| Summary of significant accounting policies | Note 2 – Summary of
significant accounting policies (a) Basis of Presentation The accompanying consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
("U.S. GAAP"). (b) Consolidation The accompanying consolidated
financial statements include the financial statements of China XD and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated upon consolidation. (c) Use of Estimates The preparation
of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Significant items subject to such estimates and assumptions include the recoverability
of the carrying amounts of property, plant and equipment, the realizability of inventories, the useful lives of property, plant
and equipment, the collectability of accounts receivable, the fair values of stock-based compensation awards, the accruals
for tax uncertainties and other contingencies, and the discount rate used to determine the present value of the lease payments. The
current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions. (d) Foreign Currency The Company's
reporting currency is the U.S. dollar (US$). The functional currency of China XD Plastics and its subsidiaries in the United States,
BVI, Hong Kong and Dubai, UAE is the US$. The functional currency of China XD's subsidiaries in the PRC is Renminbi (RMB). Transactions
denominated in currencies other than the functional currency are translated into the functional currency at the exchange
rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies
are translated into the functional currency using the applicable exchange rates at the balance sheet date. The
resulting exchange differences are recorded in foreign currency exchange gains in the consolidated statements of
comprehensive income (loss). Assets and
liabilities of subsidiaries with functional currencies other than US$ are translated into US$ using the exchange rate on the balance
sheet date. Revenues and expenses are translated into US$ at average rates prevailing during the reporting period.
The differences resulting from such translation are recorded as a separate component of accumulated other comprehensive loss within
stockholders' equity. Since the
RMB is not a fully convertible currency, all foreign exchange transactions involving RMB must take place either through the People's
Bank of China or other institutions authorized to buy and sell foreign exchange. (e) Cash and cash equivalents,
time deposits and restricted cash Cash and cash equivalents consist
of cash on hand, cash in bank and interest-bearing certificates of deposit with an initial term of three months or less when purchased. Time deposits
represent certificates of deposit with initial terms of six or twelve months when purchased. Cash deposits
in bank that are restricted as to withdrawal or usage for up to 12 months are reported as restricted cash in the consolidated
balance sheets. Short-term
bank deposits that are pledged as collateral for bills payable relating to purchases of raw materials are reported as restricted
cash and amounted to US$151,498,873 and US$202,568,664 as of December 31, 2019 and 2018, respectively. Upon maturity and repayment
of the bills payable, which is generally within 6 months, the cash becomes available for use by the Company. Short-term
bank deposits that are related to government grant are reported as restricted cash and amounted to US$69,879 and US$1,469,935
as of December 31, 2019 and 2018, respectively. Short-term
bank deposits that are pledged as collateral for issuance of letter of guarantee are reported as restricted cash and amounted
to nil and US$70,885,301 as of December 31, 2019 and 2018, respectively. Short-term bank
deposits that are pledged for the US$135.0 million syndicated loans obtained from a consortium of banks led by the Industrial
and Commercial Bank of China (Macau) Limited are reported as restricted cash and amounted to US$58,229,047 and nil as of December
31, 2019 and 2018, respectively, for details of the syndicated loans please refer to note 9. Short-term
bank deposits that are pledged as collateral to settle US$14.9 million of short-term bank loans obtained from Postal Savings Bank
of China are reported as restricted cash and amounted to US$1,433,445 and nil as of December 31, 2019 and 2018, respectively. Short-term
bank deposits that are pledged as repayment to settle US$45.0 million of syndicated loans obtained from Standard Chartered Bank
are reported as restricted cash and amounted to nil and US$50,766,123 as of December 31, 2019 and 2018, respectively. (f) Accounts Receivable Accounts
receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts
for estimated losses resulting from the inability of its customers to make required payments. In establishing the required allowance,
management considers historical losses, the amount of accounts receivables in dispute, the accounts receivables aging and the
customers' payment patterns. Account balances are written off against the allowance after all means of collection have
been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet
credit exposure related to its customers. (g) Inventories Inventories
are stated at the lower of cost or net realizable value. Cost is determined using the weighted average cost method. Work-in-progress
and finish goods comprise direct materials (including purchasing, receiving and inspection costs), direct labor and an allocation
of related manufacturing overhead based on normal operating capacity. (h) Long-lived
Assets Property, plant and equipment Property, plant and equipment
are initially recorded at cost. Depreciation is calculated on the straight-line method over the estimated useful lives
of the assets. The estimated useful lives of property, plant and equipment are as follows:
Estimated Useful Life
Workshops and buildings 39 years
Machinery, equipment and furniture 5-10 years
Motor vehicles 5 years An appropriate
allocation of depreciation expense of property, plant and equipment attributable to manufacturing activities based on normal capacity
is capitalized as part of the cost of inventory, and expensed in cost of revenues when the inventory is sold. Costs
incurred in the construction of property, plant and equipment, including an allocation of interest expense incurred, are capitalized
and transferred into their respective asset category when the assets are ready for their intended use, at which time depreciation
commences. Ordinary maintenance and repairs are charged to expenses as incurred, while replacements and betterments are capitalized. When
items are retired or otherwise disposed of, income is charged or credited for the difference between net book value of the item
disposed and proceeds realized thereon. Land Use Rights A land use right in the PRC represents
an exclusive right to occupy, use and develop a piece of land during the contractual term of the land use right. The cost of a
land use right is usually paid in one lump sum at the date the right is granted. The prepayment usually covers the entire period
of the land use right. Prior to the adoption of ASC 842, the lump sum advance payment is capitalized and recorded as land use right
and then charged to expense on a straight-line basis over the period of the right, which is normally 50 years. Upon the adoption of ASC 842 on January
1, 2019, the Company recognized US$29.8 million of right-of-use assets, which was previously recognized as land use rights under
ASC 840. Amortization expense of land use rights
was US$638,773 for the year ended December 31, 2018, and is included in general and administrative expenses. (i) Impairment of Long-lived
Assets Long-lived
assets, such as property, plant and equipment, and land use rights, are reviewed for impairment when events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. Recoverability of a long-lived asset or asset
group to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted
future cash flows expected to be generated by the asset or asset group. If the carrying value of an asset or asset
group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount that the carrying
value exceeds the estimated fair value of the asset or asset group. Fair value is determined through various valuation
techniques including discounted cash flow models, quoted market values and third party independent appraisals, as considered necessary. Assets
to be disposed are reported at the lower of carrying amount or fair value less costs to sell, and are no longer depreciated. No impairment of long-lived assets
was recognized for any of the years presented. (j) Derivative Financial Instruments The Company
recognizes all derivative instruments as either assets or liabilities at their respective fair values. Changes in the fair value
of derivative instruments not designated for hedge accounting are recognized in earnings. (k) Revenue Recognition Effective
January 1, 2018, the Company adopted the new guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which
supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Topic 606 requires the Company to recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. The Company applies the following steps to recognize
revenues: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the
transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue
when, or as, the Company satisfies a performance obligation. Products sales The Company
recognizes revenue upon transfer of control of its products to the customers, which typically occurs upon delivery. The Company’s
main performance obligation to its customers is the delivery of products in accordance with purchase orders. Each purchase order
defines the transaction price for the products purchased under the arrangement. The Company sells its products primarily to the
distributors and to a lesser extent to the direct customers. For sales in the People’s Republic of China (“PRC”),
acceptance of delivery of the products by the distributors is evidenced by goods receipt notes signed by the distributors’
customers (or end users). The distributors accept the products at the time they are delivered to the distributors’ customers
(or end customers). Delivery acceptance is evidenced by signed goods receipt notes. The Company has no remaining obligations after
the distributors’ acceptance of the products. Under the terms of the contracts or purchase orders between the Company and
the distributors, the control of the products is transferred to the distributor upon the signing of the goods receipt notes and
the distributor has no rights to return the products (other than for defective products). For sales to the overseas customers,
delivery of the products occurs at the point in time the product is delivered to the named port of shipment, which is when the
control of the products is transferred to the customer. The selling
price, which is specified in the purchase orders, is fixed. Under the terms of the purchase orders, upon the sale of the products
to the distributors and the signing of the good receipts notes, the Company has the legal enforceable right to receive full payment
of the sales price. The distributors’ obligation to pay the Company is not dependent on the distributors selling the products
or collecting cash from their customers (or end customers). The customer is required to pay under normal sales terms. The Company’s
normal payment terms in most cases are 90 days and its sales arrangements do not have any material financing components. In addition,
the Company’s customer arrangements do not produce contract assets or liabilities that are material to its consolidated
financial statements. Incremental
costs to fulfill the Company’s customer arrangements are expensed as incurred, as the amortization period is less than one
year. The Company’s
sales are net of value added tax (“VAT”) and business tax and surcharges collected on behalf of tax authorities in
respect of product sales. VAT and business tax and surcharges collected from customers, net of VAT paid for purchases, is recorded
as a liability in the consolidated balance sheets until it is paid to the tax authorities. Outbound
freight and Handling costs: The company
accounts for product outbound freight and handling costs as fulfillment activities and present the associated costs in costs of
goods sold in the period in which it sells the product. Disaggregation
of Revenues: The company
manufactures and sells modified plastics primarily for automotive applications in China and to a lesser extent, in Dubai, United
Arab Emirates (“UAE”). The Company disaggregates revenue based on its major customer grouping as this category represents
the most appropriate depiction of how the nature, amount, and timing of revenues and cash flows are affected by economic factors.
Sales by major customer group are as follows: Distributors
Direct
customers Others
The following tables provide
sales by major customer group for years ended December 31, 2019 and 2018:
Years
Ended December 31,
2019 2018
US$ US$
Distributors 1,200,582,840 1,241,373,690
Direct customers 246,881,535 32,679,238
Others 740,451 780,354
Total 1,448,204,826 1,274,833,282 (l) Cost of Revenues Cost of
revenues represents costs of raw materials (including purchasing, receiving and inspection costs), packaging materials, labor,
utilities, depreciation and amortization of manufacturing facilities and warehouses, handling costs, outbound freight and inventory
write-down. Depreciation and amortization of manufacturing facilities and warehouses attributable to manufacturing activities
is capitalized as part of the cost of inventory, and expensed in costs of revenues when the inventory is sold. (m) Selling, General and Administrative
Expenses Selling
expenses represents primarily costs of payroll, benefits, commissions for sales representatives and advertising expenses.
General and administrative expenses represent primarily payroll and benefits costs for administrative employees, rent and operating
costs of office premises, depreciation and amortization of office facilities, and other administrative expenses. (n) Research and Development
Expense Research and development costs
are expensed as incurred. (o) Government Grants Government
grants are recognized when there is reasonable assurance that the Company will comply with the conditions attaching to them
and the grants will be received. Government grants for the purpose of giving immediate financial support to the Company with
no future related costs are recognized as other income in the Company's consolidated statements of comprehensive income
(loss). Government grants related to the acquisition of assets are recorded as deferred income on the consolidated
balance sheets when the grants become receivable, and recognized as other income in the consolidated statements of
comprehensive income (loss) on a straight-line basis over the estimated useful lives of those assets. (p) Income Taxes Income taxes are accounted for under
the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and tax operating loss and tax credit carryforwards. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which those temporary
differences are expected to be recovered or settled. The effect of a change in tax rates or tax laws on deferred
income tax assets and liabilities is recognized in the consolidated statements of comprehensive income (loss) in the period
the change in tax rates or tax laws is enacted. A valuation allowance is provided to reduce the carrying amount of deferred
income tax assets if it is considered more likely than not that some portion or all of the deferred income tax assets will
not be realized. The Company recognizes in the consolidated
financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination,
based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that
is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in
which the change in judgment occurs. The Company has elected to classify interest and penalties related to unrecognized
tax benefits, if and when required, as part of interest expense, and general and administration expenses, respectively in
the consolidated statements of comprehensive income (loss). (q) Bills Payable Bills payable
represent bills issued by financial institutions to the Company's raw material suppliers. The Company's suppliers receive payments
from the financial institutions upon maturity of the bills and the Company is obliged to repay the face value of the bills to
the financial institutions. (r) Employee Benefit
Plans Pursuant
to relevant PRC regulations, the Company is required to make contributions to various defined contribution plans organized by
municipal and provincial PRC governments. The contributions are made for each PRC employee at rate of approximately 40%
on a standard salary base as determined by local social security bureau. Contributions to the defined contribution plans are
charged to the consolidated statements of comprehensive income (loss) when the related service is provided. For the
years ended December 31, 2019 and 2018, the costs of the Company's contributions to the defined contribution plans amounted
to US$2,236,528 and US$6,451,997, respectively. For the
years ended December 31, 2019 and 2018, 52% and 51% of costs of employee benefits were recorded in general and administration
expenses, respectively, with the remaining portion of costs of employee benefits in selling expenses, research and development
expenses and cost of revenues each year. The Company
has no other obligation for the payment of employee benefits associated with these plans beyond the contributions described above. (s) Stock Based Compensation The Company
measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value
of the award and recognizes the cost over the period during which the employee is required to provide service in exchange for
the award, which generally is the vesting period. The amount of cost recognized is adjusted to reflect any expected forfeitures
prior to vesting. The Company recognizes compensation cost for an award with only service conditions that has a graded
vesting schedule on a straight-line basis over the requisite service period for the entire award, provided that the cumulative
amount of compensation cost recognized at any date at least equals the portion of the grant-date value of such award that is vested
at that date. (t) Commitments and Contingencies In the normal
course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business,
that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product and environmental
liability, and non-income tax matters. An accrual for a loss contingency is recognized when it is probable that a liability
has been incurred and the amount of loss can be reasonably estimated. (u) Earnings per Share Basic earnings
per share ("EPS") is computed by dividing net income attributable to common stockholders by the weighted average number
of common stock outstanding during the year using the two-class method. Under the two-class method, net income attributable
to common stockholders is allocated between common stock and other participating securities based on participating rights in undistributed
earnings. Nonvested shares and redeemable Series D convertible preferred stock are participating securities since the holders
of these securities participate in dividends on the same basis as common stockholders. Diluted EPS is calculated by
dividing net income attributable to common stockholders as adjusted for the effect of dilutive common stock equivalent, if any,
by the weighted average number of common stock and dilutive common stock equivalent outstanding during the year. Potential
dilutive securities are not included in the calculation of diluted earnings per share if the impact is anti-dilutive. (v) Segment Reporting The Company
uses the management approach in determining reportable operating segments. The management approach considers the internal
reporting used by the Company's chief operating decision maker for making operating decisions about the allocation of resources
of the segment and the assessment of its performance in determining the Company's reportable operating segments. Management
has determined that the Company has one operating segment, which is the modified plastics segment. (w) Fair Value Measurements The Company
utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent
possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability
in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the
following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following
levels: - Level 1 Inputs:
- Level 2 Inputs - Level 3 Inputs The level in the fair value hierarchy
within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair
value measurement in its entirety. The Company
did not have any financial assets and liabilities or nonfinancial assets and liabilities that are measured and recognized at fair
value on a recurring or nonrecurring basis as of December 31, 2019 and 2018. Management used the following methods
and assumptions to estimate the fair values of financial instruments at the balance sheet dates: - Short-term
financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, amounts due from a related
party, short-term bank loans, bills payable, accounts payable, amounts due to related parties and accrued expenses and other current
liabilities- carrying amounts approximate fair values because of the short maturity of these instruments. - Long-term
bank loans-fair value is based on the amount of future cash flows associated with each loan discounted at the Company's current
borrowing rate for similar debt instruments of comparable terms. The carrying value of the long-term bank loans approximate their
fair values as the long-term bank loans carry interest rates which approximate rates currently offered by the Company's banks
for similar debt instruments of comparable maturities. - Derivative
liabilities on foreign currency option contracts-fair values are determined using Black-Scholes model. It considers the following
significant inputs: risk-free rate, foreign exchange rate and volatility. (x) Recently Issued Accounting
Standards In February 2016, the Financial Accounting
Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASC
842"). The new guidance requires the recognition of lease assets and liabilities for operating leases with terms of more than
12 months, in addition to those currently recorded, on the Company’s consolidated balance sheets. Presentation of leases
within the consolidated statements of comprehensive income (loss) and consolidated statements of cash flows will be generally consistent
with the current lease accounting guidance. The Company has adopted this ASU on January 1, 2019 using a modified retrospective
approach. This adoption approach resulted
in a balance sheet presentation that was not be comparable to the prior period in the first year of adoption. Additionally, the
Company used the package of practical expedients that allowed the Company to not reassess: (1) whether any expired or existing
contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any
expired or existing leases. The Company also elected the hindsight practical expedient to determine the reasonably certain lease
term for existing leases. The following table summarizes the effect on the consolidated balance sheets as a result of adopting
ASC842.
December 31, Effect of January 1,
2018 Adoption 2019
US$ US$ US$
Land use rights, net 29,796,795 (29,796,795 ) —
Operating lease right-of-use assets, net — 45,872,008 45,872,008
Accrued expenses and other liabilities (126,926,898 ) 752,795 (126,174,103 )
Operating lease liabilities, current — (2,086,529 ) (2,086,529 )
Operating lease liabilities, non-current — (14,741,479 ) (14,741,479 ) In February
2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU
2018-02”). The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for
stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial
statement users. The Company has adopted the standard on January 1, 2019, and there was no material impact on its consolidated
financial statements as a result of the adoption. In June 2018,
the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting (“ASU 2018-07”). The new guidance largely aligns the accounting for share-based awards issued to employees
and nonemployees. Existing guidance for employee awards will apply to non-employee share-based transactions with limited exceptions.
The new guidance also clarifies that any share-based payment awards issued to customers should be evaluated under ASC 606, Revenue
from Contracts with Customers. The Company has adopted the standard on January 1, 2019, and there was no material impact on its
consolidated financial statements as a result of the adoption. In
June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments (“ASU 2016-13”), which replaces the current incurred loss impairment methodology with a methodology
that reflects expected credit losses for financial assets. In October 2019, the FASB issued ASU 2019-10, which amended the effective
dates that were originally required by ASU 2016-13 for certain entities. The Company determined it was eligible as a smaller reporting
company (SRC) under the SEC’s definition based on an its most recent SRC determination as of November 15, 2019 in accordance
with SEC regulations and will adopt ASU 2016-13 on January 1, 2023. In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements on fair value
measurements. The Company will adopt the standard on January 1, 2020 and does not expect the adoption of this standard to have
a material impact on its financial statements. In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU
2019-12). The new guidance simplifies the accounting for income taxes by removing certain exceptions related to the approach for
intraperiod tax allocation, the recognition of deferred tax liabilities for outside basis differences and the methodology for
calculating income taxes in an interim period. It also simplifies other aspects of accounting for income taxes. The new guidance
is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, and early adoption is
permitted. The Company is currently evaluating the impact of adopting ASU 2019-12 on its consolidated financial statements. |
