10-Q 1 cxdc_10-063012.htm FORM 10-Q FOR THE PERIOD ENDED 06/30/2012 cxdc_10-063012.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 June 30, 2012

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   
(Do not check if a smaller reporting company)
Smaller reporting company  x
 
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 August 7, 2012, the registrant had 47,553,772 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
3
     
 
Unaudited Condensed Consolidated Statements of Comprehensive Income
4
     
 
Unaudited Condensed Consolidated Statements of Cash Flows
5
     
 
Notes to the Unaudited Condensed Consolidated Financial Statements
6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
14
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
24
   
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
26
     
Item 3. Defaults Upon Senior Securities
26
   
Item 4. Other Information
26
     
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

   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
US$
   
US$
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
    142,227,509       135,482,386  
Restricted cash
    18,888,714       11,128,106  
Accounts receivable, net of allowance for doubtful accounts
    47,822,751       45,232,013  
Amounts due from related parties
    7,870       78,912  
Inventories
    58,248,137       44,953,958  
Prepaid expenses and other current assets
    15,850,921       12,857,223  
Total current assets
    283,045,902       249,732,598  
Property, plant and equipment, net
    110,905,997       100,933,429  
Land use rights, net
    3,990,719       4,055,363  
Deposits for purchase of land use rights and plant
    5,556,589       5,608,765  
Deposits for purchase of equipment
    21,308,217       -  
Other non-current assets
    262,200       264,662  
Total assets
    425,069,624       360,594,817  
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCKS AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Short-term bank loans
    47,221,785       31,459,032  
Bills payable
    28,333,071       22,243,760  
Accounts payable
    97,469       398,043  
Amounts due to a related party
    168,705       -  
Income taxes payable
    7,655,800       5,814,988  
Accrued expenses and other current liabilities
    5,319,109       3,213,181  
Total current liabilities
    88,795,939       63,129,004  
Deferred income tax liabilities
    21,158,109       22,102,431  
Warrants liability
    2,000,608       3,862,927  
Embedded derivative liability
    298       610  
Total liabilities
    111,954,954       89,094,972  
Redeemable Series C convertible preferred stock
    1,829       1,829  
Redeemable Series D convertible preferred stock
    97,576,465       97,576,465  
Stockholders’ equity:
               
Series B preferred stock
    100       100  
Common stock, US$0.0001 par value, 500,000,000 shares authorized, 47,574,772 shares and 47,548,367 shares issued, 47,553,772 shares and 47,527,367 shares outstanding as of  June 30, 2012 and December 31, 2011, respectively
    4,757       4,754  
Treasury stock, at cost: 21,000 shares as of June 30, 2012 and December 31, 2011, respectively
    (92,694 )     (92,694 )
Additional paid-in capital
    71,496,969       71,190,659  
Retained earnings
    134,675,930       91,340,855  
Accumulated other comprehensive income
    9,451,314       11,477,877  
Total stockholders’ equity
    215,536,376       173,921,551  
Commitments and contingencies
    -       -  
Total liabilities, redeemable convertible preferred stocks and stockholders’ equity
    425,069,624       360,594,817  

See accompanying notes to unaudited condensed consolidated financial statements.
 
 
2

 
 

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

   
Three-Month Period Ended June 30,
   
Six-Month Period Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
US$
   
US$
   
US$
   
US$
 
                         
Revenues
    144,662,774       88,194,119       267,839,589       164,332,409  
Cost of revenues
    (109,395,422 )     (66,147,271 )     (201,350,671 )     (123,781,159 )
    Gross profit
    35,267,352       22,046,848       66,488,918       40,551,250  
                                 
Selling expenses
    (53,064 )     (256,127 )     (182,752 )     (439,744 )
General and administrative expenses
    (2,990,272 )     (1,682,107 )     (5,353,059 )     (3,131,981 )
Research and development expenses
    (4,610,458 )     (3,043,910 )     (7,065,497 )     (5,327,807 )
    Total operating expenses
    (7,653,794 )     (4,982,144 )     (12,601,308 )     (8,899,532 )
                                 
    Operating income
    27,613,558       17,064,704       53,887,610       31,651,718  
                                 
Interest income
    1,418,287       17,646       2,420,016       28,369  
Interest expense
    (913,643 )     (466,044 )     (1,399,043 )     (823,228 )
Other income
    -       94,384       -       98,629  
Other expense
    -       (181 )     -       (234 )
Change in fair value of embedded derivative liability
    298       213       312       541  
Change in fair value of warrants liability
    1,528,614       2,157,943       1,862,319       2,699,072  
    Total non-operating income, net
    2,033,556       1,803,961       2,883,604       2,003,149  
                                 
    Income before income taxes
    29,647,114       18,868,665       56,771,214       33,654,867  
                                 
Income tax expense
    (6,874,387 )     (4,488,056 )     (13,436,079 )     (7,368,136 )
                                 
    Net income
    22,772,727       14,380,609       43,335,135       26,286,731  
                                 
Earnings per share of common stock:
                               
Basic
    0.36       0.30       0.68       0.55  
Diluted
    0.33       0.30       0.65       0.52  
                                 
Net Income
    22,772,727       14,380,609       43,335,135       26,286,731  
                                 
Other comprehensive income (loss)
                               
  Foreign currency translation adjustment, net of nil income taxes
    (1,946,740 )     1,510,092       (2,026,563 )     2,689,996  
                                 
Comprehensive income
    20,825,987       15,890,701       41,308,572       28,976,727  
                                 


See accompanying notes to unaudited condensed consolidated financial statements.
 
 
 
3

 

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

   
Six-Month Period Ended June 30,
 
   
2012
   
2011
 
   
US$
   
US$
 
Cash flows from operating activities:
           
Net cash provided by operating activities
   
29,360,005
     
31,856,438
 
                 
Cash flows from investing activities:
               
Purchases and deposits for property, plant and equipment and land use rights
   
(37,490,885
)
   
(17,631,959
)
Proceeds from sales of property, plant and equipment
   
-
     
40,531
 
Net cash used in investing activities
   
(37,490,885
)
   
(17,591,428
)
                 
Cash flows from financing activities:
               
Proceeds from bank borrowings
   
70,412,507
     
30,283,168
 
Repayments of bank borrowings
   
(54,273,011
)
   
(21,412,341
)
Dividends paid to redeemable Series C convertible preferred stockholders
   
(60)
     
(120
)
Advance from a related party
   
-
     
255,147
 
Net cash provided by financing activities
   
16,139,436
     
9,125,854
 
                 
Effect of foreign currency exchange rate changes on cash and cash equivalents
   
(1,263,433
)
   
748,455
 
Net increase in cash and cash equivalents
   
6,745,123
     
24,139,319
 
                 
Cash and cash equivalents at beginning of period
   
135,482,386
     
22,720,766
 
Cash and cash equivalents at end of period
   
142,227,509
     
46,860,085
 
                 
Supplemental disclosure of cash flow information:
               
Interest paid
   
1,399,043
     
815,992
 
Income taxes paid
   
12,271,078
     
3,664,701
 
                 
Non-cash investing and financing activities:
               
Accrual for purchase of equipment
   
-
     
180,536
 

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, 2011 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, 2011, and the related consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, included in the Company’s Annual Report on Form 10-K filed with the SEC.

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 June 30, 2012, the results of operations for the three-month periods ended June 30, 2012 and 2011, and the results of operations and cash flows for the six-month periods ended June 30, 2012 and 2011, 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 and deferred income tax assets, the useful lives of property, plant and equipment, the collectibility of accounts receivable, the fair values of financial instruments and stock-based compensation awards, and 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

Sales concentration

The Company sells its products, substantially through approved distributors in the PRC. The Company’s sales are highly concentrated. Sales to five and four major distributors, which individually exceeded 10% of the Company’s revenues, accounted for approximately 76% and 75% of the Company’s revenues for the three-month periods ended June 30, 2012 and 2011, respectively. Sales to four major distributors, which individually exceeded 10% of the Company’s revenues, accounted for approximately 69% and 74% of the Company's revenues for the six-month periods ended June 30, 2012 and 2011, respectively.

The Company expects revenues from these distributors to continue to represent a substantial portion of its revenues 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 polyamide. The Company purchases substantially all of its raw materials through three distributors.  Raw material purchases from these three suppliers, which individually exceeded 10% of the Company’s total raw material purchases, accounted for approximately 99% and 99% of the Company’s total raw material purchases for the three-month periods ended June 30, 2012 and 2011, respectively, and 99% and 97% of the Company's total raw material purchase for the six-month periods ended June 30, 2012 and 2011, 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.
 

 
 
5

 
The majority owner of a major raw material supplier that supplied approximately 26% and 27% of the Company’s total raw material purchases for the three-month periods ended June 30, 2012 and 2011, respectively, and 26% and 25% of the Company's total raw material purchases for the six-month periods ended June 30, 2012 and 2011, respectively, is also the majority owner of a sales distributor of the Company, as well as the major equipment distributor to the Company. Sales to this customer were approximately 14% and 13% of the Company’s total revenues for the three-month periods ended June 30, 2012 and 2011, respectively, and 15% and 13% of the Company's total revenues for the six-month periods ended June 30, 2012 and 2011, respectively. Purchases from this major equipment distributor accounted for 99% and nil of the Company's total equipment purchases for the six-month ended June 30, 2012 and 2011, respectively.

Cash concentration

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

   
June 30,
2012
   
December 31,
2011
 
     
US$
     
US$
 
RMB denominated bank deposits with financial institutions in the PRC
   
160,839,738
     
137,503,064
 
US dollar denominated bank deposits with a financial institution in the U.S.
   
111,398
     
36,280
 
US dollar denominated bank deposits with financial institutions in the PRC
   
-
     
8,589,666
 
US dollar denominated bank deposits with a financial institution in Hong Kong Special Administrative Region
   
153,899
     
478,832
 
 
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 with acceptable credit rating.

Cash that is restricted as to withdrawal or usage is reported as restricted cash in the condensed consolidated balance sheets and is not included as cash and cash equivalents in the condensed consolidated statements of cash flows. Restricted cash of US$18,888,714 and US$11,128,106 as of June 30, 2012 and December 31, 2011, respectively, represents short-term bank deposits that are pledged as security for bills payable relating to purchase of raw materials. Upon maturity and pay off of the bills payable, which is generally within 6 months, the cash becomes available for use by the Company. The net cash flows from the pledged bank deposits, which relate to purchases of raw materials, are reported within cash flows from operating activities in the condensed consolidated statements of cash flows.
 
Note 2 - Accounts receivable

Accounts receivable consist of the following:

   
June 30,
2012
   
December 31,
2011
   
US$
   
US$
           
Accounts receivable
   
47,968,885
     
45,345,837
Allowance for doubtful accounts
   
(146,134
)
   
(113,824)
Accounts receivable, net
   
47,822,751
     
45,232,013

The Company recorded provision for doubtful accounts of US$32,310 during the three-month and six-month periods ended June 30, 2012.  There was no write-off of accounts receivables during the six-month period ended June 30, 2012 and 2011.
 

 
 
6

 
Note 3 - Inventories

Inventories consist of the following:

 
June 30,
2012
 
December 31,
2011
 
 
US$
 
US$
 
         
Raw materials
    44,644,019       37,645,204  
Work in progress
    192,697       164,144  
Finished goods
    13,411,421       7,144,610  
Total inventories
    58,248,137       44,953,958  
 
 
There were no write down of inventories during the six-month periods ended June 30, 2012 and 2011.

Note 4 – Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

   
June 30,
2012
   
December 31,
2011
   
US$
   
US$
           
Advances to suppliers
   
14,559,829
   
12,522,985
Others
   
1,291,092
   
334,238
Total prepaid expenses and other current assets
   
15,850,921
   
12,857,223

Consistent with the common industry practice in the PRC, the Company is required to pay deposits to the suppliers for the principal raw materials ordered. The Company makes advanced orders of raw materials based upon (1) the demand and supply situation in the raw materials market and (2) the forecasted demand of products.  All advances to suppliers as of June 30, 2012 are related to the purchase of raw materials, which were subsequently received by the Company in July 2012.

Others mainly include interest receivable, other prepayments and staff advances.

Note 5 – Property, plant and equipment, net

Property, plant and equipment consist of the following:
 
   
June 30,
2012
   
December 31,
2011
 
   
US$
   
US$
 
                 
Machinery, equipment and furniture
   
91,659,508
     
92,363,611
 
Motor vehicles
   
952,542
     
961,130
 
Plant and buildings
   
17,673,998
     
17,762,660
 
Construction in progress
   
17,041,767
     
1,468,408
 
Total property, plant and equipment
   
127,327,815
     
112,555,809
 
Less accumulated depreciation
   
(16,421,818
)
   
(11,622,380
)
    Property, plant and equipment, net
   
110,905,997
     
100,933,429
 
 
 
Depreciation expense was US$4,941,957 and US$2,412,243 for the six-month periods ended June 30, 2012 and 2011, respectively, and US$2,468,987 and US$1,214,694 for the three-month periods ended June 30, 2012 and 2011, respectively. For the three-month periods and six-month ended June 30, 2012 and 2011, interest expense capitalized as a component of the cost of construction-in-progress was inconsequential.
 

 
 
7

 
Note 6 – Deposit for purchase of equipment
 
In April 2012, the Company’s subsidiaries, Harbin Xinda Plastics Material Research Center Co., Ltd (“Xinda Material Research Center”) and Heilongjiang Xinda Enterprise Group Company Limited (“Xinda Group”), entered into equipment purchase agreements with Harbin Jiamu Import and Export Trading Co., Ltd. (“Harbin Jiamu”), pursuant to which Xinda Material Research Center and Xinda Group will purchase from Harbin Jiamu equipments for a consideration of RMB511,455,000 (approximately US$80,506,060) and RMB90,063,536 (approximately US$14,176,536) in cash, respectively.  The equipments are expected to be installed in the workshops under construction in the second half year 2012.
 
As of June 30, 2012, the Company had made payments in the amount of RMB228,728,100 (equivalent to US$36,003,164) to Harbin Jiamu and the Company had received equipments in the amount of RMB93,357,000 (equivalent to US$14,694,947) from Harbin Jiamu under the purchase agreements.
 
Note 7 – Short-term bank loans

   
June 30,
2012
   
December 31,
2011
 
   
US$
   
US$
 
             
Unsecured loans under the line of credit
   
15,740,595
     
-
 
Loans secured by accounts receivable
   
23,610,893
     
-
 
Loan secured by restricted cash
   
7,870,297
     
-
 
Loans secured by property, plant and equipment and land use rights
           
15,570,632
 
Loans secured by equipment of Harbin Xinda High-Tech Co., Ltd. (“Xinda High-Tech”) and guaranteed by Mr. Han Jie, (“Mr. Han”), the chief executive officer and controlling stockholder of the Company and his wife
   
-
     
15,888,400
 
Total short-term bank loans
   
47,221,785
     
31,459,032
 

As of June 30, 2012 and December 31, 2011, the Company’s short-term bank loans bear a weighted average interest rate of 6.5% and 6.1% per annum, respectively. All short-term bank loans mature and expire at various times within one year and contain no renewal terms.

On January 17, 2012, the Company obtained a revolving one-year line of credit in the amount of RMB100 million (approximately US$15.7 million) from a PRC bank in Harbin, Heilongjiang province. As of June 30, 2012, the line of credit was fully utilized.

On June 20, 2012, the Company obtained a resolving one-year line of credit in the amount of RMB120 million (approximately US$18.9 million) from a PRC bank in Harbin, Heilongjiang province.  Pursuant to the line of credit agreement, the bank will directly pay to one of the Company’s raw material vendors for the purchases of raw materials, upon the request of drawdown by the Company.  The Company is required to maintain a deposit for 20% of the utilized line of credit as a guarantee.  As of June 30, 2012, US$7.9 million line of credit was utilized.

Note 8 - Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:
 
   
June 30,
2012
   
December 31,
2011
 
   
US$
   
US$
 
             
Payables for purchase of property, plant and equipment
   
2,046,835
     
2,199,951
 
Others
   
3,272,274
     
1,013,230
 
Total accrued expenses and other current liabilities
   
5,319,109
     
3,213,181
 

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

 
 
8

 
Note 9 - Related party transactions

During the periods presented, the Company entered into related party transactions with Xinda High-Tech, an entity controlled by the wife of Mr. Han, the chief executive officer and controlling stockholder of the Company, and Mr. Han’s son.  The significant related party transactions are summarized as follows:

   
Three-Month Period Ended June 30,
   
Six-Month Period Ended June 30,
 
   
2012
 
2011
   
2012
   
2011
 
   
US$
 
US$
   
US$
   
US$
 
Costs and expenses resulting from transactions with  related parties:
                           
Rental expenses for plant and office spaces
(a)
160,354
   
84,638
     
256,089
     
168,240
 

The balances due from and to the related parties are summarized as follows:
 
     
June 30,
2012
 
December 31,
2011
     
US$
 
US$
Amounts due from related parties:
         
Prepaid rental expenses to Xinda High-Tech
(a)
   
-
 
78,912
Prepaid rental expenses to Mr. Han’s son
(a)
   
7,870
 
-
Total
     
7,870
 
78,912
             
Amounts due to a related party:
           
Rental payable to Xinda High-Tech
(a)
   
168,705
 
-

(a)
The Company rents the following plant and office buildings in Harbin, Heilongjiang province from Xinda High-Tech:


Premise Leased
 
Area (M2)
   
Annual Rental Fee (US$)
 
Period of Lease
Plant and office building
    23,894       316,461  
Between May 1, 2009 and April 30, 2012
Office building
    2,800       31,646  
Between June 1, 2010 and April 30, 2012
Office building
    500       9,494  
Between January 1, 2011 and April 30, 2012
Office building
    213       8,861  
Between January 1, 2012 and April 30, 2012
Plant and office building
    20,500       648,730  
Between May 1, 2012 and April 30, 2015
Office building
    3,394       107,407  
Between May 1, 2012 and April 30, 2015

The Company also rents a facility of approximately 3,134 square meters in Harbin, Heilongjiang province from Mr. Han’s son for an annual rental fee of RMB100,000 (approximately US$15,823).  The period of the lease is from January 1, 2012 to December 31, 2012.

Total rental expenses paid or payable to Xinda High-Tech and Mr. Han’s son amounted to US$160,354 and US$84,638 during the three-month periods, and US$256,089 and US$168,240 during the six-month periods ended June 30, 2012 and 2011, respectively.
 

 
 
9

 
Note 10 - Income tax

In 2008, Harbin Xinda Macromolecule Material Co., Ltd. (“Harbin Xinda”) was qualified as an Advanced and New Technology Enterprise (“ANTE”).  In 2011, Harbin Xinda renewed its ANTE qualification, which entitled it to the preferential income tax rate of 15% from January 1, 2011 to December 31, 2013.  In December 2011, Heilongjiang Xinda Enterprise Group Co., Ltd. (“Xinda Group”) was established and is subject to income tax at 25%.  In January 2012, as a result of an internal reorganization, Harbin Xinda was merged into Xinda Group which remains subject to income tax at 25% after the merger.

The effective income tax rates for the six-month periods ended June 30, 2012 and 2011 were 23.7% and 21.9%, respectively. The effective income tax rate for the six-month period ended June 30, 2012 differs from the PRC statutory income tax rate of 25% primarily due to the additional 50% deduction against taxable income for certain research and development expenses incurred by two research centers of the Company. 

As of June 30, 2012 and December 31, 2011, full valuation allowances of US$1,190,715 and US$1,005,361 were provided against the deferred income tax assets of entities which were in cumulative loss positions.

As of and for the three-month period and six-month period ended June 30, 2012, 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 11 - Warrants

The following is a summary of outstanding warrants as of June 30, 2012:

Warrants
 
Exercise Price
   
Number of Warrants
Outstanding
   
Remaining
Contractual Life
 
   
US$
         
Years
 
Series A investor warrants
    4.9       1,320,696       2.42  
Series A placement agent warrants
    5.5       117,261       2.42  
Series C placement agent warrants
    7.5       166,667       1.02  
              1,604,624          

The fair values of the warrants as of June 30, 2012 were calculated using Black-Scholes option pricing model with the following assumptions:

   
Series A Investor
Warrants
 
Series A Placement
Agent Warrants
 
Series C Placement
Agent Warrants
Volatility
 
52.8%
 
52.8%
 
53.5%
Expected dividends yield
   
0%
 
0%
 
0%
Fair value of underlying common stock (per share)
   
4.58
 
4.58
 
4.58
Risk-free interest rate (per annum)
   
0.36%
 
0.36%
 
0.25%

During the six-month period ended June 30, 2012, no warrants were exercised.  
 

 
 
10

 
Note 12 - Stockholders’ equity

The changes of each caption of stockholders’ equity for the six-month period ended June 30, 2012 are as follows:
 
 
   
Series B Preferred Stock
 
Common Stock
                     
   
Number
of Shares
 
Amount
 
Number
of Shares
 
Amount
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Income
 
Total
Stockholders’ Equity
 
       
US$
     
US$
                     
Balance as of January 1, 2012
  1,000,000   100   47,527,367   4,754   (92,694 ) 71,190,659   91,340,855   11,477,877   173,921,551  
Net income
  -   -   -   -   -   -   43,335,135   -   43,335,135  
Other comprehensive loss
  -   -   -   -   -   -   -   (2,026,563 ) (2,026,563 )
Dividends to redeemable Series C convertible preferred stockholders
  -   -   -   -   -   -   (60 ) -   (60 )
Exercise of unvested shares
  -   -   26,405   3   -   (3 ) -   -   -  
Stock based compensation
  -   -   -   -   -   306,313   -   -   306,313  
Balance as of June 30, 2012
  1,000,000   100   47,553,772   4,757   (92,694 ) 71,496,969   134,675,930   9,451,314   215,536,376  
                                       
 
Note 13 - Stock 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, 2011
   
297,000
     
8.01
       
Grant
   
-
     
-
       
Forfeited
   
-
     
-
       
Exercised
   
-
     
-
       
Expired
   
-
     
-
       
Outstanding as of June 30, 2012
   
297,000
     
8.01
 
8.11
 
-
Vested and expected to vest as of June 30, 2012
   
297,000
     
8.01
 
8.11
 
-
Exercisable as of June 30, 2012
   
-
     
-
       
 
The Company recognized US$82,833 and US$82,833 of share-based compensation expense in general and administration expenses relating to stock options for the three-month periods ended June 30, 2012 and 2011, respectively, and US$164,756 and US$164,756 of share-based compensation expense in general and administration expenses relating to stock options for the six-month periods ended June 30, 2012 and 2011, respectively. As of June 30, 2012, there was US$367,001 of total unrecognized compensation cost relating to stock options, which is to be recognized over a period of 1.1 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, 2011
 
106,405
 
6.03
Vested
 
(26,405)
 
4.38
Outstanding as of June 30, 2012
 
80,000
 
6.57

The Company recognized US$70,775 and US$43,800, and US$141,557 and US$113,691 of compensation expense in general and administration expenses relating to nonvested shares for the three-month periods and six-month periods ended June 30, 2012 and 2011, respectively. As of June 30, 2012, there was US$192,720 of total unrecognized compensation cost relating to nonvested shares, which is to be recognized over a weighted average period of 1.1 years.
 

 
 
11

 
Note 14 - Earnings per share

Basic and diluted earnings per share are calculated as follows:

   
Three-Month Period Ended June 30,
   
Six-Month Period Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
US$
   
US$
   
US$
   
US$
 
Numerator:
                               
Net income
   
22,772,727
     
14,380,609
     
43,335,135
     
26,286,731
 
Less: Dividends to Series C convertible preferred stockholders
   
(30)
     
(30)
     
(60)
     
(60)
 
Net income available to common stockholders
   
22,772,697
     
14,380,579
     
43,335,075
     
26,286,671
 
Less:
                               
Earnings allocated to participating Series C convertible preferred stock
   
(156)
     
(131)
     
(296)
     
(239)
 
Earnings allocated to participating Series D convertible preferred stock
   
(5,725,900)
     
-
     
(10,896,045)
     
-
 
Earnings allocated to participating nonvested shares
   
(31,433)
     
(24,154)
     
(66,139)
     
(46,265)
 
Net income for basic earnings per share
   
17,015,208
     
14,356,294
     
32,372,595
     
26,240,167
 
                                 
Changes in fair value of derivative liabilities - Series A investor warrants
   
(1,341,917) 
     
-
     
(1,629,711)
     
(1,321,460)
 
Net income for dilutive earnings per share
   
15,673,291
     
14,356,294
     
30,742,884
     
24,918,707
 
                                 
Denominator:
                               
Denominator for basic earnings per share:
                               
Weighted average number of common stock outstanding
   
47,545,938
     
47,548,367
     
47,536,652
     
47,737,651
 
Series A investor warrants
   
                6,725
     
-
     
44,264
     
90,670
 
Denominator for diluted earnings per share
   
    47,552,663
     
47,548,367
     
47,580,916
     
47,828,321
 
Earnings per share:
                               
Basic
   
0.36
     
0.30
     
0.68
     
0.55
 
Diluted
   
0.33
     
0.30
     
0.65
     
0.52
 

The following table summarizes potentially dilutive securities excluded from the calculation of diluted earnings per share for the three-month periods and six-month periods ended June 30, 2012 and 2011 because their effects are anti-dilutive:

   
Three-Month Period Ended June 30,
   
Six-Month Period Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Shares issuable upon exercise of Series A investor warrant
   
-
     
1,320,696
     
-
     
-
 
Shares issuable upon exercise of Series A placement agent warrant
   
117,261
     
117,261
     
117,261
     
117,261
 
Shares issuable upon exercise of Series C placement agent warrant
   
166,667
     
166,667
     
166,667
     
166,667
 
Shares issuable upon exercise of stock options
   
297,000
     
445,500
     
297,000
     
445,500
 
 
 
 
 
12

 
 
Note 15 - Commitments and contingencies

(1)  
Lease commitments
 
Future minimum lease payments under non-cancellable operating leases agreements as of June 30, 2012 were as follows. The Company’s leases do not contain any contingent rent payments terms.

   
US$
 
Period from July 1, 2012 to December 31, 2012
   
416,114
 
Years ending December 31,
       
2013
   
775,159
 
2014
   
756,136
 
2015
   
252,045
 
2016
   
-
 
2017 and thereafter
   
-
 
 

Rental expenses incurred for operating leases of plant and equipment and office spaces were US$181,791 and US$103,263 for the three-month periods, and US$297,495 and US$206,201 for the six-month periods ended June 30, 2012 and 2011, respectively. There are no step rent provisions, escalation clauses, capital improvement funding requirements, other lease concessions or contingent rent in the lease agreements. The Company has no legal or contractual asset retirement obligations at the end of leases.

(2)             Plant construction

Pursuant to the agreement with Harbin Shengtong Engineering Plastics Co. Ltd., the Company has a commitment of RMB316,937,900 (equivalent to US$49,887,911) as of June 30, 2012, for the acquisition of land use rights and a production plant consisting of five workshops and a building upon completion.

(3)             Warehouse construction

Pursuant to the agreement with Oriental International Construction Engineering Company Limited, the Company has a commitment of RMB4,932,698 (equivalent to US$776,436) as of June 30, 2012, for the construction of a warehouse.
 
(4)             Equipment acquisition

As of June 30, 2012, the Company has a commitment of RMB374,013,526 (equivalent to US$58,871,954) for the acquisition of equipment.
 
 
 
 
13

 
 

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

We make forward-looking statements in this report, in other materials we file with the Securities and Exchange Commission (the “SEC”) or otherwise release to the public, and on our website. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media and others. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings) and demand for our products and services, and other statements of our plans, beliefs, or expectations, including the statements contained in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” regarding our future plans, strategies and expectations are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You are cautioned not to place undue reliance on these forward-looking statements because these forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Thus, our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: economic conditions generally and the automotive modified plastics market specifically, legislative or regulatory changes that affect our business, including changes in regulation, the availability of working capital, the introduction of competing products, and other risk factors described herein. These risks and uncertainties, together with the other risks described from time-to-time in reports and documents that we filed with the SEC should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Overview

China XD Plastics Company Limited (“China XD”, “we”, and the “Company”, and “us” or “our” shall be interpreted accordingly) is one of the leading specialty chemical companies engaged in the research, development, manufacture and sale of modified plastics primarily for automotive applications in China. Through our wholly-owned operating subsidiaries in China, we develop modified plastics using our proprietary technology, manufacture and sell our products primarily for use in the fabrication of automobile parts and components. We have received 227 certifications from manufacturers in the automobile industry as of June 30, 2012. We are the only company certified as a National Enterprise Technology Center in modified plastics industry in Heilongjiang province. Our Research and Development (the “R&D”) team consists of 96 professionals and  15 consultants, including two consultants who are members of Chinese Academy of Engineering, and one consultant who is the former chief scientist of Specialty Plastics Engineering Institute of Jilin University. As a result of the integration of our academic and technological expertise, we have a portfolio of 43 patents, one of which we have obtained the patent rights and the remaining 42 of which we have applications pending in China as of June 30, 2012.

Our products include seven categories: polypropylene (PP), acrylonitrile butadiene styrene (ABS), modified engineering plastics, polyamides (PA or nylon), environment-friendly plastics, specialty engineering plastics and polyether ether ketone (PEEK). The Company's products are primarily used in the production of exterior and interior trim and functional components of more than 20 automobile brands and 70 automobile models manufactured in China, including Audi, Volkswagen, BMW, GM Mazda, Toyota, Cherry, Geely and Hafei new energy vehicles. Our research center is dedicated to the research and development of modified plastics, and benefits from its cooperation with well-known scientists from prestigious universities in China. We operate three manufacturing bases in Harbin, Heilongjiang in the PRC. As of June 30, 2012, we had approximately 255,000 metric tons of production capacity across 58 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwan conveyer systems. In addition, there are three additional workshops which are currently under construction in our third production base and expected to be completed in the second half of 2012 and which could support our production capacity expansion beyond 2012. 
 
 
 
 
14

 

Highlights for the three months ended June 30, 2012 include:
 
·
 Revenue was $144.7 million, an increase of 64.0% from $88.2 million in the second quarter of 2011
·
 Gross profit was $35.3 million, an increase of 60.0% from $22.0 million in the second quarter of 2011
·
 Gross profit margin was 24.4%, compared to 25.0% in the second quarter of 2011
·
 Net income was $22.8 million, compared to $14.4 million in the second quarter of 2011
·
 Total volume shipped was 53,866 metric tons, up 48.1% from 36,367 metric tons in the second quarter of 2011
 
Results of Operations

The following table sets forth, for the periods indicated, statements of income data in millions of US$:
 
(in millions, except  percentage)
 Three Months  Ended           Six Months Ended       
  June 30,        Change      June 30,      Change
  2012      2011          2012      2011     
Revenues
  144.7      
88.2
     
64.0
%
   
267.8
     
164.3
     
63.0
 %
Cost of revenues
  (109.4)      
(66.2)
     
65.4
%
   
(201.3)
     
(123.7)
     
62.7
Gross profit
  35.3      
22.0
     
60.0
%
   
66.5
     
40.6
     
64.0
 %
Total operating expenses
  (7.7)      
(4.9)
     
53.6
%
   
(12.6)
     
(8.9)
     
41.6
 %
Operating income
  27.6      
17.1
     
61.8
%
   
53.9
     
31.7
     
70.3
 %
Income before income taxes
  29.6      
18.9
     
57.1
%
   
56.8
     
33.7
     
68.7
 %
Income tax expense
  (6.8)      
(4.5)
     
53.2
%
   
(13.5)
     
(7.4)
     
82.4
 %
Net income
  22.8      
14.438
     
58.4
%
   
43.3
     
26.3
     
64.9
 %

Three Months Ended June 30, 2012 compared to three months ended June 30, 2011

Revenues

Revenues were US$144.7 million in the second quarter ended June 30, 2012, an increase of US$56.5 million, or 64.0%, compared to US$88.2 million in the same period of last year, due to approximately 48.1% increase in sales volume and 11.5% increase in the average selling price of our products on a constant dollar basis. 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 installed twenty production lines in December 2011, as well as the marketing efforts to develop new customers. Such increase in demand was driven by increasing demand for middle and high-end automobiles by Chinese consumers, continuing substitution of imported modified plastics by domestic suppliers, as well as the increase of plastic content on the per-vehicle-basis in China. 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 that we have been able to effectively pass through to our customers. 
 

 
 
15

 
The following table summarizes the breakdown of revenues by product mix in millions of US$:
 
(in millions, except percentage)
   
Revenues
For the Three Months Ended June 30,
               
      2012     2011                
     
Amount
     
%
   
Amount
     
%
   
Change in Amount
     
Change in
%
Modified Polypropylene (PP)
    71.6       49.4 %     48.8       55.4 %     22.8       46.7 %
                                                 
Engineering Plastics
    25.9       17.9 %     13.5       15.3 %     12.4       91.4 %
                                                 
Modified Polyamide (PA)
    12.2       8.5 %     5.9       6.7 %     6.3       106.1 %
                                                 
Alloy Plastics
    12.9       8.9 %     5.6       6.3 %     7.3       132.3 %
                                                 
Environment Friendly Plastics
    15.2       10.5 %     5.3       6.0 %     9.9       185.7  %
                                                 
Modified Acrylonitrile Butadiene Styrene (ABS)
    4.8       3.3 %     4.9       5.6 %     (0.1 )     (3.2 )%
                                                 
     Sub-total
    142.6       98.5 %     84.0       95.3 %     58.6       69.6 %
                                                 
After-sales Service
    2.1       1.5 %     4.2       4.7 %     (2.1 )     (49.2 )%
Total Revenues
    144.7       100 %     88.2       100 %     56.5       64.0 %


The following table summarizes the breakdown of metric tons (MT) by product mix:
 
(in MTs, except percentage)
   
Sales Volume
For the Three Months Ended June  30,
               
     
2012
   
2011
               
     
MT
     
%
   
MT
     
%
   
Change in 
MT
     
Change in 
%
Modified Polypropylene (PP)
    34,354       63.7 %     26,089       71.7 %     8,265       31.7 %
                                                 
Engineering Plastics
    5,121       9.5 %     2,870       7.9 %     2,251       78.4
                                                 
Polyamide (PA)
    2,536       4.7 %     1,415       3.9 %     1,121       79.2 %
                                                 
Alloy Plastics
    3,495       6.5 %     1,841       5.1 %     1,654       89.9 %
                                                 
Environment Friendly Plastics
    6,600       12.3 %     2,410       6.6 %     4,190       173.9 %
                                                 
Modified Acrylonitrile Butadiene Styrene (ABS)
    1,760       3.3 %     1,742       4.8 %     18       1.0 %
                                                 
Total sales volume
    53,866       100 %     36,367       100 %     17,499       48.1 %

The Company has shifted product mix from traditional Modified Polypropylene (PP) to higher-end products such as Environmental Friendly Plastics, Engineering Plastics, Polyamide (PA) and Alloy Plastics, primarily due to (i) the increasing demand of advanced modified plastics in luxury automobile models in China, (ii) the stronger demand promoted by Chinese government for clean energy vehicles and (iii) stronger sales of higher-end 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.
 

 
 
16

 
Gross Profit and Gross Margin

   
Three Months Ended June 30,
   
Change
 
(in millions, except percentage)
 
2012
   
2011
   
Amount
   
%
 
Gross Profit
 
$
35.3
   
$
22.0
   
$
13.3
     
60.0
%
Gross Margin
   
24.4
%    
25.0
           
(0.6)
%

Gross profit was US$35.3 million in the second quarter ended June 30, 2012 compared to US$22.0 million in the same period of 2011, representing an increase of 60.0%. Our gross margin decreased to 24.4% in the second quarter ended June 30, 2012 from 25.0% during the same quarter of 2011. The decrease was mainly attributed to increase of the price of raw materials, increase of depreciation, and increase of production related payroll expenses this year, partially offset by our efforts in developing and selling more higher value-added automotive modified plastics towards high-end products as a percentage of total sales in the second quarter ended June 30, 2012.
 
General and Administrative Expenses

   
Three Months Ended  June 30,
   
Change
 
(in millions, except percentage)
 
2012
   
2011
   
Amount
   
%
 
General and Administrative Expenses
 
$
3.0
   
$
1.7
   
$
1.3
     
77.8
%
as a percentage of revenues
   
2.1
%
   
1.9
%
           
0.2
%

General and administrative (G&A) expenses were US$3.0 million in the second quarter ended June 30, 2012 compared to US$1.7 million in the same period in 2011, representing an increase of 77.8%, or US$1.3 million. This increase is primarily due to increase of payroll resulting from raised average salary and increased headcount in the three-month period ended June 30, 2012. On a percentage basis, G&A expenses in the second quarter of 2012 increased to 2.1% of revenues from 1.9% in the same period of 2011.

Research and Development Expenses

   
Three Months Ended June 30,
   
Change
 
(in millions, except percentage)
 
2012
   
2011
   
Amount
   
%
 
Research and Development Expenses
 
$
4.6
   
$
3.0
   
$
1.6
     
51.5
%
as a percentage of revenues
   
3.2
%
   
3.5
%
           
(0.3)
%

Research and development (“R&D”) expenses were US$4.6 million during the quarter ended June 30, 2012 compared with US$3.0 million during the same period in 2011, an increase of US$1.6 million, or 51.5%, reflecting increased research and development activities on new products in order to obtain product certifications for automotive applications from automobile manufacturers as well as other non-automotive applications.

As of June 30, 2012, the number of ongoing research and development projects is 113. We expect to complete and realize economic benefits on approximately 30% of the projects in the near term. The remaining projects are expected to be carried out for a longer period. The majority of the projects are in the field of modified plastics in automotive applications and the rest are in advanced fields such as ships, airplanes, high-speed rail, medical devices, etc.

Operating Income

Total operating income was US$27.6 million in the quarter ended June 30, 2012 compared to US$17.1 million in the same period of 2011, representing an increase of 61.8% or US$10.5 million. This increase is primarily due to higher gross profit, partially offset by higher G&A and R&D expenses.
 

 
 
17

 
Other Income (Expense)

Interest Income (Expenses)
   
Three Months Ended June 30,
   
Change
 
(in millions, except percentage)
 
2012
   
2011
   
Amount
   
%
 
Interest Income
 
$
1.4
   
$
-
   
$
1.4
     
N/A
 
Interest Expenses
   
(0.9)
     
(0.5)
     
(0.4)
     
96.0
%
Net Interest Income (Expenses)
 
$
0.5
   
$
(0.5)
   
$
1.0
     
(212.5)
as a percentage of revenues
   
0.3
%
   
(0.5)
%
           
0.8
%

Net interest income was US$0.5 million in the quarter ended June 30, 2012, compared to net interest expenses of US$0.5 million in the same period of 2011, primarily due to US$1.4 million interest income generated from time deposits in the second quarter of 2012.

Change in Fair Value of Warrants Liabilities

   
Three Months Ended June 30,
   
Change
 
(in millions, except percentage)
 
2012
   
2011
   
Amount
   
%
 
Change in Fair Value of Warrants Liabilities
 
$
1.5
   
$
2.2
   
$
(0.7)
     
(29.2)
%
as a percentage of revenues
   
1.0
%
   
2.5
%
           
(1.5)
%

Change in fair value of warrants liabilities was a gain of US$1.5 million in the quarter ended June 30, 2012, compared to a gain of US$2.2 million in the same period of 2011, 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 second quarter of 2012 decreased to 1.0% of revenues from 2.5% in the second quarter of 2011.

Income Taxes

   
Three Months Ended June 30,
   
Change
 
(in millions, except percentage)
 
2012
   
2011
   
Amount
   
%
 
Income before Income Taxes
 
$
29.6
   
$
18.9
   
$
10.7
     
57.1
%
Income Tax Expense
   
(6.8)
     
(4.5)
     
(2.3)
     
53.2
%
Effective income tax rate
   
23.2
%    
23.8
           
(0.6)
%

The effective income tax rates for the three-month periods ended June 30, 2012 and 2011 were 23.2% and 23.8%, respectively. The effective income tax rate for the three-month period ended June 30, 2012 differs from the PRC statutory income tax rate of 25% primarily due to the additional 50% deduction against taxable income for certain research and development expenses incurred by our research centers. 

Our PRC subsidiaries have US$161.0 million of cash and cash equivalents and restricted cash as of June 30, 2012, which is planned to be permanently reinvested in the PRC. The distributions from our PRC subsidiaries are subject to the U.S. federal income tax at 34%, less any applicable foreign tax credits. Due to our policy of indefinitely reinvesting our earnings in our PRC business, we have not provided for deferred income tax liabilities on undistributed earnings of our PRC subsidiaries.
 
Net Income

As a result of the above factors, we had a net income of US$22.8 million in the second quarter of 2012, compared to net income of US$14.4 million in the same quarter of 2011.
 
 
 
 
18

 
Six Months Ended June 30, 2012 compared to six months ended June 30, 2011

Revenues

Revenues were US$267.8 million for the six months ended June 30, 2012, an increase of US$103.5 million, or 63.0%, compared to US$164.3 million in the same period of last year, due to approximately 40.6% increase in sales volume and 15.1% increase in the average selling price of our products on a constant dollar basis. 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 installed twenty production lines in December 2011, as well as the marketing efforts to develop new customers. Such increase in demand was driven by increasing demand for middle and high-end automobiles by Chinese consumers, continuing substitution of imported modified plastics by domestic suppliers, as well as the increase of plastic content on the per-vehicle-basis in China. 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 that we have been able to effectively pass through to our customers. 

Product Mix
 
The following table summarizes the breakdown of revenues by product mix in millions of US$:
 
(in millions, except percentage)
 
Revenues
For the Six Months Ended June 30,
             
     2012      2011              
   
Amount
   
%
   
Amount
   
%
   
Change in Amount
   
Change in
%
 
Modified Polypropylene (PP)
    136.0       50.8 %     95.6       58.2 %     40.4       42.2 %
                                                 
Engineering Plastics
    50.7       18.9 %     23.9       14.5 %     26.8       112.4 %
                                                 
Polyamide (PA)
    23.2       8.7 %     10.4       6.3 %     12.8       123.9 %
                                                 
Alloy Plastics
    19.4       7.2 %     9.1       5.6 %     10.3       111.7 %
                                                 
Environment Friendly Plastics
    24.8       9.3 %     10.6       6.4 %     14.2       134.9 %
                                                 
Modified Acrylonitrile Butadiene Styrene (ABS)
    9.6       3.6 %     7.9       4.8 %     1.7       21.8 %
                                                 
     Sub-total
    263.7       98.5 %     157.5       95.8 %     106.2       67.4 %
                                                 
After-sales Service
    4.1       1.5 %     6.8       4.2 %     (2.7 )     (39.6 )%
Total Revenues
    267.8       100 %     164.3       100 %     103.5       63.0 %


The following table summarizes the breakdown of metric tons (MT) by product mix:

   
Sales Volume
             
(in MTs, except percentage)
 
For the Six Months Ended June 30,
             
   
2012
   
2011
             
   
MT
   
%
   
MT
   
%
   
Change in
 MT
   
Change in
 %
 
Modified Polypropylene (PP)
    65,348       65.5 %     52,286       73.7 %     13,062       25.0 %
                                                 
Engineering Plastics
    9,926       10.0 %     5,315       7.5 %     4,611       86.8 %
                                                 
Polyamide (PA)
    4,749       4.8 %     2,602       3.7 %     2,147       82.5
                                                 
Alloy Plastics
    5,388       5.4 %     3,141       4.4 %     2,247       71.5 %
                                                 
Environment Friendly Plastics
    10,750       10.7 %     4,661       6.6 %     6,089       130.6 %
                                                 
Modified Acrylonitrile Butadiene Styrene (ABS)
    3,540       3.6 %     2,920       4.1 %     620       21.2 %
                                                 
Total sales volume
    99,701       100 %     70,925       100 %     28,776       40.6 %
 
 

 
 
19

 
The Company has shifted product mix from traditional Modified Polypropylene (PP) to higher-end products such as Environmental Friendly Plastics, Engineering Plastics, Polyamide (PA) and Alloy Plastics, primarily due to (i) the increasing demand of advanced modified plastics in luxury automobile models in China, (ii) the stronger demand promoted by Chinese government for clean energy vehicles and (iii) stronger sales of higher-end 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

   
Six Months Ended
June 30,
   
Change
 
(in millions, except percentage)
 
2012
   
2011
   
Amount
   
%
 
Gross Profit
 
$
66.5
   
$
40.6
   
$
25.9
     
64.0
%
Gross Margin
   
24.8
   
24.7
           
0.1
%

Gross profit was US$66.5 million for the six months ended June 30, 2012 compared to US$40.6 million in the same period of 2011, representing an increase of 64.0%. Our gross margin increased to 24.8% during the six months ended June 30, 2012 from 24.7% during the period of 2011. The increase was mainly attributed to the higher proportion of sales of our high-end products as a percentage of total sales in the six months ended June 30, 2012 as a result of our efforts in developing and selling more higher value-added automotive modified plastics.

General and Administrative Expenses

   
Six Months Ended 
 June 30,
   
Change
 
(in millions, except percentage)
 
2012
   
2011