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 inChina , and to a lesser extent, inDubai, UAE . Through our wholly-owned operating subsidiaries inChina andUAE , 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 ofDecember 31, 2020 . We are the only company certified as aNational Enterprise Technology Center in modified plastics industry inHeilongjiang 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 inChina as ofDecember 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 inChina , 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 inChina . We operate three manufacturing plants inHarbin ,Heilongjiang in the PRC. Prior toDecember 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 andTaiwan conveyer systems. InDecember 2012 , we further expanded our third production base inHarbin 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. InJuly 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 inHarbin ,Heilongjiang was downgraded to 290,000 MT. In 2019, our Harbin campus started two equipment projects inQinling Road Factory ("Qinling Road Project ") andJiangnan 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 andJiangnan Road Project was expected to be completed by the end of 2020, thus bringing the production capacity inHarbin Campus back to 390,000 MT. Also, inJuly 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 inDecember 2019 . The Company expects the gradual trial out by the end of 2022 and put into production by
the end of 2023. 91 InDecember 2013 , we broke ground on the construction of our fourth production plant inNanchong 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 ourSichuan plant with production capacity of 216,000 metric tons during the year of 2017 and an additional 10 production lines inJuly 2018 , bringing the total capacity to 259,200 metric tons. As ofDecember 31, 2020 , there is still construction ongoing on the site of ourSichuan 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 onJanuary 25, 2015 ,June 28, 2016 andSeptember 21, 2016 , respectively, fromJebel Ali Free Zone Authority ("JAFZA") inDubai, 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 ofNovember 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 inHarbin andSichuan was temporarily shut down from earlyFebruary 2020 to earlyMarch 2020 while ourDubai facilities was suspended operation from earlyFebruary 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 toApril 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 withU.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. 92
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
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. 93
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 ofDecember 31, 2020 and 2019, we had total gross deferred income tax assets ofUS$33,524,819 andUS$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 ofDecember 31, 2020 and 2019, our valuation allowance against deferred income
tax assets wasUS$33,524,819 andUS$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. 94 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 theFederal Reserve nominal rates forU.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
OnNovember 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 ofJune 15, 2020 , by and among the Company,Faith Dawn Limited , an exempted company with limited liability incorporated under the laws of theCayman Islands ("Parent"), andFaith Horizon Inc. , aNevada 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"). OnDecember 13, 2020 , the Company entered into an amendment No.1 (the "Amendment") to that certain Agreement and Plan of Merger datedJune 15, 2020 (as so amended, the "Merger Agreement") by and among the Company,Faith Dawn Limited ("Parent"), andFaith Horizon Inc. ("Merger Sub"), aNevada corporation and a wholly-owned subsidiary of Parent. The Amendment extends the Termination Date (as defined in the Merger Agreement) toFebruary 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. OnFebruary 7, 2021 , the Company entered into an amendment No.2 (the "Second Amendment") to that certain Agreement and Plan of Merger datedJune 15, 2020 , as amended onDecember 13, 2020 (as so amended, the "Merger Agreement") by and among the Company,Faith Dawn Limited ("Parent"), andFaith Horizon Inc. ("Merger Sub"), aNevada corporation and a wholly-owned subsidiary of Parent. The Second Amendment extends the Termination Date (as defined in the Merger Agreement) toMay 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. 95 OnMay 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. OnMay 12, 2021 , Parent sent a response letter, datedMay 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
For the Years Ended December 31, 2020 Change 2019 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%, orUS$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 endedDecember 31, 2020 , revenue from domestic market decreased by 5.5% orUS$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. 96
According to theChina Association of Automobile Manufacturers , automobile production and sales inChina 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 inJanuary 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 toApril 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 afterMay 2020 . We achieved sales increase by 75.7% inSouthwest China , 35.3% in East China and 7.5% inSouth China , although our sales decreased by 62.1% inNortheast China , 21.9% inCentral China and 15.2% inNorth China , for the year endedDecember 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 endedDecember 31, 2020 . (2) Overseas market
Overseas sales were nil for the year ended
TheDubai facility was temporarily shut down since late February and has not resumed its operation till the current period, which has negatively impacted operations inDubai facility. We have experienced a delay in cash collection from a major customer inUAE . As ofDecember 31, 2020 and 2019, we provided an allowance ofUS$64.8million andUS$62.8 million , respectively, for the overdue accounts receivable from the major customer inUAE , as the customer failed to make payments under the agreed extended repayment plan. The following table summarizes the breakdown of revenues by categories for the periods indicated. Revenues For the Years Ended December 31, 2020 2019 Change Change Amount % Amount % Amount % (US$ 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 )% 97 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, 2020 2019 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 inChina , (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 andGermany 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 inChina . Gross Profit and Gross Margin For the Years Ended December 31, Change (in millions, except percentage) 2020 2019 Amount % Gross Profit$ 143.7 $ 219.4 $ (75.7 ) (34.5 )% Gross Margin 11.0 % 15.1 % (4.1 )%
Gross profit was
98
General and Administrative Expenses
For the Years EndedDecember 31 , Change
(in millions, except percentage) 2020 2019 Amount
%
General and Administrative Expenses
(8.2 )% as a percentage of revenues 2.4 % 2.4 % 0.0 % General and administrative (G&A) expenses wereUS$32.5 million in 2020 compared toUS$35.4 million in 2019, representing a decrease ofUS$2.9 million . The decrease was primarily due to our approach to optimize management structure and enhancing efficiency, and partially offset share based compensation cost recognized in the year of 2020.
On a percentage basis, G&A expenses in 2020 were flat at 2.4%, compared to that of the same period of 2019.
Provision for Doubtful Accounts
For the Years Ended December 31, Change (in millions, except percentage) 2020 2019 Amount % Provision for Doubtful Accounts$ 2.4 $ 62.8 $ (60.4 )
(96.2 )% as a percentage of revenues 0.2 % 4.3 % (4.1 )%
Provision for doubtful accounts was
As ofDecember 31, 2020 , accounts receivable ofUS$2.2 million from the Company's two customers inUAE andUS$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 ofUS$2.4 million for the period endedDecember 31, 2020 . As ofDecember 31, 2019 , our mainUAE customer hadUS$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 ofUS$62.8 million for the year endedDecember 31, 2019 . Impairment of Long-Term Prepayments to Equipment and Construction Suppliers
For the Years EndedDecember 31 , Change
(in millions, except percentage) 2020 2019
Amount % Impairment of l Long-Term Prepayments to Equipment and Construction Suppliers$ 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 wasUS$21.9 million during the year endedDecember 31, 2020 compared to nil in the same period of 2019. OnOctober 20, 2016 , Sichuan Xinda entered into an equipment purchase agreement purchase contract with Peaceful for a total consideration ofRMB89.8 million (equivalent toUS$13.0 million ), and onMay 31, 2019 , Dubai Xinda entered into an equipment purchase contract with Peaceful for a total consideration ofUS$18.8 million to purchase production and testing equipment. As ofDecember 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 ofUS$21.9 million for the year endedDecember 31, 2020 . 99
Impairment of Long-Lived Assets
For the Years EndedDecember 31 , Change
(in millions, except percentage) 2020 2019 Amount
%
Impairment of Long-Lived Assets
N/A as a percentage of revenues 12.6 % - 12.6 % Impairment loss wasUS$165.3 million during the year endedDecember 31, 2020 compared to nil in the same period of 2019. TheDubai facility was temporarily shut down since late February, 2020 and has not resumed its operation till the current period, which has negatively impacted operations inDubai facility. The Company has assessed the situation of non operational and made an impairment charges ofUS$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 EndedDecember 31 , Change
(in millions, except percentage) 2020 2019 Amount
%
Research and Development Expenses
1.7 % 3.5 % (1.8 )% Research and development expenses wereUS$22.5 million in 2020 compared withUS$50.3 million in 2019, representing a decrease ofUS$27.8 million , or 55.3%. This decrease was due to (i) a decrease ofUS$14.9 million in raw materials consumption, (ii) a decrease ofUS$0.4 million in depreciation, and (iii) a decrease ofUS$0.2 million in salary and welfare for R&D personnel. As ofDecember 31, 2020 , the number of ongoing research and development projects was 347. We expect to complete and commence to realize economic benefits from approximately 25% of the projects in the near term. The majority of the projects are in the field of modified plastics in automotive applications and the rest are in advanced fields such as ships, airplanes, high-speed rail, medical devices, etc. Operating Income (loss)
Total operating loss was
Interest Income (Expenses) For the Years Ended December 31 Change (in millions, except percentage) 2020 2019 Amount % Interest Income$ 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 % 100
Net interest expense wasUS$69.5 million in 2020, compared to net interest expense ofUS$65.8 million in 2019, representing an increase of 5.6% orUS$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 endedDecember 31, 2020 and (ii) the increase of average short-term and long-term loan balance in the amount ofUS$889.7 million for the year endedDecember 31, 2020 compared toUS$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 endedDecember 31, 2019 compared to 0.65% of the same period in 2020, and (iv) the increase of average deposit balance in the amount ofUS$222.1 million for the year endedDecember 31, 2019 compared to US$ compared toUS$223.0 million for the same period in 2020.
Foreign Currency Exchange Gains (losses)
For the Years EndedDecember 31 , Change
(in millions, except percentage) 2020 2019 Amount
%
Foreign currency exchange gains (losses)
(1.0 )% 0.2 % (1.2 )%
Foreign currency exchange losses wereUS$12.6 million in 2020, compared to gains ofUS$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 EndedDecember 31 , Change
(in millions, except percentage) 2020 2019 Amount
%
Income (loss) before Income Taxes
(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
Our PRC andDubai subsidiaries hadUS$183.4 million of cash and cash equivalents and restricted cash as ofDecember 31, 2020 , which are planned to be indefinitely reinvested in PRC. The distributions from our PRC subsidiaries are subject to theU.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. 101 Net Income (loss)
As a result of the above factors, we had a net loss of
Selected Balance Sheet Data as of
December 31 ,December 31 ,
Change
(in millions, except percentage) 2020 2019
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 ofDecember 31, 2020 decreased by 8.3% as compared to that ofDecember 31, 2019 primarily due to the increase of impairment loss ofUS$165.3 million for Dubai Xinda, offset by the increase ofUS$50.0 million noncontrolling interests and the decrease ofUS$37.9 million accumulated other comprehensive loss. Cash and cash equivalents and restricted cash decreased by 19.7% orUS$45.1 million primarily due to the increase ofUS$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 inHLJ 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. 102
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 ofDecember 31, 2020 andDecember 31, 2019 , we hadUS$183.3 million andUS$228.4 million , respectively, in the total amount of cash and cash equivalents and restricted cash, which were primarily deposited with banks inChina (includingHong Kong and Macau SAR),UAE andU.S. As ofDecember 31, 2020 , we hadUS$643.6 million outstanding short-term bank loans (including the current portion of long-term bank loans), includingUS$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, andUS$98.5 million long-term bank loans that due in one year. We also hadUS$727.3 million long-term loans (excluding the current portion), includingUS$585.9 million loans secured by an undated security cheque, andUS$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 endedDecember 31, 2020 , the Company had a significant loss ofUS$181.7 million primarily due to an impairment of long-lived assets ofUS$165.3 million for Dubai Xinda and had recurring operating cash outflows ofUS$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 ofDecember 31, 2020 is as below: (in millions) December 31, 2020 Remaining Lines of Credit, Obtained 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 andCommercial 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 andCommercial Bank of China February 17, 2020 1,029.8 157.8 15.4Nanchong 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 ofDecember 31, 2020 , we have contractual obligations to pay (i) lease commitments in the amount ofUS$26.3 million , includingUS$1.4 million due in one year; (ii) equipment acquisition and facility construction in the amount ofUS$250.2 million ; (iii) long-term bank loan in the amount ofUS$727.3 million (including principals and interests). 103 We expect that we will be able to meet our needs to fund operations, capital expenditures and other commitments in the next 12 months primarily with our cash and cash equivalents, operating cash flows and bank borrowings and contribution from the principal shareholder. We may, however, require additional cash resources due to changes in business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could result in additional dilution to stockholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financial covenants that would restrict operations. Financing may not be available in amounts or on terms acceptable to us, or at all. The following table sets forth a summary of our cash flows for years endedDecember 31, 2020 and 2019. For the Years Ended December 31, (in millions US$) 2020 2019 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 wasUS$3.0 million for the year endedDecember 31, 2020 , as compared toUS$189.9 million used in operating activities for the year endedDecember 31, 2019 , primarily due to (i) the decrease of approximatelyUS$255.5 million in cash collected from our customers, (ii) the increase ofUS$6.5 million interest payments, partially offset by (vi) the decrease of approximatelyUS$335.1 million in cash operating payments, including raw material purchases, rental and personnel costs, (v) the increase ofUS$9.1 million received from government grant, and (vi) the decrease ofUS$4.8 million in income tax payments, and (vii) the decrease ofUS$5.5 million interest payment. 104 Investing Activities
Net cash used in the investing activities wasUS$431.1 million for the year endedDecember 31, 2020 compared toUS$130.1 million for the same period of last year, mainly due to (i) the increase ofUS$51.3 million purchase of property, plant and equipment, (ii) the increase ofUS$231.2 million of loans to third parties, (iii) the decrease ofUS$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 ofUS$3.8 million Government grant related to the project construction and (vi) the increase ofUS$0.7 million proceeds from disposal of property, plant and equipment. Financing Activities
Net cash provided by financing activities wasUS$387.3 million for the year endedDecember 31, 2020 , as compared toUS$185.9 million for the same period of last year, primarily as a result of the decrease of (i) the proceeds ofUS$1,033.8 million from bank borrowings, (ii) the increase ofUS$47.2 million capital injection from noncontrolling interests, (iii) the decrease ofUS$64.7 million repayment of interest-free advances from related parties, (iv) the decrease ofUS$4.4 million payments of issuance cost of bank borrowings, (v) the decrease ofUS$0.1 million payments of issuance costs for syndicated loans, partially offset by (vi) the decrease ofUS$1,038.6 million proceeds from bank borrowings, (vii) the decrease ofUS$77.2 million proceeds of interest-free advances from related parties and (viii) the increase ofUS$0.1 million payments of issuance costs for syndicated loans.
As of
Days Sales Outstanding ("DSO") has increased from 72 days for the year endedDecember 31, 2019 to 89 days for the year endedDecember 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
Turnover days of payables have decreased from 21 days for the year ended
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 ofthe People's Republic of China . There is no assurance that exchange rates between the RMB and theU.S. Dollar will remain stable. Inflation has not had a material impact on the Company's business.
105
COMMITMENTS AND CONTINGENCIES
Contractual Obligations
Our contractual obligations as of
Payment due More than Contractual obligations Total less than 1 year 1 - 3 years 3-5 years 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)
InSeptember 2016 ,Sichuan Xinda Enterprise Group Co., Ltd. ("Sichuan Xinda") entered into equipment purchase contracts withHarbin Hailezi Science and Technology Co., Ltd. ("Hailezi") for a consideration ofRMB17.0 million (equivalent toUS$2.6 million ) to purchase storage facility and testing equipment. Afterward, Sichuan Xinda cancelled two contracts with Hailezi for a consideration ofRMB1.6 million (equivalent toUS$0.2 million ). As ofDecember 31, 2020 , Sichuan Xinda has a remaining commitment ofRMB3.0 million (equivalent toUS$0.5 million ). OnOctober 20, 2016 , Sichuan Xinda entered into an equipment purchase agreement purchase contract withPeaceful Treasure Limited ("Peaceful") for a total consideration ofRMB89.5 million (equivalent toUS$13.7 million ) to purchase certain production and testing equipment. As ofDecember 31, 2020 , the Company has a commitment ofRMB55.6 million (equivalent toUS$8.5 million ). OnNovember 15, 2016 andFebruary 20, 2017 , Sichuan Xinda entered into decoration contracts withBeijin Construction to perform indoor and outdoor decoration work for a consideration ofRMB240.5 million (equivalent toUS$36.9 million ). OnJune 10, 2017 , Sichuan Xinda entered into another decoration contract withBeijin Construction to perform ground decoration work for a consideration ofRMB23.8 million (equivalent toUS$3.6 million ). As ofDecember 31, 2020 , the Company has a remaining commitment ofRMB144.7 million (equivalent toUS$22.2 million ).
Pursuant to the
106
(2)
In connection with the HLJ project mentioned in Note 9, onJune 25, 2018 andJuly 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 inHarbin , for a consideration ofRMB1,906.8 million (equivalent toUS$282.2 million ) and OnNovember 14, 2019 ,HLJ Xinda Group entered into a supplementary agreement with Hailezi, which decreased the original contract amount toRMB1,780.9 million (equivalent toUS$272.9 million ) with delivery schedule amended toDecember 31, 2021 . Pursuant to the contracts with Hailezi,HLJ Xinda Group has a remaining commitment ofRMB1,214.1 million (equivalent toUS$186.1 million ) as ofDecember 31, 2020 (3)Dubai equipment purchase OnMay 31, 2019 , Dubai Xinda entered into an equipment purchase contract with Peaceful for a total consideration ofUS$18.8 million . As ofDecember 31, 2020 , the Company has a remaining commitment ofUS$1.8 million .
(4) Xinda CI (
OnMarch 30, 2017 ,Xinda CI (Beijing) Investment Holding Co., Ltd. ("Xinda Beijing Investment ") entered into a decoration contract withBeijing Fangyuan Decoration Engineering Co., Ltd for a total consideration ofRMB5.8 million (equivalent toUS$0.9 million ) to decorate office building. As ofDecember 3, 2020 , the Company has a remaining commitment ofRMB3.7 million (equivalent
toUS$0.6 million ).
On
107
Off-Balance Sheet Arrangements
OnApril 15, 2019 , Sichuan Xinda provided guarantee to Shanghai Sales obtaining a one-year loan ofRMB800.0 million (equivalent toUS$122.6 million ) fromLongjiang Bank ,Harbin Branch with an annual interest rate of 6.09% fromApril 15, 2019 toApril 14, 2020 . If Shanghai Sales does not repay the above loan when due, Sichuan Xinda shall be obliged to repay theRMB800.0 million loan. The loan was repaid by Shanghai Sales inApril 2020 . OnDecember 3, 2019 ,HLJ Xinda Group provided guarantee to Macromolecule Composite Materials obtaining a one-year loan ofRMB612.2 million (equivalent toUS$93.8 million ) fromLongjiang 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 theRMB612.2 million loan. The loan was repaid early by to Macromolecule Composite Materials inApril 2020 . OnSeptember 28, 2020 , Sichuan Xinda provided guarantee to Macromolecule Composite Materials obtaining a three-month loan ofRMB700.0 million (equivalent toUS$107.3 million ) fromLongjiang 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 theRMB700.0 million
loan. 108
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