Item
4.02 Non-Reliance on Previously Issued Financial Statements or a
Related Audit Report or Completed Interim Review.
China XD
Plastics Company Limited (the “Company”), on management’s recommendation
concluded on April 8, 2010 that the Company’s consolidated financial statements
for the year ended December 31, 2008 as presented in our Annual Report on Form
10-K and for each of the three months ended September 30, 2009, June 30, 2009
and March 31, 2009, as presented in our Quarterly Reports on Form 10-Q, should
no longer be relied upon due to a non-cash error contained therein regarding the
accounting for recognition of stock options granted to our Chairman and CEO, Mr.
Jie Han (the “Options”) pursuant to the requirements of Financial Accounting
Standards Board Accounting Standards Codification (“ASC”) Topic
718.
The
Company discovered the non-cash error regarding the accounting for recognition
of stock options granted to Mr. Han during the routine course of its internal
audit and review. The Options were granted to Mr. Han by Ellie Qiuyao Piao (“Ms.
Piao”), the sole shareholder of XD Engineering Plastics Company Limited (“XD
Engineering”) which was the principal shareholder of our subsidiary Favor Sea
Limited before the reverse merger pursuant to an option agreement dated May 16,
2008. The agreement provides that Mr. Han may purchase from Ms. Piao for a
nominal price all of the outstanding equity (40,000 shares) in XD Engineering
if, on a consolidated basis, the revenue of Favor Sea Limited (“FSL”), a
subsidiary of the Company, which indirectly owns our operating subsidiaries
Harbin Xinda Macromolecule Material Co., Ltd. and Harbin Xinda Macromolecule
Research Institute achieve certain revenue thresholds. Mr. Han may purchase 25%
of the total outstanding equity in XD Engineering if FSL’s revenue during the
first three quarters of 2008 exceeds $40 million. He may purchase 14% of the
total outstanding equity in XD Engineering if FSL’s revenue during the first
three quarters of 2009 exceeds $70 million. And he may purchase 61% of the total
outstanding equity in XD Engineering if FSL’s revenue during the first three
quarters of 2010 exceeds $110 million. The purpose of the Options is to enable
Mr. Han to re-acquire ultimately the legal ownership of the Company in
compliance with the laws and regulations of the People’s Republic of
China.
Therefore,
based on the related guidance of ASC Topic 718, the Company believes that the
Options should have been accounted for under the Company’s financial statements
as share-based payments awarded to an employee by a related party as
compensation for services rendered. As a result of the restatement, our
consolidated net income for the year ended December 31, 2008 and the second
quarter of 2009 is expected to be reduced by a non-cash charge of approximately
$5.5 million and $3.1 million, respectively, accounted for the above mentioned
option grant arrangement. The adjustment is to be recorded in general and
administrative expense in the consolidated statements of income and other
comprehensive income.
Management
have discussed the matters disclosed in this current report on Form 8-K with the
Audit Committee and Moore Stephens Hong Kong, the Company’s independent
registered public accounting firm, and has notified Bagell, Josephs, Levine
& Company, LLC, the Company's former independent registered public
accounting firm, who were the auditors of the Company for the year ended
December 31, 2008, with regard to these matters.
The
Company has restated its financial statements for the year ended December 31,
2008 and for the quarters ended September 30, 2009, June 30, 2009 and March 31,
2009 and has disclosed such restatements in its Annual Report on Form 10-K
for the year ended December 31, 2009 filed with the SEC.