Interest expense increased $147,030 or 77% from $190,083 during the three months ended June 30, 2008 to $337,113 for the three months ended June 30, 2009. The increase in interest expense resulted from the increase in our loans, as we borrowed to fund the rapid growth in our sales.
Despite the significant increase in our costs and expenses, our net income remains stable with $4,996,391 during the three months ended June 30, 2009, compared with $5,098,287 during the three months ended June 30, 2008. We were able to maintain the same level of net income despite the increase in costs and expenses largely attributable to the significant increase in sales as a result of our increased efforts to obtain more customers as well as increased sales to existing customers.
As a result of the factors described above and a currency translation adjustment, our comprehensive income was $5,006,611 during the quarter ended June 30, 2009, compared with $5,512,874 during the quarter ended June 30, 2008.
The following table sets forth information from our statements of operations for the six months ended June 30, 2009 and 2008, in dollars:
During the six months ended June 30, 2009, we had net sales of $58,304,156, as compared with net sales of $33,477,156 during the same period in 2008, an increase of $24,827,000, or 74% due to our increased and expanded sales both in volume and of new variety of products to our existing and new customers.
Cost of Sales and Gross Margin
During the six months ended June 30, 2009, we had cost of sales of $45,879,331, as compared with cost of sales of $25,325,675 during the same period in 2008, an increase of approximately $20,553,656, or 81%, reflecting the increase in net sales. The gross profit rose to $12,424,825 for the six months ended June 30, 2009, or a 52.4% increase compared with $8,151,481 during the same period in 2008. Our gross margin decreased slightly from 24.3% during the six months ended June 30, 2008 to 21.3% during the six months ended June 30, 2009. The decrease was mainly attributed to the slight increase of percentage of lower margin products in response to increasing demand of modified plastics used by economy vehicle models in China. Such increase in demand was spurred by the sales tax cuts and government subsidies for economy vehicle models.
Operating Expenses
Our operating expenses were $2,765,269 during the six months ended June 30, 2009, compared with $814,372 during the six months ended June 30, 2008, an increase of $1,950,897 or approximately 240%. The increase in operating expenses was principally due to the increased depreciation expenses and payroll expenses and expenses incurred by our US office as well as stock based compensation expenses. Selling expenses increased from $47,795 during the six months ended June 30, 2008 to $106,243 during the same period in 2009 as we increased our efforts to obtain more customers. General and administrative expenses increased from $445,937 during the quarter ended June 30, 2008 to $2,161,053 during the quarter ended June 30, 2009, reflecting the increased salary expense, depreciation expense and other expenses pertinent to the reverse merger and listing in the US as well as stock based compensation expenses. Research and development expenses increased to $497,973 during the six months ended June 30, 2009 compared to $320,640 during the same period in 2008 reflecting our increased efforts in new product development by adding more researchers and increasing raw material usage. As a result, our operating expenses increased to $2,765,269 during the quarter ended June 30, 2009 from $814,372 during the quarter ended June 30, 2008.
Interest Expense
Interest expense increased $529,452 from $163,267 during the six months ended June 30, 2008 to $692,719 for the six months ended June 30, 2009. The increase in interest expense was resulted from the increase in our loans, as we borrowed to fund the rapid growth in our sales.
Net Income
As a result of the factors described above, we had net income of $9,013,033 during the six months ended June 30, 2009, compared with $7,192,793 during the six months ended June 30, 2008.
Comprehensive Income
As a result of the factors described above and a currency translation adjustment, our comprehensive income was $8,985,637 during the quarter ended June 30, 2009, compared with $8,003,536 during the quarter ended June 30, 2008.
Liquidity and Capital Resources
As of June 30, 2009, we had $1,466,634 in cash and cash equivalents, compared to $1,451,600 on June 30, 2008. There was a net increase in cash and cash equivalent of $15,034. The net increase in cash and cash equivalents for the period was mainly due to the cash generated from operation.
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Operations
For the six months ended June 30, 2009, cash provided by operations was $3,992,276, compared to cash used by operations of $7,618,278 for the same period in 2008. The primary reason for the change was due to the increase in net income and decrease in accounts receivable and other receivables.
Investments
Cash used in investing activities was $711,153 for the six months ended June 30, 2009 as compared to $4,879,024 for the six months ended June 30, 2008. We have invested heavily in purchases of new production equipments, which accounted for majority of the cash used in investing activities in 2008 as compared to the same period in 2009.
Financing
For the six months ended June 30, 2009, net cash used in financing activities was $5,678,139 as opposed to $13,671,615 provided by financing activities for the same period in 2008. Increase in cash used in financing activities is due to the repayment of short term bank loan and of a related party loan.
The primary sources of cash in the six months ended June 30, 2009 were from operating activities. For the six months ended June 30, 2009, we generated $3,992,276 from operating activities.
Based on past performance and current expectations, we believe our cash and cash equivalents and cash generated from operations will satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations for at least the next 12 months.
The majority of the 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. The Company does not engage in currency hedging. Inflation has not had a material impact on the Company’s business.
Off-Balance Sheet Arrangements
Neither us, nor any of our subsidiaries has any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on their financial condition or results of operations.
Critical Accounting Policies
Principles of consolidation
The consolidated financial statements of the Company include the accounts of the Company, Favor Sea, HK Plastics Engineering, Harbin Xinda and the Research Institute. All significant inter-company balances and transactions are eliminated in consolidation.
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Use of estimates
In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets and the valuation of inventories. Actual results could differ from those estimates.
Cash and cash equivalents
For purposes of the statement of cash flow, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Accounts receivable
Accounts receivables consist primarily of receivables resulting from sales of products, and are stated at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts. The allowance is calculated based upon the evaluation and the level of past due accounts and the relationship with and the economic status of the customers.
Inventory
Inventory is composed of raw materials, packing materials, work in process and finished goods. Inventory is valued at the lower of cost or market with cost determined by the weighted average method. Management periodically compares the cost of inventory with the market value and an allowance is made for writing down the inventory to its market value, if lower than cost. No allowance for inventory is considered necessary for the three months ended June 30, 2009 and 2008.
Property and equipment
Property and equipment are stated at cost. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and locations for its intended use. Depreciation is calculated using the straight-line method over the following useful lives:
| |
Buildings and improvements | 39 years |
Machinery, equipment and automobiles | 5-10 years |
Expenditures for maintenance and repairs are charged to expense as incurred. Additions, renewals and betterments are capitalized.
Advance to suppliers
Advance to suppliers represent the payments made and recorded in advance for goods and services received. The Company makes advances to raw materials purchased from certain agents. In order to maintain a long-term relationship with the vendors, the Company frequently needs to make advances from one and half month to three months ahead. The advances to suppliers were $14,514,312 as of June 30, 2009.
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Impairment of long-lived assets
Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the assets. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. No impairment loss is recorded for the six months ended June 30, 2009 and 2008.
Income taxes
The Company accounts for income tax under the provisions of SFAS No.109 “Accounting for Income Taxes”, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns. Deferred income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities. Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. There are no deferred tax amounts recognized in the six months ended June 30, 2009 and 2008.
Revenue recognition
The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exists and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue.
Research and development expenses
Research and development expenses are costs associated with developing the Company’s intellectual property. Research and development costs are expensed as incurred. The costs of equipments that are acquired or constructed for research and development activities and have alternative future uses are classified as plant and equipment and depreciated over their estimated useful lives. The research and development expense for the three months ended June 30, 2009 and 2008 was $208,818 and $252,416, respectively.
Earnings per share
The Company computes earnings per share (“EPS”) in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”), and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
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Concentration of credit risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of accounts receivable and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of its clients’ financial condition and customer payment practices to minimize collection risk on accounts receivable.
Risks and uncertainties
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
Fair value of financial instruments
The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, other receivables, accounts payable, accrued expenses, taxes payable, notes payable and other loans payable approximate fair value due to the short-term nature of these items. The carrying amounts of short-term loans from bank approximate the fair value based on the Company’s expected borrowing rate for debt with similar remaining maturities and comparable risk.
Foreign currency translation
The Company’s functional currency is the Renminbi (“RMB”). For financial reporting purposes, RMB has been translated into United States dollars (“USD”) as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive income”. Gains and losses resulting from foreign currency translations are included in accumulated other comprehensive income. There is no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.
Recent accounting pronouncements
In June 2009, the FASB issued SFAS 168, The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162. The FASB Accounting Standards Codification TM (“Codification”) will become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Adoption of SFAS 168 is not expected to have a material impact on the Company’s results of operations or financial position.
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In June 2009, the FASB issued SFAS 167, Amendments to FASB Interpretation No. 46(R), which improves financial reporting by enterprises involved with variable interest entities. SFAS 167 addresses (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities , as a result of the elimination of the qualifying special-purpose entity concept in SFAS 166 and (2) concerns about the application of certain key provisions of FIN 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. SFAS 167 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Adoption of SFAS 167 is not expected to have a material impact on the Company’s results of operations or financial position.
In May 2009, the FASB issued SFAS 165, Subsequent Events , which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. An entity should apply the requirements of SFAS 165 to interim or annual financial periods ending after June 15, 2009. Adoption of SFAS 165 did not have a material impact on the Company’s results of operations or financial position.
On April 1, 2009, the FASB approved FSP FAS 141(R)-1,Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies,which amends Statement 141(R) and eliminates the distinction between contractual and non-contractual contingencies. Under FSP FAS 141(R), an acquirer is required to recognize at fair value an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value cannot be determined, the acquirer applies the recognition criteria in SFAS No. 5,Accounting for Contingenciesand Interpretation 14, “Reasonable Estimation of the Amount of a Loss – and interpretation of FASB Statement No. 5,” to determine whether the contingency should be recognized as of the acquisition date or after it. We are currently evaluating the potential impact of adopting this statement.
On April 9, 2009, the FASB also approved FSP FAS 107-1 and APB 28-1,Interim Disclosures about Fair Value of Financial Instrumentsto require disclosures about fair value of financial instruments in interim period financial statements of publicly traded companies and in summarized financial information required by APB Opinion No. 28,Interim Financial Reporting. We are required to adopt this FSP for our interim and annual reporting periods ending after June 15, 2009. This FSP does not require disclosures for periods presented for comparative purposes at initial adoption. This FSP requires comparative disclosures only for periods ending after initial adoption. We are currently evaluating the potential impact of adopting this statement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4T. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company’s management has evaluated, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operations of the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)), as of the end of the period covered by this annual report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the evaluation of the effectiveness of our disclosure controls and procedures was completed; our disclosure controls and procedures were not effective.
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Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the three months ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
As of the date of this filing, there have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K filed on March 23, 2009. We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially affect our operations. The risks, uncertainties and other factors set forth in our Annual Report on Form 10-K may cause our actual results, performances and achievements to be materially different from those expressed or implied by our forward-looking statements. If any of these risks or events occurs, our business, financial condition or results of operations may be adversely affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Conversion of Series A Convertible Preferred Stock
On April 20, 2009, 1,000,000 shares of Series A Convertible Preferred Stock of the Company which constituted all of the outstanding shares of Series A Convertible Preferred Stock of the Company were automatically converted into 38,194,072 shares of Company’s common stock.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
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Item 6. Exhibits.
(a) Exhibits
| | |
Exhibit Number | | Description of Exhibit |
31.1 | | Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended |
| | |
31.2 | | Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended |
| | |
32.1 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer) |
| | |
32.2 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer) |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | |
| | China XD Plastics Company Limited. |
| | | |
Dated: August 12, 2009 | | By: | /s/ Jie Han |
| | |
|
| | | |
| | | Jie Han |
| | | Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
| | | |
Dated: August 12, 2009 | | By: | /s/ Taylor Zhang |
| | |
|
| | | |
| | | Taylor Zhang |
| | | Chief Financial Officer |
| | | (Principal Financial and Accounting Officer) |
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