Results of
Operations
Comparing
Three Months Ended March 31, 2009 and 2008:
The following
table sets forth information from our statements of operations for the three
months ended March 31, 2009 and 2008, in dollars:
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Three months ended
March 31,
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2009
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2008
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Sales
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$
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26,391,889
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$
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10,382,422
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Cost of
Sales
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$
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20,635,575
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$
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8,023,576
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Gross Profit
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$
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5,756,314
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$
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2,358,846
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Operating
Expense
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$
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1,380,735
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$
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316,324
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Operating
Income
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$
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4,375,580
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$
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2,042,522
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Other Income
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$
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(356,249
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)
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$
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51,985
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Interest
Expense
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$
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(355,606
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)
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$
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26,816
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Net Income
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$
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4,016,645
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$
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2,094,507
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Comprehensive
Income
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$
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3,979,030
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$
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2,490,663
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Net
sales
During the
three months ended March 31, 2009, we had net sales of $26,391,889, as compared
with net sales of $10,382,422 during the same period in 2008, an increase of
$16,009,467, or 154% 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
three months ended March 31, 2009, we had cost of sales of $20,635,575, as
compared with cost of sales of $8,023,576 during the same period in 2008, an
increase of approximately $12,611,999, or 157%, reflecting the increase in net
sales. The gross profit rose to $5,756,314 for the three months ended March 31,
2009, or a 144% increase compared with $2,358,846 during the same period in
2008. Our gross margin decreased slightly from 22.7% during the three months
ended March 31, 2008 to 21.8% during the three months ended March 31, 2008. 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. The increase in demand for economy vehicles
was driven by the stimulus plan for the automobile industry by the central
government during the three months ended March 31, 2009.
Operating
Expenses
Our operating
expenses were $1,380,735 during the three months ended March 31, 2009, compared
with $316,324 during the three months ended March 31, 2008, an increase of
$1,064,411 or approximately 336%. The increase in operating expenses was
principally due to the increased depreciation expenses and payroll expenses and
expenses incurred by our US office. Selling expenses increased from $17,822
during the three months ended March 31, 2008 to $45,650 during the same period
in 2009 as we increased our efforts to obtain more customers. General and
administrative expenses increased from $230,278 during the quarter ended March
31,
2008 to $1,045,930 the quarter ended March 31, 2009, reflecting the increased
salary expense, depreciation expense and other expenses pertinent to the
reverse merger and listing in the US. Research and development expenses
increased to $289,155 during the three months ended March 31, 2009 compared to
$68,224 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 $1,380,735 during the
quarter ended March 31, 2009 from $316,324 during the quarter ended March 31,
2008.
Interest
Expense
Interest
expense increased $382,423 from an income of $26,816 during the three months
ended March 31, 2008 to an expense of $355,606 for the three months ended March
31, 2009. The increase interest expense resulted from the increase in our loans
and notes payable, as we borrowed to fund the rapid growth in our sales and the
development of our manufacturing facility.
22
Net
Income
As a result of
the factors described above, we had net income of $4,016,645 during the three
months ended March 31, 2009, compared with $2,094,507 during the three months
ended March 31, 2008.
Comprehensive
Income
As a result of
the factors described above and a currency translation adjustment, our
comprehensive income was $3,979,030 during the quarter ended March 31, 2009,
compared with $2,490,663 during the quarter ended March 31, 2008.
Liquidity and
Capital Resources
As of March
31, 2009, we had $1,852,532 in cash and cash equivalents, compared to 1,381,272
on March 31, 2008. There was a net increase in cash and cash equivalent of
$471,260. The net increase in cash and cash equivalents for the period was
mainly due to the increase of cash generated from operating
activities.
Operations
For the three
months ended March 31, 2009, cash provided by operations was $5,567,572, an
increase of $1,285,248 or 30%, compared to $4,282,324 for the same period in
2008. The increase in our cash liquidity was mainly due to the $5,352,875
increase in accounts receivable and other receivable, as well as the $2,743,623
decrease in advances to suppliers. During the first quarter in 2009, we
collected a large portion of our accounts receivable and other receivable and
reduced the balance to $5,845,990 in order to fund our operation expansion in
addition to modest extension of payments to the suppliers.
Investments
Cash used in
investing activities was $39,791 for the three months ended March 31, 2009 as
compared to $4,345,498 for the three months ended March 31, 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 three
months ended March 31, 2009, net cash used in financing activities was
$7,537,339 as opposed to $1,326,405 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 three months ended March 31, 2009 were from operating
activities. For the three months ended March 31, 2009, we generated $5,567,572
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 Companys revenues and expenses were denominated primarily in
Renminbi
(RMB), the currency of the Peoples 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 Companys business.
23
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.
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 March 31, 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:
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Buildings
and improvements
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39 years
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Machinery,
equipment and automobiles
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5-10 years
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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, which account for 98% of raw materials needed. 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 $10,365,041 as of March
31, 2009 and $13,131,074 as of December 31, 2008.
24
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
assets
expected future discounted cash flows or market value, if readily determinable.
No impairment loss is recorded for the three months ended March 31, 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 three months ended March 31, 2009 and
2008.
Revenue
recognition
The Companys
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 Companys
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 March 31, 2009 and 2008 was
$289,155 and $68,224, 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.
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.
25
Risks
and uncertainties
The Companys
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
Companys
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 Companys expected
borrowing rate for debt with similar remaining maturities and comparable
risk.
Foreign
currency translation
The Companys
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 February 2008,
the FASB issued Staff
Position No. 157-2 (FSP 157-2), which delays the effective date of
FAS 157 one year for all nonfinancial assets and nonfinancial liabilities,
except those recognized or disclosed at fair value in the financial statements
on a recurring basis. FSP 157-2 is effective for us beginning
January 1, 2009. We do not believe the adoption of FSP 157-2 will
have a material impact on our consolidated financial statements.
In March 2008,
the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 161, Disclosures about Derivative Instruments and Hedging Activities,
an amendment of FASB Statement No. 133, which requires additional
disclosures about the objectives of the derivative instruments and hedging
activities, the method of accounting for such instruments under SFAS
No. 133 and its related interpretations, and a tabular disclosure of the
effects of such instruments and related hedged items on our financial position,
financial performance, and cash flows. SFAS No. 161 is effective beginning
January 1, 2009. We are currently assessing the potential impact that
adoption of SFAS No. 161 may have on our financial statements.
In April 2008, the
FASB issued FASB Staff
Position FAS 142-3, Determination of Useful Life of Intangible
Assets
(FSP 142-3). FSP 142-3 amends the factors that should be considered
in developing the renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FAS 142, Goodwill and
Other
Intangible Assets. FSP 142-3 also requires expanded disclosure
regarding
the determination of intangible asset useful lives. FSP 142-3 is effective
for fiscal years beginning after December 15, 2008. Earlier adoption is
not permitted. We do not believe the adoption of FSP 142-3 will have a
material impact on our consolidated financial statements.
Item 3.
Quantitative and Qualitative
Disclosures About Market Risk.
Not
applicable.
26
Item 4T. Controls
and Procedures.
Evaluation of
Disclosure Controls and
Procedures
The Companys
management has evaluated, under the supervision and with the participation of
the Companys Chief Executive Officer and Chief Financial Officer, the
effectiveness of the design and operations of the Companys 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 Companys 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.
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 March 31, 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 Companys 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.
Stock
Issued in Reverse Merger
On December
24, 2008, the Company issued 405,865 shares of common stock (post reverse split
of 124.1 to 1 effected on December 31, 2008); 1,000,000 shares of Series A
Convertible Preferred Stock and 1,000,000 shares of Series B Preferred Stock
for the recapitalization.
Reverse
Stock Split
On December
31, 2008, the Company effected a reverse stock split at the ration of 1 share
for every 124.1 shares.
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 Companys common stock.
Item 3. Defaults
Upon Senior Securities.
None.
27
Item 4.
Submission of Matters to a Vote of
Security Holders.
On or about
January 6, 2009, the Company sent an Information Statement on Schedule 14f-1
reporting a change in the majority of the Companys Board of Directors to
its
shareholders of record. 10 days following the mailing of the Schedule 14f-1,
the election of Jie Han, Junjie Ma and Qingwei Ma to replace Paul Kelly, Craig
Burton and Leonard J. Battagha as the Companys directors became
effective.
On or about
March 17, 2009, the Company the Company sent an Information Statement on
Schedule 14c to its shareholders of record to report the authorization by
written consent of stockholders holding a majority of the voting stock of the
Company dated January 8,2 009, to file an amendment to the Companys
Articles
of Incorporation to increase the Companys authorized capital to
550,000,000
shares consisting of 500,000,000 shares of common stock, par value $0.0001 per
share, and 50,000,000 shares of preferred stock, par value $0.0001 per share.
The amendment to the Articles of Incorporation was effected on April 20, 2009.
In connection with the effective increase of the authorized shares of common
stock, all of the Companys Series A Convertible Preferred Stock were
automatically converted into 38,194,072 shares of the Companys common
stock.
Item 5. Other
Information.
None.
Item 6.
Exhibits.
(a)
Exhibits
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Exhibit
Number
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Description
of Exhibit
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31.1
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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
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31.2
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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
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32.1
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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)
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32.2
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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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28
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.
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China XD
Plastics Company Limited.
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May 12, 2009
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By:
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/s/ Jie
Han
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Jie Han
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Chief
Executive Officer
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(Principal
Executive Officer)
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May
12, 2009
|
By:
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/s/ Taylor
Zhang
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Taylor Zhang
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Chief
Financial Officer
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(Principal
Financial and Accounting Officer)
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29
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