114931.5
A high-strength carbon fiber reinforced polyetheretherketone composite material and its preparation method
April 20, 2012
Authorized
201210201826.5
High performance halogen-free flame-retardant PC / ABS composite material and its preparation method
June 19, 2012
Authorized
201210241856.9
A high temperature conductive PPO/PA6 alloy material and its preparation method
July 13, 2012
Authorized
201210260160.0
High-performance, green flame retardant reinforced PA66 composites technology
July 26, 2012
Authorized
201210296750.9
An antistatic LSOH flame retardant PC / ABS alloy material and its preparation method
August 20, 2012
Authorized
201210306240.5
Primer-free, directly sprayable bumper composite material and preparation method thereof
August 27, 2012
Authorized
201210306240.5
A free primer and sprayed directly on the bumper composites
August 27, 2012
Authorized
201210328192.X
A high performance PC / ABS alloy prepared from waste electrical appliances and its preparation method and Application
September 7, 2012
Authorized
201210328194.9
A high performance PA66 + GF30% alloy prepared from waste electrical PA66 material and its preparation method and Application
September 7, 2012
Authorized
201210357867.3
Extrusion grade sisal fiber reinforced polypropylene composite material and preparation process thereof
September 25, 2012
Authorized
201210357867.3
An extrusion grade sisal fiber reinforced polypropylene composite material and its preparation process
September 25, 2012
Authorized
201210369747.5
A modified Kevlar fiber reinforced PA66 material and its preparation method
September 26, 2012
Authorized
201210362626.8
A long glass fiber reinforced polypropylene material and its preparation method
September 26, 2012
Authorized
201210396122.8
A high toughness wear-resistant fiberglass /PA6 composites for rail transit fasteners
October 18, 2012
Authorized
201210403197.4
A glass fiber reinforced poly (ethylene terephthalate) / polycarbonate alloy
October 22, 2012
Authorized
201210411680.7
A production method of antimicrobial, hydrophilic polypropylene particle
October 25, 2012
Authorized
201210411231.2
Graphene / polymer conductive composites
October 25, 2012
Authorized
201210439116.6
A glass fiber, SiO2 enhanced toughening polyphenylene sulfide material and its preparation method
November 7, 2012
Authorized
201510357015.8
Preparation method of chlorinated PVC modified materials
March 6, 2013
Authorized
201310071388.X
Chlorinated polyvinyl chloride modified material and its preparation method
March 6, 2013
Authorized
201510356957.4
A modified material of chlorinated polyvinyl chloride
March 6, 2013
Authorized
201510356960.6
Chlorinated polyvinyl chloride modified materials
March 6, 2013
Authorized
201310203047.3
A high mobility of polyvinyl alcohol / lignin WPC
May 28, 2013
Authorized
201510356956.X
A preparation method of chlorinated polyvinyl chloride modified material
June 3, 2013
Authorized
201310242323.7
A phosphorus synergistic flame retardant ABS composite and its preparation method
June 19, 2013
Authorized
201310283032.2
A phosphorus synergistic flame retardant PC / ABS alloy material and its preparation method
July 28, 2013
Authorized
201310367459.0
A applied to electrostatic spraying PPO/PA6 alloy material and its preparation method
August 22, 2013
Authorized
201310468057.X
A free spray paint bumper with modified material and preparation method
October 10, 2013
Authorized
201310468059.9
Preparation method of impact-resistant strain of modified polylactic acid material
October 10, 2013
Authorized
201610259409.4
Halogen free flame retardant Poe material
August 11, 2014
Authorized
201610259600.9
A halogen free flame retardant POE material
August 11, 2014
Authorized
201410763389.5
A polyurethane composite and its preparation method
December 11, 2014
Authorized
201410833271.5
Environmentally friendly flame retardant PA6 material and its preparation method
December 29, 2014
Authorized
201520229477.7
A stereoscopic word based on 3D printing
April 16, 2015
Authorized
201510290769.6
A medical chest straps based on 3D printing technology and its preparation method
June 1, 2015
Authorized
201610602000.8
A halogen free flame retardant PBT material
August 6, 2015
Authorized
201510931252.0
The invention relates to a polylactic acid material for melt deposition molding and a preparation method thereof
December 11, 2015
Authorized
201610063342.7
A preparation method of modified PP / CaCO3 composite
January 31, 2016
Authorized
201610073925.8
A kind of high-toughness full-degradation polylactic acid-based composite material and its preparation method
February 3, 2016
Authorized
201610073934.7
A 3D printing withABS composite material and its preparation method
February 3, 2016
Authorized
201810497313.0
Flame retardant polypropylene material with good light stability and its preparation method
April 28, 2016
Authorized
201610274966.3
A conductive nylon composite powder for selective laser sintering and its preparation method
April 28, 2016
Authorized
201610851656.3
Toughening and reinforcing PA6 material and its preparation method
September 26, 2016
Authorized
201610870588.5
The invention relates to a matt polylactic acid wire for melt deposition molding and a preparation method thereof
September 30, 2016
Authorized
201610943939.0
A preparation method of fiber reinforced PBT composite fusion joint
October 26, 2016
Authorized
201611052598.4
Halogen free flame retardant composite and its preparation method
November 25, 2016
Authorized
201711229300.7
A kind of montmorillonite composite flame retardant material and its preparation method
November 29, 2017
Authorized
201810585253.8
Preparation method of scaffold for guiding regeneration of bone tissue
August 6, 2018
Authorized
201510309013.1
Halogen free flame retardant PBT and its preparation method
June 8, 2015
Authorized
201510651187.6
Composition using SEBS recycled material and high strength halogen free flame retardant insulating material obtained therefrom
October 10,2015
Authorized
201610078670.4
A kind of starch based biodegradable plastics and its preparation method
Feburary 5, 2016
Authorized
202022082970.4
A 3D printing powder consumable for medical model and its preparation method
September 22, 2020
Authorized
202010998525.4
A 3D printing brain lesion model
September 22, 2020
Authorized
201010173663.5
A molding method suitable PEEK
May 17, 2010
Pending
201010230088.8
A lower mold shrinkage ratio method of calcium carbonate / polypropylene nanocomposites
July 19, 2010
Pending
201010230064.2
A method for automotive interior matte, anti-scratch modified polypropylene composites
July 19, 2010
Pending
201010230061.9
A high notched impact PA / ASA alloy material and its preparation method
July 19, 2010
Pending
201010258950.6
A high impact and high flow PC / ASA alloy material and its preparation method
August 20, 2010
pending
201010258955.9
Nano-ZnO filled with modified PEEK film and its preparation method
August 20, 2010
Pending
201010282022.3
A microporous zeolite materials modified PEEK and its preparation method
September 15, 2010
Pending
201010282042.0
A preparation method of SiO2/CaCO3 nano-composite particles modified polypropylene
September 15, 2010
Pending
201010508177.4
An anti-aging, anti-yellowing, low odor polypropylene composite material and its preparation method
October 15, 2010
Pending
201010543439.0
A alloy material of high-impact, high-brightness ASA
November 15, 2010
Pending
201110347338.0
A high heat-resistant and high wear-resistant PEEX composite material and its preperation process
January 10, 2011
Pending
201110035736.9
A preparation method of polymer composites with high toughness
February 11, 2011
Pending
201110347336.1
A preperation process of high weathering colour ASA resin
February 11, 2011
Pending
201110035725.0
A preparation method of the thermoplastic elastomers PP with high mobility and high resistance of deformation
February 11, 2011
Pending
201110094466.9
A special material of cooling grille with high heat resistance and high weather resistance
April 15, 2011
Pending
201110122566.8
A preparation process of centralized control method used in plastic production line
May 12, 2011
Pending
201110122586.5
Apreparation process of ABS alloy with high impact performance and high heat resistance
May 12, 2011
Pending
201110158528.8
A rapid detection method of the impact propertie of midfide plastics used in automobile specially
June 14 2011
Pending
201110158512.7
A preparation method of high heat-resistant and high rigid PLA composite material reinforced by fully biodegrdable natural fiber
June 14 2011
Pending
201110158511.2
A preparation method of easily dispersed and easily processimg polyprolene composite material
June 14 2011
Pending
201110158488.7
A preparation process of the premixed screening system
June 14, 2011
Pending
201110196226.X
A high impact PA6 composite material with core-shell toughening and its preparation method
July 13, 2011
Pending
201110233488.9
A preparation methed of the plastic production line with high performance and high honogeneity
August 16, 2011
Pending
201110268687.3
A preparation method of polylactic acid used composite material modified by hydroxyapatite with supercritical water act
September 13, 2011
Pending
201110347339.5
A high toughnees,low warpage and low mold temperature PET/PA6 alloy reinfoced by glass fiber and preperation method
November 7, 2011
Pending
201110347320.0
A polypropylene composite material used in battery tank of new source of energy automobile and its preperation method
November 7, 2011
Pending
201110399890.4
A preparation method of glass fiber reinforced polyether ether ketone with high strength and high heat resestance
December 5, 2011
Pending
201110319832.6
A high toughness of polycarbonate blends material and its preparation method
December 20, 2011
Pending
201210122281.9
A high-impact, green flame retardant PC / ABS alloy material and its preparation process
April 25, 2012
Pending
201210147444.9
A preparation method for heat-resistant and easy processing of natural fiber reinforced polylactic acid composites
May 14, 2012
Pending
201210295154.9
A preparation method of high encapsulation efficiency and stable release polylactic lysozyme drug microsphere
August 20, 2012
Pending
201210298694.2
A Supercritical carbon dioxide reactor pressure method for preparating polypropylene foamed material
August 22, 2012
Pending
201210305824.0
An antimicrobial, dust suppression, halogen-free flame retardant ABS and its preparation process
August 27, 2012
Pending
201911322331.6
High-modulus flame-retardant reinforced nylon composite material and preparation method thereof
September 25, 2012
Pending
201911322323.1
Graphene modified antistatic polypropylene composite material and preparation method thereof
September 25, 2012
Pending
201911322322.7
High-impact flame-retardant reinforced PC/ABS alloy material and preparation method thereof
September 25, 2012
Pending
201911322128.9
A method for preparing high-toughness and high-flow PS for 3D printing materials
September 25, 2012
Pending
201911322088.8
Low temperature resistant and drop resistant box material and preparation method thereof
September 25, 2012
Pending
201911322087.3
PC/ABS alloy material with resistance to automobile paint and high toughness and preparation method thereof
September 25, 2012
Pending
201911322124.0
Low-temperature impact-resistant PC/ABS composite material and preparation method thereof
September 25, 2012
Pending
201911322125.5
Environment-friendly flame-retardant and aging-resistant polypropylene composite material and preparation method thereof
September 25, 2012
Pending
201911322074.6
Halogen-free flame-retardant, low-fiber reinforced polypropylene composite material and preparation method thereof
September 25, 2012
Pending
201911322075.0
High-impact, high-modulus nylon composite material and preparation method thereof
September 25, 2012
Pending
201911322086.9
Low-shrinkage, precipitation-resistant, halogen-free flame-retardant ABS composite material and preparation method thereof
September 25, 2012
Pending
201911322073.1
Low-odor, low-VOC polypropylene composite material and preparation method thereof
September 25, 2012
Pending
201911322091.X
High modulus and high flow glass fiber reinforced composite material and preparation method thereof
September 25, 2012
Pending
201911322070.8
High-gloss, high-toughness polypropylene composite material and preparation method thereof
September 25, 2012
Pending
201911322069.5
High-gloss, high-temperature-resistant polypropylene composite material and preparation method thereof
September 25, 2012
Pending
201210358122.9
A preparation methods of ultra-hydrophobic microporous polymer film
September 25, 2012
Pending
201210370558.X
A flame-retardant glass fiber reinforced PA66 and its preparation method
September 26, 2012
Pending
201210370558.X
Halogen-free flame-retardant glass fiber reinforced nylon 66 and preparation method thereof
September 29, 2012
Pending
201220526299.0
The chest protected belts
October 15, 2012
Pending
201210395921.3
A non-asbestos and non-metal materials brake pads composite material and its preparation method
October 18, 2012
Pending
201210402814.9
A wear-resistant, antistatic, flame-retardant ultra-high molecular weight polyethylene composite material
October 22, 2012
Pending
201210403095.2
A high impact, high heat-resistant PC / PBT alloy material and its preparation process
October 22, 2012
Pending
201210402814.9
A wear-resistant, anti-static, flame retardant ultra-high molecular weight polyethylene composite material
October 22, 2012
Pending
201210411967.X
Continuous aramid fiber reinforced polyoxymethylene material and preparation method thereof
October 25, 2012
Pending
201210411967.X
A continuous aramid fiber reinforced POM materials and preparation methods
October 25, 2012
Pending
201210442251.6
An alcohol solution PA66 material special for intake manifold and its preparation method
November 8, 2012
Pending
201210457403.X
An environmentally friendly self- aromatic polypropylene material and its preparation process
November 15, 2012
Pending
201210474211.X
A multilayer hot pressing method for preparating hydroxyapatite / polylactide composite
Novemer 21, 2012
Pending
201210472283.0
A mechanical strength polypropylene power lithium battery separator and its preparation method
Novemer 21, 2012
Pending
201310185514.4
An ramie fiber reinforced polypropylene composite material and its preparation process
May 20, 2013
Pending
201310185228.8
An environmentally friendly foam polypropylene material and preparation method
May 20, 2013
Pending
201310185041.8
Preparation of a glass fiber reinforced nylon 66 / nylon 6 Composites
May 20, 2013
Pending
201310250047.9
A polypropylene self-luminous material and preparation method
June 24, 2013
Pending
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An impact-resistance PC/PBT composite material and its preparation method
December 24, 2019
Pending
201911347542.5
A high modulus, high impact and high flow polypropylene composite material and its preparation method
December 24, 2019
Pending
201911036987.1
Low-VOC, scratch-resistant polypropylene composite material and preparation method thereof
December 26, 2019
Pending
201911036986.7
High-gloss, high-toughness polypropylene composite material and preparation method thereof
December 26, 2019
Pending
201911036493.3
PP and PA6 blended modified composite material and preparation method thereof
December 26, 2019
Pending
201911036473.6
High-gloss reinforced polypropylene composite material and preparation method thereof
December 26, 2019
Pending
201911036467.0
High-gloss and high-impact PC-ASA alloy material and preparation method thereof
December 26, 2019
Pending
202011008595.7
PC-PET composite material for automobile heat dissipation grid and preparation method thereof
June 22, 2020
Pending
202010570453.3
A high-flow fiber reinforced nylon 6 composite material
June 22, 2020
Pending
202010570364.9
Glass fiber reinforced PA6 composite material for automobile radiator grille and preparation method thereof
June 22, 2020
Pending
202010604631.X
Flame retardant antistatic pa56 composite and its preparation method
June 29, 2020
Pending
202010604632.4
A reinforced bio based pa56 composite and its preparation method
June 29, 2020
Pending
202010606254.3
A silver free spraying PC / ABS composite and its preparation method
June 29, 2020
Pending
202010604636.2
A halogen free flame retardant antistatic PA6 / GF COMPOSITE and its preparation method
June 29, 2020
Pending
202010604643.2
A oil resistant and scratch resistant polypropylene composite and its preparation method
June 29, 2020
Pending
202010604635.8
A heat resistant and high toughness PLA composite and its preparation method
June 29, 2020
Pending
202010604651.7
A high performance PLA / cellulose nanofiber composite and its preparation method
June 29, 2020
Pending
2020106062558.0
A nylon composite with high heat resistance and low warpage and its preparation method
June 29, 2020
Pending
202010606266.6
A low odor scratch resistant polypropylene composite and its preparation method
June 29, 2020
Pending
202010604644.7
A low warpage and high impact PC material for 3D printing and its preparation method
June 29, 2020
Pending
202010604644.7
A low warpage and high impact PC material for 3D printing and its preparation method
June 29, 2020
Pending
202010606266.6
A low odor scratch resistant polypropylene composite material and its preparation method
June 29, 2020
Pending
202010606255.8
A nylon composite material with high heat resistance and low warpage and its preparation method
June 29, 2020
Pending
202010604651.7
A high performance PLA / cellulose nanofiber composite material and its preparation method
June 29, 2020
Pending
202010604635.8
A heat resistant and high toughness PLA composite material and its preparation method
June 29, 2020
Pending
202010604643.2
A oil resistant and scratch resistant polypropylene composite and its preparation method
June 29, 2020
Pending
202010604636.2
A halogen free flame retardant antistatic PA6 / GF COMPOSITE and its preparation method
June 29, 2020
Pending
202010606254.3
A silver free spraying PC / ABS composite and its preparation method
June 29, 2020
Pending
202010604632.4
A reinforced bio based pa56 composite and its preparation method
June 29, 2020
Pending
202010604631.X
A flame retardant antistatic pa56 composite and its preparation method
June 29, 2020
Pending
202011007100.9
A low cost PBAT composite for UV resistant film
September 23, 2020
Pending
202011008178.2
A starch filled PLA-PBAT biodegradable composite and its preparation method
September 23, 2020
Pending
202011006602.X
PLA composite for disposable cutlery
September 23, 2020
Pending
202011015504.2
A PLA biodegradable film and its preparation method
September 24, 2020
Pending
202011015684.4
A mesoporous material reinforced biodegradable material and its preparation method
September 24, 2020
Pending
202011173583.4
Preparation of PLA composite with high flow and toughness
October 28, 2020
Pending
202011172397.4
PLA composite for degradable straw
October 28, 2020
Pending
202011173519.1
A biodegradable poly (lactic acid) bio matrix composite
October 28, 2020
Pending
202011170829.8
A toughened PLA Composite
October 28, 2020
Pending
202011170820.7
PLA composite for degradable straw
October 28, 2020
Pending
Trademark
We own the trademarks for our graphic logo and Chinese characters of “Xinda”, which we use in packaging our products and marketing.
Certification Process
To meet the requirements of an automobile manufacturer, products used as component parts must pass a rigorous certification process by the manufacturer’s technological quality assurance department before they can be approved for and used in production. The certification process consists of three stages.
First, the automobile manufacturer reviews the manufacturer of modified plastics. The examination involves assessment of the operation history of the modified plastics manufacturer, their experience in providing component services, the specialization of their factory equipment, their research and development capacity and quality assurance systems. The manufacturer’s operations need to meet the requirements of the automobile manufacturer. Once the initial review is passed, the modified plastics manufacturer will obtain a qualification as an automobile component manufacturer. This initial stage takes approximately sixteen to twenty-two months to complete.
Second, the automobile manufacturer and the manufacturer of modified plastics reach an understanding about a product specification. The modified plastics manufacturer provides product research and development materials to the automobile manufacturer for inspection. The automobile manufacturer tests the product specification according to its standards and, if results are satisfactory, the modified plastics manufacturer obtains a product specification certification and enters the product certification stage. The second stage takes approximately eight months to complete.
Third, the parties complete technology R&D tests and perform automobile component finished parts tests. The product undergoes additional testing by the automobile manufacturer and is used in road tests. This stage takes approximately five to fifteen months depending on whether the car model is an existing model or a new model. At the conclusion of the third stage, the modified plastics manufacturer receives a product certification from the automobile manufacturer.
We believe that the necessity, rigorousness, complexity and duration of the certification process make it difficult for outside competitors to enter the field in a short period of time. We had 688 certifications from automobile manufacturers as of December 31, 2020, which we believe is currently one of the largest portfolios of product certifications in the Chinese automobile modified plastics industry.
Sales and Marketing
Currently, our sales network focuses on the northeastern, northern, eastern and southwestern regions of China. We primarily sell to end customers through our approved distributors. To a less extent, we also sell directly to end customers. A typical customer development cycle starts when our R&D staff develops customized products for new end customers and obtains product certifications. These end customers are usually major automobile parts manufacturers who can only source from suppliers like China XD with product certifications granted by major automobile manufacturers. After we established relationships with these end customers and began to have large volume of transactions with them, we assign end customers to our approved distributors according to our internal policies. We also acquired end customers with our existing certifications from time to time. In 2020, approximately 82.9% of our sales were generated from approved distributors.
We enter into distribution agreements with local distributors in areas where large automobile manufacturers are located. The distribution agreements usually have a term of one year, during which period we can enter into distribution agreements with other distributors for our products. The distributors are responsible for marketing and distributing our products. Through the established sales channels, we can quickly respond to local market demand, address customer needs, enhance our ability to provide technical support and after-sales services, and lower our marketing expenses. Our general credit term with our distributors is three months and our collection of payment from distributors is not contingent upon their cash collection from end customers. We manufacture products according to orders received from our distributors and maintain a certain quantity of raw materials based on our experience and the distributors order patterns. By doing this we hope to ensure the smooth implementation of the production plan of major automobile manufacturers and avoid risks of inventory shortage. We do not provide the distributors nor end customers with the right of return, price protection or any other concessions. We allow for an exchange of products or return only if the products are defective.
We have been actively engaging our distribution network with 11 distributors in 2020 and we believe we have good relationships with our distributors. We believe that we have been able to secure and maintain strong relationships with end customers due to our existing certifications, advanced technologies and high product quality, which establish a higher barrier to entry for others. Most of the end customer relationships will be developed through our own R&D and sales force and maintained by our R&D and sales professionals and our distributors. According to our distribution contracts, our distributors are prohibited from selling our competitors’ products and required to use the product certificate, brand name and package standards set by us during the distribution period. After the expiration of the distribution contracts in absence of renewal, we retain the customer relationships with end customers.
While the pricing volatility of our raw materials is a primary cause of cost variations in our products, we are generally able to pass the cost of price changes in our raw materials to our customers, although there are timing delays of varying lengths depending upon volatility of raw material prices, the type of products, competitive conditions and individual customer arrangements.
We sell our products substantially through approved distributors in the PRC. Our sales to our distributors are highly concentrated but have been gradually diversified in recent years. Sales to major distributors, which individually exceeded 10% of our revenues, accounted for approximately 9.3% and 10% of our revenues for the years ended December 31, 2020 and 2019, respectively. We expect to reduce our distributor concentration over time, although revenues from these distributors are expected to continue to represent a substantial portion of our revenue in the future. Further information about our major distributors and the director customer, which individually exceeded 10% of our revenues, for the years ended December 31, 2020 and 2019, is set forth in Note 22 of the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We have initiated our marketing efforts to develop new customers outside of China, in particular those in the UAE market. We have started offering certain high-end products, such as PA66 and long-chain Plastic Alloy, most manufactured in Heilongjiang plants and a small portion manufactured in Dubai plant since the second quarter of 2014. In January 2015, we completed and run the trial production in the plant in Dubai, UAE with additional 2,500 metric tons targeting high-end products for the overseas markets. We plan to serve customers in oversea markets from our Dubai Xinda plant. In order to develop potential overseas markets, Dubai Xinda obtained one leased property and two purchased properties, approximately 52,530 square meters in total, including one leased 10,000 square meters, and two purchased 20,206 and 22,324 square meters on January 25, 2015, June 28, 2016 and September 21, 2016, respectively, from Jebel Ali Free Zone Authority (“JAFZA”) in Dubai, UAE, with constructed building comprising warehouses, offices and service blocks. In addition to the earlier 10 trial production lines in Dubai Xinda, we completed installing 45 production lines with 11,250 metric tons of annual production capacity by the end of November 2018. As of December 31, 2020 , an additional 30 production lines with 7,500 metric tons of annual production capacity mainly targeted for ABS products, were still in the progress of redesigning upgrading and further equipment testing. The Company estimates 22 production lines will be put into production in the fourth quarter of 2021, 8 production lines will be put into production in the second quarter of 2022, and will then increase the total production capacity in Dubai Xinda to 21,250 metric tons, targeting high-end products for the overseas market.
After a successful trial production at our production base in Dubai in November 2018, we have established business relationships with new customers in UAE and India, and shipped products to the end users in Europe and Southeast Asia. We are optimistic about the prospect of our business expansion overseas.
Information about geographic revenue is set forth in Note 24 of the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Competition
The PRC automotive modified plastics industry is growing rapidly and highly fragmented with the top four domestic producers occupying less than approximately 28.8% of the market shares in 2018 according to Frost & Sullivan’s report. According to Frost & Sullivan’s report, in terms of sales volume and production capacity, we are one of the leading domestic specialized manufacturers of modified plastic for automobile parts in China, with a market share of approximately 7.7 % in 2020 and 5.4% in 2019. In 2020, our sales volume of automotive plastics was approximately 325,210 MT. As of December 31, 2020, our annual production capacity of automotive plastics was 405,450 MT.
Due to our high quality standard and competitive pricing, we are able to compete in and penetrate markets outside of China.
After a successful trial production at our production base in Dubai in November 2018, the Company has established business relationships with new customers in UAE and India, and shipped products to the end users in Europe and Southeast Asia. We are optimistic about the prospect of our business expansion overseas.
Currently, the Company’s primary Chinese competitor in the automobile industry is Guangzhou Kingfa Science & Technology Co., Ltd. (“Guangzhou Kingfa”). Guangzhou Kingfa entered the automotive modified plastics market in 2006 and had a sales volume of 514,000 MT in 2018 with a market share of 11.7% in 2019, according to Frost & Sullivan’s report. Guangzhou Kingfa has the largest capacity expansion with 2.44 million MT annual production capacity, including 2.43 million MT annual modified plastics at the end of 2020 based on Guangzhou Kingfa’s public disclosure, but its utilization rate of production capacity is expected to be lower than that of China XD based on Frost & Sullivan’s report. Guangzhou Kingfa has much larger financial resources than HLJ Xinda Group and Sichuan Xinda. However, we believe that it is less focused in automotive sector and currently holds fewer number of product certifications for automotive modified plastic to the automobile industry compared to HLJ Xinda Group and Sichuan Xinda. Another top domestic manufacturer of modified plastic is Shanghai Pret Composites Co., Ltd. (“Shanghai Pret”), which focuses on the production of automotive plastics. It had a sales volume of 203,000 MT with a market share of 4.6% in 2019, according to Frost & Sullivan’s report.
Historically, the Chinese auto market predominantly used modified plastics manufactured overseas or in factories controlled by foreign companies, such as manufacturers from Germany, the US, the Netherlands and Japan. Although China’s automotive plastic market has been dominated by foreign or JV players, Chinese suppliers are continuing to gain market share. It is estimated that automotive plastics imported or manufactured by multinational and JV companies accounted for approximately 21.6 % of the total China automotive plastic supply in 2019 , decreased from 31.5% in 2014. JV manufacturers based in China in automotive plastics sector have been slow to invest and expand in China. Compared to non-domestic competitors including JV manufacturers, domestic manufacturers can benefit from the lower costs and geographical proximity in China. As local players continue to invest in research and development, enhance product quality and improve management skills, we believe that domestic production of automotive plastics will compete very favorably with the foreign competitors in terms of price, quality, services and delivery times and continue to replace imported plastics.
Our Competitive Strengths
We believe that the following competitive strengths continue to enable us to compete effectively in the automotive modified plastics market in the PRC:
● Leading Market Position in an Industry with High Barrier to Entry. We believe that we are one of the China’s leading specialized manufacturers of modified plastic for automobile parts in terms of sales volume and production capacity, with a market share of approximately % the second TOP 10 largest in 2019. The PRC automotive modified plastics industry is growing rapidly and is highly fragmented with the top three domestic producers occupying less than approximately 21.7% of the market share in 2019 .
We installed 50 new product lines in 2012 and 2013, which are utilized primarily for the manufacture of higher value-added modified plastics products. The lines increased the Company’s total production capacity by 135,000 MT to 390,000 MT per annum. In July 2017, the Company launched a new industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics, which was originally expected to be completed by the end of the second quarter of 2020. The reason for such delay is due to additional time for equipment installation and testing. As a result, our production capacity in Harbin, Heilongjiang was downgraded to 290,000 MT as of December 31, 2018. Due to the need for equipment upgrade and overhaul, our Harbin campus further downgraded its production capacity to 135,000 MT as of December 31, 2019, in Qinling Road Factory (“Qinling Road Project”) and Jiangnan Road Factory (“Jiangnan Road Project”), which was originally scheduled to be completed by end of the third quarter of 2020, to bring the production capacity in Harbin campus back to 390,000 MT. Simultaneously, our Harbin campus also included an industrial project for 300,000 metric tons of biological composite materials, an industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory, which was broken ground in December 2019 with four workshops. However, both production upgrade and new projects have been delayed due to the outbreak of the Covid-19 pandemic since early 2020.
In December 2013, we broke ground on the construction of our fourth production plant in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, which is expected to bring total domestic installed production annual capacity to 690,000 metric tons with the addition of 70 new production lines upon the completion of the construction of our fourth production plant. Sichuan Xinda has been supplying to its customers since 2013, mainly backed by production capacity in our Harbin production plant until we installed 50 production lines in the second half of 2016 at our Sichuan plant with production capacity of 216,000 metric tons during 2017. We installed an additional 10 production lines in July 2018, bringing the total capacity to 259,200 metric tons. As of December 31, 2020 , there is still construction ongoing on the site of our Sichuan plant for equipment installation, and we expect to put into production by the end of the first half of 2021.
In addition, we completed and run the trial production in the plant in Dubai, UAE with additional 2,500 metric tons targeting high-end products for the overseas markets. In order to develop potential overseas markets, Dubai Xinda obtained one leased property and two purchased properties, approximately 52,530 square meters in total, including one leased 10,000 square meters, and two purchased 20,206 and 22,324 square meters on January 25, 2015, June 28, 2016, and September 21, 2016, respectively, from Jebel Ali Free Zone Authority (“JAFZA”) in Dubai, UAE, with constructed building comprising warehouses, offices and service blocks.
As of December 31, 2020 our annual production capacity of automotive plastics totaled 405,450 MT, including 394,200 MT in domestic production bases and 11,250 in Dubai campus. In 2019, our sales volume of automotive plastics was approximately 360,072 MT, representing a decrease of 18.8% compared to that in 2019 , primarily because of the supply chain interruption caused by both the global COVID-19 pandeic and chip shortage since early 2020, Our overseas sales were nil in the year ended December 31, 2020 as compared to US$61.2 million in prior year also due to the above reference factors.
We believe our leading market position allows us to successfully compete with other foreign and domestic modified plastic manufacturers in the market. Being one of the leading specialized manufacturers of automotive modified plastics in China, we believe we are well-positioned to not only grow with the increasing market demand but increase market share by replacing smaller and less efficient modified plastic manufacturer.
In addition, as a result of our consistent research and development efforts, we had 688 product certifications from major automotive manufacturers in the PRC as of December 31, 2020, which we believe is among the largest numbers of product certifications by any domestic player in China’s automotive plastics industry. Strict certification requirements and long certification periods result in high barriers to entry. Our current or potential competitors are required to obtain relevant product certifications from automotive manufacturers in order to compete with us. Each certification normally takes over two years to complete, and as a result, automotive manufacturers are reluctant to replace suppliers like us who have already received necessary certifications and proven consistent product quality. We believe that having one of the largest portfolios of product certifications in China allows us to strengthen our competitive position.
● Long-Term Relationships with Reputable End Users. Our senior management has been involved in the business of modified plastics since 1985. We benefit from the industry connections and experience of our senior management, which have enabled us to establish long-term customer relationships and strong industry recognition. We are a qualified provider of high-quality automotive plastics, and have sold our products through plastic auto part manufacturers to many leading automotive manufacturers in China. Currently, our modified plastics are utilized in more than 29 automobile brands and 111 automobile models manufactured in China, including Audi, Mercedes Benz, BMW, Toyota, Buick, Chevrolet, Mazda, Volvo, Ford, Citroen, Jinbei, VW Passat, Golf, Jetta, etc. We believe that our brand and our products are well recognized and respected in China’s automotive modified plastics market.
● Manufacturing facilities critical to the quality of products. We have in the past invested substantial time and resources in building state-of-the-art production lines to enhance our product quality. Our facilities have maintained ISO/TS16949, a certification of quality management systems specific to the automotive industry.
● Strong Customer-Oriented R&D Capabilities. The modified plastics industry is characterized by rapid development and increasing demand for high quality products. We have strong R&D capabilities that allow us to successfully pass OEM automakers’ certification processes in the past and continually introduce new and high quality products to the market. Compared to international plastic supply models, which target larger scale applications of common plastics and involve less customization and specialization, we provide customer-oriented product development through our certification process. By working closely with our customers, we are able to adjust our product features to better satisfy the specific needs of each customer. To achieve this, we have staffed our R&D team with professionals, 24 of whom have Ph.D. and/or Master’s degrees. On average, our R&D employees have worked with us for more than three years, and some key experts have more than 10 years of experience in our industry. We have also cooperated with a number of the leading technology centers in China. Besides providing specialized research and development skills, these relationships help us formulate cutting edge research programs aimed at developing new technologies and applications in plastics engineering. We currently have 32 approved patents and 477 pending patent applications with the State Intellectual Property Office of the PRC, or SIPO.
● Established Distribution Model. Through twelve distributors across China, we have established distribution networks that cover Northeast, North, Southwest and East China, with a current focus on Northeast China. We enter into distribution agreements with local distributors in areas where large automobile manufacturers are located. By leveraging the proximity of our distributors to the automobile manufacturers, we can enhance our relationships with our customers. Through the established sales channels, we can quickly respond to local market demand, address customer needs, enhance our ability to provide superior technological support and after-sales services, and lower our marketing expenses. At the same time, our distributors are responsible for the payments to us which is not contingent upon their cash collection from end customers. By actively managing our distribution network, we are also able to accelerate local market penetration and increase sales opportunities. For example, we entered the north China market in 2009 through a local distributor, one year earlier than we planned, and in 2013, we entered into the Southwest China market, and in 2014, we entered into South China and Central China market. For the year ended December 31, 2019, Northeast, East, North, Southwest, Central and South accounted for approximately 32.2%, 26.4%, 15.7%, 9.2%, 6.3% and 6.0% of our revenues, respectively.
● Stable Presence to Overseas Market. The Company has tried to develop new overseas customers and has established a business relationship with an overseas customer in Ras Al Khaimah, UAE in fourth quarter of 2018. After a successful trial production at our production base in Dubai in November 2018, the Company has established business relationships with new customers in UAE and India, and shipped products to the end users in Europe and Southeast Asia. US$61.2 million products have been sold to overseas market, accounting for 4.2% of the total revenues for the year ended December 31, 2019.
● Seasoned Management Team. Our senior management team and key personnel have extensive operating and industry experience. Mr. Han, our chief executive officer and president, founded our former affiliate Harbin Xinda Nylon Factory in 1985. With 30 years of industry experience, Mr. Han has in-depth knowledge and expertise in China’s modified plastics industry. Our chief executive officer, chief technology officer and chief operating officer have over 50 years combined experience in the modified plastics industry and we believe their extensive expertise and knowledge can well serve our customers.
Our Strategies
Our goal is to capitalize on China’s modified plastics growth trend, with a specific focus on applications in the auto sector, and to eventually be the leading modified plastics manufacturer in China. We are committed to enhancing our sales and profitability and achieving our goals through the following strategies:
● Continue to Expand/Upgrade Production Capacity. Over the past five years, we have consistently increased production capacity to meet the rising demands of the automotive industry in the PRC. As of December 31, 2019, we have an installed annual production capacity of 394,200 metric tons in domestic production bases, and we have been operating at near full capacity since 2007. With the expected strong growth in the automotive modified plastics market of China, we expect that we will continue to experience strong demand from our customers. Therefore, we intend to continue to strategically increase our production capacity to meet customer demands from both expanded geographical locations and future downstream sector growth. In 2013, we commenced to construct our fourth production base with 300,000 MT new material production capacity and the affiliated research and development center and training center in Nanchong City of Sichuan Province (the “Project”). We installed 50 production lines with production capacity of 216,000 metric tons in the second half of 2016 in our Sichuan plant and additional 10 production lines in July 2018, bringing the total capacity to 259,200 metric tons. As of December 31, 2019, there was still construction ongoing on the site of our Sichuan plant which is expected to be completed by the end of the fourth quarter of 2020.
The Company completed and started the trial production in the plant in Dubai, UAE with additional 2,500 metric tons targeting high-end products for the overseas markets. The Company completed installing 45 production lines with 11,250 metric tons of annual production capacity by the end of November 2018. As of December 31, 2019, an additional 30 production lines with 7,500 metric tons of annual production capacity mainly targeted for ABS products, were still in the progress of redesigning upgrading and further equipment testing. The Company estimates 22 production lines will be put into production in the fourth quarter of 2021, 8 production lines will be put into production in the second quarter of 2022, then, bringing total installed production capacity in Dubai Xinda to 21,250 metric tons, targeting high-end products for the overseas market.
Since 2013, the HLJ Xinda Group had approximately 390,000 metric tons of annual production capacity across 88 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwan conveyer systems. In July 2017, the HLJ Xinda Group launched a new industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics, which we expect to be completed by the end of the second quarter of 2020. The reason for such delay is due to additional time for equipment’s installation and test. In 2019, HLJ Xinda Group started another two equipment projects totaling 155,000 MT in Qinling Road Factory (“Qinling Road Project”) and Jiangnan Road Factory (“Jiangnan Road Project”) for equipment upgrade and overhaul progress, which is expected be completed by the end of the third quarter of 2020. Also included is an industrial project for 300,000 metric tons of biological composite materials, an industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory, all of which we expect to be completed by the end of 2023.
● Focus on R&D and Develop New Product Offerings. We are currently utilizing our R&D capabilities to obtain further product certifications, develop new products, applications and technologies. Approximately 90% of our automotive plastics product certification applications are currently undergoing trial manufacturing periods to obtain the necessary certifications. In addition, we are developing new products for automotive applications to expand our product portfolio, including initiating R&D on modified plastic for use in electric vehicles. We also have increased efforts directed towards applications in new electrical equipment and electronics, alternative energy applications, power devices, aviation equipment and ocean engineering, in addition to other new products primarily for advanced industrialized applications in the automobile sector and in new verticals such as ships, airplanes, high-speed rail, 3D printing materials, biodegradable plastics, and medical devices. We are the first non-State-Owned-Enterprise awarded National Level Enterprise Technology Center, in Heilongjiang Province. In addition, we have Postdoctoral and Academy Member Workstation in Heilongjiang Province enhancing our research and development capabilities.
● Expand Customer Base Domestically and Internationally. The automotive plastics market in the PRC is highly fragmented with significant barriers to entry. In 2016, we had 8.0% of the market share with our customer coverage was originally concentrated in the northeast regions of the PRC. We seek to steadily enhance our market share in Northeast China, and also expand our reach to East China, Central China, Southwest China and South China. In addition, we have conducted sales in overseas markets and exported our products including non-auto sectors since 2014. In 2018, we had 8.0% of the market share, ranking the second in terms of sales volume of automotive modified plastics in China. We plan to implement such strategies through further expanding our distribution network by working with local distributors who have contacts and networks overseas and directly establishing strategic alliances with certain of our non-PRC customers. Although the entry barrier of some non-auto sectors might not generally be as high as that of the auto sector, our focus is to target high-value-added products by leveraging our technology, expertise and know-how accumulated in the auto sector over the course of our operational history.
● Pursue Selective Strategic Acquisitions. While we have experienced substantial organic growth, we plan to pursue a disciplined and targeted acquisition strategy to accelerate our growth. Our strategy will focus on strengthening presence in certain geographies, improving our penetration in attractive markets, enhancing research and development capabilities and acquiring new markets or customers.
● Increase Efficiency by Corporate Restructuring. We completed our corporate restructuring plan at the end of 2014 and further optimized our management structure and enhancing efficiency in 2018, with the aim of establishing a more efficient company group structure, as a result of which our subsidiaries are more easily accessible to our end customers and our operations are able to respond to the market changes in a more efficient manner.
Environmental Laws
The cost of compliance with Chinese environmental regulations currently is minimal. Most of the waste produced from our production process is water, which we circulate in our enclosed water treatment system.
Employees
China XD’s operations are organized into several operational departments including manufacturing, R&D, management, finance, sales, purchasing and marketing and others. As of December 31, 2020, there were 967 employees, including 450 in manufacturing, 118 in R&D, 155 in management, 19 in finance, 112 in sales, purchasing and marketing and 113 in other departments .
Available Information
We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and registration statements, and any amendments thereto, with the Securities and Exchange Commission (“SEC”). All such filings are available online through the SEC’s website at http://www.sec.gov or on our corporate website at http://www.chinaxd.net. We make available free of charge, on or through our corporate website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the SEC. In addition, copies of the written charters for the committees of our board of directors and our Code of Business Conduct are also available on our website, and can be found under the Investor Relations-Corporate Governance links. Our website address is intended to be an inactive textual reference only, and none of the information contained on our website is part of this report or is incorporated in this report by reference.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
In addition to the other information in this Form 10-K, readers should carefully consider the following important factors. These factors, among others, in some cases have affected, and in the future could affect, our financial condition and results of operations and could cause our future results to differ materially from those expressed or implied in any forward-looking statements that appear in this on Form 10-K or that we have made or will make elsewhere.
The global economic uncertainty could further impair the automotive industry thereby limiting demand for our products.
The continuation or intensification of the recent global economic uncertainty arising from the Brexit crisis, the worldwide disruption and negative impact on the macro-economic environment caused by the outbreak of COVID-19 and the economic slowdown in Asia may adversely impact our business and the businesses of our customers. Our specialized plastics are sold to automobile parts manufacturers and distributors. The recent global economic uncertainty has harmed most industries and is detrimental to the automotive industry. Since virtually all of our sales are made to auto industry participants, our sales and business operations are dependent on the financial health of the automotive industry and could suffer if our customers experience, or continue to experience, a downturn in their business. Presently, it is unclear whether and to what extent the economic stimulus measures facilitated by the European Union and other governments throughout the world will mitigate the effects of the crisis on the automotive industry and other industries that affect our business.
We concentrate our operations primarily in the automotive industry; therefore, the fluctuations in automotive sales and production could have a material adverse effect on our results of operations and liquidity.
We develop, manufacture, and distribute modified plastic, primarily for use in automobiles. Automotive sales and production are highly cyclical and depend, among other things, on general economic conditions and consumer spending and preferences (which can be affected by a number of issues including fuel costs and the availability of consumer financing). As the volume of automotive production fluctuates, the demand for our products also fluctuates. According to China Association of Automobile Manufacturers, for the year ended December 31, 2019, automobile production and sales in China decreased by 7.5% and 8.2%, respectively as compared to the same period of 2018. A weakening in macroeconomic conditions since summer of 2018 has deteriorated business conditions. There can be no assurance that the market conditions, government policies and other factors will help the growth rate in the future. Any contraction in automotive sales and production will harm our results of operations and financial condition. Consequently, we are exposed to the risks of adverse developments affecting the auto industry to a greater extent than if our operations were dispersed over a variety of industries.
Our financial performance may be affected by the prospects of our Dubai facility and the associated expansion into Middle East, Europe and other parts of Asia.
In 2014, we embarked our entry into the international market by primarily marketing long carbon chain PA plastic alloy and high-performance modified PA66 products. After a successful trial production at our production base in Dubai in November 2018, we have established business relationships with new customers in UAE and India, and shipped products to the end users in Europe and Southeast Asia. We have experienced a delay in cash collection from a major customer in UAE. As of December 31, 2019, we provided an allowance of US$62.8 million for the overdue accounts receivable from the major customer in UAE, as the customer failed to make payments under the agreed extended repayment plan.
The Company has been putting efforts into ramping up its production. In addition to the 10 trial production lines at Dubai Xinda, the Company completed installing 45 production lines with 11,250 metric tons of annual production capacity at the end of November 2018, and an additional 30 production lines with 7,500 metric tons of annual production capacity are under construction. The Company estimates 22 production lines will be put into production in the fourth quarter of 2021, 8 production lines will be put into production in the second quarter of 2022, bringing total installed production capacity at Dubai Xinda to 21,250 metric tons, targeting high-end products for the overseas market. If we are unable to expand our Dubai facility and the associated expansion in other areas, our financial performance may be affected.
The occurrence of the COVID-19 pandemic may negatively affect our business, financial condition, and results of operations.
We currently operate a substantial portion of our manufacturing facilities in China, and our corporate headquarters are located at Harbin, Heilongjiang Province in China. Since January 2020, the rapid spread of COVID-19 has resulted in increased travel restrictions and disruption and shutdown of businesses in China. In early 2020, we temporarily closed our manufacturing facilities and corporate offices in accordance with the requirement of the Chinese government, and requested our employees to work remotely. As a result, our business, financial condition, and results of operations may be adversely affected by the disruption of our business and limited access to our manufacturing facilities caused by the outbreak of COVID-19 in the PRC.
The overall impact of the outbreak of COVID-19 on our operations and financial results for the year of 2020 remains to be seen. Currently, given the effective COVID-19 containment measures implemented in China, approximately 50% of employees of our administrative offices had returned to work by the end of March 2020 and 90% returned to work by end of April. Our factories in Heilongjiang and Sichuan provinces were running at 20% capacity utilization at the end of March, and approximately around 70% capacity utilization by the end of April, and normal utilization rate by the end of May 2020. Our factory in Dubai was not impacted by the outbreak of COVID-19 during January and February but only 20% employees from private sectors are now allowed to go to work due to the recent rise of COVID-19 cases in UAE.
We may further experience impacts from quarantines, market downturns and changes in customer behavior related to fears of the pandemic if the coronavirus becomes widespread in any of our markets. Furthermore, if the coronavirus were to affect a significant number of our workforce employed in our manufacturing facilities or corporate offices, we may experience delays or the inability to develop, produce and deliver our products on a timely basis. In addition, one or more of our customers, distributors, service providers or suppliers may experience financial distress, file for bankruptcy protection, go out of business, or suffer disruptions in their businesses due to the COVID-19 outbreak, which may in turn adversely affect our business operations and financial condition. The extent to which the COVID-19 pandemic or any other health epidemic may affect our business and operations will depend on future developments, including new information which may emerge concerning the severity of COVID-19 and the actions taken by governments and private businesses to contain the COVID-19 pandemic, among others, which are highly uncertain and cannot be predicted at this moment. As a result, the occurrence of the COVID-19 pandemic may have a material adverse effect on our business, financial condition and results of operations.
The withdrawal of preferential government policies and the tightening control over the Chinese automotive industry and automobile purchase restrictions imposed in certain major cities may limit market demand for our products.
In 2011, Chinese government terminated two preferential policies for its automotive industry: (1) vehicles with 1.6L or lower air displacement were given a 50% discount in purchase tax and (2) vehicles sold in rural area were given a government subsidy. Since 2011, in order to resolve the extreme traffic congestion, the Beijing government has been implementing the vehicle purchase quota policy, which limits the maximum vehicles sold in Beijing per month to 20,000. Other cities which have begun to show signs of traffic congestion have also begun to implement similar measures to control traffic congestion, including the limited automobile licenses policy implemented in Shanghai and Tianjin and the imposition of congestion charges in Shenzhen. The termination of two nation-wide preferential policies negatively affected consumer demand for new vehicles, and local restrictive measures over automobile purchases in major cities has resulted in slower growth of sales for many years prior to the reintroduction of the preferential policies in September 2015. The national and local policies over the Chinese automotive industry may continue to impact market demand for automobiles in 2019 and any future withdrawal of preferential government policies and the further tightening of control and restrictions may eventually result in a reduction in our product sales.
The Chinese automotive industry’s growth is slowing after the rapid growth since 2000 and such slowdown may adversely affect the market demand for our products.
There is a direct correlation between our business and automobile production volume and sales, which are dependent on economic policies and market sentiment. The Chinese automotive industry had been rapidly growing for a decade prior to 2011. However, inflation, higher interest rates, tighter bank lending, lifting of consumer subsidies and buying restrictions in congested cities all contributed to a more modest environment since 2011. In order to stimulate the growth of the auto industry, on September 29, 2015, the Chinese government implemented a tax incentive policy of 50% reduction of the sales tax for eligible purchase of vehicles with engines of 1.6 liters and less. This helped the recovery of vehicle sales in China since the fourth quarter of 2015 and automobile sales volume growth rate reached to 13.7% in 2016. However, following the automobile sales in China with a lower growth rate of 3.0% in 2017, Chinese government suspended the above tax incentive policy and resumed vehicle purchase tax at a statutory rate of 10% effective from January 1, 2018. Furthermore, since summer of 2018, Chinese macroeconomic conditions signaled weakening and deteriorated business conditions, automobile production and sales in China further decreased by 7.5% and 8.2%, respectively, for twelve months of 2019 as compared to the same period of 2018, according to China Association of Automobile Manufacturers. In March 2019, the Chinese government decided to reduce the financial subsidy policy for the promotion and application of New Energy Vehicles with subsidies fallen more than 50%. There can be no assurance that the market conditions, government policies and other factors leading to the current growth in demand for automobiles continue. Any significant decline in demand for automobiles would directly and adversely affect demand for our products and hence our business, financial condition and results of operations.
A large percentage of our sales revenue is derived from sales to a limited number of distributors and a limited number of customers, and our business will suffer if sales to these customers decline.
In 2014, we embarked our entry into the international market by primarily marketing long carbon chain PA plastic alloy and high-performance modified PA66 products. After a successful trial production at our production base in Dubai in November 2018, we have established business relationships with new customers in UAE and India, and shipped products to the end users in Europe and Southeast Asia. We have experienced a delay in cash collection from a major customer in UAE. As of December 31, 2020, we provided an allowance of US$62.8 million for the overdue accounts receivable from the major customer in UAE, as the customer failed to make payments under the agreed extended repayment plan.
We may not be able to manage our business expansion effectively, which could harm our business.
We have expanded rapidly by making substantial investments in new markets and geographic regions. For example, on March 17, 2017, we entered into a definitive agreement with 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. 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. We anticipate continuous expansion in our business by entering into new markets serving different industries and geographic regions. Such business expansion requires significant local management resources and personnel, knowledges and expertise in new markets and geographies and building relationship with local suppliers and clients. In order to manage the planned business expansion, we will be required to expand, train and manage our growing employee base. Furthermore, our management will be required to learn new markets and geographies and build relationship with local suppliers and clients. We cannot assure you that our current resources, knowledges and business relationships will be adequate to support our current expansion plans. If we are not successful in expanding our personnel, acquiring knowledge and expertise in the new markets and geographies and building relationship with local suppliers and clients, our business may be materially and adversely affected.
We are dependent on a limited number of suppliers. While we have identified alternative sources for the materials and equipment we use, a temporary disruption in our ability to procure necessary materials and equipment could adversely impact our sales in future periods.
Materials constitute a substantial part of the cost of our products. We seek to reduce the cost of raw materials by dealing with major suppliers. During the year ended December 31, 2019, we purchased approximately 14.7% of our raw materials from one major supplier. We believe the relationship with our suppliers is satisfactory and that alternative suppliers are available if relationships falter or existing suppliers should become unable to keep up with our requirements. However, there can be no assurance that our current or future suppliers will be able to meet our requirements on commercially reasonable terms or within scheduled delivery times. An interruption of our arrangements with suppliers could cause a delay in the production of our products for timely delivery to distributors and customers, which could result in a loss of sales in future periods.
If we are subject to product quality or liability claims relating to our products, we may incur significant litigation expenses and management may have to devote significant time defending such claims, which if determined adversely to us, could require us to pay significant damage awards.
Although we have adopted certain internal measures to supervise and examine the quality of our products, we may be subject to legal proceedings and claims from time to time relating to our product quality. Consistent with rapid growth and expansion in many businesses, there are risks associated with quality of newly developed products, especially during the initial stage and time and efforts needed to improve our technology and techniques in order to supply quality and batch consistency to our new customers, in particular, high-end products to overseas customers. The defense of these proceedings and claims could be both costly and time-consuming and significantly divert the efforts and resources of our management. An adverse determination in any such proceedings could subject us to significant liability. In addition, any such proceeding, even if ultimately determined in our favor, could damage our market reputation and prevent us from maintaining or increasing sales and market share. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase of our products.
We have limited insurance coverage on our assets in China and any uninsured loss or damage to our property, business disruption or litigation may result in our incurring substantial costs and have a material adverse effect on our results of operations, financial condition and/or liquidity.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited insurance products. Other than automobile insurance on certain vehicles and property and casualty insurance for some of our assets such as factories and equipment we do not have insurance coverage on our other assets or inventories, nor do we have any business interruption, product liability or litigation insurance for our operations in China. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured loss or damage to property, business disruption or litigation may result in our incurring substantial costs and the diversion of our resources, which may have a material adverse effect on our results of operations, financial condition and/or liquidity.
SAFE regulations relating to offshore investment activities by PRC individuals may increase our administrative burden and restrict our overseas and cross-border investment activity. If our shareholders and beneficial owners who are PRC individuals fail to make any required applications, registrations and filings under such regulations, we may be unable to distribute profits or become subject to liability under PRC laws, and our ability to compensate our staff through equity compensation may be hindered and business operation may be adversely affected.
The State Administration of Foreign Exchange (“SAFE”), has promulgated several regulations, including the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular No. 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular No. 75.
We have requested our shareholders and beneficial owners who are PRC residents to make the necessary applications and filings as required under these regulations and under any implementation rules or approval practices that may be established under these regulations. As of the date of this Annual Report on Form 10-K, Mr. Han, our Chief Executive Officer, has registered his beneficial ownerships in China XD and XD Engineering Plastics Company Limited (“XD Engineering Plastics”) respectively with local SAFE in accordance with Circular No. 37. However, we cannot assure you that the rest of our shareholders and beneficial owners who are PRC individuals have timely updated their registrations with SAFE in accordance with SAFE regulations. The failure or inability of our PRC shareholders and beneficial owners make any required registrations may subject us to fines and legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, as a result of which our acquisition strategy and business operations and our ability to distribute profits to you could be materially and adversely affected.
On December 25, 2006, the People’s Bank of China issued the Administration Measures of Foreign Exchange Matters for Individuals, which set forth the respective requirements for foreign exchange transactions by individuals (both PRC and non-PRC citizens) under the current account or the capital account, and the corresponding Implementing Rules were issued by SAFE on January 5, 2007, both of these regulations became effective on February 1, 2007. According to these regulations, all foreign exchange matters relating to employee stock holding plans, share option plans or similar plans of an overseas publicly-listed company in which PRC citizens will participate require approval from SAFE or its authorized branch.
In February 2012, SAFE promulgated the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, or the New Stock Option Rules, which replaced and substituted the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule. According to the New Stock Option Rules, if a PRC resident participates in any stock incentive plan of an overseas publicly-listed company, a qualified PRC domestic agent, which could be a PRC subsidiary of such overseas publicly-listed company or another qualified institution selected by such PRC subsidiary, among other things, must file on behalf of such participant an application with SAFE to conduct the SAFE registration with respect to such stock incentive plan and obtain approval for an annual allowance with respect to the purchase of foreign exchange in connection with the exercise or sale of stock options or stock such participant holds. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the qualified PRC domestic agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the qualified PRC domestic agent or the overseas entrusted institution or other material changes. Such participant’s foreign exchange income received from the sale of stock and dividends distributed by the overseas publicly-listed company must be fully remitted into a specific domestic foreign currency account opened and managed by such qualified PRC domestic agent first, before distribution to such participants.
We are an offshore listed company and, as a result, any Chinese employee or foreign employee of our PRC subsidiaries, who resides in PRC more than one year consecutively, including without limitation, directors, supervisors and other senior management staffs of our PRC subsidiaries, who have been granted share options or shares under our existing share incentive plan, are subject to the New Stock Option Rules. We completed the application with local SAFE in Heilongjiang on December 16, 2013, obtaining a registration in respect of our 2009 Stock Option/Stock Issuance Plan in accordance with the New Stock Option Rules and are in the process of applying relevant registration for our 2020 Stock Option/Stock Issuance Plan. If our PRC subsidiaries or their qualified employees fail to comply with these regulations, including the New Stock Option Rules, they may be subject to fines or other legal sanctions imposed by SAFE or other Chinese government authorities. In that case, our ability to compensate our employees, directors, supervisors and other senior management staffs through equity compensations may be hindered and our business operations may be adversely affected.
Under the PRC EIT Law, we and/or Favor Sea (BVI) may be classified as a “resident enterprise” of the PRC. Such classification could result in tax consequences to us, our non-PRC resident shareholders and Favor Sea (BVI).
On March 16, 2007, the National People’s Congress approved and promulgated the PRC Enterprise Income Tax Law (“EIT Law”), which took effect on January 1, 2008. Under the EIT Law, enterprises are classified as resident enterprises and non-resident enterprises. An enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” and subject to the uniform 25% enterprise income tax rate on global income. The implementing rules of the EIT Law define “de facto management bodies” as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise; however, due to the short history of the EIT Law and lack of applicable legal precedents, it remains unclear whether the PRC tax authorities would deem our managing body as being located within China, or whether we or our non-PRC subsidiaries would be deemed as resident enterprises of the PRC.
If the PRC tax authorities determine that we, Favor Sea Limited, a British Virgin Islands corporation (“Favor Sea (BVI)”) and/or Xinda Holding (HK) Company Limited, a Hong Kong corporation (“Xinda HK”), are “resident enterprises” for PRC enterprise income tax purposes, a number of PRC tax consequences could follow. We, Favor Sea (BVI) and/or Xinda HK may be subject to enterprise income tax at a rate of 25% on our, Favor Sea (BVI)’s and/or Xinda HK’s worldwide taxable income, as well as PRC enterprise income tax reporting obligations. However, under the EIT Law and its implementing rules, dividends paid between “qualified resident enterprises” are exempt from enterprise income tax. As a result, if we, Favor Sea (BVI) and Xinda HK are treated as PRC “qualified resident enterprises,” all dividends paid from HLJ Xinda Group to Xinda HK, from Xinda HK to Favor Sea (BVI) and from Favor Sea (BVI) to us may be exempt from PRC tax. Otherwise, all dividends paid from HLJ Xinda Group to Xinda HK, from Xinda HK to Favor Sea (BVI) and from Favor Sea (BVI) to us may be subject to withholding tax under the EIT Law and its implementing rules.
On April 22, 2009, State Administration of Taxation (“SAT”) enacted “Circular of the State Administration of Taxation on Issues Concerning the Identification of Chinese-Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance With the Actual Standards of Organizational Management”. On July 27, 2011, SAT enacted “Announcement of the State Administration of Taxation on Printing and Distributing the Administrative Measures for Income Tax on Chinese-controlled Resident Enterprises Incorporated Overseas (Trial Implementation)”. Under those two rules, either the enterprises may request the PRC tax authorities to determine their “resident enterprises” identity or the tax authority may investigate and determine an enterprise’s identity. The target enterprises under those two rules are foreign registered companies controlled by the PRC companies, however, the PRC tax authority may determine if a foreign registered company controlled by the PRC individual(s) is a “resident enterprise” or not by reference to those two rules.
Under the EIT Law and its implementation rules, dividends payable by a foreign-invested enterprise in China to its shareholders that are “non-resident enterprises” are subject to a 10% withholding tax, unless such shareholders’ jurisdiction of incorporation has a tax treaty with China that provides for a preferential arrangement. Pursuant to the Notice of the SAT on Issuing the Table of Tax Rates on Dividends in Treatises, or Notice 112, which was issued on January 29, 2008, the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double Taxation Arrangement (Hong Kong), which became effective on December 8, 2006, such withholding tax may be lowered to 5% if the PRC enterprise is at least 25% directly held by a Hong Kong enterprise. In October 2009, the SAT further issued the Notice on How to Understand and Determine the “Beneficial Owners” in Tax Treaties, or Circular 601. According to Circular 601, non-resident enterprises that cannot provide valid supporting documents as “beneficial owners” may not be approved to enjoy tax treaty benefits, and “beneficial owners” refer to individuals, companies or other organizations which are normally engaged in substantive operations. These rules also set forth certain adverse factors on the recognition of a “beneficial owner.” Specifically, they expressly exclude a “conduit company” that is usually established for the purposes of avoiding or reducing tax obligations or transferring or accumulating profits and not engaged in substantive operations such as manufacturing, sales or management, from being a “beneficial owner.” As a result, if we are treated as PRC “non-resident enterprises” under the EIT Law, then dividends from HLJ Xinda Group (assuming such dividends were considered sourced within the PRC) paid to us through Xinda HK may be subject to a reduced withholding tax at a rate of 5% if Xinda HK is determined to be Hong Kong tax residents and are considered to be “beneficial owners” that are generally engaged in substantive business activities and entitled to treaty benefits under the Double Taxation Arrangement (Hong Kong). Otherwise, we may not be able to enjoy the preferential withholding tax rate of 5% under the tax arrangement and therefore be subject to withholding tax at a rate of 10% with respect to dividends to be paid by HLJ Xinda Group (assuming such dividends were considered sourced within the PRC) to us through Xinda HK. Any such taxes on dividends could materially reduce the amount of dividends, if any, we could pay to our shareholders.
However, if we are deemed as a “resident enterprise,” the new “resident enterprise” classification could result in a situation in which an up to 10% PRC tax is imposed on dividends we pay to our non-PRC shareholders that are not PRC tax “resident enterprises”. In such event, we may be required to withhold an up to 10% PRC tax on any dividends paid to non-PRC resident enterprise shareholders. Our non-PRC resident enterprise shareholders also may be responsible for paying PRC tax at a rate of 10% on any gain realized from the sale or transfer of our ordinary shares in certain circumstances if such income is considered PRC-sourced income by relevant tax authorities. We would not, however, have an obligation to withhold PRC tax with respect to such gain.
We (or a foreign investor) may become at risk of being taxed or imposed a penalty under Announcement 7 and may be required to expend valuable resources to comply with Announcement 7 or to establish that we (or such foreign investor) should not be taxed under Announcement 7, which could have a material adverse effect on our financial condition and results of operations (or such foreign investor’s investment in us).
On December 15, 2009, the State Administration of Taxation (“SAT”) released the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises (“Circular 698”) that reinforces the taxation of non-listed equity transfers by non-resident enterprises through overseas holding vehicles. Circular 698 is retroactively effective from January 1, 2008. Subsequently SAT also released the Announcement on Several Issues Related to Enterprise Income Tax for Indirect Asset Transfer by Non-PRC Resident Enterprises (“Announcement 7”), effective from February 3, 2015, which in part supersedes Circular 698.
Announcement 7 addresses indirect share transfer as well as other issues. According to Announcement 7, if a non-PRC resident enterprise transfers the equity interests of or similar rights or interests in overseas companies which directly or indirectly own PRC taxable assets through an arrangement without a reasonable commercial purpose, but rather to avoid PRC corporate income tax, the transaction will be re-characterized and treated as a direct transfer of PRC taxable assets subject to PRC corporate income tax. Announcement 7 specifies certain factors that should be considered in determining whether an indirect transfer has a reasonable commercial purpose. Since Announcement 7 has a short history, there is uncertainty as to its application and in particular, the interpretation of the term “reasonable commercial purpose.”
Announcement 7 further provides that, the entity which has the obligation to pay the consideration for the transfer to the transferring shareholders has the obligation to withhold any PRC corporate income tax that is due. If the transferring shareholders do not pay corporate income tax that is due for a transfer and the entity which has the obligation to pay the consideration does not withhold the tax due, the PRC tax authorities may impose a penalty on the entity that so fails to withhold, which may be relieved or exempted from the withholding obligation and any resulting penalty under certain circumstances if it reports such transfer to the PRC tax authorities.
PRC regulations relating to mergers and acquisitions of domestic enterprises by foreign investors may increase the administrative burden we face and create regulatory uncertainties.
On August 8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce, or MOFCOM, the State Assets Supervision and Administration Commission, or SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or CSRC, and SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, which became effective on September 8, 2006. The M&A Rule purports, among other things, (i) to require any PRC company, enterprise or individual that intends to merge or acquire its domestic affiliated company in the name of an overseas company which it lawfully established or controls, to apply for MOFCOM’s examination on and approval for the proposed merger or acquisition; and (ii) to require SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled directly or indirectly by PRC companies or individuals, to obtain the approval of CSRC prior to publicly listing their securities on an overseas stock exchange. However, there are substantial uncertainties regarding the interpretation, application and enforcement of these rules, and CSRC has yet to promulgate any written provisions or formally to declare or state whether the overseas listing of a PRC-related company structured similar to ours is subject to the approval of CSRC. As a result, we are not sure whether the M&A Rule would require us or our entities in China to obtain the approval from either MOFCOM or CSRC or any other regulatory agencies in connection with the transaction contemplated by the share transfer contracts which were entered into between Mr. Jie Han, Mr. Qingwei Ma and Xinda Holding (HK) Company Limited on June 26, 2008, the transaction contemplated in the Agreement and Plan of Merger entered into by and among NB Telecom, Favor Sea (BVI) and the shareholders of Favor Sea (BVI) on December 24, 2008 (detailed description of both of the two aforesaid transactions and relevant contracts can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed on April 14, 2010) the adoption and performance of the option agreement dated May 16, 2008 between Ms. Piao and Mr. Han.
Further, in the event MOFCOM or CSRC deems it necessary for us to obtain its approval prior to our entry into the aforesaid agreements, we could be subject to severe penalties. The M&A Rule does not stipulate the specific penalty terms, therefore, we are unable to determine what penalties we may face, and how such penalties may affect our business operations or future strategy.
Our business will suffer if we cannot obtain or maintain necessary permits or approvals.
Under PRC laws, we are required to obtain from various PRC governmental authorities certain permits and licenses in relation to the operation of our business. These permits and licenses are subject to periodic renewal and/or reassessment by the relevant PRC government authorities and the standards of compliance required in relation thereto may from time to time be subject to change. We cannot assure you that we can always obtain, maintain or renew all the permits and licenses in a timely manner. Additionally, any changes in compliance standards, or any new laws or regulations that may prohibit or render it more restrictive for us to conduct our business or increase our compliance costs may adversely affect our operations or profitability. Any failure by us to obtain, maintain or renew necessary licenses, permits and approvals, could subject us to fines and other penalties and limit the business we could conduct, which could have a material adverse effect on the operation of our business. In addition, we may not be able to carry on business without such permits and licenses being renewed and/or reassessed.
Pursuant to PRC laws and regulations, construction or expansion of a building or a production facility is subject to various permits and approvals from different government authorities. In connection with the construction of HLJ Xinda Group’s factory and production facilities, which has already been completed and put into operation, we obtained a project approval from Administration Committee of Harbin Economic and Technological & High-tech Development Zone and an approval for the environmental impact assessment report on the construction project of HLJ Xinda Group in 2003. In connection with the construction of Sichuan Xinda Group’s factory and production facilities which has been partially completed in the second half of 2016, we obtained the project approvals from Bureau of Development and Reform of Shunqing District, Nanchong City in 2013 and 2015, respectively. In connection with the Phase II construction of AL Composites which has been completed by the middle of 2016, we obtained the project approval from Engineering & Project Management Department, UAE region Economic Zones World (“EZW”) in June 2015, and the building permit from Department of Planning & Development, Ports, Customs & Free Zone Corporation, Government of Dubai in September 2015. In July 2017, HLJ Xinda Group launched new industrial development project with the Management Committee of Harbin Economic - Technological Development Zone for upgrading existing equipment for 100,000 metric tons of engineering plastics and building 300,000 metric tons of biological composite materials, an industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory. On December 21, 2017 and February 7, 2018, we got building and planning permit from Harbin Municipal Urban and Rural Bureau, respectively. Failure to obtain all necessary approvals/permits may subject us to various penalties, such as fines or being required to vacate from the facilities where we currently operate our business.
Increased environmental regulation in China could increase our costs of operation.
Certain processes utilized in the production of modified plastics result in toxic by-products. To date, the Chinese government has imposed only limited regulation on the production of these by-products, and enforcement of the regulations has been sparse. Recently, however, there is a substantial increase in focus on the Chinese environment, which has inspired considerable new regulation. Because we plan to export plastics to the U.S. and Europe in coming years, we have developed certain safeguards in our manufacturing processes to assure compliance with the environmental protection standard ISO/TS16949 Quality Assurance Standard, the European Union’s RoHS Standards and Germany’s PAHs Standards. Furthermore, have applied for the U.S.’s UL Safety Certification, ISO14001 Environmental Management System Certification and OHSAS18001 Occupational Health Management System Certification This compliance regimen brings us into compliance with all Chinese environmental regulations. Additional regulation, however, could increase our cost of doing business, which would impair our profitability.
Recent joint statement by the SEC and the Public Company Accounting Oversight Board (United States), or the PCAOB, proposed rule changes submitted by Nasdaq, and the newly enacted Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to the trading of our common stock on U.S. stock exchanges, including the possibility that our securities can be delisted if the PCAOB cannot inspect or fully investigate our auditor.
On April 21, 2020, the SEC Chairman and PCAOB Chairman, along with other senior SEC staff, released a joint statement highlighting the risks associated with investing in companies based in or have substantial operations in emerging markets including China. The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in emerging markets.
On May 18, 2020, Nasdaq filed three proposals with the SEC to (1) apply minimum offering size requirement for companies primarily operating in “Restrictive Market,” (2) adopt a new requirement relating to the qualification of management or board of director for Restrictive Market companies, and (3) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s auditor.
On June 4, 2020, the U.S. President issued a memorandum ordering the President’s working group on financial markets to submit a report to the President within 60 days of the date of the memorandum that should include recommendations for actions that can be taken by the executive branch and by the SEC or PCAOB to enforce U.S. regulatory requirements on Chinese companies listed on U.S. stock exchanges and their audit firms. However, it remains unclear what further actions, if any, the U.S. executive branch, the SEC, and PCAOB will take to address the problem.
On August 6, 2020, the President’s working group released a report recommending that the SEC take steps to implement the five recommendations outlined in the report. In particular, to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfill its statutory mandate, the President’s working group recommended enhanced listing standards on U.S. stock exchanges. This would require, as a condition to initial and continued exchange listing, PCAOB access to work papers of the principal audit firm for the audit of the listed company. Companies unable to satisfy this standard as a result of governmental restrictions on access to audit work papers and practices in their jurisdiction may satisfy this standard by providing a co-audit from an audit firm with comparable resources and experience where the PCAOB determines it has sufficient access to audit work papers and practices to conduct an appropriate inspection of the co-audit firm. The report permits the new listing standards to provide for a transition period until January 1, 2022 for listed companies, but would apply immediately to new listings once the necessary rulemakings and/or standard-setting are effective.
On August 10, 2020, the SEC announced that the SEC Chairman had directed the SEC staff to prepare proposals in response to the report of the President’s working group, and that the SEC was soliciting public comments and information with respect to the development of these proposals.
On May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act, or the Act. The Act was approved by the U.S. House of Representatives on December 2, 2020. On December 18, 2020, the Act was signed into public law by the President of the United States. In essence, the Act requires the SEC to prohibit foreign companies from listing securities on U.S. securities exchanges if a company retains a foreign accounting firm that cannot be inspected by the PCAOB for three consecutive years, beginning in 2021. On March 24, 2021, the SEC announced that it had adopted interim final amendments to implement congressionally mandated submission and disclosure requirements of the Act. The interim final amendments will apply to registrants that the SEC identifies as having filed an annual report on Forms 10-K, 20-F, 40-F or N-CSR with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction.
The enactment of the Act and any additional actions, proceedings, or new rules resulting from these efforts to increase U.S. regulatory access to audit information could cause investors uncertainty for affected issuers and the price of our shares could be adversely affected, and we could face regulatory sanctions if we and our auditor are unable to meet the PCAOB inspection requirement.
The lack of access to the PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based in China. As a result, investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of these accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections.
Our auditor, the independent registered public accounting firm that issues the audit report, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States, pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is headquartered in Lakewood, Colorado and has been inspected by the PCAOB on a regular basis with the last inspection in 2019 with inspection report available in November 2021. However, the recent developments would add uncertainties to the trading of our shares on U.S. stock exchanges, including the possibility that our securities can be delisted if the PCAOB cannot inspect or fully investigate our auditor, and we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach, or experience as it relates to our audit.
The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in China. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where substantially all of our operations and business are located has conducted any due diligence on our operations or reviewed or cleared any of our disclosure.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act of 1933, as amended (the “Securities Act”) and the Exchange Act of 1934, as amended (the “Exchange Act”). Unlike public reporting companies whose operations are located primarily in the United States, however, substantially all of our operations are located in China. Since substantially all of our operations and business takes place in China, it may be more difficult for the Staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of the CSRC, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any due diligence on our company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise scrutinized by any local regulator.
Our former independent registered public accounting firm may be temporarily suspended from practicing before the SEC if unable to continue to satisfy SEC investigation requests in the future. If a delay in completion of our audit process occurs as a result, we could be unable to timely file certain reports with the SEC, which may lead to the delisting of our stock.
The vast majority of our sales are to customers in China, and we have all of our operations in China. Like many U.S. companies with significant operations in China, our former independent registered public accounting firm is located in China.
On January 22, 2014, Judge Cameron Elliot, an SEC administrative law judge, issued an initial decision suspending the Chinese member firms of the “Big Four” accounting firms, including our former independent registered public accounting firm, from practicing before the SEC for six months. In February 2014, the initial decision was appealed. While under appeal and in February 2015, the Chinese member firms of “Big Four” accounting firms reached a settlement with the SEC. As part of the settlement, each of the Chinese member firms of “Big Four” accounting firms agreed to settlement terms that include a censure, undertakings to make a payment to the SEC, procedures and undertakings as to future requests for documents by the SEC, and possible additional proceedings and remedies should those undertakings not be adhered to.
If the settlement terms are not adhered to, Chinese member firms of “Big Four” accounting firms may be suspended from practicing before the SEC which could in turn delay the timely filing of our financial statements with the SEC. Although we have engaged another qualified independent auditor to replace our former independent registered public accounting firm, any delay in such transition could cause a delinquency in our filings with the SEC and may result in NASDAQ initiating procedures, which could adversely harm our reputation and have other material adverse effects on our overall growth and prospects.
We may fail to develop and maintain an effective system of internal controls over financial reporting. As a result, we may not be able to accurately report our financial results or prevent fraud and current and potential shareholders could lose confidence in the integrity of our financial reports, which could harm our business and the trading price of our common stock.
Prior to our listing on the US stock exchange, we were a private company with all business operations within China. Our accounting and reporting system was designed to satisfy local statutory requirements and internal management needs. Since we became a public company, our business has grown significantly over the years. Management concluded that our internal controls over financial reporting were ineffective as of December 31, 2020, due to one material weakness which relates to the lack of sufficient accounting and financial reporting personnel to formalize certain key controls over the financial reporting process and report financial information based on US GAAP and SEC reporting requirements.
Our management is committed to strengthening our internal controls and complying with Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”). Since 2014, when we were required to comply with SOX 404, our efforts to improve our internal control over financial reporting include: (1) our accounting staff obtained external training of U.S. GAAP and SEC reporting by qualified entities, (2) having hired two third-party SOX 404 compliance consultants to help us improve our internal control system, (3) continuing to seek senior qualified people with requisite expertise and knowledge to help improve our internal control procedures, (4) having adopted internal policies and approval and supervision procedures governing financial reporting, (5) having adopted procedures to evaluate and assess performance of directors, officers and employees of the Company, and (6) continuing to hold internal meetings, discussions and seminars periodically to review and improve our internal control procedures.
However, we cannot be certain that these measures we have undertaken will ensure that we will develop and maintain adequate controls over our financial processes and reporting in the future. Furthermore, if we are able to rapidly grow our business, the internal controls that we will need may become more complex, and significantly more resources may be required to ensure our internal controls remain effective. Failure to implement required controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we fail to develop and maintain an effective internal control system, our stockholders and other potential investors may lose confidence in our business operations and the integrity of our financial statements, and may be discouraged from future investments in our company, which may delay or hinder any future business development or expansion plans if we are unable to raise funds in future financings, and our current stockholders may choose to dispose of the shares of common stock they own in our company, which could have a negative impact on our stock price. In addition, non-compliance with SOX 404 could subject us to a variety of administrative sanctions, including the suspension of trading of our stock on the NASDAQ Global Market, ineligibility for listing on other national securities exchanges, and the inability of registered broker-dealers to make a market in our common stock, which could further reduce our stock price.
We may be subject to or be liable for U.S. taxes, interest and penalties.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a tax on deemed repatriation of deferred foreign income. The Act also created a new minimum tax on certain future foreign earnings.
The Company recorded a charge of approximately $71.0 million for the tax on deemed repatriation to the United States based on 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. The charge for deemed repatriation was payable by the Company over an eight-year period commencing April 2018.
As of December 31, 20120 for U.S. federal income tax purposes, the Company owed U.S. federal income taxes of US$6,407 other than the above repatriation tax. There can be no assurance that the Internal Revenue Service (“IRS”) will not assess additional U.S. federal income taxes, interest and penalties on us.
Our inability or failure to protect our intellectual property rights may significantly and materially impact our business, financial condition and results of operations.
Protection of our proprietary processes, methods and other technology is important to our business. We generally rely on a combination of the patent, trademark and copyright laws of the PRC and laws protecting trade secret in the PRC, as well as licenses and non-disclosure and confidentiality agreements, to protect our intellectual property rights. The patent, trademark and copyright laws of the PRC, as well as laws protecting trade secret in the PRC, may not protect our intellectual property rights to the same extent as the laws of the U.S.
Failure to protect our intellectual property rights may result in the loss of valuable proprietary technologies. Additionally, some of our technologies are not covered by any patent or patent application and, even if a patent application has been filed, it may not result in an issued patent. If patents are issued to us, those patents may not provide meaningful protection against competitors or against competitive technologies. In addition, upon the expiration of patents issued to us, we will be unable to prevent our competitors from using or introducing products using the formerly-patented technology. As a result, we may be faced with increased competition and our results of operations may be adversely affected. We cannot assure you that our intellectual property rights will not be challenged, invalidated, circumvented or rendered unenforceable.
We also rely upon unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive position. While we generally enter into confidentiality/non-disclosure agreements with our employees and third parties to protect our intellectual property, we cannot assure you that our confidentiality/non-disclosure agreements will not be breached, that they will provide meaningful protection for our trade secrets and proprietary manufacturing expertise or that adequate remedies will be available in the event of an unauthorized use or disclosure of our trade secrets or manufacturing expertise.
Our intellectual property rights may be challenged or infringed upon by third parties or we may be unable to maintain, renew or enter into new license agreements that are important to our business with third-party owners of intellectual property on reasonable terms. We could also face patent infringement claims from our competitors or others alleging that our processes or products infringe on their proprietary technologies. If we are found to be infringing on the proprietary technology of others, we may be liable for damages, and we may be required to change our processes, to redesign our products partially or completely, to pay to use the technology of others or to stop using certain technologies or producing the infringing product(s) entirely. Even if we ultimately prevail in an infringement suit, the existence of the suit could prompt customers to switch to products that are not the subject of infringement suits. We may not prevail in any intellectual property litigation and such litigation may result in significant legal costs or otherwise impede our ability to produce and distribute key products.
We may be unable to renew the leases for our factories on acceptable terms or these leases may be terminated.
As of December 31, 20120 HLJ Xinda Group operated three separate factories located at 9 Qinling Road (the “Qinling Road Factory”), 9 North Dalian Road (the “Dalian Road Factory”) and 9 Jiangnan First Road (the “Jiangnan Road Factory”), respectively. HLJ Xinda Group owns the titles to the land and premises of the Qinling Road Factory. HLJ Xinda Group leases the land and premises of the Dalian Road Factory from Harbin Xinda High-Tech Co., Ltd (“Xinda High-Tech”). HLJ Xinda Group is in the process of acquiring the titles to the land and premises at Jiangnan Road Factory. The Company expects the title transfer to be completed by the end of third quarter of 2021. HLJ Xinda Group’s leases was renewed to be expired on December 31, 2020. If we are unable to renew our lease on acceptable terms in due course or acquire the titles to the land and premises at Jiangnan Road Factory or if our lease is terminated by the lessor unilaterally for the Dalian Road Factory:
● we may be unable to find a new property with the amenities and in the location we require for our factories, which may result in a factory closure;
● we may have to relocate to a less desirable location;
● we may have to relocate to a location with facilities that do not meet our requirements;
● our factories may experience significant disruption in operations and, as a result, we may be unable to produce products during the period of disruption.
Any of these events may materially and adversely affect our business, prospects, results of operations and financial condition.
Our ability to sell our products at current profit margin is subject to a number of risks and uncertainties, which are beyond our control; in particular, we may not be able to reflect raw material cost increases in the price of our products.
Our ability to sell our products at current profit margin is subject to a number of risks and uncertainties, which are beyond our control. For example, general slow-down in the Chinese or world economy may lessen the demand for our products, and we may be forced to sell our products at a lower price.
Particularly, we may not be able to pass through raw material cost increases to our customers on a timely basis and reflect such increases in the price of our products. We purchase various plastic resins, which are derived from petroleum or natural gas, to produce our modified plastics products. Cost of raw materials made up a vast majority of our cost of revenues in 2020 and 2019. The market prices of plastic resins may fluctuate due to changes in supply and demand conditions in that industry. Any shortage in supply of or significant increase in demand for plastic resins and additives may result in higher market prices and thereby increase our cost of revenues, and we may not be able to pass on increases in the prices of raw materials to our customers. Under the terms of our distributor agreements, we will only be able to increase the sales prices for our products if the cost of our raw materials increases by more than 5% on a cumulative basis. As a result, we may not be able to adjust our selling prices in a timely manner, and our inability to increase the selling prices of our products sold during the period in which the cumulative increases of the cost of our raw materials is less than 5% may reduce our profitability. Furthermore, other adverse developments such as increased competition may not allow us to pass through cost increases to our distributors at all. Any of the foregoing could have a material adverse effect on our margins, results of operations and financial condition. When expanding into new regions, we have taken and may continue to take marketing initiatives from time to time to offer sales incentives, including discounts, to increase market share. Such initiatives and measures have put and may continue to put pressure on our margins.
Our assets are primarily located in China. So any dividends or proceeds from liquidation are subject to the approval of the relevant Chinese government agencies, and you may face difficulties in protecting your interests.
Our assets are primarily located inside China. Under the laws governing foreign investment entities in China, dividend distribution and liquidation are allowed but subject to respective administrative procedures under the Foreign Investment Law and relevant laws and rules. Any dividend payment will be subject to the decision of the Board of Directors and be subject to foreign exchange rules governing such repatriation. Any liquidation is subject to the decision of the highest authority of the company, the relevant government agency’s approval and supervision (including but not limited to the local branch of MOFCOM), as well as the whole process of liquidation under PRC laws and regulations, including without limitation personnel resettlement, assets disposition, settlement of debts and creditor’s rights as well as deregistration, which process could be very time-consuming and complex. Since the dividend distribution procedure is subject to foreign exchange rules governing such repatriation, risks may arise for our investors when HLJ Xinda Group pays dividend to us through Xinda HK. Furthermore, the liquidation procedure is a complex and time consuming procedures subject to government approvals, additional risks and costs may arise for our investors in the process.
In addition, we conduct substantially all of our business operations in China, and substantially all of our directors and senior management are based in China. The SEC, U.S. Department of Justice and other authorities often have substantial difficulties in bringing and enforcing actions against non-U.S. companies and non-U.S. persons, including company directors and officers, in certain emerging markets, including China. Additionally, our public shareholders may have limited rights and few practical remedies in emerging markets where we operate, as shareholder claims that are common in the United States, including class action securities law and fraud claims, generally are difficult or impossible to pursue as a matter of law or practicality in many emerging markets, including China.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company operated in the United States.
Governmental control of currency conversions may affect the value of your investment.
A majority of our revenue are earned in Renminbi. Any future restrictions on currency conversions may limit our ability to use revenue generated in Renminbi to make dividend or other payments in U.S. dollars. Although the PRC government introduced regulations in 1996 to allow greater convertibility of the Renminbi for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises like us may buy, sell or remit foreign currencies only after providing valid commercial documents at a PRC banks specifically authorized to conduct foreign-exchange business.
In addition, conversion of Renminbi for capital account items, including direct investment and loans, is subject to governmental approval in the PRC, and companies are required to open and maintain separate foreign-exchange accounts for capital account items. There is no guarantee that PRC regulatory authorities will not impose additional restrictions on the convertibility of the Renminbi. Such restrictions could prevent us from distributing dividends and thereby reduce the value of our stock.
The fluctuation of the exchange rate of the Renminbi against the dollar could reduce the value of your investment.
The value of our common stock will be affected by the foreign exchange rate between U.S. dollars and Renminbi. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into Renminbi for our operations, appreciation of the Renminbi against the U.S. Dollar could reduce the value in Renminbi of our funds. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of declaring dividends on our common stock or for other business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of our earnings from our subsidiaries in China would be reduced.
On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. Dollar. Under the 2005 policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Renminbi appreciated by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. On June 19, 2010, the People’s Bank of China decided to further promote the reform of the Renminbi exchange rate formation mechanism, and improve the flexibility of Renminbi exchange rate. The Company and its subsidiaries (both domestic and overseas) have debts denominated in foreign currencies, fluctuations in the exchange rates of Renminbi and Singapore dollar into foreign currencies creates exchange risk for the Company. With the internationalization process and RMB joining the SDR, RMB exchange rate may continue to fluctuate in the future. In August 2015, the People’s Bank of China perfected its midpoint rate determination mechanism, which led to a 2% depreciation of Renminbi against the U.S. dollar. However, it is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future. There remains significant international pressure on the PRC Government to further liberalize its currency policy, which could result in further fluctuations in the value of the Renminbi against the U.S. dollar. However, there is no assurance that there will not be a devaluation of Renminbi in the future. If there is such devaluation, our debt servicing cost will increase and the return to our overseas investors may decrease.
The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the China. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi are to be converted into foreign currency and remitted out of the PRC to pay capital expenses, such as the repayment of bank loans denominated in foreign currencies.
The PRC government could also restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain expenses as they become due.
Recent international trade tensions could materially and adversely affect our business, financial condition, and results of operations.
Economic conditions in China are sensitive to global economic conditions. The global financial markets have experienced significant disruptions in the past, including the recent international trade disputes and tariff actions announced by the United States, the PRC and certain other countries. The U.S. administration has imposed significant amount of tariffs on Chinese goods, and the PRC government has imposed tariffs on certain goods manufactured in the United States. There is no assurance that the list of goods impacted by additional tariffs will not be expanded or the tariffs will not be increased materially. It is difficult to predict how PRC or U.S. government policy, in particular, the outbreak of a trade war between the PRC and the United States and the imposition in 2018 of additional tariffs on bilateral imports, may continue to impact the PRC. If the list of goods is further expanded or the tariff is further increased, the volume of China-U.S. import and export trade would drop significantly, which will lead to deterioration in economic conditions of both countries and decrease of business and official activities between both countries. If any new tariffs, legislation and/or regulations are implemented, or if existing trade agreements are renegotiated or, in particular, if the U.S. government takes retaliatory trade actions due to the recent U.S.-China trade tension, such changes could negatively affect the demand for our products, which may in turn have an adverse effect our business, financial condition and results of operations.
We face risks related to health epidemics, natural disasters and other calamities.
Our business could be adversely affected by the effects of health epidemics and natural disasters. In recent years, there have been breakouts of epidemics in China and globally. Our business operations could be disrupted if any of our employees is suspected of having the novel coronavirus, H1N1 flu, avian flu or another epidemic, which would require our employees to be quarantined and/or the facilities used for our operations to be disinfected, and may cause the suspension of manufacturing of our products. In addition, our results of operations could be adversely affected to the extent that such outbreak harms the Chinese economy in general and the automotive industry in particular. The recent outbreak of coronavirus (COVID-19) has endangered the health of many people residing in China and significantly disrupted travel and business activities, and economic conditions in China. These events could also significantly impact our industry and cause a temporary shutdown of the facilities we use for our operations, which would have a material adverse effect on our business, financial condition and results of operations.
We are also vulnerable to natural disasters and other calamities. We cannot assure you that our infrastructure will be adequate to protect us from the effects of fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events. Any of the foregoing events may disrupt our research and development and manufacturer processes, disrupt our business operations, and have a material adverse effect on our business, financial condition and results of operations.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Physical Plant and Production
Our executive offices are located in Chaoyang District, Beijing, the capital city of China. Our owned facility includes two-floor office space (2,331.90 square meters) and 5-parking-lot spaces (288.17 square meters). The Company obtained the title of such offices and parking lots on April 28, 2017.
We had production facilities located in the Harbin Development Zone in the City of Harbin, which is the provincial capital of Heilongjiang Province in northeast China. Our owned facility has a total usable area of 7,359 square meters (79,212 square feet). The facility includes six buildings with one office building attached by one workshop, one storage room, one transformer station, and two guard rooms. All the Company’s properties are insured by China Pacific Property Insurances Co., Ltd.
The land on which our owned facility in Heilongjiang is located measures 14,715 square meters (158,391 square feet). The land use right was issued to HLJ Xinda Group by the City of Harbin and will expire in 2053. In October 2017, HLJ Xinda Group gained additional 95,758 square meters (1,030,734 square feet) land use right by the City of Harbin and will expire in 2067. We also have a long-term lease of the production facilities with Xinda High-Tech. The land on which our leased facility is located measures 16,537 square meters (178,009 square feet). The facility we rent includes three buildings with two office buildings attached by one workshop respectively and one guard room.
The two lands on which our owned facility in Sichuan are located measures 287,503 square meters (3,094,657 square feet) and 23,859 square meters (256,816 square feet), respectively. The land use rights were issued to Sichuan Xinda by the City of Nanchong and will expire in 2065 and 2085, respectively.
The land on which our owned facility in Dubai is located measures 52,530 square meters (565,428 square feet) issued to Dubai Xinda by Department of Planning & Development, Ports, Customs & Free Zone, Government of Dubai.
On May 9, 2011, Harbin Xinda, a subsidiary of China XD, entered into a purchase agreement with Harbin Shengtong Engineering Plastics Co. Ltd. (“Harbin Shengtong”) as amended on June 1, 2011. The legal representative of Harbin Shengtong is a former employee of Harbin Xinda. Pursuant to the purchase agreement, Harbin Xinda will purchase from Harbin Shengtong land use rights and a plant consisting of five workshops, a building and certain ancillary facilities (the “Project”). Harbin Shengtong is responsible to complete the construction of the plant and workshops according to Harbin Xinda’s specifications. Once the Project is fully completed and accepted by Harbin Xinda, Harbin Shengtong shall transfer titles of the Project to Harbin Xinda. During the year ended December 31, 2014, the Project was completed. The total cost for the Project was RMB501.5 million. The titles of the five workshops are expected to transfer to the Company by the end of the third quarter of 2021.
Since 2013, the HLJ Xinda Group had approximately 390,000 metric tons of annual production capacity across 88 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwan conveyer systems. In July 2017, the HLJ Xinda Group launched a new industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics, which we expect to be completed by the end of the second quarter of 2020. The reason for such delay is due to additional time for equipment’s installation and test. In 2019, HLJ Xinda Group started another two equipment projects totaling 155,000 MT in Qinling Road Factory (“Qinling Road Project”) and Jiangnan Road Factory (“Jiangnan Road Project”) for equipment upgrade and overhaul progress, which is expected be completed by the end of the third quarter of 2020 Also included is an industrial project for 300,000 metric tons of biological composite materials, an industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory, all of which we expect to be completed by the end of 2023.
In December 2013, we broke ground on the construction site of our fourth production plant in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, expecting to bring total domestic installed production capacity to 690,000 metric tons with the addition of 70 new production lines upon the completion of the construction of our fourth production plant. Sichuan Xinda has been supplying to its customers since 2013, mainly backed by production capacity in our Harbin production plant in its inception. We installed 50 production lines in the second half of 2016 in our Sichuan plant with production capacity of 216,000 metric tons during the year of 2017 and an additional 10 production lines in July 2018, bringing the total capacity to 259,200 metric tons. As of December 31, 2020, there is still construction ongoing on the site of our Sichuan plant which is expected to be completed by the end of the third quarter of 2022. The reason for such delay is due to additional time for equipment’s installation and test and building decoration.
In order to develop potential overseas markets, Dubai Xinda obtained one leased property and two purchased properties, approximately 52,530 square meters in total, including one leased property of 10,000 square meters, and two purchased two properties of 20,206 and 22,324 square meters on January 25, 2015, June 28, 2016 and September 21, 2016, respectively, from Jebel Ali Free Zone Authority (“JAFZA”) in Dubai, UAE, with constructed building comprising warehouses, offices and service blocks. In addition to the earlier 10 trial production lines in Dubai Xinda, we completed installing 45 production lines with 11,250 metric tons of annual production capacity by the end of November 2018. As of December 31, 2012, an additional 30 production lines with 7,500 metric tons of annual production capacity mainly targeted for ABS products, were still in the progress of redesigning upgrading and further equipment testing. The Company estimates 22 production lines will be put into production in the second quarter of 2022, 8 production lines will be put into production in the second quarter of 2022, and will then increase the total production capacity in Dubai Xinda to 21,250 metric tons, targeting high-end products for the overseas market.
The process of manufacturing modified plastic consists of modifying a standard plastic (polypropylene, ABS, PA6, PA66, etc.) by adding various agents and additives that will alter the physical and/or functional characteristics of the plastic. Catalysts are added that facilitate the desired chemical reactions, all of which occurs in a specially designed equipment. The resulting plastics are then extracted from the equipment by an extraction technique that is proprietary to HLJ Xinda Group. Further processing may involve additional blending, extrusion, cooling and cutting, homogenizing and packing, as needed to meet the customer’s requirements.
In addition to its unique extraction technology, HLJ Xinda Group has developed its own techniques and equipment for many of the steps in the production process. Among the aspects of production for which HLJ Xinda Group has proprietary technology are product formulae, a technique for combining extruder screws, and certain stuffing techniques. With these unique formulas and techniques, our products can satisfy clients’ standard requirements at a lower cost than competitive products.
Our facilities have been certified under the following international qualifications criteria: ISO9001: 2000 quality management system certification and ISO/TS16949: 2002 international auto parts industry quality systems certification. The Chinese government has designated HLJ Xinda Group as a National Torch Project and a National Spark Plan Project, and has given HLJ Xinda Group the “Most Valuable High Tech in China” award. HLJ Xinda Group is an executive member of the Council of the Chinese Automobile Parts Association, a member of the Chinese Modified Plastics Professional Committee, a member of the Chinese Plastics Engineering Committee and Heilongjiang Province Postdoctoral Workstation.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
The Company and its board of directors were named as defendants in three below summarized lawsuits in connection with the terminated going-private transaction. There is a possibility that a loss may have been incurred, as the Company is unable to estimate the possible loss or range of loss at this early stage in the case, no loss contingency was accrued as of December 31, 2020.
Jagdish Kothari v. China XD Plastics Company Limited et al. (Case No. 2:20-CV-01330)
Plaintiff claims that Defendants violated the Securities Exchange Act of 1934 arising out of the proposed buyout of the company by its chairman, Jie Han through his affiliated companies. Plaintiff claims that the proxy provided to the shareholders was materially defective. Plaintiff has filed a second amended complaint and the Company is vigorously defending this matter. It is too early to determine if there will be a favorable outcome.
Zhong Hao Feng et al. v. China XD Plastic Company Limited et al. (Case No. A-20-822393-B)
Plaintiffs claim that Defendants breached their fiduciary duties to China XD’s public stockholders by agreeing to sell the company for an inadequate $1.20 per share. Plaintiffs claim that the proxy provided to the shareholders was materially false and misleading. Plaintiffs’ have filed a First Amended Complaint and Defendants have filed their Answers to the First Amended Complaint and the Company is vigorously defending this matter.
Walter Aerts et al. v. China XD Plastic Company Limited et al. (Case No. !-20-819986-B)
Plaintiffs claim that China XD wrongfully entered into a definitive agreement to sell for an unfair price outstanding shares of common stock of the company. Answers have been filed to the Complaint. A five-week jury trial has been set for May 22, 2023 and the Company is vigorously defending this matter.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Prior to November 27, 2009, our common stock was quoted on the OTC Bulletin Board (“OTCBB”) under the symbol “CXDC”. On November 27, 2009, we terminated our listing on OTCBB and listed our common stock on NASDAQ Global Market under the same symbol.
Number of Holders
As of October 29, 2021, there were 325 record holders of our common stock.
Issuer Direct Corporation is the registrar and transfer agent for our common stock. Its address is 1981 Murray Holladay Road, Suite 100, Salt Lake City, UT 84117 USA, telephone: (801) 272-9294.
Dividend Policy
We have not paid any cash dividends since our inception and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We expect to retain our earnings, if any, to provide funds for the expansion of our business. Future dividend policy will be determined periodically by the Board of Directors based upon conditions then existing, including our earnings and financial condition, capital requirements and other relevant factors.
Under current PRC regulations, wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, these foreign-invested enterprises are required to set aside certain amounts of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends. Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs.
Stockholder Return Performance Graph
The following Performance Graph and related information shall not be deemed “soliciting material” or deemed to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that we specifically incorporate such information by reference into such filing.
The following graph compares the change in cumulative total stockholders’ return on our common stock with (a) NASDAQ Composite Index and (b) Russell Small Cap Completeness Index, for each year from December 31, 2015 through December 31, 2020. The graph assumes an initial investment of $100 at the closing price on December 31, 2015 and assumes all dividends (if any) were reinvested. The figures for the chart and graph set forth below have been calculated based on the closing prices on the last trading day on the NASDAQ Global Market for each period indicated.
Adjusted Closing Stock Price Cumulative Change
12/31/2020
12/31/2019
12/31/2018
12/31/2017
12/31/2016
12/31/2015
China XD Plastics Co. Ltd.
$
$
$
$
$
$
Nasdaq Composite Index
$
$
$
$
$
$
Russell Small Cap Completeness Index
$
$
$
$
$
$
*$100 invested on 12/31/2015 in stock or index, including reinvestment of dividends. Data points are the last day of each fiscal year for the Company’s common stock and December 31 of each year for indexes.
Recent Sale of Unregistered Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
None.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
The tables below set forth selected historical financial information of the Company that has been derived from the audited financial statements as of December 31, 2016, 2017, 2018, 2019 and 2020, and for the last five years in the period ended December 31, 2020. The selected historical financial data should be read in conjunction with the consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included elsewhere in this Form 10-K.
2017
(in millions, except number of shares and per share amounts)
Revenues $ 1,311.9 $ 1,448.2 $ 1,274.8 $ 1,290.4 $ 1,201.7
Net income (loss) $ (181.7 ) $ 3.1 $ 68.3 $ 31.6 $ 101.6
Earnings per share
- basic $ (4.06 ) $ 0.05 $ 1.03 $ 0.48 $ 1.54
- diluted $ (4.06 ) $ 0.05 $ 1.03 $ 0.48 $ 1.54
Shares used in computing earnings per share
- basic 44,733,357 55,200,896 50,290,425 49,598,609 49,418,188
- diluted 44,733,357 55,200,896 50,290,425 49,598,609 49,419,197
Total cash, cash equivalents, restricted cash and time deposits 183.3 228.4 367.0 608.1 456.4
Total assets 2,923.9 2,635.9 2,753.5 2,544.1 2,126.5
Long term bank loans 727.3 322.5 111.8 114.2 249.5
Total liabilities 2,156.7 1,799.5 1,907.0 1,733.7 1,394.7
Redeemable Series D Convertible Preferred Stock - - 97.6 97.6 97.6
Total stockholders’ equities 767.2 836.4 748.9 712.8 634.3

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section titled “Selected Consolidated Financial and Other Data” and the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled “Risk Factors” and other parts of this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
General
China XD is one of the leading specialty chemical companies engaged in the research, development, manufacture and sale of modified plastics primarily for automotive applications in China, and to a lesser extent, in Dubai, UAE. Through our wholly-owned operating subsidiaries in China and UAE, we develop modified plastics using our proprietary technology, manufacture and sell our products primarily for use in the fabrication of automobile parts and components. We have 688 certifications from manufacturers in the automobile industry as of December 31, 2020. We are the only company certified as a National Enterprise Technology Center in modified plastics industry in Heilongjiang province. Our Research and Development (the “R&D”) team consists of 127 professionals and 7 consultants. As a result of the integration of our academic and technological expertise, we have a portfolio of 647 patents, 63 of which we have obtained the patent rights and the remaining 584 of which we have applications pending in China as of December 31, 2020.
Our products include twelve categories: Modified Polypropylene (PP), Modified Acrylonitrile Butadiene Styrene (ABS), Modified Polyamide 66 (PA66), Modified Polyamide 6 (PA6), Modified Polyoxymethylenes (POM), Modified Polyphenylene Oxide (PPO), Plastic Alloy, Modified Polyphenylene Sulfide (PPS), Modified Polyimide (PI), Modified Polylactic acid (PLA), Poly Ether Ether Ketone (PEEK), and Polyethylene (PE).
The Company’s products are primarily used in the production of exterior and interior trim and functional components of 29 automobile brands and 111 automobile models manufactured in China, including Audi, Mercedes Benz, BMW, Toyota, Buick, Chevrolet, Mazda, Volvo, Ford, Citroen, Jinbei, VW Passat, Golf, Jetta, etc. Our research center is dedicated to the research and development of modified plastics, and benefits from its cooperation with well-known scientists from prestigious universities in China. We operate three manufacturing plants in Harbin, Heilongjiang in the PRC. Prior to December 2012, we had approximately 255,000 metric tons of annual production capacity across 58 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwan conveyer systems. In December 2012, we further expanded our third production base in Harbin with additional 135,000 metric tons of annual production capacity, bringing total installed production capacity in our three production bases to 390,000 metric tons with additional 30 new production lines. In July 2017, our Harbin campus launched a new industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics. As a result, our production capacity in Harbin, Heilongjiang was downgraded to 290,000 MT. In 2019, our Harbin campus started two equipment projects in Qinling Road Factory (“Qinling Road Project”) and Jiangnan Road Factory (“Jiangnan Road Project”) for equipment upgrade and overhaul progress, which further downgraded our production capacity to 135,000 MT. The industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics was expected to be completed by the end of 2020, Qinling Road Project and Jiangnan Road Project was expected to be completed by the end of 2020, thus bringing the production capacity in Harbin Campus back to 390,000 MT. Also, in July 2017, HLJ Xinda Group started an industrial project for 300,000 metric tons of biological composite materials, an industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory. This project with four workshops was formally broken ground in December 2019. The Company expects the gradual trial out by the end of 2022 and put into production by the end of 2023.
In December 2013, we broke ground on the construction of our fourth production plant in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, which we expect will bring total domestic installed production capacity to 590,000 metric tons with the addition of 70 new production lines upon the completion of the construction of our fourth production plant. Sichuan Xinda has been supplying to its customers since 2013. We installed 50 production lines in the second half of 2016 in our Sichuan plant with production capacity of 216,000 metric tons during the year of 2017 and an additional 10 production lines in July 2018, bringing the total capacity to 259,200 metric tons. As of December 31, 2020, there is still construction ongoing on the site of our Sichuan plant which is expected to be completed by the end of the third quarter of 2022 .
In order to develop potential overseas markets, Dubai Xinda obtained one leased property and two purchased properties, approximately 52,530 square meters in total, including one leased 10,000 square meters, and two purchased 20,206 and 22,324 square meters on January 25, 2015, June 28, 2016 and September 21, 2016, respectively, from Jebel Ali Free Zone Authority (“JAFZA”) in Dubai, UAE, with constructed building comprising warehouses, offices and service blocks. In addition to the earlier 10 trial production lines in Dubai Xinda, the Company completed installing 45 production lines with 11,250 metric tons of annual production capacity by the end of November 2018, and an additional 30 production lines with 7,500 metric tons of annual production capacity. The Company previously estimated 22 production lines to be put into production in the fourth quarter of 2021, and 8 production lines in the second quarter of 2022. Due to the negative impact of COVID-19, this project was suspended and the Company plans to resume the installation process by the first half of 2022 . The new completion timeline is estimated by the end of 2022, thus bringing total installed production capacity in Dubai Xinda to 21,250 metric tons, targeting high-end products for the overseas market.
Due to the COVID-19 pandemic, the Company’s manufacturing facilities in Harbin and Sichuan was temporarily shut down from early February 2020 to early March 2020 while our Dubai facilities was suspended operation from early February 2020 till current in accordance with the requirement of the local governments. The Company’s business was negatively impacted and generated lower revenue and net income during the period from February to April 2020. The extent of the impact of COVID-19 on the Company’s results of operations and financial condition will depend on the virus’ future developments, including the duration and spread of the outbreak and the impact on the Company’s customers, which are still uncertain and cannot be reasonably estimated at this point of time.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (1) the reported amounts of our assets and liabilities; (2) the disclosure of our contingent assets and liabilities at the end of each reporting period; and (3) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these judgments, estimates and assumptions based on our own historical experience, knowledge and assessment of current business and other conditions and our expectations regarding the future based on available information which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
When reading our consolidated financial statements, you should consider our selection of critical accounting policies, the judgment and other uncertainties affecting the application of such policies, and the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.
Long-Lived Assets
Our long-lived assets include property, plant and equipment and land use rights.
We depreciate and amortize our property, plant and equipment and land use rights, using the straight-line method of accounting over the estimated useful lives of the assets. We make estimates of the useful lives of property, plant and equipment, including the salvage values, and land use rights in order to determine the amount of depreciation and amortization expense to be recorded during each reporting period. The estimated useful life is the period over which the long-lived assets are expected to contribute directly or indirectly to the future cash flows of the Company.
We evaluate long-lived assets, including property, plant and equipment, and land use rights for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We assess recoverability by comparing carrying amount of a long-lived asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, we recognize an impairment charge based on the amount by which the carrying amount exceeds the estimated fair value of the asset or asset group. We estimate the fair value of the asset or asset group through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Assets to be disposed are reported at the lower of carrying amount or fair value less costs to sell, and are no longer depreciated.
Impairment charges of US$165.3 million was recognized for long-lived assets during the year ended December 31, 2020 (See Note 26 to Consolidated Financial Statements).
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In establishing the required allowance, we consider historical losses adjusted to take into account current market conditions, the amount of receivables in dispute, and the current receivables aging and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We do not have any off-balance-sheet credit exposure related to our customers.
We extend unsecured credit to customers with good credit history. We review our accounts receivable on a regular basis to determine if the bad debt allowance is adequate at each year-end.
Valuation of Inventories
Our inventories are stated at the lower of cost or net realizable value (NRV). We routinely evaluate quantities and value of our inventories in light of current market conditions and market trends, and record a write-down against the cost of inventories for net realizable value below cost. Expected demand and anticipated sales price are the key factors affecting our inventory valuation analysis. For purposes of our inventory valuation analysis, we develop expected demand and anticipated sales prices primarily based on sales orders as well as industry trends and individual customer analysis. We also consider sales and sales orders after each reporting period-end but before the issuance of our financial statements to assess the accuracy of our inventory valuation estimates. Historically, actual demand and sales price have generally been consistent with or greater than expected demand and anticipated sales price used for purposes of our inventory valuation analysis. The evaluation also takes into consideration new product development schedules, the effect that new products might have on the sale of existing products, product obsolescence, customer concentrations, product merchantability and other factors. Market conditions are subject to change and actual consumption of inventories could differ from forecasted demand. Our products have a long life cycle and obsolescence has not historically been a significant factor in the valuation of inventories. We have not experienced any material inventory write-downs before.
Income Tax Uncertainties and Realization of Deferred Income Tax Assets
Our income tax provision, deferred income tax assets and deferred income tax liabilities are recognized and measured primarily based on actual and expected future income, PRC statutory income tax rates, PRC tax regulations and tax planning strategies.
Significant judgment is required in interpreting tax regulations in the PRC, evaluating uncertain tax positions, and assessing the realizability of deferred income tax assets. Actual results could differ materially from those judgments, and changes in judgments could materially affect our consolidated financial statements. As of December 31, 2020 and 2019, we had total gross deferred income tax assets of US$33,524,819 and US$14,313,575, respectively. We record a valuation allowance to reduce our deferred income tax assets if, based on the weight of available evidence, we believe expected future taxable income is not likely to support the use of a deduction or credit in that jurisdiction. We evaluate the level of our valuation allowances quarterly, and more frequently if actual operating results differ significantly from forecasted results. As of December 31, 2020 and 2019, our valuation allowance against deferred income tax assets was US$33,524,819 and US$14,313,575, respectively.
We recognize the impact of a tax position if we determine the position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based solely on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, it is presumed that the position will be examined by the appropriate tax authority that has full knowledge of all relevant information. In addition, a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than fifty percent (50%) likely of being realized upon settlement. The tax positions are regularly re-evaluated based on the results of the examination of income tax filings, statute of limitations expirations and changes in tax law that would either increase or decrease the technical merits of a position relative to the more-likely-than-not recognition threshold. In the normal course of business, we are regularly audited by the PRC tax authorities. The settlement of any particular issue with the applicable tax authority could have a material impact on our consolidated financial statements.
Stock Based Compensation
We measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award and recognize the cost over the period the employee is required to provide service in exchange for the award, which generally is the vesting period. We have elected to recognize the compensation cost for an award with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. However, the cumulative amount of compensation cost recognized at any date equals at least the portion of the grant date value of such award that is vested at that date.
We estimated the fair value of our share options using the Black-Scholes Option Pricing model. The model incorporates subjective assumptions. The expected volatility was based on implied volatilities from traded options and historical volatility of the Company’s common stock. The risk-free interest rate assumption is determined using the Federal Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. There is no expected dividend yield, as the Company has not paid dividend and does not anticipate paying dividend over the term of the grants.
Recent Development
On November 5, 2020, the Company held a special meeting of stockholders, at which the Company’s stockholders voted, among other things, in favor of the proposal to adopt the previously announced agreement and plan of merger (the “Merger Agreement”), dated as of June 15, 2020, by and among the Company, Faith Dawn Limited, an exempted company with limited liability incorporated under the laws of the Cayman Islands (“Parent”), and Faith Horizon Inc., a Nevada corporation and wholly owned subsidiary of Parent (“Merger Sub”), providing for the merger of the Merger Sub with and into the Company, with the Company continuing as the surviving corporation and as a wholly-owned subsidiary of Parent (the “Merger”).
On December 13, 2020, the Company entered into an amendment No.1 (the “Amendment”) to that certain Agreement and Plan of Merger dated June 15, 2020 (as so amended, the “Merger Agreement”) by and among the Company, Faith Dawn Limited (“Parent”), and Faith Horizon Inc. (“Merger Sub”), a Nevada corporation and a wholly-owned subsidiary of Parent. The Amendment extends the Termination Date (as defined in the Merger Agreement) to February 7, 2021. The special committee of the board of directors of the Company and the board of directors of the Company both approved the Amendment to permit additional time for the parties to the Merger Agreement to complete the merger. The parties to the Merger Agreement are currently working on the logistics to complete the Merger. Other than as described herein, the Amendment does not amend any other provision of the Merger Agreement.
On February 7, 2021, the Company entered into an amendment No.2 (the “Second Amendment”) to that certain Agreement and Plan of Merger dated June 15, 2020, as amended on December 13, 2020 (as so amended, the “Merger Agreement”) by and among the Company, Faith Dawn Limited (“Parent”), and Faith Horizon Inc. (“Merger Sub”), a Nevada corporation and a wholly-owned subsidiary of Parent. The Second Amendment extends the Termination Date (as defined in the Merger Agreement) to May 10, 2021.The special committee of the board of directors of the Company and the board of directors of the Company both approved the Second Amendment to permit additional time for the parties to the Merger Agreement to complete the merger. The parties to the Merger Agreement are currently working on the logistics to complete the Merger. Other than as described herein, the Second Amendment does not amend any other provision of the Merger Agreement.
On May 8, 2021, the Company issued a notice of termination to Parent (the “Notice of Termination”) notifying Parent that the Company terminated the merger agreement pursuant to Section 9.1(c)(i) of the merger agreement, based on Parent and Merger Sub’s breaches of the merger agreement, which have given rise to the failure of several conditions set forth in Section 8.1 and Section 8.3 of the merger agreement. These breaches are not capable of being cured prior to the termination date of the merger agreement. Pursuant to the Notice of Termination, as a result of such termination, the Parent Termination Fee becomes due and payable to the Company by Parent. On May 12, 2021, Parent sent a response letter, dated May 11, 2021 (the “Response Letter”), to the Company that while it disagrees with the allegations made in the Notice of Termination, Parent acknowledges that the Company may terminate the merger agreement pursuant to Section 9.1(c)(iii) of the merger agreement and thus agrees to pay the Parent Termination Fee pursuant to Section 9.3(b) of the merger agreement under that basis. As a result of the termination of the merger agreement, the merger will not be completed.
The following table sets forth statements of comprehensive income (loss) data for the years ended December 31, 2020 and 2019 in millions of US$:
For the Years Ended December 31,
Change
Amount % % Amount %
(US$ in millions, except the percentage)
Revenues 1,311.9 100 % (9.4 )% 1,448.2 100 %
Cost of revenues (1,168.2 ) (89.0 )% (4.9 )% (1,228.8 ) (84.9 )%
Gross profit 143.7 11.0 % (34.5 )% 219.4 15.1 %
Impairment of long-lived assets (165.3
) (12.6
)% N/A
- -
Total operating expenses (245.8 ) (18.7 )% (63.9 )% (150.0 ) (10.4 )%
Operating income (loss) (102.0 ) (7.8 )% (247.0 )% 69.4 4.8 %
Income (loss) before income taxes (175.9 ) (13.4 )% (1,128.6 )% 17.1 1.2 %
Income tax expense (5.8 ) (0.4 )% (58.6 )% (14.0 ) (1.0 )%
Net income (loss) (181.7 ) (13.8 )% (5,961.3 )% 3.1 0.2 %
Revenues
Revenues decreased by 9.4%, or US$136.3 million, in 2020 as compared to 2019. This was due to a decrease of 7.8% in sales volume, and a decrease of 1.6% in the average RMB selling price of our products, as compared with those of the same period of last year.
(1) Domestic market
For the year ended December 31, 2020, revenue from domestic market decreased by 5.5% or US$75.6 million, as a result of a decrease of 6.4% in sales volume, and partially offset by an increase of 1.0% in the average RMB selling price of our products, as compared with those of the same period of last year.
According to the China Association of Automobile Manufacturers, automobile production and sales in China decreased by 2.0% and 1.9 %, respectively, for twelve months of 2020 as compared to the same period of 2019. The weakening in macroeconomic conditions since the outbreak of COVID-19 pandemic in January 2020 continued to exacerbate auto business environment throughout year of 2020. The Company’s business was negatively impacted and has generated lower revenue during the period from February to April 2020. Thanks to our positive efforts to expand our customer bases and to meet their new requirements, including producing raw materials for PPE such as goggles and masks, to help alleviate the pandemic to our communities and mitigate the negative impact of world pandemic on Chinese auto industry, the Company has begun to recover slowly after May 2020. We achieved sales increase by 75.7% in Southwest China, 35.3% in East China and 7.5% in South China, although our sales decreased by 62.1% in Northeast China, 21.9% in Central China and 15.2% in North China, for the year ended December 31, 2020 as compared to the same period of 2019.
As for the RMB selling price, the increase of 1.0% was mainly due to increased sales of new categories of higher-end products of PA66 and PA6 produced with high-priced raw materials with higher selling price in domestic markets during the year ended December 31, 2020.
(2) Overseas market
Overseas sales were nil for the year ended December 31, 2020 as compared to US$61.2 million in prior year.
The Dubai facility was temporarily shut down since late February and has not resumed its operation till the current period, which has negatively impacted operations in Dubai facility.
We have experienced a delay in cash collection from a major customer in UAE. As of December 31, 2020 and 2019, we provided an allowance of US$64.8million and US$62.8 million, respectively, for the overdue accounts receivable from the major customer in UAE, as the customer failed to make payments under the agreed extended repayment plan.
The following table summarizes the breakdown of revenues by categories for the periods indicated.
Revenues
For the Years Ended December 31,
Change Change
Amount % Amount % Amount %
(US$ in millions, except the percentage)
Modified Polyamide 66 (PA66) 605.2 46.1 % 427.0 29.5 % 178.2 41.7 %
Modified Polyamide 6 (PA6 ) 393.9 30.0 % 338.3 23.4 % 55.6 16.4 %
Plastic Alloy 78.4 6.0 % 245.3 16.9 % (166.9 ) (68.0 )%
Modified Polypropylene (PP) 74.6 5.7 % 126.5 8.7 % (51.9 ) (41.0 )%
Polyethylene (PE) 64.6 4.9 % 11.5 0.8 % 53.1 461.7 %
Modified Acrylonitrile butadiene styrene (ABS) 24.3 1.8 % 50.1 3.5 % (25.8 ) (51.5 )%
Polyoxymethylenes (POM) 4.8 0.4 % 6.9 0.5 % (2.1 ) (30.4 )%
Modified Polylactic acid (PLA) 3.5 0.3 % 65.1 4.5 % (61.6 ) (94.6 )%
Polyphenylene Oxide (PPO) 0.0 0.0 % 32.4 2.2 % (32.4 ) (0.0 )%
Semi-finished goods 58.8 4.5 % 144.4 10.0 % (85.6 ) (59.3 )%
Others 3.8 0.3 % 0.7 0.0 % 3.1 442.9 %
Total Revenues 1,311.9 100.0 % 1,448.2 100.0 % (136.3 ) (9.4 )%
The following table summarizes the breakdown of metric tons (MT) by product mix for the periods indicated:
Sales Volume
For the Years Ended December 31,
Change Change
MT % MT % MT %
(in MTs, except percentage)
Modified Polyamide 66 (PA66) 76,415 23.4 % 72,196 20.0 % 4,219 5.8 %
Modified Polyamide 6 (PA6 ) 55,470 17.0 % 64,004 17.8 % (8,534 ) (13.3 )%
Plastic Alloy 47,930 14.7 % 71,268 19.8 % (23,338 ) (48.7 )%
Modified Polypropylene (PP) 57,016 17.5 % 87,343 24.2 % (30,327 ) (34.7 )%
Polyethylene (PE) 71,691 22.0 % 10,459 2.9 % 61,232 585.4 %
Modified Acrylonitrile butadiene styrene (ABS) 12,955 4.0 % 23,997 6.7 % (11,042 ) (46.0 )%
Polyoxymethylenes (POM) 1,370 0.4 % 2,042 0.6 % (672 ) (32.9 )%
Modified Polylactic acid (PLA) 2,363 0.7 % 6,209 1.7 % (3,846 ) (61.9 )%
Polyphenylene Oxide (PPO) - - % 6,455 1.8 % (6,455 ) (0.0 )%
Semi-finished goods 6,780 2.0 % 16,099 4.5 % (9,319 ) (57.9 )%
Total Sales Volume 331,990 100.0 % 360,072 100.0 % (28,082 ) (7.8 )%
The Company continued to shift production mix from traditional lower-end products such as PP to higher-end products such as PA66, PA6, and PE, primarily due to (i) greater growth potential of advanced modified plastics in luxury automobile models in China, (ii) the stronger demand as a result of promotion by the Chinese government for clean energy vehicles and (iii) better quality demand from and consumer recognition of higher-end cars made by automotive manufacturers from Chinese and Germany joint ventures, Sino-U.S. and Sino-Japanese joint ventures, which manufacturers tend to use more and higher-end modified plastics in quantity per vehicle in China.
Gross Profit and Gross Margin
For the Years Ended December 31,
Change
(in millions, except percentage) Amount %
Gross Profit $ 143.7 $ 219.4 $ (75.7 ) (34.5 )%
Gross Margin 11.0 % 15.1 %
(4.1 )%
Gross profit was US$143.7 million in 2020, as compared to US$219.4 million in 2019. Our gross margin decreased to 11.0% during 2020 from 15.1% in 2019, primarily due to the increased cost for idle capacity as a result of shutdown.
General and Administrative Expenses
For the Years Ended December 31,
Change
(in millions, except percentage) Amount %
General and Administrative Expenses $ 32.5 $ 35.4 $ (2.9 ) (8.2 )%
as a percentage of revenues 2.4 % 2.4 %
0.0 %
General and administrative (G&A) expenses were US$32.5 million in 2020 compared to US$35.4 million in 2019, representing a decrease of US$2.9 million. The decrease was primarily due to our approach to optimize management structure and enhancing efficiency, and partially offset share based compensation cost recognized in the year of 2020.
On a percentage basis, G&A expenses in 2020 were flat at 2.4%, compared to that of the same period of 2019.
Provision for Doubtful Accounts
For the Years Ended December 31,
Change
(in millions, except percentage) Amount %
Provision for Doubtful Accounts $ 2.4 $ 62.8 $ (60.4 ) (96.2 )%
as a percentage of revenues 0.2 % 4.3 %
(4.1 )%
Provision for doubtful accounts was US$2.4 million in 2020 compared to 62.8 million in 2019.
As of December 31, 2020, accounts receivable of US$2.2 million from the Company’s two customers in UAE and US$0.4 million from the Company’s one customer in PRC were overdue for more than 12 months. Based on assessment of the collectability of the amounts due from the customers, the Company provided an allowance for doubtful accounts of US$2.4 million for the period ended December 31, 2020.
As of December 31, 2019, our main UAE customer had US$62.8 million of overdue accounts receivable and the customer failed to make payments under the agreed extended repayment plan. Based on its assessment of the collectability of the amounts due from the customer, the Company provided an allowance for doubtful accounts of US$62.8 million for the year ended December 31, 2019.
Impairment of Long-Term Prepayments to Equipment and Construction Suppliers
For the Years Ended
December 31,
Change
(in millions, except percentage) Amount %
Impairment of l Long-Term Prepayments to Equipment and Construction Suppliers $ 21.9 $ - $ 21.9 N/A
as a percentage of revenues 1.7 % -
1.7 %
Impairment of Long-Term Prepayments to Equipment and Construction Suppliers was US$21.9 million during the year ended December 31, 2020 compared to nil in the same period of 2019. On October 20, 2016, Sichuan Xinda entered into an equipment purchase agreement purchase contract with Peaceful for a total consideration of RMB89.8 million (equivalent to US$13.0 million), and on May 31, 2019, Dubai Xinda entered into an equipment purchase contract with Peaceful for a total consideration of US$18.8 million to purchase production and testing equipment. As of December 31, 2020, Peaceful failed to deliver the equipments under the purchase agreements. Based on the assessment of the recoverability of the prepayments, the Company recognized an impairment charges of US$21.9 million for the year ended December 31, 2020.
Impairment of Long-Lived Assets
For the Years Ended
December 31,
Change
(in millions, except percentage) Amount %
Impairment of Long-Lived Assets $ 165.3 $ - $ 165.3 N/A
as a percentage of revenues 12.6 % -
12.6 %
Impairment loss was US$165.3 million during the year ended December 31, 2020 compared to nil in the same period of 2019. The Dubai facility was temporarily shut down since late February, 2020 and has not resumed its operation till the current period, which has negatively impacted operations in Dubai facility. The Company has assessed the situation of non operational and made an impairment charges of US$165.3 million, primarily related to workshops, machinery and construction in progress (See Note 26 to Consolidated Financial Statements).
Research and Development Expenses
For the Years Ended December 31,
Change
(in millions, except percentage) Amount %
Research and Development Expenses $ 22.5 $ 50.3 $ (27.8 ) (55.3 )%
as a percentage of revenues 1.7 % 3.5 %
(1.8 )%
Research and development expenses were US$22.5 million in 2020 compared with US$50.3 million in 2019, representing a decrease of US$27.8 million, or 55.3%. This decrease was due to (i) a decrease of US$14.9 million in raw materials consumption, (ii) a decrease of US$0.4 million in depreciation, and (iii) a decrease of US$0.2 million in salary and welfare for R&D personnel.
As of December 31, 2020, the number of ongoing research and development projects was 347. We expect to complete and commence to realize economic benefits from approximately 25% of the projects in the near term. The majority of the projects are in the field of modified plastics in automotive applications and the rest are in advanced fields such as ships, airplanes, high-speed rail, medical devices, etc.
Operating Income (loss)
Total operating loss was US$102.0 million in 2020 compared to an operating income of US$69.4 million in 2019, representing a decrease of 250.6% or US$171.4 million. This decrease is primarily due to the lower gross profit, the impairment charges of US$165.3 million, and the higher operating expenses.
Interest Income (Expenses)
For the Years Ended December 31
Change
(in millions, except percentage) Amount %
Interest Income $ 1.7 $ 1.4 $ 0.3 21.4 %
Interest Expenses (71.2 ) (67.2 ) (4.0 ) 6.0 %
Net Interest Expenses (69.5 ) (65.8 ) (3.7 ) 5.6 %
as a percentage of revenues 5.3 % 4.5 %
0.8 %
Net interest expense was US$69.5 million in 2020, compared to net interest expense of US$65.8 million in 2019, representing an increase of 5.6% or US$3.7 million, primarily due to (i) the increase of average loan interest rate from 5.5% of the same period in 2019 to 5.6% for the year ended December 31, 2020 and (ii) the increase of average short-term and long-term loan balance in the amount of US$889.7 million for the year ended December 31, 2020 compared to US$912.8 million of the same period in 2019, partially offset by the iii) increase of interest income resulting from the average interest rate decreased to 0.60% for the year ended December 31, 2019 compared to 0.65% of the same period in 2020, and (iv) the increase of average deposit balance in the amount of US$222.1 million for the year ended December 31, 2019 compared to US$ compared to US$223.0 million for the same period in 2020.
Foreign Currency Exchange Gains (losses)
For the Years Ended December 31,
Change
(in millions, except percentage) Amount %
Foreign currency exchange gains (losses) $ (12.6 ) $ 2.9 $ (15.5 ) (534.5 )%
as a percentage of revenues (1.0 )% 0.2 %
(1.2 )%
Foreign currency exchange losses were US$12.6 million in 2020, compared to gains of US$2.9 million in 2019, which was due to the fluctuation of the exchange rate of RMB again US Dollar.
Income Taxes
For the Years Ended December 31,
Change
(in millions, except percentage) Amount %
Income (loss) before Income Taxes $ (175.9 ) $ 17.1 $ (193.0 ) (1,128.7 )%
Income tax expense (5.8 ) (14.0 ) 8.2 (58.6 )%
Effective income tax rate (3.3 )% 82.1 %
(85.4 )%
The effective income tax rate in 2020 and 2019 was negative 3.3% and 82.1%, respectively.
The decrease of effective income tax rate in 2020 was primarily due to the increased loss before income taxes from Dubai Xinda, and decreased income before taxes from HLJ Xinda Group and Sichuan Xinda.
Our PRC and Dubai subsidiaries had US$183.4 million of cash and cash equivalents and restricted cash as of December 31, 2020, which are planned to be indefinitely reinvested in PRC. The distributions from our PRC subsidiaries are subject to the U.S. federal income tax at 21%, less any applicable foreign tax credits. Due to our policy of indefinitely reinvesting our earnings in our PRC business, we have not provided for deferred income tax liabilities related to PRC withholding income tax on undistributed earnings of our PRC subsidiaries.
Net Income (loss)
As a result of the above factors, we had a net loss of US$181.7 million in 2020 as compared to net income of US$3.1 million in 2019.
Selected Balance Sheet Data as of December 31, 2020 and 2019:
December 31, December 31, Change
(in millions, except percentage) Amount %
Cash and cash equivalents 78.3 17.2 61.1 355.2 %
Restricted cash 105.1 211.2 (106.1 ) (50.3 )%
Accounts receivable, net of allowance for doubtful accounts 423.9 222.1 201.8 90.9 %
Amounts due from related parties 0.9 - 0.9 N/A
Inventories 577.9 642.5 (64.6 ) (10.0 )%
Prepaid expenses and other current assets 158.6 171.8 (13.2 ) (7.7 )%
Property, plant and equipment, net 778.8 830.3 (51.5 ) (6.2 )%
Long-term prepayments to equipment and construction suppliers 512.0 495.6 16.4 3.3 %
Operating right of use assets, net 44.9 44.1 0.8 1.8 %
Loans receivable-non current 242.1 - 242.1 N/A
Deferred tax assets 0.8 - 0.8 N/A
Other non-current assets 0.2 1.0 (0.8 ) (80.0 )%
Total assets 2,923.9 2,635.9 288.0 10.9 %
Short-term bank loans, including current portion of long-term bank loans 643.6 680.2 (36.6 ) (5.4 )%
Bills payable 344.1 400.7 (56.6 ) (14.1 )%
Accounts payable 69.6 57.5 12.1 21.0 %
Amounts due to related parties 23.8 26.3 (2.5 ) (9.5 )%
Income taxes payable, including noncurrent portion 107.8 109.7 (1.9 ) (1.7 )%
Accrued expenses and other current liabilities 111.9 86.6 25.3 29.2 %
Long-term bank loans, excluding current portion 727.3 322.5 404.8 125.5 %
Deferred income 106.9 92.6 13.3 14.3 %
Operating lease liabilities, non-current 14.1 14.4 (0.3 ) (2.1 )%
Noncontrolling interests 50.0 - 50.0 N/A
Stockholders’ equity 767.2 836.4 (69.2 ) (8.3 )%
Stockholders’ equity as of December 31, 2020 decreased by 8.3% as compared to that of December 31, 2019 primarily due to the increase of impairment loss of US$165.3 million for Dubai Xinda, offset by the increase of US$50.0 million noncontrolling interests and the decrease of US$37.9 million accumulated other comprehensive loss. Cash and cash equivalents and restricted cash decreased by 19.7% or US$45.1 million primarily due to the increase of US$45.1 million operating activity cash outflows. The aggregate short-term and long-term bank loans increased by 53.4% due to using the line of credits to support operating and investing activities in HLJ Xinda Group and Sichuan Xinda. We define the manageable debt level as the sum of aggregate short-term and long-term loans over total assets.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary uses of cash have been to finance working capital needs and capital expenditures for new production lines. We have financed these requirements primarily from cash generated from operations, bank borrowings and the issuance of our convertible preferred stocks and debt financings. As of December 31, 2020 and December 31, 2019, we had US$183.3 million and US$228.4 million, respectively, in the total amount of cash and cash equivalents and restricted cash, which were primarily deposited with banks in China (including Hong Kong and Macau SAR), UAE and U.S. As of December 31, 2020, we had US$643.6 million outstanding short-term bank loans (including the current portion of long-term bank loans), including US$481.0 million unsecured loan, US$36.5 million guaranteed loan, US$15.3 million loans secured by restricted cash, US$12.3 million loans secured by inventories, and US$98.5 million long-term bank loans that due in one year. We also had US$727.3 million long-term loans (excluding the current portion), including US$585.9 million loans secured by an undated security cheque, and US$239.9 million unsecured loans. Short-term and long-term bank loans in total bear a weighted average interest rate of 5.6% per annum and do not contain any renewal terms. We have historically been able to make repayments when due.
However, as disclosed in Note 3 in the Company’s financial statements, for the year ended December 31, 2020, the Company had a significant loss of US$181.7 million primarily due to an impairment of long-lived assets of US$165.3 million for Dubai Xinda and had recurring operating cash outflows of US$3.0 million. These conditions raised substantial doubts about the Company’s ability to continue as a going concern.
A summary of lines of credit and the remaining line of credit as of December 31, 2020 is as below:
(in millions) December 31, 2020
Lines of Credit, Obtained Remaining
Available
Name of Financial Institution Date of Approval RMB USD USD
China Construction Bank January 20, 2020 714.1 109.4 89.8
Longjiang Bank February 28, 2020 1,250.0 191.6 -
Industrial and Commercial Bank of China May 9, 2020 1,335.0 204.6 -
Agricultural Bank of China February 24, 2020 250.0 38.3 -
Postal Savings Bank of China April 30, 2020 100.0 15.3 -
Sichuan Tianfu Bank March 12, 2020 522.0 80.0 -
Nanchong Rural Commercial Bank July 17, 2020 238.4 36.5 1.8
Bank of Harbin August 10, 2020 70.0 10.7 -
Harbin Rural Commercial Bank April 30, 2020 330.0 50.6 -
Jianxin Financial Asset Investment Co., Ltd. November 21, 2019 390.0 59.8 -
Subtotal (credit term<=1 year)
5,199.5 796.8 91.6
Agricultural Bank of China December 7, 2020 400.0 61.3 -
Longjiang Bank June 17, 2019 4,172.2 639.4 -
National Bank of Umm Al Qaiwain December 26, 2018 14.2 2.2 -
Industrial and Commercial Bank of China February 17, 2020 1,029.8 157.8 15.4
Nanchong Shuntou Development Group Co., Ltd January 6, 2017 350.0 53.6 -
Subtotal (credit term>1 year)
5,966.2 914.3 15.4
Total
11,165.7 1,711.1 107.0
As of December 31, 2020, we have contractual obligations to pay (i) lease commitments in the amount of US$26.3 million, including US$1.4 million due in one year; (ii) equipment acquisition and facility construction in the amount of US$250.2 million; (iii) long-term bank loan in the amount of US$727.3 million (including principals and interests).
We expect that we will be able to meet our needs to fund operations, capital expenditures and other commitments in the next 12 months primarily with our cash and cash equivalents, operating cash flows and bank borrowings and contribution from the principal shareholder.
We may, however, require additional cash resources due to changes in business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could result in additional dilution to stockholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financial covenants that would restrict operations. Financing may not be available in amounts or on terms acceptable to us, or at all.
The following table sets forth a summary of our cash flows for years ended December 31, 2020 and 2019.
For the Years Ended December 31,
(in millions US$)
Net cash (used in) provided by operating activities (3.0 ) (189.9 )
Net cash used in investing activities (431.1 ) (130.1 )
Net cash provided by financing activities 387.3 185.9
Effect of foreign currency exchange rate changes on cash, cash equivalents and restricted cash 1.7 (4.5 )
Net (decrease) increase in cash, cash equivalents, and restricted cash (45.1 ) (138.6 )
Cash, cash equivalents, and restricted cash at the beginning of period 228.4 367.0
Cash, cash equivalents, and restricted cash at the end of period 183.3 228.4
Operating Activities
Net cash used in operating activities was US$3.0 million for the year ended December 31, 2020, as compared to US$189.9 million used in operating activities for the year ended December 31, 2019, primarily due to (i) the decrease of approximately US$255.5 million in cash collected from our customers, (ii) the increase of US$6.5 million interest payments, partially offset by (vi) the decrease of approximately US$335.1 million in cash operating payments, including raw material purchases, rental and personnel costs, (v) the increase of US$9.1 million received from government grant, and (vi) the decrease of US$4.8 million in income tax payments, and (vii) the decrease of US$5.5 million interest payment.
Investing Activities
Net cash used in the investing activities was US$431.1 million for the year ended December 31, 2020 compared to US$130.1 million for the same period of last year, mainly due to (i) the increase of US$51.3 million purchase of property, plant and equipment, (ii) the increase of US$231.2 million of loans to third parties, (iii) the decrease of US$7.3 million proceeds from sales of a subsidiary, (iv) the decrease of $15.7 million refund of prepayment for property and equipment purchase, and partially offset by (v) the increase of US$3.8 million Government grant related to the project construction and (vi) the increase of US$0.7 million proceeds from disposal of property, plant and equipment.
Financing Activities
Net cash provided by financing activities was US$387.3 million for the year ended December 31, 2020, as compared to US$185.9 million for the same period of last year, primarily as a result of the decrease of (i) the proceeds of US$1,033.8 million from bank borrowings, (ii) the increase of US$47.2 million capital injection from noncontrolling interests, (iii) the decrease of US$64.7 million repayment of interest-free advances from related parties, (iv) the decrease of US$4.4 million payments of issuance cost of bank borrowings, (v) the decrease of US$0.1 million payments of issuance costs for syndicated loans, partially offset by (vi) the decrease of US$1,038.6 million proceeds from bank borrowings, (vii) the decrease of US$77.2 million proceeds of interest-free advances from related parties and (viii) the increase of US$0.1 million payments of issuance costs for syndicated loans.
As of December 31, 2020, our cash, cash equivalents and restricted cash balance was US$183.3 million, compared to US$228.4 million at December 31, 2019.
Days Sales Outstanding (“DSO”) has increased from 72 days for the year ended December 31, 2019 to 89 days for the year ended December 31, 2020 as a result of cash collection of overdue accounts receivable from customers in 2020.
It takes shorter to collect from our customers. We believe that our DSO is still below industry average. Industry Standard Customer and Supplier Payment Terms (days) as below:
Year ended December 31, 2020 Year ended December 31, 2019
Customer Payment Term Payment in advance/up to 90 days Payment in advance/up to 90 days
Purchase Credit Term Payment in advance/up to 90 days Payment in advance/up to 90 days
Inventory turnover days increased from 185 days for the year ended December 31, 2019 to 188 days for the year ended December 31, 2020.
Turnover days of payables have decreased from 21 days for the year ended December 31, 2019 to 20 days for the year ended December 31, 2020.
Based on past performance and current expectations, we believe that our current cash and cash equivalents and anticipated cash flows from operating activities will satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations for at least the next 12 months.
The majority of the Company’s revenues and expenses were denominated primarily in Renminbi (“RMB”), the currency of the People’s Republic of China. There is no assurance that exchange rates between the RMB and the U.S. Dollar will remain stable. Inflation has not had a material impact on the Company’s business.
COMMITMENTS AND CONTINGENCIES
Contractual Obligations
Our contractual obligations as of December 31, 2020 are as follows:
Contractual obligations Total Payment due
less than 1 year - 3 years 3-5 years More than
5 years
Commitments for purchase of equipment and construction in progress (1)(2)(3)(4) 250,191,790 250,191,790
-
- -
Long-term bank loans 727,293,417 316,483,751 247,409,851 163,399,815 -
Operating leases 26,360,622 1,418,719 2,854,011 2,908,476 19,179,416
Total 1,003,845,829
568,094,260
250,263,862
166,308,291
19,179,416
(1) Sichuan plant construction and equipment purchase
In September 2016, Sichuan Xinda Enterprise Group Co., Ltd. (“Sichuan Xinda”) entered into equipment purchase contracts with Harbin Hailezi Science and Technology Co., Ltd. (“Hailezi”) for a consideration of RMB17.0 million (equivalent to US$2.6 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, 2020, Sichuan Xinda has a remaining commitment of RMB3.0 million (equivalent to US$0.5 million).
On October 20, 2016, Sichuan Xinda entered into an equipment purchase agreement purchase contract with Peaceful Treasure Limited (“Peaceful”) for a total consideration of RMB89.5 million (equivalent to US$13.7 million) to purchase certain production and testing equipment. As of December 31, 2020, the Company has a commitment of RMB55.6 million (equivalent to US$8.5 million).
On November 15, 2016 and February 20, 2017, Sichuan Xinda entered into decoration contracts with Beijin Construction to perform indoor and outdoor decoration work for a consideration of RMB240.5 million (equivalent to US$36.9 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$3.6 million). As of December 31, 2020, the Company has a remaining commitment of RMB144.7 million (equivalent to US$22.2 million).
Pursuant to the Nanchong Project mentioned in Note 9 In connection with the Nanchong Project, on June 21, 2018, Sichuan Xinda entered into equipment purchase contracts with Hailezi to purchase production equipment for a consideration of RMB1,910.5 million (equivalent to US$292.8 million). Pursuant to the contract with Hailezi, Sichuan Xinda has a remaining commitment of RMB198.5 million (equivalent to US$30.4 million) as of December 31, 2020.
(2) Heilongjiang plant construction and equipment purchase
In connection with the HLJ project mentioned in Note 9, on June 25, 2018 and July 12, 2018, HLJ Xinda Group entered into two equipment purchase contracts with Hailezi to purchase production equipment, which will be used for 300,000 metrics tons of biological based composite material, located in Harbin, for a consideration of RMB1,906.8 million (equivalent to US$282.2 million) and On November 14, 2019, HLJ Xinda Group entered into a supplementary agreement with Hailezi, which decreased the original contract amount to RMB1,780.9 million (equivalent to US$272.9 million) with delivery schedule amended to December 31, 2021. Pursuant to the contracts with Hailezi, HLJ Xinda Group has a remaining commitment of RMB1,214.1 million (equivalent to US$186.1 million) as of December 31, 2020
(3) Dubai equipment purchase
On May 31, 2019, Dubai Xinda entered into an equipment purchase contract with Peaceful for a total consideration of US$18.8 million. As of December 31, 2020, the Company has a remaining commitment of US$1.8 million.
(4) 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$0.9 million) to decorate office building. As of December 3, 2020, the Company has a remaining commitment of RMB3.7 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, 2020, the Company has a remaining commitment of RMB0.6 million (equivalent to US$0.1 million).
Off-Balance Sheet Arrangements
On April 15, 2019, Sichuan Xinda provided guarantee to Shanghai Sales obtaining a one-year loan of RMB800.0 million (equivalent to US$122.6 million) from Longjiang Bank, Harbin Branch with an annual interest rate of 6.09% from April 15, 2019 to April 14, 2020. If Shanghai Sales does not repay the above loan when due, Sichuan Xinda shall be obliged to repay the RMB800.0 million loan. The loan was repaid by Shanghai Sales in April 2020.
On December 3, 2019, HLJ Xinda Group provided guarantee to Macromolecule Composite Materials obtaining a one-year loan of RMB612.2 million (equivalent to US$93.8 million) from Longjiang Bank, Harbin Branch with an annual interest rate of 6.25%. If Macromolecule Composite Materials does not repay the above loan when due, HLJ Xinda Group shall be obliged to repay the RMB612.2 million loan. The loan was repaid early by to Macromolecule Composite Materials in April 2020.
On September 28, 2020, Sichuan Xinda provided guarantee to Macromolecule Composite Materials obtaining a three-month loan of RMB700.0 million (equivalent to US$107.3 million) from Longjiang Bank, Harbin Branch with an annual interest rate of 5.95%. If Macromolecule Composite Materials does not repay the above loan when due, Sichuan Xinda shall be obliged to repay the RMB700.0 million loan.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to interest rate risk primarily with respect to our short-term and long-term bank loans. Although the interest rates of our short-term and long-term bank loans, which are based on the prime rates set by People’s Bank of China, are fixed during the terms of the loans, increase in interest rates will increase the cost of new borrowings and our interest expense.
A hypothetical 1.0% increase in the annual interest rate for all of our credit facilities under which we had outstanding borrowings as of December 31, 2020 would decrease income before income taxes by approximately US$17.2 million for the year ended December 31, 2020. Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.
Foreign Currency Exchange Rates
Majority of our revenues are collected in and our expenses are paid in RMB. We face foreign currency rate translation risks when our results are translated to U.S. dollars.
The RMB was relatively stable against the U.S. dollar at approximately 8.28 RMB to the US$1.00 until July 21, 2005 when the Chinese currency regime was altered resulting in a 2.1% revaluation versus the U.S. dollar. From July 21, 2005 to June 30, 2010, the RMB exchange rate was no longer linked to the U.S. dollar but rather to a basket of currencies with a 0.3% margin of fluctuation resulting in further appreciation of the RMB against the U.S. dollar. Since June 30, 2009, the exchange rate had remained stable at 6.8307 RMB to 1.00 U.S. dollar until June 30, 2010 when the People’s Bank of China allowed a further appreciation of the RMB by 0.43% to 6.798 RMB to 1.00 U.S. dollar. The People’s Bank of China allowed the RMB and U.S. dollar exchange rate to fluctuate within 1% on April 16, 2012 and 2% on March 17, 2014 respectively. On December 31, 2020, the RMB traded at 6.5249 RMB to 1.00 U.S. dollar.
There remains international pressure on the Chinese government to adopt an even more flexible currency policy and the exchange rate of RMB is subject to changes in China’s government policies which are, to a large extent, dependent on the economic and political development both internationally and locally and the demand and supply of RMB in the domestic market. There can be no assurance that such exchange rate will continue to remain stable in the future amongst the volatility of currencies, globalization and the unstable economies in recent years. Since (i) our revenues and net income of our PRC operating entities are denominated in RMB, and (ii) the payment of dividends, if any, will be in U.S. dollars, any decrease in the value of RMB against U.S. dollars would adversely affect the value of the shares and dividends payable to shareholders, in U.S. dollars.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary financial information of the Company and its subsidiaries, including the notes thereto, together with the report of our independent registered public accounting firm, are presented beginning on page of this report and are incorporated into this Item 8.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on our assessment, the Chief Executive Officer and the Chief Financial Officer determined that, as of December 31, 2020, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, because of the material weakness in our internal control over financial reporting described below, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended.
Notwithstanding management’s assessment that our internal control over financial reporting was ineffective as of December 31, 2020 due to the material weakness described below under Management’s Annual Report on Internal Control Over Financial Reporting, we believe that the consolidated financial statements included in this Annual Report on Form 10-K correctly present our financial condition, results of operations and cash flows for the fiscal years covered thereby in all material respects.
(a) Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over the Company’s financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States and includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on a framework established in Internal Control- Integrated Framework (2013) issued by the committee of Sponsoring Organizations of the Treadway Commission (COSO) as of December 31, 2020. Based on such evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, has concluded that the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) as of December 31, 2020 was ineffective. This assessment identified one material weakness related to lack of sufficient accounting and financial reporting personnel to formalize certain key controls over the financial reporting process and report financial reporting information based on generally accepted accounting principles and SEC reporting requirements.
Our internal control over financial reporting is not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report.
Changes in Internal Control Over Financial Reporting
During the twelve months ended December 31, 20120 our efforts to improve our internal controls over financial reporting included (1) hiring additional qualified financial staff; (2) adopting procedures to evaluate and assess performance of directors, officers and employees of the Company, (3) internal meetings, discussions, trainings and seminars periodically to review and improve our internal control procedures. We plan to improve on the above-referenced weakness by the end of the fiscal year ending December 31, 2020.
Other than the foregoing, there has been no other changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our fourth fiscal quarter ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The following table sets forth the names and ages of our current directors and executive officers, their age, their principal offices and positions and the date each such person became a director or executive officer. Executive officers are appointed at the discretion of the Board of Directors. Directors are elected annually by our stockholders at our annual meeting of stockholders. Each director holds his office until his successor is elected and qualified or his earlier resignation or removal.
Our current directors and executive officers are as follows:
Name(4)
Age
Title
Date of Initial Appointment
Jie Han
Chief Executive Officer and
Chairman of the Board of Directors
December 31, 2008
Taylor Zhang
Chief Financial Officer and Director
May 14, 2009
Linyuan Zhai (1)(2)(3)
Independent Director
May 14, 2009
Huiyi Chen (1)(3)
Independent Director
January 2, 2020
Guanbao Huang (1)(2)
Independent Director
January 2, 2020
Qingwei Ma
Chief Operating Officer and
Chief Technology Officer
December 31, 2008
Feng Li(1)(2)(3)
Independent Director
September 9, 2021
(1) Serves as a member of the Audit Committee.
(2) Serves as a member of the Compensation Committee.
(3) Serves as a member of the Nominating Committee. Mr. Huiyi Chen resigned on September 9, 2021 and replaced by Mr. Feng Li.
(4) On March 6, 2019, Mr. Joseph Chow resigned from the Board of Directors, and Mr. Xin Li was appointed by the Board as a director of the Company. On April 23, 2019, Mr. Jun Xu resigned from the Board of Directors, and Ryan Law was appointed by the stockholder holding all of the issued and outstanding series D junior convertible preferred stock to serve as a director of the Company. As a result of the mandatory conversion (by reason of the terms of the Series D Preferred Stock) on September 26, 2019, the term of office of Series D Director nominees on the Board, namely Homer Sun and Ryan Law, was automatically terminated. On January 1, 2020, Xin Li, Feng Li, and Qingwei Ma resigned from the Board of Directors. Huiyi Chen and Guanbao Huang were appointed by the Board as directors of the Company, effective from January 2, 2020.
Jie Han. Mr. Han co-founded Harbin Xinda Macromolecule Material Co., Ltd. (“Harbin Xinda”), the Company’s wholly owned subsidiary, has been employed by Harbin Xinda since 2004. In January 2008, Mr. Han was appointed Chairman and Chief Executive Officer of Harbin Xinda. Prior to organizing Xinda High-Tech Co., Ltd (“Xinda High-Tech”), which was founded in 2003, Mr. Han had been associated with the Harbin Xinda Nylon Factory, which he founded in 1985. With 31 years of experiences in the industry, Mr. Han is an expert in the management and financial aspects of the manufacture and distribution of modified plastic products. Mr. Han contributes to our Board of Directors strong leadership and vision for the development of our Company. Based on the above-described expertise, background and experience, we believe that Mr. Han is qualified to serve as a member of our Board.
Mr. Han currently serves as an executive director of China Plastic Processing Industry Association and is also a director of the Heilongjiang Industry and Commerce Association. In addition, Mr. Han serves as a deputy to the Harbin Municipal People’s Congress. Mr. Han received a business management degree from the Heilongjiang Provincial Party School.
Taylor Zhang. Mr. Zhang has over 15 years of experience in finance and operation in a broad range of industries. Mr. Zhang has been employed as a Chief Financial Officer of the Company since May 2009. From May 2008 to March 2009, Mr. Zhang served as Chief Financial Officer of Advanced Battery Technologies, Inc. From 2007 to 2008, he served as the Executive Vice President of Finance of China Natural Gas, Inc. From 2005 to 2007, Mr. Zhang worked as a research analyst in New York Private Equity. From 2000 to 2002, he was employed as Finance Manager by Datong Thermal Power Limited. Mr. Zhang contributes to our Board of Directors with extensive experience in finance and operations. He holds an MBA from University of Florida and a Bachelor’s Degree in mechanical and electronic engineering from Beijing Technology and Business University. Based on the above-described expertise, background and experience, we believe that Mr. Zhang is qualified to serve as a member of our Board.
Linyuan Zhai. Mr. Zhai worked for China FAW Group Corporation for 37 years and has contributed to our Board of Directors with extensive experience in terms of technology, production, and business management. He is one of the pioneers and outstanding contributors of FAW Group’s success. Since 2000, Mr. Zhai has served as general manager of FAW Sihuan Products Co., Ltd., an automobile manufacturing company. From August 1998 to December 2000, Mr. Zhai was the manufacturing section chief at FAW Sihuan Head Office. From August 1992 to August 1998, Mr. Zhai was the factory manager at FAW Sihuan Auto Warm Air Blower Factory. In 2000, as deputy general manager, Mr. Zhai successfully led the initial public offering of Four Ring Company, a subsidiary of FAW Group, a leader in the vehicle manufacturing industry based in China. Mr. Zhai received his business management degree from Changchun University. Based on the above-described expertise, background and experience, we believe that Mr. Zhai is qualified to serve as a member of our Board.
Huiyi Chen. Mr. Chen has extensive experience in financial management in the banking industry. He has held supervisory and management positions in the Industrial and Commercial Bank of China Limited, the People’s Bank of China, and the Bank of Communication, respectively. From 2000 to 2016, Mr. Chen served as a credit officer and vice president of the Heilongjiang Branch of the Bank of Communication. He was the president of the Harbin Branch of the Bank of Communication from 1999 to 2000. From 1986 to 1999, Mr. Chen worked in the People’s Bank of China and served as the deputy director for the Heilongjiang Branch and the Shenyang Branch, the vice president for the Qiqihar Center Branch, and the vice president and the president of the Fuyu County Branch. From 1984 to 1986, Mr. Chen served as the vice president for the Industrial and Commercial Bank of China’s Fuyu County Branch. Mr. Chen graduated from Heilongjiang Banking Professional School in 1983. Based on the above-described expertise, background and experience, we believe that Mr. Chen is qualified to serve as a member of our Board . Mr. Chen resigned from the Board and audit committee on September 9, 2021 and Mr. Feng Li was appointed as Mr. Chen’s replacement.
Feng Li. Mr. Li has been a director of the Company since November 14, 2012 Mr. Li is a deputy director at Plastics Processing R&D Center of Beijing Research Institute of the Chemical Industry, as well as a member of the Science and Technology Committee of Beijing Research Institute of the Chemical Industry. He has and contributes to our Board of Directors substantial experience in technology, production, and business management in the chemical industry. Under his leadership in various senior roles including Vice General Manager, Director, and Chief Engineer, responsible for project design, investment, management and finance, Mr. Li successfully launched and operated several joint ventures between Beijing Chemical Industry Research Institute (Group), a subsidiary of China Petroleum & Chemical Corp (Sinopec), the largest refiner in Asia, and Jiangnan Mould & Plastic Co. Ltd., Shenzhen Petrochemical and Plastics Co. Ltd., Suzhou Anli Chemical Co., Ltd., and others. Mr. Li is also on the committee of Venture Capital for Innovative Small-Medium size Enterprises under the Ministry of Science and Technology of the People’s Republic of China. Mr. Li received a B.S. in polymer material from Nanjing Institute of Chemical Technology and a Master’s Degree from Beijing University of Chemical Technology. Mr. Li also attended MBA program at China Sinopec Management Institute of Business Administration and studied as an exchange scholar at the University of Technology in Sydney, Australia. Based on the above-described expertise, background and experience, we believe that Mr. Li is qualified to serve as a member of our Board.
Guanbao Huang. Mr. Huang has been engaged in the teaching and research of polymer materials for more than twenty years. His research areas include polyester synthesis and modification, resin-based fiber reinforced materials, and cellulose processing. Mr. Huang has published more than 50 academic papers and co-authored or translated three books, and has been the associate professor of Beijing Institute of Fashion Technology since 1994. Mr. Huang’s project on “High Viscosity Polyester Chip” won the third prize of National Science and Technology Progress Award in 1993, and his project on “Disperse Dyes Atmospheric Pressure Dyeable Copolyether Ester (EDDP-1) and Fiber” won the second prize of Beijing Municipal Science and Technology Progress in 1999. In 1997, Mr. Huang received the first prize of the first Hong Kong Sang Ma Foundation Science and Technology Award. He currently served as the deputy chairman of Beijing Chaoyang District Committee, China Democratic National Construction Association, and the director for Liyang Huajing Polyester Green Catalyst Co., Ltd. and the director of Shaanxi Zhongxin Biodegradable Materials Co., Ltd. Based on the above-described expertise, background and experience, we believe that Mr. Huang is qualified to serve as a member of our Board.
Qingwei Ma. Mr. Ma has been employed as General Manager of Harbin Xinda since it was founded in 2004. In 2008, he was promoted to Chief Operating Officer and appointed to the Board of Directors. Prior to joining Harbin Xinda, Mr. Ma was employed for six years by Harbin Xinda Nylon Factory as Manager of Quality Assurance, then as Manager of Research and Development, and finally as Production Manager. In 1997, Mr. Ma was awarded a bachelor’s degree by the Northern China Technology University, where he specialized in the chemical engineering of high polymers. Mr. Ma has 18 years of experiences in the modified plastics industry and contributes to our Board of Directors with such extensive experience. He also published two articles in China’s key journals in the areas of modified plastic industry. In 2001, Mr. Ma was selected as “Harbin Quality Work Advanced Enterprise and Advanced Worker” and in 2004, he was awarded the Heilongjiang First Professional Manager Qualification Certificate. One of his inventions, “compound nano modified materials dedicated to the automobile bumper,” won the “Science and Technology Progress Awards” issued by Harbin Municipality. Based on the above-described expertise, background and experience, we believe that Mr. Ma is qualified to serve as chief operating officer and chief technology officer.
Family Relationships
There are no family relationships between or among any of the executive officers or directors of the Company.
Board Leadership Structure
The Board of Directors believes that Jie Han’s service as both Chairman of the Board of Directors and Chief Executive Officer is in the best interest of the Company and its stockholders. Mr. Han possesses detailed and in-depth knowledge of the issues, opportunities, and challenges facing the Company, and is thus best positioned to develop agendas that ensure that the time and attention of our Board of Directors are focused on the most critical matters. His combined role enables decisive leadership, ensures clear accountability, and enhances the Company’s ability to communicate its message and strategy clearly and consistently to the Company’s stockholders, employees and customers.
Each of the directors other than Jie Han and Taylor Zhang is independent (see “Director Independence” below), and the Board of Directors believes that the independent directors provide effective oversight of management. The Board of Directors has not designated a lead director. Our independent directors call and plan their executive sessions collaboratively and, between Board of Directors meetings, communicate with management and one another directly. In the circumstances, the directors believe that formalizing in a lead director functions in which they all participate might detract from rather than enhance performance of their responsibilities as directors.
Director Qualifications
We seek directors with established strong professional reputations and experience in areas relevant to the strategy and operations of our businesses. We also seek directors who possess the qualities of integrity and candor, who have strong analytical skills and who are willing to engage management and each other in a constructive and collaborative fashion, in addition to the ability and commitment to devote significant time and energy to service on the Board of Directors and its committees. We believe that all of our directors meet the foregoing qualifications.
The Nominating Committee and the Board of Directors believe that the leadership skills and other experiences of the members of its Board of Directors, as described “Item 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE - Directors and Executive Officers”, provide the Company with a range of perspectives and judgment necessary to guide our strategies and monitor their execution.
Board of Directors Practices
Our business and affairs are managed under the direction of our Board of Directors. The primary responsibilities of our Board of Directors are to provide oversight, strategic guidance, counseling and direction to our management. It is our expectation that the Board of Directors will meet regularly on a quarterly basis and additionally as required.
Board of Directors’ Role in Risk Oversight
The Board of Directors as a whole has responsibility for risk oversight, with reviews of certain areas being conducted by the relevant Board of Directors committees. These committees then provide reports to the full Board of Directors. The oversight responsibility of the Board of Directors and its committees is enabled by management reporting processes that are designed to provide visibility to the Board of Directors about the identification, assessment, and management of critical risks. These areas of focus include strategic, operational, financial and reporting, succession and compensation, compliance, and other risks. The Board of Directors and its committees oversee risks associated with their respective areas of responsibility, as summarized below.
Meetings of the Board of Directors
The Board of Directors held eight meetings during 2019. No director attended fewer than 75% of the meetings of the Board of Directors. No director attended less than 75% of any meeting of a committee of which the director was a member in fiscal year 2019.
Involvement in Certain Legal Proceedings
None of our directors and officers has been involved in any of the legal proceedings specified in Item 401(f) of Regulation S-K in the past 10 years.
Committees of the Board of Directors
Our Board of Directors has an Audit Committee, a Nominating Committee, and a Compensation Committee. Our Board of Directors has determined that Linyuan Zhai, Feng Li and Guanbao Huang, the members of these committees, are “independent” under the current independence standards of NASDAQ Marketplace Rule 5605(a)(2) and meet the criteria for independence set forth in Rule 10A-3(b)(1) under the Exchange Act. Our Board of Directors has also determined that these persons have no material relationships with us - either directly or as a partner, stockholder or officer of any entity - which could be inconsistent with a finding of their independence as members of our Board of Directors.
Audit Committee
The Audit Committee was established on May 26, 2009. The Audit Committee operates under a written charter. The Audit Committee Charter can be found on our website at www.cxdc.net and can be made available in print free of charge to any shareholder who requests it.
The Audit Committee’s charter states that the responsibilities of the Audit Committee shall include, among other things:
● reviewing the Audit Committee’s charter, annual report to stockholders and reports submitted to the SEC;
● appointing the Company’s independent auditors, confirming and reviewing their independence, and approving their fees;
● reviewing the independent auditors’ performance;
● discussing with the independent auditor and management the independent auditor’s judgment about the quality, not just the acceptability, of the Company’s accounting principles;
● following an audit, reviewing significant difficulties encountered during the audit; and
● reviewing significant disagreements among management and the independent auditors in the preparation of the Company’s financial statements.
In addition, the Audit Committee reviews and approves all transactions with affiliates, related parties, directors and executive officers.
The Audit Committee held four meetings in 2020. The members of the Audit Committee during 2019 were Feng Li (Appointed on September 9, 2021 ), Linyuan Zhai, Joseph Chow (resigned on March 6, 2019) and Xin Li (appointed on March 6, 2019 and resigned on January 1, 2020). Mr. Li served as the Chairman of the Audit Committee since September 9, 2021Following Mr. Chow’s resignation, Mr. Xin Li served as the Chairman of the Audit Committee from March 6, 2019 till his resignation on January 1, 2020, and Mr. Huiyi Chen had served as the Chairman of the Audit Committee since January 2, 2020 until September 9, 2021, on which Mr. Feng Li was appointed as the Chairman of the Audit Committee. Currently, our Audit Committee consists of Feng Li, Linyuan Zhai and Guanbao Huang. Each of the above-listed Audit Committee members were or are considered “independent” under the current independence standards of NASDAQ Marketplace Rule 5605(a)(2) and meet the criteria for independence set forth in Rule 10A-3(b)(1) of the Exchange Act, as determined by the Board of Directors.
Our Board of Directors has determined that we have at least one audit committee financial expert, as defined in the Exchange Act, serving on our Audit Committee. Joseph Chow (resigned on March 6, 2019) and Xin Li (appointed on March 6, 2019 and resigned on January 1, 2020) were the “audit committee financial expert” and were independent members of our Board of Directors during the year ended December 31, 2019. Since January 2, 2020, Huiyi Chen has been determined by the Board as the “audit committee financial expert” and is an independent member of our Board of Directors.
AUDIT COMMITTEE REPORT
The Audit Committee has reviewed and discussed our consolidated financial statements for the fiscal year ended December 31, 2020, including significant accounting policies applied by the Company in its consolidated financial statements, as well as alternative treatments with management and the Company’s independent registered public accounting firm. The Committee has discussed with the independent registered public accounting firm all matters required by the standards of the Public Company Accounting Oversight Board (the “PCAOB”), including those described in Auditing Standard No. 1301, Communications with Audit Committees.
In addition, the Committee has received the letter from the independent registered public accounting firm required by the applicable PCAOB requirements concerning auditor independence, and the Committee has discussed with the independent registered public accounting firm their independence from the Company and its management. The Committee has also considered whether the independent registered public accounting firm’s provision of non-audit services to the Company could affect the accountant’s independence. The Committee has concluded that the independent registered public accounting firm is independent from the Company and its management. The Committee has discussed with the Company’s independent registered public accounting firm the overall scope and plans for its audit.
Based on the Audit Committee’s review of the matters noted above and its discussions with our independent registered public accounting firm and our management, the Audit Committee recommended to the Board of Directors that the financial statements be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Respectfully submitted by members of the Audit Committee:
Huiyi Chen, Chairman, from January 2, 2020 to September 9, 2021
Linyuan Zhai
Guanbao Huang, from January 2, 2020
Feng Li, From September 9, 2021
Nominating Committee
The Nominating Committee was established on May 26, 2009. The purpose of the Nominating Committee is to assist the Board of Directors in identifying qualified individuals to become members of the Board of Directors, in making recommendations to the Board of Directors as to the independence of each director, in monitoring significant developments in the law and practice of corporate governance and of the duties and responsibilities of directors of public companies, and in leading the Board of Directors in any annual performance self-evaluation, including establishing criteria to be used in connection with such evaluation. The Nominating Committee held four meetings during 2020.
The members of the Nominating Committee during 2019 were Joseph Chow (resigned on March 6, 2019), Xin Li (appointed on March 6, 2019 and resigned on January 1, 2020), Feng Li (resigned on January 1, 2020) and Linyuan Zhai. Mr. Zhai served as the Chairman of the Nominating Committee. Currently, our Nominating Committee consists of Linyuan Zhai and Huiyi Chen. Each of the above-listed Nominating Committee members is considered “independent” under the current independence standards of NASDAQ Marketplace Rule 5605(a)(2) and meets the criteria for independence set forth in Rule 10A-3(b)(1) of the Exchange Act, as determined by the Board of Directors.
The Nominating Committee operates under a written charter. The Nominating Committee Charter can be found on our website at www.chinaxd.net and can be made available in print free of charge to any shareholder who requests it.
On September 28, 2011 the Company filed a Certificate of Designation with the Secretary of State of the State of Nevada (amended on January 24, 2014 and filed with the Secretary of State of the State of Nevada on January 27, 2014), which provides the holders of the Series D Preferred Stock with the right to elect up to two (2) directors to the Company’s Board of Directors on the terms and conditions set forth therein. On September 26, 2019, the Company amended the Certificate of Designation as a result of the mandatory conversion (by reason of the terms of the Series D Preferred Stock), and the term of office of Series D Director nominees on the Board, namely Homer Sun and Ryan Law, was automatically terminated. There have been no other changes to the procedures by which the stockholders of the Company may recommend nominees to the Board of Directors since the filing of the Company’s Definitive Proxy Statement on November 19, 2009 for its Annual Meeting of Stockholders, which was held on December 1, 2009. The Nominating Committee will consider director candidates recommended by any reasonable source, including current Board of Directors members, stockholders, professional search firms or other persons. The directors will not evaluate candidates differently based on who has made the recommendation. The Board of Directors does not have a formal policy on Board of Directors candidate qualifications. The Board of Directors may consider those factors it deems appropriate in evaluating director nominees made either by the Board of Directors or stockholders, including judgment, skill, strength of character, experience with businesses and organizations comparable in size or scope to the Company, experience and skill relative to other Board of Directors members, and specialized knowledge or experience in business or financial matters as would make such nominee an asset to the Board of Directors and may, under certain circumstances, be required to be “independent,” as such term is defined in the NASDAQ Marketplace Rules and applicable SEC regulations. Depending upon the current needs of the Board of Directors, certain factors may be weighed more or less heavily. In considering candidates for the Board of Directors, the directors evaluate the entirety of each candidate’s credentials and do not have any specific minimum qualifications that must be met.
Security holders wishing to submit the name of a person as a potential nominee to the Board of Directors must send the name, address, and a brief (no more than 500 words) biographical description of such potential nominee to the Nominating Committee at the following address: Nominating Committee of the Board of Directors, c/o China XD Plastics Company Limited, 13620 38th Avenue, Suite 3A-1, Room 105, Flushing, New York 11354. Potential director nominees will be evaluated by personal interview, such interview to be conducted by one or more members of the Nominating Committee, and/or any other method the Nominating Committee deems appropriate, which may, but need not, include a questionnaire. The Nominating Committee may solicit or receive information concerning potential nominees from any source it deems appropriate. The Nominating Committee need not engage in an evaluation process unless (i) there is a vacancy on the Board of Directors, (ii) a director is not standing for re-election, or (iii) the Nominating Committee does not intend to recommend the nomination of a sitting director for re-election. A potential director nominee recommended by a security holder will not be evaluated any differently than any other potential nominee. Although it has not done so in the past, the Nominating Committee may retain search firms to assist in identifying suitable director candidates.
Compensation Committee
The Compensation Committee was established on May 26, 2009. The members of the Compensation Committee during 2019 were Feng Li (resigned on January 1, 2020), Homer Sun (until September 30, 2019) and Linyuan Zhai. Mr. Li served as the Chairman of the Compensation Committee. Currently, our Compensation Committee consists of Linyuan Zhai and Guanbao Huang. Each of these members was or is considered “independent” under the current independence standards of NASDAQ Marketplace Rule 5605(a)(2) and meets the criteria for independence set forth in Rule 10A-3(b)(1) of the Exchange Act, as determined by the Board of Directors.
The Compensation Committee operates under a written charter. The Compensation Committee Charter can be found on our website at www.chinaxd.net and can be made available in print free of charge to any shareholder who requests it.
The Compensation Committee discharges the Board of Directors’ responsibilities relating to compensation of the Company’s executive officers and administers our 2009 Stock Option/Stock Issuance Plan, supplemented by “Stock Award Grant Supplemental Provisions” in July 2013 (collectively, the “2009 Plan”) and the 2020 Stock Option/Stock Issuance Plan (the “2020 Plan”, which was adopted on January 10, 2020). The Compensation Committee reviews and recommends to the Board of Directors the compensation and benefits of all of the Company’s officers and reviews general policy matters relating to compensation and benefits of the Company’s employees. The Committee has overall responsibility for approving and evaluating the executive officer compensation plans, policies and programs of the Company. The Compensation Committee held two meetings during 2020.
The Compensation Committee is composed solely of independent, non-employee directors. None of the members of the Compensation Committee have any relationships requiring disclosure by the Registrant under Item 404 of SEC Regulation S-K. None of the Company’s executive officers served as a director or a member of a compensation committee (or other committee serving an equivalent function) of any other entity, an executive officer of which served as a director of the Company or member of the Compensation Committee during 2020.
Special Committee
In May 2020, our board of directors formed a Special Committee of independent directors consisting of Linyuan Zhai, Huiyi Chen and Mr. Guanbao Huang, with Huiyi Chen serving as chairperson of the Special Committee, in response to a preliminary non-binding proposal letter from the Buyer Group notifying our board of directors of their interest in acquiring all of our outstanding shares of common stock not already beneficially owned by them in a proposed going-private transaction. See “Item 1. Business-Our History.”
Code of Business Conduct
We have adopted a code of business conduct that applies to our directors, officers and employees. A written copy of the code can be found on our website at www.chinaxd.net and can be made available in print to any shareholder upon request at no charge by writing to our Secretary, c/o China XD Plastics Company Limited, 13620 38th Avenue, Suite 3A-1, Room 105, Flushing, New York 11354. Our code of business conduct is intended to be a codification of the business and ethical principles which guide us, and to deter wrongdoing, to promote honest and ethical conduct, to avoid conflicts of interest, and to foster full, fair, accurate, timely and understandable disclosures, compliance with applicable governmental laws, rules and regulations, the prompt internal reporting of violations and accountability for adherence to the code.
Executive Sessions
Under NASDAQ Marketplace Rule 5605(b)(2), our independent directors are required to hold regular executive sessions. The chairperson of the executive session will rotate at each session so that each non-management director shall have an opportunity to serve as chairperson. Interested parties may communicate directly with the presiding director of the executive session or with the non-management directors as a group, by directing such written communication to Linyuan Zhai at c/o China XD Plastics Company Limited, 13620 38th Avenue, Suite 3A-1, Room 105, Flushing, New York 11354.
Process for Sending Communications to the Board of Directors
The Board of Directors maintains a process for stockholders to communicate with the Board of Directors. Stockholders wishing to communicate with the Board of Directors or any individual director may send an email through our website at www.chinaxd.net or mail a communication addressed to the Secretary of the Company, c/o China XD Plastics Company Limited, 13620 38th Avenue, Suite 3A-1, Room 105, Flushing, New York 11354. Any such communication must state the number of shares of common stock beneficially owned by the stockholder making the communication. All of such communications will be forwarded to the full Board of Directors or to any individual director or directors to whom communication is directed unless the communication is clearly of a marketing nature or is inappropriate, in which case we have the authority to discard the communication or take appropriate legal action regarding the communication.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act of 1934, requires the executive officers and directors of the Company and every person who is directly or indirectly the beneficial owner of more than 10% of any class of security of the Company to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Such persons also are required to furnish our company with copies of all Section 16(a) forms they file. Based solely on our review of copies of such forms received by us, we believe that during the fiscal year 2019 all of the executive officers and directors of the Company and every person who is directly or indirectly the beneficial owner of more than 10% of any class of security of the Company complied with the filing requirements of Section 16(a) of the Exchange Act.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The following is a discussion and analysis of our named executive officer compensation program for the year ended December 31, 2020 detailing what we pay to our named executive officers and how our compensation objectives and policies help achieve our business objectives.
Overview of Compensation Program
Our Compensation Committee has responsibility for establishing, implementing and monitoring adherence to our compensation philosophy and objectives. Our Compensation Committee is responsible for ensuring that the total compensation paid to our executive officers is fair, reasonable and competitive. Our compensation decisions with respect to executive officer salaries, annual incentives and long-term incentive opportunities are influenced by (a) the officer’s level of responsibility and function; (b) our overall financial performance and, in some cases, the officer’s business unit; and (c) our assessment of the competitive marketplace, including other peer companies.
Compensation Philosophy and Objectives
All of our compensation programs, including our executive compensation programs, are designed to attract and retain key employees in the highly competitive modified plastic marketplace in China. Our executive compensation programs are also designed to motivate our executives to achieve and reward them for superior performance in attaining corporate and individual objectives that create stockholder value. Different programs, including both cash and stock-based compensation, are geared towards short-term and long-term performance, respectively, with the goal of aligning employee interests with stockholder interests and increasing stockholder value over the long term. Executive compensation programs impact all employees by setting general levels of compensation and creating an environment of goals, reward and expectations. Finally, we endeavor to ensure that our compensation programs are viewed as fundamentally fair to our stockholders.
During the year ended December 31, 2020, the compensation packages for our executives mainly included cash compensation. No bonuses or stock-based compensation were granted as performances were short of annual goal of revenues and net income due to the weakening economic environment and industry declining trend.
Compensation Programs and Process
Elements of Compensation
Elements of compensation for our named executive officers include base salary, non-equity incentive compensation, equity incentive awards, pension plan, health, disability and life insurance and certain other perquisites. We use salary as the base amount necessary to match our competitors for executive talent. We utilize cash incentive payments to reward performance achievements over the course of a one-year horizon and we use equity incentive awards to reward long-term performance, with excellent corporate performance and extended tenure producing potentially significant value for our named executive officers. We believe that this combination of programs provides an appropriate mix of fixed and variable pay, balances short-term operational performance with long-term stockholder value, and encourages executive recruitment and retention.
During the year ended December 31, 2020 and 2019, the elements of compensation for our named executive officers include just cash salary and a discretionary bonuses.
Compensation Process
Our Compensation Committee is responsible for establishing, implementing and monitoring the compensation of our named executive officers. When making compensation decisions, our Compensation Committee analyzes the dollar amount of each component of the executive officer’s compensation, including current cash compensation (base salary and non-equity plan incentive compensation), long-term equity incentive program compensation, and any other compensation.
Except as set forth below, our Compensation Committee has not adopted any formal or informal policies or guidelines for allocating compensation between long-term and currently paid out compensation, or between cash and non-cash compensation. However, our philosophy is to pay our executive officers competitive levels of compensation that best reflect their individual responsibilities and contributions to us.
We choose to pay each element of compensation in order to attract and retain necessary talent, reward annual performance (on an individual, business unit and enterprise-wide basis) and provide incentives for achieving long-term strategic goals as well as short-term objectives. The amount of each element of compensation is determined by our Compensation Committee in consultation with our CEO with respect to the other named executive officers, and, with respect to the CEO, by our Compensation Committee. Compensation decisions for all named executive officers, on semi-annual and annual evaluations take into account of the following factors:
● Performance against corporate and individual objectives for the previous year;
● Value of skills and capabilities to support our long-term performance;
● Performance of general management responsibilities; and
● Contribution as a member of our executive management team.
Base Salary
Base salary levels for our named executive officers are intended to compensate executives competitively within the modified plastic marketplace in China. Base salary rewards core competence in an executive role relative to an officer’s skills, experience and contributions to our business. Base salaries are determined on an individual basis by evaluating each executive officer’s scope of responsibility, past performance, and data on prevailing compensation levels in an appropriate market comparison group. There is no adjustment of base salary for our named executive officers given that each of them is under a five-year term agreement with the Company.
In 2020, pursuant to the Company’s 2010 Executive Compensation Program which sets forth cash and stock compensation of the Company’s executives and directors, including the Company’s named executive officers, the executive officers are entitled to receive compensation as follows:
Compensation for Mr. Jie Han, the Company’s Chief Executive Officer: For fiscal year ended December 31, 2020, Mr. Han is entitled to a base salary of $143,238 (RMB 988,000 ) per month from January to December. In addition, Mr. Han did not receive a discretionary bonus as determined by the Compensation Committee of the Board of Directors at the end of the fiscal year due to the company-wide performance was short of annual goal of revenues and net income due to the weakening economic environment and auto industry declining trend.
Compensation for Mr. Taylor Zhang, the Company’s Chief Financial Officer: For fiscal year ended December 31, 2020, Mr. Zhang is entitled to a annual base salary of US$ 258,216 and received $68,339 cash compensation . On August 28, 2020, Mr. Zhang received 500,000 vested shares, under our 2020 Stock Option/Stock Issuance Plan. The shares shall vest upon issuance. In addition, Mr. Zhang did not receive a discretionary bonus as determined by the Compensation Committee of the Board of Directors at the end of the fiscal year due to the company-wide performance was short of annual goal of revenues and net income due to the weakening economic environment and auto industry declining trend.
Compensation for Mr. Qingwei Ma, the Company’s Chief Operating Officer: For fiscal year ended December 31, 2020, Mr. Ma is entitled to a base salary of US$81,623 (RMB 563,000 ) per month from January to December. On August 7, 2015, Mr. Ma received 20,440 non-vested shares, under our 2009 Stock Option/Stock Issuance Plan. The restricted shares shall vest on the third anniversary of the grant date. In addition, Mr. Ma did not receive a discretionary bonus as determined by the Compensation Committee of the Board of Directors at the end of the fiscal year due to the company-wide performance was short of annual goal of revenues and net income due to the weakening economic environment and auto industry declining trend.
Stock Option / Stock Issuance Plan
On May 26, 2009, we adopted our 2009 Stock Option / Stock Issuance Plan, supplemented by “Stock Award Grant Supplemental Provisions” in July 2013 (the “2009 Plan”), under which 7,800,000 shares of common stock are reserved for issuance. The 2009 Plan provides for the grant of the following types of incentive awards: (i) stock options and (ii) stock issuances. Each of these is referred to individually as an “Award.” Those who are eligible for Awards under the 2009 Plan include employees, directors and independent contractors who provide services to the Company and/or its affiliates.
The Board of Directors has reserved 7,800,000 shares of the common stock for issuance under the 2009 Plan. As of December 31, 2019, 4,349,376 stock awards and 1,170,500 options have been granted under the 2009 Plan. The 2009 Plan was terminated in accordance with its terms on May 26, 2019, after which we are not allowed to grant equity awards thereunder.
Stock Option / Stock Issuance Plan
On January 10, 2020, we adopted our 2020 Stock Option / Stock Issuance Plan (the “2020 Plan”), under which 13,000,000 shares of common stock are reserved for issuance. The 2020 Plan provides for the grant of the following types of incentive awards: (i) stock options and (ii) stock issuances. Each of these is referred to individually as an “Award.” Those who are eligible for Awards under the 2020 Plan include employees, directors and independent contractors who provide services to the Company and/or its affiliates.
Number of Shares of Common Stock Available Under the 2020 Plan
The Board of Directors has reserved 13,000,000 shares of the common stock for issuance under the 2020 Plan. Currently, approximately 45 employees and directors are eligible to participate in the 2020 Plan.
If the Company declares a dividend or other distribution or engages in a recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of shares or other securities of the Company, or other change in the corporate structure of the Company affecting the Company’s common stock, the Board of Directors will adjust the number and class of shares that may be delivered under the 2020 Plan, the number, class, and price of shares covered by each outstanding Award, and the numerical per-person limits on Awards.
Shares of common stock subject to outstanding options shall be available for subsequent issuance under the 2020 Plan to the extent (1) the options expire or terminate for any reason prior to exercise in full or (2) the options are cancelled in accordance with the 2020 Plan. Unvested shares issued under the 2020 Plan and subsequently repurchased by the Company, at a price per share not greater than the option exercise or direct issue price paid per share, pursuant to the Company’s repurchase rights under the 2020 Plan shall be added back to the number of shares of common stock reserved for issuance under the 2020 Plan and shall accordingly be available for reissuance through one or more subsequent option grants or direct stock issuances under the 2020 Plan.
Administration of the 2020 Plan
The Board of Directors administers the 2020 Plan. However, any or all administrative functions otherwise exercisable by the Board of Directors may be delegated to a committee of the Board of Directors (the “Committee”). Members of the Committee serve for such period of time as the Board of Directors may determine and shall be subject to removal by the Board of Directors at any time. The Board of Directors may also at any time terminate the functions of the Committee and reassume all powers and authority previously delegated to the Committee. Subject to the terms of the 2020 Plan, the Board of Directors has the sole discretion to select the employees, independent contractors, and directors who will receive Awards, determine the terms and conditions of Awards, and to interpret the provisions of the 2020 Plan and outstanding Awards.
Options
The Board of Directors is able to grant nonqualified stock options and incentive stock options under the 2020 Plan. The Board of Directors determines the number of shares subject to each option. Incentive options may only be granted to employees. The aggregate fair market value of the shares of common stock for which one or more options granted to any employee under the 2020 Plan may for the first time become exercisable as incentive options during one calendar year may not exceed $100,000.
The Board of Directors determines the exercise price of options granted under the 2020 Plan, provided the exercise price (i) of incentive stock options must be at least equal to the fair market value of the common stock on the date of grant and (ii) of non-statutory stock options must be at least equal to 85% of the fair market value of the common stock on the date of grant. In addition, the exercise price of an incentive stock option granted to any participant who owns more than 10% of the total voting power of all classes of the Company’s outstanding stock must be at least 110% of the fair market value of the common stock on the grant date.
The term of an option may not exceed ten years, except incentive stock options granted to an employee who is a 10% stockholder may not exceed five years.
Unless otherwise determined by the Board of Directors, after a termination of service with the Company, a participant will be able to exercise the vested portion of his or her option for (i) 90 days following his or her termination (or within such other period of time as may be specified by the Company, but in any event no later than the date of expiration of the option term) for reasons other than death, disability or misconduct, (ii) one year following his or her termination (or within such other period of time as may be specified by the Company, but in any event no later than the date of expiration of the option term) due to death or disability. Unless otherwise determined by the Board of Directors, if a participant ceases to be employed by the Company on the account of (i) termination by the Company for defined misconduct, any option held by the participant shall (A) terminate on the date on which the participant ceases to be employed by, or provide service to, the Company, or the date on which such option would otherwise expire, if earlier.
The administrator of the 2020 Plan shall have the discretion to grant options that are exercisable for unvested shares. Should the optionee’s service cease while the shares issued upon the early exercise of the optionee’s option are still unvested, the Company shall have the right to repurchase any or all of the unvested shares in accordance with the 2020 Plan.
Stock Issuance
The Board of Directors may transfer shares of Company stock to a Plan participant pursuant to a stock issuance, either through the immediate purchase of such shares or as a bonus for services rendered the Company. Stock issuances will vest in accordance with the terms and conditions established by the Board of Directors in its sole discretion. The Board of Directors will determine the number of shares granted pursuant to an Award of stock. Vesting conditions on stock issuances granted to non-officer employees may not be more restrictive than 20% per year vesting, with the initial vesting to occur no later than one year after the shares are issued.
The Board of Directors shall fix the purchase price per share of stock issuance. Shares issued to 10% stockholders must not have a purchase price per share less than 100% of the fair market value per share of common stock on the date of issuance. Shares issued to other Plan participants shall not be less than 85% of the fair market value per share of common stock on the date of issuance.
The participant shall have full stockholder rights with respect to any shares of common stock issued to the participant under the 2020 Plan, whether or not the participant’s interest in those shares is vested. Accordingly, the participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares.
Should the participant cease to remain in service while holding one or more unvested shares issued under the 2020 Plan or should the performance objectives not be attained with respect to one or more such unvested shares, then the Company has the right to repurchase the unvested shares at the lower of (a) the purchase price paid per share or by the participants (b) the fair market value per share on the date participant’s service ceased or the performance objective was not attained. The terms upon which such repurchase right shall be exercisable shall be established by the Board of Directors and set forth in the document evidencing such repurchase right.
The Board of Directors may in its discretion waive the surrender and cancellation of one or more unvested shares (or other assets attributable thereto) which would otherwise occur upon the non-completion of the vesting schedule applicable to those shares. Such waiver shall result in the immediate vesting of the participant’s interest in the shares of common stock as to which the waiver applies. Such waiver may be effectuated at any time, whether before or after the Participant’s service ceases or he or she attains the applicable performance objectives.
Transferability of Awards
Except as described below, Stock Option Awards granted under the 2020 Plan are generally not transferable, and all rights with respect to a Stock Option Award granted to a participant generally will be available during a participant’s lifetime only to the participant. A participant may not transfer those rights except by will or by the laws of descent and distribution. Participant may transfer non-statutory stock options to family members, or one or more trusts or other entities for the benefit of or owned by family members or to a transferee’s former spouse, consistent with applicable securities laws, provided that the participant receives no consideration for the transfer of an option and the transferred option shall continue to be subject to the same terms and conditions as were applicable to the option immediately before the transfer.
The Company has the right of first refusal with respect to any proposed disposition by an optionee or a participant of any shares of common stock issued under the 2020 Plan. Such right of first refusal shall be exercisable and lapse in accordance with the terms established by the Board of Directors and set forth in the document evidencing such right.
Change of Control
In the event of a change of control, each outstanding option which is at the time outstanding will automatically become fully vested and exercisable and be released from any restrictions on transfer and repurchase or forfeiture rights, and the restrictions and conditions on all outstanding stock issuances will lapse immediately prior to the specified effective date of such change of control, for all of the shares at the time represented by such option or stock issuance. An outstanding option shall not fully vest and be exercisable and released from such limitations and a stock issuance will not be released from such restrictions and restrictions on stock issuances if and to the extent: (i) such option or stock issuance is, in connection with the change in control, either to be assumed by the successor corporation or parent thereof or to be replaced with a comparable option, stock appreciation right or stock issuance with respect to shares of the capital stock of the successor corporation or parent thereof, or (ii) such option or stock issuance is to be replaced with a cash incentive program of the successor corporation or parent thereof which preserves the compensation element of such option or stock issuance existing at the time of the change in control and provides for subsequent payout in accordance with the same vesting schedule applicable to such option or stock issuance. The determination of option or stock issuance comparability under clause (i) above shall be made by the Board of Directors.
Effective upon the consummation of the change of control, all outstanding options or stock issuances under the 2020 Plan will terminate and cease to remain outstanding, except to the extent assumed by the successor company or its parent.
Amendment and Termination of the 2020 Plan
The Board of Directors has the authority to amend, alter, suspend or terminate the 2020 Plan, except that shareholder approval will be required for any amendment to the 2020 Plan to the extent required by any applicable laws. No amendment, alteration, suspension or termination of the 2020 Plan will impair the rights of any participant, unless mutually agreed otherwise between the participant and the Board of Directors and which agreement must be in writing and signed by the participant and the Company. The 2020 Plan will terminate on January 10, 2030, unless the Board of Directors terminates it earlier or it is extended by the Company with the approval of the shareholders.
Although there may be adverse accounting consequences to doing so, options may be granted and shares may be issued under the 2020 Plan which are in each instance in excess of the number of shares of common stock then available for issuance under the 2020 Plan, provided any excess shares actually issued under those programs shall be held in escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of common stock available for issuance under the 2020 Plan. If such stockholder approval is not obtained within twelve months after the date the first such excess grants or issuances are made, then (1) any unexercised options granted on the basis of such excess shares shall terminate and (2) the Company shall promptly refund to the optionees and the participants the exercise or purchase price paid for any excess shares issued under the 2020 Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this filing on Form 10-K with management. Based on the Compensation Committee’s review of and the discussions with management with respect to the Compensation Discussion and Analysis, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 for filing with the SEC.
Respectfully submitted by the members of the Compensation Committee:
Guanbao Huang, Chairman, from January 2, 2020
Linyuan Zhai
The following table is a summary of the compensation paid to our executive officers for the two years ended December 31, 2020 and 2019.
SUMMARY COMPENSATION TABLE
Name and Principal Position Year Salary ($) Bonus ($) Total
($)
Jie Han, 143,238
522,049
CEO 522,049
522,049
Qingwei Ma, 81,623
139,213
COO/CTO 139,213
139,213
Taylor Zhang, 68,339
68,339
CFO 68,321
68,321
The Company granted no plan-based awards to our named executive officers for the year ended December 31, 2020. None of our named executive officers held outstanding equity awards as of December 31, 2020.
Options Exercised and Stock Vested
There was no stock option exercised by or vested for each of our named executive officers during two years ended December 31, 2020 and 2019.
Employment Agreements
All of our named executive officers have entered into employment agreements with the Company.
On December 31, 2011, Jie Han and China XD’s subsidiary, HLJ Xinda Group, entered into an employment agreement and an employment memorandum, pursuant to which Mr. Han received a monthly salary of RMB250,000 (approximately US$35,836). Also, Mr. Han will receive an annual bonus of RMB 3,000,000 (approximately US$430,003), which amount is subject to the Company’s achievement of the corresponding year’s performance goals. The calculation of the annual performance-based salary is based on a method set forth in HLJ Xinda Group’s compensation management policy. On January 1, 2017, Jie Han and HLJ Xinda Group extended the term of employment for additional five years beginning on January 1, 2017, pursuant to which Mr. Han was entitled to a monthly salary of RMB300,000 (equivalent to US$43,003). The employer and employee may reach consent and terminate Mr. Han’s employment with HLJ Xinda Group, and HLJ Xinda Group may have the right to unilaterally terminate Mr. Han’s employment prior to the expiration of the employment term under certain circumstances, with a one-month prior notice.
On December 31, 2011, Taylor Zhang and HLJ Xinda Group entered into an employment agreement and an employment memorandum, pursuant to which Mr. Zhang received a monthly salary of US$18,200 and awards of shares of China XD’s common stock and options to purchase shares of China XD’s common stock, as determined by the Compensation Committee of the Board of Directors. The term of employment is five years beginning on January 1, 2012, and extended on January 1, 2017 for another 5 years. The employer and employee may reach consent to terminate Mr. Zhang’s employment with HLJ Xinda Group at any time and HLJ Xinda Group has the right to unilaterally terminate Mr. Zhang’s employment prior to the expiration of the employment term under certain circumstances, with a one-month prior notice.
On December 31, 2011, Qingwei Ma and HLJ Xinda Group entered into an employment agreement and an employment memorandum, pursuant to which Mr. Ma received a monthly salary of RMB168,000 (approximately US$24,082). Also, Mr. Ma will receive a performance based bonus of RMB2,016,000 (approximately US$288,983), which amounts are subject to the Company’s achievement of the corresponding year’s performance goals. The calculation of the annual performance-based salary is based on a method set forth in the HLJ Xinda Group’s compensation management policy. On January 1, 2017, Qingwei Ma and HLJ Xinda Group extended the term of employment for additional five years beginning on January 1, 2017, pursuant to which Mr. Ma was entitled to a monthly salary of RMB175,000 (equivalent to US$25,085). The employer and employee may reach consent to terminate Mr. Ma’s employment with HLJ Xinda Group at any time and HLJ Xinda Group has the right to unilaterally terminate Mr. Ma’s employment prior to the expiration of the employment term under certain circumstances, with a one-month prior notice.
Potential Payments Upon Termination or Change in Control
We may be required to make severance payments upon termination of employment pursuant to the laws of the PRC and other applicable jurisdictions. Under the PRC Labor Contract Law, if an employment is terminated prior to the expiration of the employment term, unless the termination resulted from such employee’s certain fault, the employer shall pay a severance compensation for termination at an amount that is usually the average monthly salary of the 12-month period prior to termination multiplied by the number of years for which the terminated employee worked at the Company, subject to certain adjustment and restrictions if such employee’s base salary is sufficiently higher than that of the average in the municipal region. In addition, in the event that the employer terminates the employment in violation of the PRC Labor Contract Law, the applicable severance compensation for termination should be two times the aforementioned amount. Furthermore, certain non-compete payment obligation may also apply upon termination of an employment, which payment amount pursuant to the Company’s standard non-compete agreement, if so entered into with the said employee, is one third the monthly base salary prior to the termination of such employee per month for 24 months following the termination.
Director Compensation
On December 30, 2009, our Board of Directors approved 2010 Executive Compensation Program, which sets forth cash and stock compensation of the Company’s executives and directors. Under the 2010 Executive Compensation Program, the Company’s employee directors receive no additional compensation for their services to the Company as directors, including the Chairman of the Board of Directors. In addition, for fiscal year 2015, all non-employee directors who reside in China received an annual cash compensation of RMB60,000 (approximately $8,601) after the first 18 months of continuous directorship and RMB36,000 (approximately $5,160) during the initial 18 months directorship. In addition, each non-employee director other than the two directors appointed by the Series D Preferred Stockholder (until September 26, 2019) is entitled to an annual stock award equal to a number of shares of the Company’s common stock valued at $50,000 for those who reside outside of China, RMB50,000 (approximately $7,167) for Mr. Linyuan Zhai, who resides in China, based on the market value of the common stock at the time of the stock award and such stock award shall vest six months after the grant date. Mr. Feng Li will be eligible for an annual stock award equal to a number of shares of the Company’s common stock valued at RMB50,000 (approximately $7,167) after 18 months of continuous directorship. The Company also accrued and recorded the stock award for the service rendered during the year ended December 31, 2020 as share base compensation expense. The Company has repurchase rights on the unvested shares of the stock award. The Company did not issue this stock award the service rendered during the year ended December 31, 2020 and 2019, respectively.
Pursuant to the service agreement with Joseph Chow (resigned on March 6, 2019) dated November 16, 2017, Mr. Chow is entitled to receive an annual cash compensation of US$60,000 (US$5,000 per month) and without stock award.
Pursuant to the service agreement with Xin Li (appointed on March 6, 2019 and resigned on January 1, 2020) dated March 6, 2019, Mr. Li is entitled to receive an annual cash compensation of US$60,000 (US$5,000 per month) and without stock award.
Pursuant to the service agreement with Huiyi Chen (appointed on January 2, 2020) dated January 1, 2020, Mr. Chen is entitled to receive an annual cash compensation of US$60,000 (US$5,000 per month) and without stock award.
Pursuant to the service agreement with Guanbao Huang (appointed on January 2, 2020) dated January 1, 2020, Mr. Huang is entitled to receive an annual cash compensation of RMB120,000 (RMB10,000 per month) and without stock award.
The following is a summary of the compensation paid to our non-employee directors for the year ended December 31, 2020. Our employee directors do not receive compensation for their services to the Company as directors.
DIRECTOR COMPENSATION
Name (1) (2) Fees earned or paid in cash ($) Total ($)
Guanbao Huang 17,397 17,397
Huiyi Chen 60,000 60,000
Linyuan Zhai 17,397 17,397
(1) Jie Han, Taylor Zhang and Qingwei Ma are not included in this table as they are our executive officers and thus received no compensation for their services as a director. For disclosure related to the compensation of Jie Han, Taylor Zhang and Qingwei Ma as an executive officer, see the “Summary Compensation Table” above.
(2) Huiyi Chen and Tianbao Huang were appointed on January 1, 2020.
On September 9, 2021, Huiyi Chen, resigned as an independent director, Chair of the Audit Committee, and member of the Nominating Committee, resigned f
During the year ended December 31, 2020, no stock or option was awarded to the executive directors and non-employee directors. And no non-vested shares existed for executive directors and non-employee directors as of December 31, 2020.
Service Agreements
On January 1, 2020, the Company entered into a Service Agreement with Huiyi Chen. Pursuant to the terms of the Service Agreement, the Company shall pay Mr. Chen a fee of US$5,000 per month (US$60,000 annually).
On January 1, 2020, the Company entered into a Service Agreement with Guanbao Huang. Pursuant to the terms of the Service Agreement, the Company shall pay Mr. Huang a fee of RMB10,000 per month (RMB120,000 annually).
On March 6, 2019, the Company entered into a Service Agreement with Xin Li who was appointed on March 6, 2019 and resigned on January 1, 2020. Pursuant to the terms of the Service Agreement, the Company shall Mr. Li a fee of US$5,000 per month (US$60,000 annually).
On November 16, 2017, the Company entered into a Service Agreement with Joseph Chow, who was resigned on March 6, 2019. Pursuant to the terms of the Service Agreement, the Company paid Mr. Chow a fee of $5,000 per month ($60,000 annually).
On November 14, 2010, the Company entered into a Service Agreement with Linyuan Zhai. Pursuant to the terms of the Service Agreement, the Company shall (i) pay Mr. Zhai a fee of RMB5,000 per month (RMB60,000 annually); and (ii) award to Mr. Zhai under the Company’s 2009 Equity Incentive Plan and pursuant to the terms of a restricted stock award agreement RMB50,000 in restricted shares of common stock of the Company on an annual basis (the “Stock”), which shall vest in accordance with the terms of the restricted stock award agreement. The Stock shall be valued at the average closing price for the ten trading days prior to November 14, 2010, the date of the execution of the Service Agreement, and prior to each anniversary thereof. The Stock shall vest after twelve months of each year subject to Mr. Zhai’s continued directorship with the Company, pursuant to such vesting schedule set forth in the restricted stock award agreement.
On September 9, 2021, the Company entered into a Service Agreement with Feng Li. Pursuant to the terms of the Service Agreement, the Company shall (i) pay Mr. Li a fee of RMB3,000 per month (RMB36,000 annually) for 18 months, and then RMB5, 000 per month (RMB60,000 annually) starting from March 9, 2022; and (ii) award to Mr. Li under the Company’s 2020 Equity Incentive Plan and pursuant to the terms of a restricted stock award agreement RMB50,000 in restricted shares of common stock of the Company on an annual basis (the “Stock”), which shall vest in accordance with the terms of the restricted stock award agreement. The Stock shall be valued at the average closing price for the ten trading days prior to March 9, 2022, the date of the execution of the Service Agreement, and prior to each anniversary thereof. The Stock shall vest after twelve months of each year subject to Mr. Li’s continued directorship with the Company, pursuant to such vesting schedule set forth in the restricted stock award agreement.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance under Equity Compensation Plans
The Company adopted the 2009 Stock Option / Stock Issuance Plan (the “2009 Plan”) on May 26, 2009, which reserved 7,800,000 shares of common stock for issuance under the 2009 Plan. The 2009 Plan allows the Company to issue awards of stock options and stock issuances to directors, officers, employees and consultants of the Company, which may be subject to restrictions. The 2009 Plan was terminated in accordance with its terms on May 26, 2019.
The following table provides certain information with respect to the Company’s equity compensation plan in effect as of December 31, 2020.
Plan category Number of securities to be issued upon exercise of outstanding options and unvested shares (a) Weighted-average exercise price of outstanding options and unvested options (b) Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a)) (c)
Equity compensation plan approved by security holders - 2020 Stock Option / Stock Issuance Plan - - -
Total - - -
The Company adopted the 2020 Stock Option / Stock Issuance Plan (the “2020 Plan”) on January 10, 2020 under which 13,000,000 shares of common stock are reserved for issuance. On February 24, 2020, the Company’s Board of Directors approved the grant of 4,000,000 shares of common stock to certain executive officers and employees as incentive stock grant upon meeting certain performance service target.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of May 25, 2020, with respect to the beneficial ownership of the outstanding share capital of our Company by (i) any holder of more than five percent (5%) of any class of our voting securities; (ii) each of our executive officers and directors; and (iii) our directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned. We have based our calculation of the percentage of beneficial ownership on 66,948,841 shares of Common Stock outstanding and 1,000,000 shares of Series B Preferred Stock outstanding as of May 25, 2020.
Name and Address Title of Class Amount and
Nature of Beneficial
Ownership(1)
Percent of
Class
Jie Han Series B Preferred Stock 1,000,000 (2) 100.0 %
Jie Han Common Stock 34,865,054 (2) 49.4 %
Linyuan Zhai Common Stock 10,879 *
XD. Engineering Plastics Company Limited Common Stock 5,960,788 (2) 8.9 %
XD. Engineering Plastics Company Limited Series B Preferred Stock 1,000,000 (2) 100.0 %
MSPEA Modified Plastics Holding Limited Common Stock 16,000,000 (3) 23.9 %
Total Ownership of Common Stock by All Directors and Executive Officers as a Group
34,865,054 49.4 %
* Represents beneficial ownership of less than one percent (1%) of the outstanding shares of our common stock.
** Unless otherwise indicated, the address of each beneficial owner listed in the table is c/o China XD Plastics Company Limited, 13620 38th Avenue, Suite 3A-1, Room 105, Flushing, New York 11354.
# The 1,000,000 shares of Series B Preferred Stock has a voting power equivalent to 40% of the total voting power of all Common Stock of the Company. The Common Stock and Series B Preferred Stock vote together as a single class on all matters submitted to a vote of our stockholders, except as may otherwise be required by law or our constitutional documents.
(1) The amount of beneficial ownership includes the number of shares of Common Stock and/or Series B Preferred Stock, plus, in the case of each of the executive officer and directors and all officers and directors as a group, all shares issuable upon the exercise of the options held by them, which were exercisable as of May 25, 2020 or within 60 days thereafter. Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended, and the rules promulgated by the SEC, every person who has or shares the power to vote or to dispose of shares of common stock are deemed to be the “beneficial owner” of all the shares of common stock over which any such sole or shared power exists.
(2) Represents 34,865,054 shares of the Company beneficially owned by Mr. Jie Han as reported in a Schedule 13D/A filed by Mr. Jie Han and XD. Engineering Plastics Company Limited on May 11, 2020, including (i) 27,104,266 shares of Common Stock directly owned by Mr. Han and (ii) 5,960,788 shares of Common Stock and 1,000,000 shares of Series B Preferred Stock beneficially owned by Mr. Han through his 100% ownership of XD Engineering Plastics Company Limited, representing 50.1% of the share capital of Company. The 1,000,000 shares of Series B Preferred Stock has a voting power equivalent to 40% of the total voting power of all Common Stock of the Company in addition to the common stock beneficially owned by him. The address of XD. Engineering Plastics Company Limited is c/o Palm Grove House, P.O. Box 438, Road Town, Tortola, British Virgin Islands.
(3) Represents 16,000,000 shares of Common Stock beneficially owned by MSPEA Modified Plastics Holding Limited as reported in a Schedule 13D/A filed by it on October 15, 2019. The address of MSPEA Modified Plastics Holding Limited owns is c/o Walkers Corporate Services Limited, Walker House, 87 Mary Street, George Town, Grand Cayman KY1-9005, Cayman Islands.
Changes in Control
There were no arrangements, known to the Company, including any pledge by any person of securities of the Company the operation of which may at a subsequent date result in a change in control of the Company.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
Other than as described below, there have been no other transactions since January 1, 2019, or any currently proposed transaction, or series of similar transactions, to which the Company was or is to be a party, in which the amount involved exceeds $120,000 and in which any current or former director of officer of the Company, any 5% or greater shareholder of the Company or any member of the immediate family of any such persons had, or will have, a direct or indirect material interest other than as disclosed below.
(i) During the year ended December 31, 2020, the Company received RMB20.0 million (equivalent to US$2.9 million) from Mr. Jie Han, the Chairman and CEO of the Company, as interest-free advances and repaid RMB0.8 million (equivalent to US$0.1 million). As of December 31, 2020, the amounts due to Mr. Jie Han was RMB88.0 million (equivalent to US$12.5 million).
During the year ended December 31, 2019, the Company received RMB60.0 million (equivalent to US$8.8 million) from Mr. Jie Han’s son as interest-free advances. As of December 31, 2019, the amounts due to Mr. Jie Han’s son was RMB65.0 million (equivalent to US$9.3 million).
(ii) In April 2019, the Company repaid RMB30.0 million (equivalent to US$4.4 million) to the senior management employees in Sichuan Xinda. During the year ended December 31, 2019, the Company received RMB1.9 million (equivalent to US$0.3 million) from a senior management employee from HLJ Xinda Group and repaid RMB2.0 million (equivalent to US$0.3 million). As of December 31, 2019, the amounts due to the senior management employee from HLJ Xinda Group was RMB1.1 million (equivalent to US$0.2 million).
(iii) During the year ended December 31, 2019, the Company received RMB65.0 million (equivalent to US$9.4 million) from Qingwei Ma, the Chief Operating Officer of the Company, as interest-free advances to the Company, and repaid RMB57.0 million (equivalent to US$8.3 million). As of December 31, 2019, the amounts due to Mr. Qingwei Ma was RMB8.0 million (equivalent to US$1.1 million).
(iv) On December 26, 2018, Shanghai Sales set up Heilongjiang Xinda Macromolecule Composite Materials Company Limited (“Macromolecule Composite Materials”). On April 22, 2019, Shanghai Sales transferred 97.5% equity interest in Macromolecule Composite Materials to Harbin Shengtong Engineering Plastics Co. Ltd. (“Harbin Shengtong”). Mr. Xigang Chen, who was the general manager of Sichuan Xinda, is the general manager and also the principal shareholder of Harbin Shengtong.
Since Mr. Xigang Chen resigned from Sichuan Xinda on August 5, 2019, Macromolecule Composite Materials was no longer a related party of the Company.
During the period from April 22, 2019 through August 5, 2019, revenues from products sold to Macromolecule Composite Materials was US$1.0 million.
During the period from April 22, 2019 through August 5, 2019, the Company received RMB434.4 million (equivalent to US$63.5 million) of interest-free advances from Macromolecule Composite Materials and repaid RMB431.6 million (equivalent to US$63.0 million).
The related party balances are summarized as follows:
December 31,
Amounts due from a related party: US$ US$
Mr. Qingwei Ma Chief Operating Officer) 941,462 -
Amount due from Mr. Qingwei Ma was Employee advance.
December 31,
US$ US$
Amounts due to related parties:
Mr. Jie Han 13,973,332 12,499,642
Mr. Jie Han’s wife 500,000 3,137,539
Mr. Jie Han’s son - 9,317,393
Mr. Qingwei Ma ( Chief Operating Officer)
1,146,756
Mr. Xin Yang (CFO of HLJ Xinda Group) 9,198,108
Senior management employee in HLJ Xinda GroupXinda - 150,589
Total amounts due to related parties 23,671,440 26,251,919
Amounts due to related parties are interest free advances for operating expense paid on behalf of the Company.
It is our policy that we will not enter into any related party transactions unless the Audit Committee or another independent body of the Board of Directors first reviews and approves such transaction over US$120,000.
Director Independence
A majority of the directors serving on our Board of Directors must be independent directors under Rule 5605(b)(1) of the Marketplace Rules of The NASDAQ Stock Market (“NASDAQ”). The Board of Directors has a responsibility to make an affirmative determination whether a director has a material relationships with the listed company through the application of Rule 5605(a)(2) of the Marketplace Rules of NASDAQ, which provides the definition of an independent director.
The Board of Directors has determined that each of the directors, except Jie Han and Taylor Zhang, has no relationship that, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and is an “independent director” as defined in the Marketplace Rules of NASDAQ. In determining the independence of our directors, the Board of Directors has adopted independence standards that follow the criteria specified by applicable laws and regulations of the SEC and the Marketplace Rules of NASDAQ. In determining the independence of our directors, the Board of Directors considered all transactions in which the Company and any director had any interest, including those discussed under “Certain Relationships and Related Transactions” above.
Based on the application of the independence standards and the examination of all of the relevant facts and circumstances, the Board of Directors has determined that none of Lingyuan Zhai, Huiyi Chen, and Guanbao Huang had any material relationship with the Company and, thus, were independent under Rule 5605(a)(2) of the Marketplace Rules of NASDAQ. In accordance with the Marketplace Rules of NASDAQ, a majority of our Board of Directors is independent.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our independent accountants for the audit of our annual financial statements for the years ended December 31, 2019 was KPMG Huazhen LLP. On February 18, 2021, the Company engaged Friedman LLP, which was dismissed on September 17, 2021, on which BF Borgers CPA, PC was engaged. The following table shows the fees paid and to be paid by us to our independent accountants.
Audit Fees $ 2,420,304 $ 1,932,222
Audit-Related Fees - -
Tax Fees - -
Total paid to independent public audit firms $ 2,420,304 $ 1,932,222
Audit Fees
Audit fees were paid for professional services rendered for the audit of our annual financial statements and the review of our quarterly financial statements and statutory audits. We paid or accrued expenses of US$2,420,304 and US$1,932,22, related to audits of our annual financial statements, reviews of our quarterly financial statements and statutory audits for the years ended December 31, 2020 and 2019, respectively.
Audit-Related Fees
Fees for audit-related services were nil and nil, respectively, for the years ended December 31, 2020 and 2019.
Tax Fees
During the years ended December 31, 2020 and 2019, we did not pay or accrue any fees to our auditors for tax services.
Pre-Approval Policies and Procedures
The Audit Committee appoints the independent auditor each year and approves the audit, audit related and permissible non-audit services and fees proposed by the independent auditor. All services described under the caption services and fees of independent auditors were approved.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following are filed with this Annual Report:
(1) The financial statements listed on the Financial Statements Table of Contents.
(2) Not applicable.
(3) The exhibits referred to below, which include the following management contracts or compensatory plans or arrangements:
● Service Agreement effective as of November 14, 2010 between China XD Plastics Company Limited and Linyuan Zhai
● Service Agreement effective as of November 14, 2010 between China XD Plastics Company Limited and Lawrence W. Leighton
● Employment Agreement dated January 1, 2017 between Heilongjiang Xinda Enterprise Group Co., Ltd and Jie Han
● Employment Memorandum dated December 31, 2011 between Heilongjiang Xinda Enterprise Group Co., Ltd and Jie Han
● Employment Agreement dated January 1, 2017 between Heilongjiang Xinda Enterprise Group Co., Ltd and Qingwei Ma
● Employment Memorandum dated December 31, 2011 between Heilongjiang Xinda Enterprise Group Co., Ltd and Qingwei Ma
● Employment Agreement dated January 1, 2017 between Heilongjiang Xinda Enterprise Group Co., Ltd and Taylor Zhang
● Employment Memorandum dated December 31, 2011 between Heilongjiang Xinda Enterprise Group Co., Ltd and Taylor Zhang
● Employment Agreement dated January 1, 2016 between Heilongjiang Xinda Enterprise Group Co., Ltd and Kenan Gong
● Employment Memorandum dated December 31, 2011 between Heilongjiang Xinda Enterprise Group Co., Ltd and Kenan Gong
● Service Agreement dated November 14, 2012 between China XD Plastics Company Limited and Feng Li
● Service Agreement dated November 16, 2017 between China XD Plastics Company Limited and Joseph Chow
● Service Agreement dated March 6, 2019 between China XD Plastics Company Limited and Xin Li
● Service Agreement dated January 1, 2020 between China XD Plastics Company Limited and Huiyi Chen
● Service Agreement dated January 1, 2020 between China XD Plastics Company Limited and Guanbao Huang
(b) The exhibits listed on the Exhibit Index are filed as part of this Annual Report.
(c) Not applicable.