10-Q 1 cxdc_10q-093011.htm FORM 10-Q cxdc_10q-093011.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2011

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to _____
 
Commission File Number:  000-53131

CHINA XD PLASTICS COMPANY LIMITED
 (Exact name of registrant as specified in its charter)
 
Nevada
04-3836208
 (State or other jurisdiction of incorporation or
organization)
 (I.R.S. Employer Identification No.)   
 
No. 9 Dalian North Road, Haping Road Centralized Industrial Park,
Harbin Development Zone, Heilongjiang Province, PRC 150060
 
(Address of principal executive offices) (Zip Code)

86-451-84346600
(Registrant’s telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o                                                                                    Accelerated filer  o
Non-accelerated filer  o                                                                                     Smaller reporting company  x
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 10, 2011, the registrant had 47,527,367 shares of common stock, par value US$0.0001 per share, outstanding.


 
 

 
TABLE OF CONTENTS
 
PAGE
PART I. FINANCIAL INFORMATION
 
     
Item 1. Financial Statements
2
     
 
Unaudited Condensed Consolidated Balance Sheets
2
     
 
Unaudited Condensed Consolidated Statements of Income and Comprehensive Income
3
     
 
Unaudited Condensed Consolidated Statements of Cash Flows
4
     
 
Notes to the Unaudited Condensed Consolidated Financial Statements
5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
25
   
Item 4. Controls and Procedures
25
     
PART II. OTHER INFORMATION
 
     
Item 1. Legal Proceedings
26
     
Item 1A. Risk Factors
26
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
27
     
Item 3. Defaults Upon Senior Securities
27
   
Item 4. Other Information
27
     
Item 5. Exhibits
27
     
Signatures
28
 
1
 
 
 

 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
     
US$
     
US$
 
ASSETS
               
Current assets:
   
  
     
  
 
Cash and cash equivalents
   
158,776,624
     
22,720,766
 
Restricted cash
   
10,977,405
     
-
 
Accounts receivable, net of allowance for doubtful accounts
   
40,621,745
     
29,018,400
 
Amounts due from a related party
   
-
     
75,732
 
Inventories
   
30,561,851
     
25,257,083
 
Prepaid expenses and other current assets
   
23,333,052
     
32,644,683
 
Total current assets
   
264,270,677
     
109,716,664
 
                 
Property, plant and equipment, net
   
46,872,735
     
49,038,103
 
Land use right, net
   
248,539
     
244,417
 
Deposits for purchase of land use rights and plant
   
12,999,044
     
-
 
Deposits for purchase of equipment
   
15,277,522
     
-
 
Other non-current assets
   
261,329
     
399,917
 
Total assets
   
339,929,846
     
159,399,101
 
                 
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCKS AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Short-term bank loans
   
31,044,214
     
21,204,700
 
Accounts payable
   
22,189,294
     
736,667
 
Amounts due to related parties
   
1,897,190
     
1,769,145
 
Income taxes payable
   
4,551,258
     
65,817
 
Accrued expenses and other current liabilities
   
4,728,241
     
4,073,259
 
Total current liabilities
   
64,410,197
     
27,849,588
 
Deferred income tax liabilities
   
21,928,802
     
21,525,274
 
Warrants liability
   
3,365,353
     
5,719,130
 
Embedded derivative liability
   
436
     
905
 
Total liabilities
   
89,704,788
     
55,094,897
 
                 
Redeemable Series C convertible preferred stock, US$0.0001 par value, 50,000,000
shares of preferred stock authorized, 2 shares of Series C preferred stock issued and
outstanding as of September 30, 2011 and December 31,  2010, respectively
   
1,829 
     
1,829
 
Redeemable Series D convertible preferred stock, US$0.0001 par value, 50,000,000
shares of preferred stock authorized, 16,000,000 shares of Series D preferred stock
and nil issued and outstanding as of September 30, 2011 and December 31,  2010, respectively
   
97,576,465
     
-
 
             
  
 
Stockholders’ equity:
               
Series B preferred stock, US$0.0001 par value, 50,000,000 shares authorized,
1,000,000 shares of Series B preferred stock issued and outstanding as of September 30, 2011 and
 December 31, 2010, respectively
   
100
     
100
 
Common stock, US$0.0001 par value, 500,000,000 shares authorized, 47,548,367
shares and 47,528,511 shares issued, 47,527,367 shares and 47,528,511 shares
outstanding as of September 30, 2011 and December 31, 2010, respectively
   
4,754
     
4,752
 
Treasury stock, at cost: 21,000 shares and nil as of September 30, 2011 and
December 31, 2010, respectively
   
(92,694)
     
-
 
Additional paid-in capital
   
70,947,385
     
69,040,396
 
Retained earnings
   
73,797,732
     
31,785,497
 
Accumulated other comprehensive income
   
7,989,487
     
3,471,630
 
Total stockholders’ equity
   
152,646,764
     
104,302,375
 
Commitments and contingencies
   
-
     
-
 
Total liabilities, redeemable convertible preferred stocks and stockholders’ equity
   
339,929,846
     
159,399,101
 
 
 
See accompanying notes to unaudited condensed consolidated financial statements
 
2
 
 

 

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
 

   
Three-Month Period Ended September 30,
   
Nine-Month Period Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
US$
   
US$
   
US$
   
US$
 
                         
Revenues
   
103,820,442
     
65,345,883
     
267,694,860
     
177,392,985
 
Cost of revenues
   
(77,289,477)
     
(49,161,946)
     
 (201,133,363)
     
(134,695,611)
 
    Gross profit
   
26,530,965
     
16,183,937
     
 66,561,497
     
 42,697,374
 
                                 
Selling expenses
   
(40,311)
     
(59,494)
     
(217,571)
     
(174,593)
 
General and administrative expenses
   
(2,255,633)
     
(1,527,619)
     
(4,750,968)
     
(17,835,153)
 
Research and development expenses
   
(3,476,958)
     
(1,993,748)
     
(9,084,782)
     
(5,616,800)
 
    Total operating expenses
   
  (5,772,902)
     
 (3,580,861)
     
(14,053,321)
     
(23,626,546)
 
                                 
    Operating income
   
20,758,063
     
12,603,076
     
52,508,176
     
19,070,828
 
                                 
Interest income
   
202,332
     
21,344
     
230,701
     
23,405
 
Interest expense
    (489,718)       (331,858)       (1,312,946)       (1,017,222)  
Change in fair value of embedded derivative liability
   
(72)
     
59
     
469
     
3,300,661
 
Change in fair value of warrants liability
   
(345,295)
     
88,005
     
2,353,777
     
1,196,289
 
    Total other income (expense), net
   
(632,753)
     
(222,450)
     
1,272,001
     
3,503,133
 
                                 
    Income before income taxes
   
20,125,310
     
12,380,626
     
53,780,177
     
22,573,961
 
                                 
Income tax expense
   
(4,399,716)
     
(117,549)
     
   (11,767,852)
     
(184,900)
 
                                 
    Net income
   
15,725,594
     
12,263,077
     
  42,012,325
     
22,389,061
 
                                 
Other comprehensive income
                               
  Foreign currency translation adjustment, net of nil income taxes
   
1,827,861
     
1,271,020
     
4,517,857
     
1,816,530
 
                                 
Comprehensive income
   
17,553,455
     
13,534,097
     
46,530,182
     
24,205,591
 
                                 
Net income
   
15,725,594
     
12,263,077
     
  42,012,325
     
22,389,061
 
                                 
Dividends to redeemable Series C convertible preferred stockholders
   
(30)
     
(60)
     
(90)
     
(2,723,397)
 
                                 
Net income attributable to common stockholders
   
15,725,564
     
12,263,017
     
42,012,235
     
19,665,664
 
                                 
Earnings per share:
                               
Basic
   
0.33
     
0.28
     
0.88
     
0.44
 
Diluted
   
0.33
     
0.27
     
0.86
     
0.41
 

See accompanying notes to unaudited condensed consolidated financial statements
 
 
3
 
 
 

 
CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Nine-Month Period Ended
September 30,
 
   
2011
   
2010
 
   
US$
   
US$
 
Cash flows from operating activities:
           
Net cash provided by operating activities
   
54,506,421
     
10,104,084
 
                 
Cash flows from investing activities:
               
Purchases and deposits for property, plant and equipment and land use rights
   
(28,547,852)
     
(983,753)
 
Proceeds from disposal of equipment
   
107,748
     
324,924
 
Net cash used in investing activities
   
(28,440,104)
     
(658,829)
 
                 
Cash flows from financing activities:
               
Proceeds from bank borrowings
   
31,410,498
     
-
 
Repayments of bank borrowings
   
(21,570,984)
     
(1,175,328)
 
Proceeds from an interest free loan provided by a related party
   
-
     
1,879,320
 
Repayments of an interest free loan provided by a related party
   
-
     
(2,666)
 
Dividends paid to redeemable Series C convertible preferred stockholders
   
(210)
     
(1,796,337)
 
Repurchase of treasury stock
   
(92,694)
     
-
 
Proceeds from issuance of redeemable Series D convertible preferred stock
   
100,000,000
     
-
 
Payments of issuance cost of redeemable Series D convertible preferred stock
   
(564,163)
     
-
 
Net cash provided by (used in) financing activities
   
109,182,447
     
(1,095,011)
 
                 
Effect of foreign currency exchange rate changes on cash and cash equivalents
   
 807,094
     
274,796
 
Net increase in cash and cash equivalents
   
136,055,858
     
8,625,040
 
                 
Cash and cash equivalents at beginning of period
   
22,720,766
     
6,850,784
 
Cash and cash equivalents at end of period
   
158,776,624
     
15,475,824
 
                 
Supplemental disclosure of cash flow information:
               
Interest paid
   
1,312,946
     
1,017,222
 
Income taxes paid
   
7,850,831
     
67,540
 
Non-cash investing and financing activities:
               
Conversion of redeemable Series C convertible preferred stocks into common stock
   
-
     
29,385,040
 
Accrual for purchase of property and equipment
   
2,050,665
     
1,469
 
Settlement of accrual for purchase of equipments using bank acceptance notes
   
-
     
5,876,649
 
Accrual of issuance cost of redeemable Series D convertible preferred stock
   
358,372
     
-
 
Inducement cost in connection with the issuance of redeemable Series D convertible preferred stock (see note 12)
   
1,501,000
     
-
 


See accompanying notes to unaudited condensed consolidated financial statements

4
 
 

 
CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Basis of presentation, significant concentrations and risks
 
(a) Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted as permitted by rules and regulations of the United States Securities and Exchange Commission. The condensed consolidated balance sheet as of December 31, 2010 was derived from the audited consolidated financial statements of China XD Plastics Company Limited (“China XD Plastics”) and subsidiaries (the ‘‘Company’’). The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated balance sheet of the Company as of December 31, 2010, and the related consolidated statements of income and other comprehensive income, changes in stockholders’ equity and cash flows for the year then ended.

In the opinion of the management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of September 30, 2011, the results of operations for the three-month periods ended September 30, 2011 and 2010, and the results of operations and cash flows for the nine-month periods ended September 30, 2011 and 2010, have been made.

The preparation of consolidated financial statements in accordance with US 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 financial instruments and share-based compensation awards, the accruals for tax uncertainties and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.

(b) Significant concentrations and risks

Concentration on raw material purchases
The Company’s customers are engaged in the automotive industry.  Sales to four major customers, which are located in the People’s Republic of China (PRC) and individually exceeded 10% of the Company’s revenues, accounted for approximately 73.5% and 85.0% of the Company’s revenues for the three-month periods ended September 30, 2011 and 2010, respectively, and 72.4% and 67.2% of the Company’s revenues for the nine-month periods ended September 30, 2011 and 2010, respectively.  The Company expects revenues from these customers to continue to represent a substantial portion of its revenue in the future.  Any factors adversely affecting the automobile industry in the PRC or the business operations of these customers will have a material effect on the Company’s business, financial position and results of operations.

Purchase concentration

The principal raw materials used for the Company’s production of modified plastics products are plastic resins, such as polypropylene, ABS and nylon.  Purchase from five major suppliers, which individually exceeded 10% of the Company’s total raw material purchases, accounted for approximately 97.7% and 99.6% of the Company’s raw material purchases for the three-month periods ended September 30, 2011 and 2010, respectively, and 99.9% and 99.5% of the Company’s raw material purchases for the nine-month periods ended September 30, 2011 and 2010, respectively.  Management believes that other suppliers could provide similar raw materials on comparable terms.  A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect the Company’s business, financial position and results of operations.
 
Concentration on equipment purchases

The Company purchased equipment from one major supplier, which accounted for 40.8% and nil of the Company's equipment purchases for the three-month periods ended September 30, 2011 and 2010, respectively, and 97.9% and nil of the Company's equipment purchases for the nine-month periods ended September 30, 2011 and 2010, respectively.  The controlling shareholder of the equipment supplier is also the controlling shareholder of a major raw material supplier and a major customer of the Company.  A change in supplier could cause a delay in manufacturing and a possible loss of sales, which could adversely affect the Company's business, financial position and results of operations.
 
Cash concentration

Cash and cash equivalents maintained at banks consist of the following:

   
September 30,
2011
   
December 31,
2010
 
   
US$
   
US$
 
RMB denominated bank deposits with financial institutions in the PRC
    58,464,198       21,886,085  
US dollar denominated bank deposits with a financial institution in the U.S.
    118,918       74,924  
US dollar denominated bank deposits with financial institutions in the PRC
    158       158  
US dollar denominated bank deposits with a financial institution in Hong Kong SAR
    100,170,804       725,626  
 

5
 
 

 
The bank deposits with financial institutions in the PRC are uninsured by the government authority.  To limit exposure to credit risk relating to bank deposits, the Company primarily places bank deposits with large financial institutions in the PRC and Hong Kong SAR with acceptable credit rating.

Restricted cash of US$10,977,405 as of September 30, 2011 represents the short-term pledged bank deposits which serve as security deposits for issuance of bills payable relating to purchase of raw materials.  Upon maturity of the bills payable, which is generally within six months, the cash becomes available for use by the Company.  Pledged bank deposits, which relate to purchases of raw materials, are reported within cash flow from operating activities in the consolidated statements of cash flow.
 
Note–2 - Accounts receivable

Accounts receivable consist of the following:

   
September 30,
2011
   
December 31,
2010
 
   
US$
   
US$
 
             
Trade receivables
   
40,672,492
     
29,051,536
 
Allowance for doubtful accounts
   
(50,747)
     
(33,136)
 
Accounts receivable, net
   
40,621,745
     
29,018,400
 

Note–3 - Inventories

Inventories consist of the following:

   
September 30,
2011
   
December 31,
2010
 
   
US$
   
US$
 
             
Raw materials
   
23,578,005
     
10,689,420
 
Work in progress
   
99,170
     
935,282
 
Finished goods
   
6,884,676
     
13,632,381
 
Total inventories
   
30,561,851
     
25,257,083
 
 
Note–4 – Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

   
September 30,
2011
   
December 31,
2010
 
   
US$
   
US$
 
             
Advances to suppliers
   
  22,999,580
     
31,937,098
 
Others
   
333,472
     
707,585
 
Total prepaid expenses and other current assets
   
23,333,052
     
32,644,683
 

Consistent with the common industry practice in the PRC, the Company is required to pay deposits to the suppliers for the 60% to 80% of the amount of principal raw materials ordered.  The Company’s decision to make advanced orders of raw materials is mainly based upon (1) the demand and supply situation in the raw materials market and (2) the forecasted demand of products.  All of the raw materials relating to advances to suppliers as of September 30, 2011 have been subsequently received by the Company in October 2011.
 

6
 
 

 
Note–5 – Property, plant and equipment, net

Property, plant and equipment consist of the following:
   
September 30,
2011
   
December 31,
2010
 
   
US$
   
US$
 
                 
Machinery and equipment
   
48,477,618
     
46,259,596
 
Motor vehicles
   
540,122
     
169,987
 
Plant and buildings
   
4,252,298
     
4,025,178
 
Construction in progress
   
3,805,271
     
4,671,714
 
Total property, plant and equipment
   
57,075,309
     
55,126,475
 
Less accumulated depreciation
   
(10,202,574)
     
(6,088,372)
 
Property, plant and equipment, net
   
46,872,735
     
49,038,103
 

Depreciation expense was US$1,303,559 and US$826,420 for the three-month periods ended September 30, 2011 and 2010, respectively and US$3,857,591 and US$2,477,951 for the nine-month periods ended September 30, 2011 and 2010, respectively.

Note 6 – Deposits for land use rights and plant

On May 9, 2011, Harbin Xinda Macromolecule Material Co., Ltd. (“Harbin Xinda”), a subsidiary of the Company, entered into a purchase agreement with Harbin Shengtong Engineering Plastics Co. Ltd. (“Harbin Shengtong”), whose legal representative is a former employee of Harbin Xinda, as amended on June 1, 2011, pursuant to which Harbin Xinda will purchase from Harbin Shengtong land use rights and a plant in exchange for a total consideration of RMB435,000,000 (approximately US$67,306,205) in cash. Harbin Shengtong is responsible to complete the construction of the plant according to Harbin Xinda’s design. Once the plant is completed and accepted by Harbin Xinda, which is expected to occur in 2012, Harbin Shengtong shall transfer titles of the land use rights and the plant to Harbin Xinda.

As of September 30, 2011, the Company had made deposits in the amount of RMB82,907,900 (equivalent to US$12,999,044) to Harbin Shengtong.

Note 7 – Short-term bank loans
 
   
September 30,
2011
   
December 31,
2010
 
   
US$
   
US$
 
             
Loans secured by property, plant and equipment and land use right
   
15,365,318
     
13,631,593
 
Loans secured by equipment of Harbin Xinda High-Tech Co., Ltd. (“Xinda High-Tech”), a related party
    -       7,573,107  
Loans secured by equipment of Xinda High-Tech and guaranteed by Mr. Han Jie, (“Mr. Han”), the chief executive officer and controlling stockholder of the Company and his wife
   
15,678,896
     
-
 
Total short-term bank loans
   
31,044,214
     
21,204,700
 

As of September 30, 2011 and December 31, 2010, the Company’s short-term bank loans bear a weighted average interest rate of 6.0% and 6.9% per annum, respectively.  All short-term bank loans mature and expire at various times within one year and contain no renewal terms.

Note 8 - Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:
 
   
September 30,
2011
   
December 31,
2010
 
   
US$
   
US$
 
             
Payables for purchase of property, plant and equipment
   
2,050,665
     
2,100,040
 
Dividends payable
   
792,000
     
792,120
 
Others
   
1,885,576
     
1,181,099
 
Total accrued expenses and other current liabilities
   
4,728,241
     
4,073,259
 

Others mainly represent accrual for professional service expenses, accrued payroll, employee benefits, accrued utility charges, tax payables other than income tax payable and other accrued miscellaneous operating expenses.
 
 
7
 
 

 
Note 9 – Related party transactions

During the periods presented, the Company entered into related party transactions with (i) Xinda High-Tech, an entity controlled by the wife of Mr. Han, the chief executive officer and controlling stockholder of the Company, (ii) Ms. Piao, the former majority owner of XD Engineering Plastics Company Limited (“XD Engineering Plastics”), which is the Company’s principal stockholder.  The significant related party transactions are summarized as follows:

   
Three-Month
Period Ended 
September 30,
   
Nine-Month
Period Ended 
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
US$
   
US$
   
US$
   
US$
 
Costs and expenses resulting from transactions with a related party:
                         
Rental expenses for plant and office spaces
(a)
    84,660       81,114       253,979       230,168  

The balances due from and to the related parties are summarized as follows:
 
     
September 30,
2011
   
December 31,
2010
 
     
US$
   
US$
 
Amounts due from a related party:
             
Prepaid rental expenses to Xinda High-Tech
  (a)
   
-
     
75,732
 

Amounts due to related parties:
             
Rental payable to Xinda High-Tech
  (a)
   
128,045
     
-
 
Interest free loans provided by Ms. Piao
  (b)
   
1,769,145
     
1,769,145
 
Total
     
1,897,190
     
1,769,145
 

(a)  
The Company rents a plant and office building of approximately 23,894 square meters in Harbin, Heilongjiang province from Xinda High-Tech for the period from May 1, 2009 to April 30, 2012. The annual rental fee is US$307,852. The Company also rents an office building of approximately 2,800 square meters in Harbin, Heilongjiang province from Xinda High-Tech from June 1, 2010 to May 31, 2013. The annual rental fee is US$30,785. The Company recorded rental expenses of US$84,660 and US$81,114 for the three-month periods ended September 30, 2011 and 2010, respectively and US$253,979 and US$230,168 for the nine-month periods ended September 30, 2011 and 2010, respectively.

(b)  
Represents U.S. dollar denominated interest free loans provided by Ms. Piao to fund the Company’s working capital, which are unsecured and do not have specific terms of repayment.

Note 10 - Earnings per share

Basic and diluted earnings per share are calculated as follows:
 
   
Three-Month
Period Ended
 September 30,
   
Nine-Month
Period Ended 
September 30,
 
   
2011
   
2010
   
2011
 
2010
 
   
US$
   
US$
   
US$
 
US$
 
Numerator:
                         
Net income
   
15,725,594
     
12,263,077
   
42,012,325
 
22,389,061
 
Less: Dividends to redeemable Series C convertible preferred stockholders
   
(30)
     
(60)
   
(90)
 
(2,723,397)
 
Net income attributable to common stockholders
   
15,725,564
     
12,263,017
   
42,012,235
 
19,665,664
 
Less:
                         
Earnings allocated to participating redeemable Series C convertible preferred stock
   
(144)
     
(120)
   
(382)
 
(446,433)
 
Earnings allocated to participating redeemable Series D convertible preferred stock
   
(170,399)
     
-
   
(154,522)
 
-
 
Earnings allocated to participating unvested shares
   
(26,128)
     
(16,241)
   
(72,736)
 
(240,593)
 
Net income for basic earnings per share
   
15,528,893
     
12,246,656
   
41,784,595
 
18,978,638
 
                           
Changes in fair value of derivative liabilities - Series A investor warrants
   
-
     
(80,828)
   
(937,739)
 
(1,098,736)
 
Changes in fair value of derivative liabilities - Series A placement agent warrants
   
-
     
(7,177)
   
-
 
(97,553)
 
Net income for dilutive earnings per share
   
15,528,893
     
12,158,651
   
40,846,856
 
17,782,349
 
                           
Denominator:
                         
Denominator for basic earnings per share:
                         
Weighted average number of common stock outstanding
   
47,547,910
     
44,195,177
   
47,545,449
 
42,659,612
 
Contract to be settled in common stock    
144,022
     
144,022
   
144,022
 
144,022
 
Series A investor warrants
   
-
     
176,505
   
36,943
 
253,646
 
Series A placement agent warrants
   
               -
     
15,671
   
-
 
22,521
 
Denominator for diluted earnings per share
   
   47,691,932
     
44,531,375
   
47,726,414
 
43,079,801
 
Earnings per share:
                         
Basic
   
0.33
     
0.28
   
0.88
 
0.44
 
Diluted
   
0.33
     
0.27
   
0.86
 
0.41
 

8
 
 

 
The following table summarizes dilutive securities excluded from the calculation of diluted earnings per share for the three-month periods and the nine-month periods ended September 30, 2011 and 2010, because their effects are anti-dilutive:

   
Three-Month Period Ended September 30,
 
Nine-Month Period Ended September 30,
 
   
2011
   
2010
 
2011
 
2010
 
                     
Shares issuable upon conversion of redeemable Series C
convertible preferred stock
   
 
435
     
 
435
  435   435  
Shares issuable upon conversion of redeemable Series D
convertible preferred stock
   
 
16,000,000
     
 
-
  16,000,000   -  
Shares issuable upon exercise of Series A investor warrants
   
1,320,696
     
-
  -   -  
Shares issuable upon exercise of Series A placement agent
warrants
   
117,261
     
 
-
  117,261   -  
Shares issuable upon exercise of Series C investor warrants
   
1,666,667
     
-
  1,666,667   -  
Shares issuable upon exercise of Series C placement agent
warrants
   
166,667
     
 
-
  166,667   -  
Shares issuable upon exercise of stock options     297,000       445,500   297,000   445,500  
 
Note 11 – Income tax

The effective income tax rates for the three-month periods ended September 30, 2011 and 2010 were 22% and 1%, respectively. The effective income tax rates for the nine-month periods ended September 30, 2011 and 2010 were 22% and 1%, respectively. The effective income tax rate for the nine-month period ended September 30, 2011 differs from the PRC statutory income tax rate of 25% primarily due to (i) the preferential income tax rate of 15% entitled by Harbin Xinda, as an Advanced and New Technology Enterprise; and (ii) the additional 50% deduction against taxable income for the research and development expenses incurred by Harbin Xinda Macromolecule Material Research Center and Harbin Xinda Macromolecule Material Engineering Center Co., Ltd..  The significant increase of the effective income tax rates in the three-month period and the nine-month period ended September 30, 2011 when compared to comparable periods in 2010 is primarily due to the liquidation of Harbin Xinda Macromolecule Material Research Institute in December 2010, which was exempt from income taxes.

As of September 30, 2011 and December 31, 2010, full valuation allowances of US$962,587 and US$677,119 were provided against the deferred income tax assets arising from tax loss carryforwards and deductible temporary differences of entities which were in cumulative loss positions.

As of and for the nine-month period ended September 30, 2011, the Company did not have any unrecognized tax benefits, and thus no interest and penalties related to unrecognized tax benefits were recorded. In addition, the Company does not expect that the amount of unrecognized tax benefits will change significantly within the next 12 months.

Note 12 – Redeemable Series D convertible preferred stock

On August 15, 2011, China XD Plastics entered into a securities purchase agreement (the “Securities Purchase Agreement”) with MSPEA Modified Plastics Holding Limited, a Cayman Islands company and an affiliate of Morgan Stanley (“MSPEA”), XD Engineering Plastics and Mr. Han, pursuant to which MSPEA purchased 16,000,000 shares of redeemable Series D convertible preferred stock with par value of US$0.0001 per share (the “Series D Preferred Stock”), for a total consideration of US$100 million or US$6.25 per share (“Series D Original Issuance Price”). On September 28, 2011, China XD Plastics issued 16,000,000 shares of Series D Preferred Stock and received total gross proceeds of US$100 million in cash.
 

9
 
 

 
The Company determined that there was no embedded beneficial conversion feature attributable to the Series D convertible preferred stock at the commitment date since the initial conversion price of the Series D convertible preferred stock was greater than the price of China XD Plastics’ common stock as of August 15, 2011.

The significant terms of Series D Preferred Stock are as follows:

(i)    Conversion

The holders of Series D Preferred Stock have the right to convert all or any portion of their holdings into common stock at a price of US$6.25 per share from January 1, 2012 through September 28, 2014, subject to adjustments for stock splits, combinations, dividends or distributions of common stock, merger and reorganization.  In addition, if the Company achieves net income after all charges and provisions for taxes and adjusted to exclude (i) all extraordinary or non-recurring gains or losses for the relevant period, (ii) all gains or losses derived from any business operation other than the principal business of the Company or otherwise derived outside the ordinary course of business of the Company for the relevant period, and (iii) all gains or losses attributable to the Series D Preferred Stock (“Actual Profit”), at least RMB360 million, RMB520 million and RMB800 million in 2011, 2012 and 2013, respectively, each outstanding Series D Preferred Stock will be converted into common stock from September 28, 2014 upon the delivery of a written notice from the Company to the holders of Series D Preferred Stock:

(ii)   Voting

The holders of Series D Preferred Stock have voting rights equivalent to the common stockholders on an “if-converted” basis.  In addition, if 1,600,000 shares or more (adjusted for any dilutive corporate actions) of Series D Preferred Stock remain outstanding, holders of Series D Preferred Stock have veto rights over certain material corporate actions of the Company, as defined.

(iii)  Dividends

Each share of Series D Preferred Stock shall be entitled to dividend or other distribution simultaneously with any dividend or distribution on any shares of the Company’s common stock as if all such Series D Preferred Stock has been converted to common stock.

(iv)  Liquidation preference

In the event of the liquidation, dissolution or winding-up of the affairs of the Company, whether voluntary or involuntary (a "Liquidation"), the holders of Series D Preferred Stock then outstanding shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders before any payment shall be made to the holders of shares of common stock by reason of their ownership thereof, but after any payment shall be made to the holders of any Series B preferred stock or Series C convertible preferred stock by reason of their ownership thereof, with respect to each share of Series D Preferred Stock, an amount equal to the greater of (i) an amount per share of Series D Preferred Stock equal to an amount that would yield a total internal rate of return of 15% to the holder on the Series D Original Issuance Price, taking into account all cash dividends and/or distributions paid by the Company and received by the holder in respect of his or her share of Series D Preferred Stock (the IRR Price); and (ii) such amount per share as would have been payable had all shares of Series D Preferred Stock been converted into the Company’s common stock pursuant to a voluntary conversion or a mandatory conversion immediately prior to such Liquidation (without taking into account any limitations or restrictions on the convertibility of the shares of Series D Preferred Stock).

(v)  Redemption

Upon the occurrence of a triggering event as defined below, the holders of the Series D Preferred Stocks have the option to redeem the Series D Preferred Stocks at a price equal to the IRR Price (the “Redemption Price”), by delivery of written notice to the Company (the "Redemption Request") at least 6 months prior to the proposed date of redemption (the "Redemption Date") set forth in the Redemption Request, provided that in no event shall the Redemption Date be prior to March 3, 2013 if any shares of Series C convertible preferred stock remain outstanding, unless otherwise consented to by holders of the Series C convertible preferred stock.

A triggering event means either of the two events: (I) the occurrence of any of the following: (i) the Actual Profit for the Financial Year ending December 31, 2011 is less than RMB360 million (the “2011 Target”), (ii) the Actual Profit for the Financial Year ending December 31, 2012 is less than RMB468 million, or (iii) the Actual Profit for the Financial Year ending December 31, 2013 is less than RMB608 million (collectively the Actual Profit Targets); or (II) any breach by any of the Company, XD Engineering Plastics and Mr. Han (the “Principal Stockholders”) of any representation, warranty, covenant or other agreement in the Securities Purchase Agreement, the Certificate of Designation, the Registration Rights Agreement, the Stockholders' Agreement, the Pledge Agreement and the Indemnification Agreements (collectively, the “Transaction Document”) that (i) in the case of a breach of a covenant or agreement that is curable, has remained uncured for 30 days after the holder of Series D Preferred Stock has given written notice of such breach to the Company’ Principal Stockholders and (ii) has had or could reasonably be expected to have a material adverse impact on (a) the business, operations, properties, financial position (including any material increase in provisions), earnings or condition of the Company, or (b) the value, marketability or liquidity of the Series D Preferred Stock taking into account any remedies already sought and received in connection with such breach; (c) the commencement by the Company or any other member of the Company of any bankruptcy, insolvency, reorganization or other similar applicable law or of any other case or proceeding to be adjudicated a bankruptcy or insolvency, or the consent by it to the entry of a decree or order for relief in respect of the Company or any other member of the Company in an involuntary case; or (iv) the appointment of a custodian, receiver, liquidator, assignee, trustee, sequestrator other similar officials of the Company or any other member of the Company for the winding up or liquidation of its affairs.
 

10
 
 

 
If any shares of Series D Preferred Stock remain outstanding on September 28, 2014, the holders of such shares shall require the Company to redeem each share of Series D Preferred Stock at a price equal to the IRR Price (the “Mandatory Redemption Price”).  The mandatory redemption date should be March 28, 2015.

Based on the historical income level, year to date income and future profit forecast, the Company concluded that it will achieve Actual Profit targets and will not be in breach of the other trigger events. As a result, it was not probable that the Series D Preferred Stock is redeemable as of September 30, 2011.  Therefore no changes in the redemption value were recognized during the three-month period ended September 30, 2011.  The Company will assess the probability of whether the Series D Preferred Stock will become redeemable at each reporting period end.

(vi)   Stockholders’ Agreement

Pursuant to the Stockholders’ Agreement between MSPEA and the Principal Stockholders, if the Company shall at any time issue or sell any shares of common stock or equity securities, other than an issuance or sale in an exempted issuance, at a price per share of Common Stock, or in the case other equity securities exchangeable or convertible into shares of common stock, at a conversion or exercise price for a share of common stock (in each case, the "New Issue Price") that is less than the then effective conversion price of Series D Preferred Stock (treating the price per share of common stock, in the case of the issuance of any equity securities, as equal to (x) the sum of the price for such equity securities plus any additional consideration payable (without regard to any anti-dilution adjustments) upon the conversion, exchange or exercise of such equity securities divided by (y) the number of shares of common stock initially underlying such equity securities), the holders of Series D Preferred Stock shall have the right to purchase from the Principal Stockholders, and Principal Stockholders shall sell and transfer to the holders of Series D Preferred Stock, at par value per share, a number of shares of common stock that is equal to (i) the number of shares of common stock that the Series D Preferred Stock held by the holders of Series D Preferred Stock would have been convertible into as if the then effective conversion price is equal to the New Issue Price, minus (ii) the number of shares of common stock that the outstanding Series D Preferred Stock held by the holders of Series D Preferred Stock are convertible into under the then effective conversion price.  The exempted issuance refers to (a) any issuance of common stock upon the conversion of the Series D Preferred Stock; (b) the conversion, exercise or exchange of options, warrants or convertible securities of the Company that are outstanding and have been fully disclosed to MSPEA as of September 28, 2011; (c) any issuance of shares of common stock or options to employees, officers, directors or other service providers of the Company pursuant to any stock or option plan duly approved for such purpose including the board of directors; (d) any issuance of common stock, options, warrants or convertible securities of the Company pursuant to acquisitions or other strategic transactions, in each case approved by the board of directors and (e) any issuance of adjustment shares that the Principal Stockholders shall sell and transfer to the holders of Series D Preferred Stock if the Company is unable to achieve the Actual Profit as defined below.

In addition, the Principal Stockholders entered into a pledge agreement with the holders of Series D Preferred Stock to secure the payment and performance of the following obligations (collectively, the “Secured Obligations”), which are secured by the collateral under the Pledge Agreement between the holders of Series D Preferred Stock and the Principal Stockholders: (a) the full and prompt payment when due (whether at stated maturity, by redemption or acceleration or otherwise) of all debts, obligations and liabilities of Principal Stockholders owing to the holders of Series D Preferred Stock; (b) all reasonable costs and expenses incurred by the holders of Series D Preferred Stock to enforce this Agreement and maintain, preserve, collect and realize upon the collateral.  The collateral refers to 16,000,000 shares of common stock, par value $0.0001, in China XD Plastics registered in the name of XD Engineering Plastic.

The holders of Series D Preferred Stock have an option to purchase common stock at par value from the Principal Stockholders if the Company is unable to achieve the Actual Profit of RMB360 million, RMB520 million and RMB800 million in 2011, 2012 and 2013, respectively. The number of common stock to be purchased is based on a pre-set formulas as specified in the Stockholders' Agreement.
 
The Stockholders' Agreement was an inducement made to facilitate the investment in the Series D Preferred Stock on behalf of the Company.  Therefore, the fair value of the options issued by the Principal Stockholders to the holders of the Series D Preferred Stock was recognized as issuance cost of the Series D Preferred Stock and reflected as a reduction of the proceeds allocated to the Series D Preferred Stock.  As of September 28, 2011, the fair value of such options was determined to be US$1,501,000 based on the Company's common stock price on September 28, 2011 and the assumptions, including probability of the Company's future financial projection and the expected volatility on the Company's common stock.
 
11
 
 

 
Note 13 – Stockholders’ equity

The changes of each caption of stockholders’ equity for the nine-month period ended September 30, 2011 are as follows:
 
   
Series B Preferred Stock
 
Common Stock
                         
   
Number of Shares
 
Amount
 
Number of Shares
 
Amount
 
Treasury Stocks
 
Additional
Paid-in Capital
 
Accumulated Other Comprehensive Income
   
Retained Earnings
   
Total
Stockholders’ Equity
 
       
US$
     
US$
                         
Balance as of
January 1, 2011
    1,000,000     100     47,528,511     4,752     -     69,040,396     3,471,630       31,785,497       104,302,375  
Net income
    -     -     -     -     -     -     -       42,012,325       42,012,325  
Foreign currency translation
adjustment, net of nil income taxes
    -     -     -     -     -     -     4,517,857       -       4,517,857  
Dividend for Series C preferred stock
    -     -     -     -     -     -     -       (90 )     (90 )
Inducement cost in connection with the issuance of redeemable Series D convertible preferred stock
    -     -     -     -     -     1,501,000     -       -       1,501,000  
Repurchase of common stock
    -     -     (21,000 )   -     (92,694 )   -     -       -       (92,694 )
Share-based compensation
    -     -     -     -     -     405,991     -       -       405,991  
Exercise of nonvested shares
    -     -     19,856     2     -     (2 )   -       -       -  
Balance as of
September 30, 2011
    1,000,000     100     47,527,367     4,754     (92,694 )   70,947,385     7,989,487       73,797,732       152,646,764  

On April 7, 2011, the Board of Directors approved the US$10 million stock repurchase program effective until May 31, 2012.  On September 28, 2011, the Company purchased 21,000 shares of its common stock in the public stock market for a total consideration of US$92,694.

Note 14 - Warrants

The following is a summary of outstanding warrants as of September 30, 2011:
 
Warrants
   
Exercise Price
   
Number of Warrants Outstanding
   
Remaining Contractual Life
 
     
 US$
       
Years
 
Series A investor warrants
   
4.9
 
            1,320,696
   
3.17
 
Series A placement agent warrants
   
5.5
 
               117,261
   
3.17
 
Series C investor warrants
   
6.0
 
            1,666,667
   
0.04
 
Series C placement agent warrants
    7.5    166,667     1.77  
           3,271,291        
 
 
The fair values of the warrants as of September 30, 2011 were determined based on Black-Scholes option pricing model, using the following assumptions:

   
Series A Investor Warrants
   
Series A Placement Agent Warrants
 
Series C Investor Warrants
   
Series C Placement Agent Warrants
 
Expected volatility
 
78.7%
   
78.7%
 
51.0%
   
65.0%
 
Expected dividends yield
   
0%
   
0%
   
0%
     
0%
 
Fair value of underlying common stock (per share)
   
4.51
   
4.51
   
4.51
     
4.51
 
Risk-free interest rate (per annum)
   
0.46%
   
0.46%
   
0.02%
     
0.26%
 

The expected volatility was estimated based on peer companies volatilities and historical volatility of the Company’s common stocks.

During the nine-month period ended September 30, 2011, no warrants were exercised.  On October 14, 2011, all of 1,666,667 Series C investor warrants expired.
 

12
 
 

 
Note 15– Share based compensation
 
A summary of stock option activities is as follows:
 
   
Number of
Options Outstanding
   
Weighted Average
Exercise Price
US$
 
Weighted
Average Remaining Contractual Life
Years
 
Aggregate
Intrinsic
Value
US$
Outstanding as of December 31, 2010
   
445,500
     
8.01
 
-
 
-
Grant
   
-
     
-
 
-
 
-
Forfeited
   
-
     
-
 
 -
 
-
Exercised
   
-
     
-
 
-
 
-
Expired
    (148,500     8.01   -   -
Outstanding as of September 30, 2011
    297,000       8.01   8.86   -
Exercisable as of September 30, 2011
    -                
 
The Company recognized US$83,744 and US$49,154 of share-based compensation expense in general and administration expenses for the three-month periods ended September 30, 2011 and 2010, respectively, and US$248,500 and US$49,154 of share-based compensation expense in general and administration expenses for the nine-month periods ended September 30, 2011 and 2010, respectively.

As of September 30, 2011, there was US$615,334 of total unrecognized compensation cost related to stock options, which is to be recognized over a period of approximately 1.9 years.

A summary of the nonvested shares activity is as follows

   
Number of Nonvested Shares
 
Weighted Average
Grant Date Fair Value
Per share
       
US$
Balance as of December 31, 2010
   
99,856
   
6.57
Vested
   
(19,856)
   
6.57
Outstanding as of September 30, 2011
   
80,000
   
6.57

The Company recognized US$43,800 and US$134,200 of share-based compensation expense for nonvested shares in general and administration expenses for the three-month periods and US$157,491 and US$1,325,227 of share-based compensation expense for nonvested shares in general and administration expenses for the nine-month periods ended September 30, 2011 and 2010, respectively.

As of September 30, 2011, there was US$324,120 of total unrecognized compensation cost related to nonvested shares, which is to be recognized over a weighted average period of 1.9 years.

Note 16 - Commitments and contingencies

(1)  
Lease commitments
 
Future minimum lease payments under non-cancellable operating leases agreements as of September 30, 2011 were as follows.  The company’s leases do not contain any contingent rent payments terms.

   
US$
 
Period from October 1, 2011 to December 31, 2011
    103,183  
Years ending December 31,
       
2012
    207,994  
2013
    31,849  
2014
    -  
2015
    -  
2016 and thereafter
    -  
Total
    343,026  

Rental expenses incurred for operating leases of plant and equipment and office spaces were US$98,285 and US$78,942 for the three-month periods and US$298,064 and US$282,842 for the nine-month periods ended September 30, 2011 and 2010, respectively.
 

(2)  
Renovation of plant facilities

As of September 30, 2011, the Company has a commitment of US$778,569 for renovation of plant facilities.

(3)  
Acquiring land use rights and plant

Pursuant to the agreement with Harbin Shengtong, the Company has a commitment of RMB352,937,900 (equivalent to US$55,336,767) as of September 30, 2011, for the acquisition of land use rights and plant. As disclosed in note 6, the acquisition of the land use rights and the plant is subject to completion of the construction project by Harbin Shengtong and acceptance by the Company.
 

13
 
 

 
(4)  
Acquiring equipment

As of September 30, 2011, the Company had a commitment of RMB199,564,866 (equivalent to US$31,289,568) for the acquisition of equipment.

Note 17 – Reclassification

Certain items in the prior period’s unaudited condensed consolidated financial statements have been reclassified to conform to the current period consolidated financial statement presentation. These reclassifications had no effect on total assets, total liabilities or net income as previously reported.
 
 
 
14
 
 

 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those financial statements appearing elsewhere in this Form 10-Q.

Certain statements in this Report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements, which involve risks and uncertainties, regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategies, (c) anticipated trends in our industries, (d) our future financing plans, and (e) our anticipated needs for, and use of, working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the negative of these words or other variations on these words or comparable terminology. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” in our Annual Report on Form 10-K and matters described in this report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
 
The "Company", "we," "us," "our," and the "Registrant" refer to China XD Plastics Company Limited and its subsidiaries.  Unless the context otherwise requires, all references to (i)  “PRC” and “China” are to the People’s Republic of China; (ii) “US dollar,” “$”, and “US$” are to United States dollars; (iii) “RMB” are to Yuan Renminbi of China; (iv) “Securities Act” are to the Securities Act of 1933, as amended; and (v) “Exchange Act” are to the Securities Exchange Act of 1934, as amended.

Overview

We are one of the leading modified plastics manufacturers for automotive applications in the PRC, based on production capacity and number of product certifications granted by automotive manufacturers.  We design, develop and produce made-to-order modified plastics for automotive applications including exterior parts consisting of automobile bumpers, rearview and sideview mirrors, front grille, and license plate parts; interior parts, such as door panels, dashboards, steering wheels, and glove compartment and safety belt components; and functional components comprising air conditioner casings, heating and ventilation casings, engine covers, and air ducts etc.  In addition, we provide after-sales services to auto parts manufacturers that supply to automotive original equipment manufacturers (OEMs) including Audi, Red Flag, Volkswagen (VW) Golf, Toyota, BMW, Mazda and Hafei Alternative Energy Vehicle, etc.

Our growth strategy focuses on 1) increasing production capacity to meet the increasing demand of automotive plastics in China driven by automobile consumption and increasing plastic content per vehicle in China; 2) growing our market share by expanding customer base and geographic distribution; 3) enhancing our research and development capabilities to offer more high-value-added products to customers and 4) substituting higher-priced imported products with high quality products required by automotive OEMs.

The primary industry growth drivers include: 1) rising auto demand driven by rising Chinese household incomes, low market penetration, and favorable government policies; 2) benefits of using modified plastics compared to metals in terms of lighter weight, lower costs, easier processing and reuse, and greater customizability; 3) increasing usage of modified plastics in automobiles because of the current lower penetration in the Chinese auto industry compared to developed markets; 4) strong growth of electric vehicles which contain a higher percentage of plastics compared to traditional fuel vehicles; and 5) local growth opportunities created by the large gap between local supply and demand, and substitution opportunities with foreign competitors.

The Chinese auto market predominantly uses modified plastics manufactured overseas or in local factories invested by foreign companies, such as manufacturers from Germany, the Netherlands and Japan. Although China’s automotive plastic market is dominated by foreign or joint venture players, Chinese suppliers are continually gaining market share. According to a market report on China Automotive Modified Plastics by Forward & Intelligence of China Association of Automobile Manufacturers (CAAM), imported automotive plastics accounted for approximately 65% of the total China automotive plastic supply in 2009, decreasing from 69% in 2004. Compared to foreign competitors, domestic manufacturers can benefit from the lower labor cost and geographical intimacy in China. As local players continue to invest in research and development, enhance product quality and improve management skills, we believe that domestic production of automotive plastic will have competitive advantages over their foreign competitors in terms of price, quality, services and delivery times and continually replace imported plastics.
 

15
 
 

 
Recent Events

On August 15, 2011, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with MSPEA Modified Plastics Holding Limited, a Cayman Islands company and an affiliate of Morgan Stanley (“MSPEA”), XD Engineering Plastics and Mr. Han, our chief executive officer and controlling shareholder, pursuant to which MSPEA purchased 16,000,000 shares of redeemable Series D convertible preferred stock with par value of US$0.0001 per share (the “Series D Preferred Stock”), for a total consideration of US$100 million or US$6.25 per share. On September 28, 2011, we issued 16,000,000 shares of Series D Preferred Stock and received total gross proceeds of US$100 million in cash.

On November 8, 2011, the Company's Board of Directors approved by unanimous written consent to adopt the Second Amended and Restated Bylaws of the Company (the “Bylaws Amendment”). The Bylaws Amendment clarified stockholder voting requirements by deleting Article III, Section 7 in its entirety and restating the section as follows: "Except as may be otherwise provided in the Corporation’s Articles of Incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. Except as otherwise required by law or the Corporation’s Articles of Incorporation, all elections shall be determined by a plurality of the votes duly cast and all other matters submitted to a vote of the stockholders shall be determined by a majority of the votes duly cast affirmatively or negatively."  The form of the Bylaws Amendment was filed as Exhibit 3.1 to the Current Report on Form 8-K as filed with the SEC on November 8, 2011.
 
During the nine months ended September 30, 2010, we acquired land use rights of nearly 50 acres and a plant at the South Harbin Industrial Park, Harbin from a third party, and commissioned the third party to complete the construction of the plant with five workshops and a R&D center for a value of RMB435 million (approximately US$66.9 million).  As of September 30, 2011, the main construction of five workshops and main part of the R&D center building has been completed, among which two workshops will be put into use on or before December 31, 2011 to meet our requirement of capacity expansion in 2012.

We will add 90,000 metric tons of production capacity in the first quarter of 2012 with 20 new production lines under the process of installation.  Once online, this additional capacity will produce higher-end products such as Environmental Friendly Plastics, Engineering Plastics and Alloy Plastics to meet the growing demand for our products and further expand our product portfolio and industry leading position.
 
Highlights for the three months ended September 30, 2011 include:

· Revenue was a record $103.8 million, an increase of 59.0 % from the third quarter of 2010
· Gross profit was $26.5 million, an increase of 63.6% from the third quarter of 2010
· Gross profit margin was 25.6%, compared to 24.8% in the third quarter of 2010
· Net income attributable to common shareholders was $15.7 million, compared to $12.3 million in the third quarter of 2010
· Total volume shipped was 39,211 metric tons, up 26.1% from 31,086 metric tons in the third quarter of 2010
 

16
 
 

 
Results of Operations

The following table sets forth, for the periods indicated, income statement data in millions of US dollars:
 
 
Three Months Ended
   
Nine Months Ended
 
September 30,
  Change    
September 30,
  Change
  2011     2010    %     2011     2010   %
Revenues
  103.8    
65.3
 
59.0
%
   
267.7
   
177.4
 
50.9
%
Gross profit
  26.5    
16.2
 
63.6
%
   
66.6
   
42.7
 
56.0
%
Selling, general and administrative, research and development expenses
  (5.8)    
(3.6)
 
61.1
%
   
(14.1)
   
(23.6)
 
(40.3)
Operating income
  20.7    
12.6
 
64.3
%
   
52.5
   
19.1
 
174.9
Income before income taxes
  20.1    
12.4
 
62.1
%
   
53.8
   
22.6
 
138.1
Income tax expense
  (4.4)    
(0.1)
 
4,300.0
%
   
(11.8)
   
(0.2)
 
5,800.0
Net income  15.7     12.3   27.6     42.0     22.4   87.5
 
Three months ended September 30, 2011 compared to three months ended September 30, 2010

Revenues

Revenues were US$ 103.8 million in the third quarter of 2011, an increase of US$ 38.5 million, or 59.0%, compared to US$ 65.3 million in the same period of last year, due to approximately 26.1% increase in sales volume and 25.9% increase in the average selling price of our products. The increase of sales volume was driven by the strong demand of modified plastics in the PRC market and higher penetration of our business in our existing markets supported by our newly acquired nine production lines in December 2010. The increase of average selling price was due to the shift of product mix towards higher-end products as well as higher raw material prices.
 
Product Mix
 
The following table summarizes the breakdown of revenues in millions of US$ by product mix:
 
in millions, except percentage)
   
Revenues
Three Months Ended September 30,
             
     2011            2010           Change in        Change in  
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
Modified Polypropylene (PP)
    45.8       44.2%       42.5       65.1 %     3.3       7.8%  
                                                 
Engineering Plastics
    10.8       10.4%       3.1       4.7 %     7.7       248.4%  
                                                 
Modified Polyamide (PA)
    20.8       20.0%       11.1       17.1 %     9.7       87.4%  
                                                 
Alloy Plastics
    11.0       10.6%       2.4       3.7 %     8.6       358.3%  
                                                 
Environment Friendly Plastics
    7.2       6.9%       3.1       4.7 %     4.1       132.3%  
                                                 
Modified Acrylonitrile Butadiene Styrene (ABS)
    8.2       7.9%       3.1       4.7 %     5.1       164.5%  
                                                 
Total Revenues
    103.8       100%       65.3       100 %     38.5       59.0%  

 
17
 
 

 
The following table summarizes the breakdown of metric tons (MT) by product mix:
(in MTs, except percentage)    
 
Sales Volume
Three Months Ended September 30,
                 
     
MT
     
%
   
MT
     
%
   
Change in MT
     
Change in
 %
Modified Polypropylene (PP)
    22,878       58.4     24,384       78.5     (1,506     (6.2 )% 
                                                 
Engineering Plastics
    4,385       11.2 %     2,160       6.9 %     2,225       103.0 %
                                                 
Modified Polyamide (PA)
    1,598       4.1 %     761       2.4 %     837       110.0
                                                 
Alloy Plastics
    3,232       8.2 %     1,250       4.0 %     1,982       158.6
                                                 
Environment Friendly Plastics
    4,365       11.1 %     1,240       4.0 %     3,125       252.0
                                                 
Modified Acrylonitrile Butadiene Styrene (ABS)
    2,753       7.0 %     1,291       4.2 %     1,462       113.2
                                                 
Total sales volume
    39,211       100 %     31,086       100 %     8,125       26.1

The Company has shifted product mix from traditional Modified Polypropylene (PP) to higher-end products such as Environmental Friendly Plastics, Engineering Plastics and Alloy Plastics, primarily due to the increasing demand of advanced modified plastics in luxury automobile models in China and the stronger demand promoted by Chinese government on clean energy vehicles and stronger sales of  model cars made by automotive manufacturers from China and Germany, US and Japanese joint ventures, which tend to use more and higher-end modified plastics in quantity per vehicle in China.

Gross Profit and Gross Margin

   
Three Months Ended September 30,
   
Change
 
(in millions, except percentage)
 
2011
   
2010
   
Amount
   
%
 
Gross Profit
 
$
26.5
   
$
16.2
   
$
10.3
     
63.6
%
Gross Margin
   
25.6%
     
24.8%
             
0.8
%

Gross profit was US$ 26.5 million in the quarter ended September 30, 2011 compared to US$ 16.2 million in the same period of 2010, representing an increase of 63.6%. Our gross margin increased to 25.6% during the quarter ended September 30, 2011 from 24.8% during the same quarter of 2010. The increase was mainly attributed to the higher proportion of sales of our high-end products as a percentage of total sales in 2011 as a result of our efforts in developing and selling more high value-added automotive modified plastics. Such increase in demand was driven by increasing demand for automobiles by Chinese consumers, as well as the increase of plastic content on the per-vehicle-basis in China.

General and Administrative Expenses

   
Three Months Ended September 30,
   
Change
 
(in millions, except percentage)
 
2011
   
2010
   
Amount
   
%
 
General and Administrative Expenses
 
$
2.3
   
$
1.5
   
$
0.8
     
53.3
%
as a percentage of revenues
   
2.2
%
   
2.3
%
           
(0.1)
%

General and administrative (G&A) expenses were US$ 2.3 million in the quarter ended September 30, 2011 compared to US$ 1.5 million in the same period in 2010, representing an increase of 53.3%, or US$ 0.8 million. This increase is primarily due to increase of payroll resulting from headcount increase, increase of audit fees and increase of Director and Officer’s insurance cost due to higher premium as a result of higher coverage we obtained this year.  On a percentage basis, G&A expenses in the third quarter of 2011 decreased to 2.2% of revenues from 2.3% in the third quarter of 2010.

Research and Development Expenses

   
Three Months Ended September 30,
   
Change
 
(in millions, except percentage)
 
2011
   
2010
   
Amount
   
%
 
Research and Development Expenses
 
$
3.5
   
$
2.0
   
$
1.5
     
74.5
%
as a percentage of revenues
   
3.4
%
   
3.1
%
           
0.3
%

Research and development (“R&D”) expenses were US$ 3.5 million during the quarter ended September 30, 2011 compared with US$ 2.0 million during the same period in 2010, an increase of US$ 1.5 million, or 74.5%, reflecting the increased research and development activities on new products in order to obtain product certifications for automotive applications from automobile manufacturers.
 

18
 
 

 
Operating Income

Total operating income was US$ 20.7 million in the quarter ended September 30, 2011 compared to US$ 12.6 million in the same period of 2010, representing an increase of 64.3% or US$ 8.1 million. This increase is primarily due to higher gross profit, partially offset by higher G&A and R&D expenses.

Other Income (Expense)

Interest Income (Expenses)
   
Three Months Ended September 30,
   
Change
 
(in millions, except percentage)
 
2011
   
2010
   
Amount
   
%
 
Interest Income
 
$
0.2
   
$
-
   
$
0.2
     
N/A
 
Interest Expenses
   
(0.5)
 
   
(0.3)
 
   
(0.2)
 
   
66.7
%
Net Interest Income (Expenses)
 
$
(0.3)
   
$
(0.3)
   
$
-
     
-
 
as a percentage of revenues
   
(0.3)
%
   
(0.5)
%
           
(0.2)
%

Net interest expenses remained stable in the third quarter of 2011 compared to that of the same period of 2010. On a percentage basis, net interest expenses in the third quarter of 2011 decreased to 0.3% of revenues from 0.5% in the third quarter of 2010.

Change in Fair Value of Warrants Liabilities

   
Three Months Ended September 30,
   
Change
 
(in millions, except percentage)
 
2011
   
2010
   
Amount
   
%
 
Change  in fair value of warrants liabilities
 
$
(0.3)
   
$
0.1
   
$
(0.4)
     
(422.2)
%
as a percentage of revenues
   
(0.3)
%
   
0.1
%
           
(0.4)
%

Change in fair value of warrants liabilities was a loss of US$ 0.3 million in the quarter ended September 30, 2011, compared to a gain of US$0.1 million in the same period of  2010, primarily due to the change of fair value of warrants driven by the fluctuation of our stock price in respective periods.   On a percentage basis, change in fair value of warrants liabilities in the third quarter of 2011 increased to 0.3% of revenues from 0.1% in the third quarter of 2010.

Income Taxes

   
Three Months Ended September 30,
   
Change
 
(in millions, except percentage)
 
2011
   
2010
   
Amount
   
%
 
Income before Income Taxes
 
$
20.1
   
$
12.4
   
$
7.7
     
62.1
%
Income Tax Expense
   
(4.4)
     
(0.1)
     
(4.3)
 
   
4,300.0
%
Effective income tax rate
   
21.9%
     
0.9%
             
21.0
%

The effective income tax rate was 21.9% in the third quarter of 2011, compared to 0.9% in the same quarter of last year. The effective income tax rates for the third quarter of 2011 differ from the PRC statutory income tax rate of 25% primarily due to (i) the preferential income tax rate of 15% entitled by Harbin Xinda, as an Advanced and New Technology Enterprise; and (ii) the additional 50% deduction against taxable income for the research and development expenses incurred by Harbin Xinda Macromolecule Material Research Center and Harbin Xinda Macromolecule Material Engineering Center Co., Ltd..

The significant increase of the effective income tax rates in the third quarter of 2011 compared to comparable periods in 2010 is primarily due to the liquidation of Harbin Xinda Macromolecule Material Research Institute in December 2010, which was exempt from income taxes.

Net Income

As a result of the above factors, we had a net income of US$ 15.7 million in the third quarter of 2011 compared to net income of US$ 12.3 million in the same quarter of 2010.
 

19
 
 

 
Nine months ended September 30, 2011 compared to nine months ended September 30, 2010:

Revenues

Revenues were US$ 267.7 million for the nine months ended September 30,  2011, an increase of US$ 90.3  million, or 50.9%, compared to US$ 177.4 million in the same period of last year, due to approximately 31.5% increase in sales volume and 14.9% increase in the average selling price of our products. The increase of sales volume was driven by the strong demand of modified plastics in the PRC market and higher penetration of our business in our existing markets supported by our newly acquired nine production lines in December 2010. The increase of average selling price was due to the shift of product mix towards higher-end products as well as higher raw material prices.

Product Mix

The following table summarizes the breakdown of revenues in millions of US$ by product mix:
 
(in millions, except percentage)
 
Revenues
Nine Months Ended September 30,
               
   
2011
         
2010
          Change in     Change in    
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
   
Modified Polypropylene (PP)
    145.2       54.3 %     108.8       61.3 %     36.4       33.5 %
 
                                                   
Engineering Plastics
    45.6       17.0 %     31.4       17.7 %     14.2       45.2 %
 
                                                   
Modified Polyamide (PA)
    18.0       6.7 %     10.7       6.0 %     7.3       68.2 %
 
                                                   
Alloy Plastics
    20.3       7.6 %     8.9       5.0 %     11.4       128.1 %
 
                                                   
Environment Friendly Plastics
    22.2       8.3 %     6.5       3.7 %     15.7       241.5 %
 
                                                   
Modified Acrylonitrile Butadiene Styrene (ABS)
    16.4       6.1 %     11.1       6.3 %     5.3       47.7 %
 
                                                   
Total Revenues
    267.7       100 %     177.4       100 %     90.3       50.9 %

The following table summarizes the breakdown of metric tons (MT) by product mix:
 
                                                 
 
(in MTs, except percentage)
   
Sales Volume
Nine Months Ended September 30,
     
Change in
     
Change in
 
     
MT
     
%
     
MT
     
%
     
MT
     
%
 
Modified Polypropylene (PP)
    75,297       68.2 %     63,408       75.6 %     11,889       18.8 %
                                                 
Engineering Plastics
    9,700       8.8 %