10-Q 1 cxdc_10q-063013.htm FORM 10-Q FOR THE PERIOD ENDED 6/30/2013 cxdc_10q-063013.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, 2013

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 August 5, 2013, the registrant had 47,788,772 shares of common stock, par value US$0.0001 per share, outstanding.
 
 
 

 
TABLE OF CONTENTS
 
PAGE
PART I. FINANCIAL INFORMATION
  2
     
Item 1. Financial Statements
2
     
 
Unaudited Condensed Consolidated Balance Sheets
2
     
 
Unaudited Condensed Consolidated Statements of 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
14
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
25
   
Item 4. Controls and Procedures
25
     
PART II. OTHER INFORMATION
26
     
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. Mine Safety Disclosures
26
     
Item 5. Exhibits
26
     
Signatures
27
 
 
 
 
1

 
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

   
June 30, 2013
   
December 31, 2012
 
   
US$
   
US$
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
   
66,011,897
     
83,822,602
 
Restricted cash
   
11,862,515
     
16,915,359
 
Time deposits
   
175,155,603
     
47,955,923
 
Accounts receivable, net
   
207,115,047
     
143,843,764
 
Amounts due from related parties
   
8,147
     
219,360
 
Inventories
   
102,439,195
     
78,263,071
 
Prepaid expenses and other current assets
   
5,931,739
     
6,090,232
 
    Total current assets
   
568,524,143
     
377,110,311
 
Property, plant and equipment, net
   
218,380,146
     
223,780,133
 
Land use rights, net
   
10,572,538
     
10,524,451
 
Other non-current assets
   
 2,335,044
     
169,414
 
    Total assets
   
799,811,871
     
611,584,309
 
                 
                 
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCKS AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
               
Short-term loans
   
245,225,991
     
162,076,050
 
Bills payable
   
14,256,851
     
15,810,340
 
Accounts payable
   
74,400,321
     
7,061,259
 
Amounts due to a related party
   
170,743
     
-
 
Income taxes payable
   
8,966,254
     
8,511,679
 
Accrued expenses and other current liabilities
   
32,093,456
     
34,442,983
 
    Total current liabilities
   
375,113,616
     
227,902,311
 
Income taxes payable-non current
   
1,528,345
     
-
 
Deferred income tax liabilities
   
20,155,409
     
20,733,959
 
Warrants liability
   
588,419
     
1,008,750
 
    Total liabilities
   
397,385,789
     
249,645,020
 
                 
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, 47,809,772 shares and 47,584,772 shares issued, 47,788,772 shares and 47,563,772 shares outstanding as of June 30, 2013 and December 31, 2012, respectively
   
4,781
     
4,758
 
Treasury stock, 21,000 shares at cost
   
(92,694
)
   
(92,694
)
Additional paid-in capital
   
73,173,925
     
72,583,910
 
Retained earnings
   
212,465,960
     
177,208,492
 
Accumulated other comprehensive income
   
19,297,545
     
14,658,258
 
    Total stockholders’ equity
   
304,849,617
     
264,362,824
 
Commitments and contingencies
   
-
     
-
 
    Total liabilities, redeemable convertible preferred stocks and stockholders’ equity
   
799,811,871
     
611,584,309
 


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,
 
   
2013
   
2012
   
2013
   
2012
 
   
US$
   
US$
   
US$
   
US$
 
                         
Revenues
   
202,150,358
     
144,662,774
     
373,117,929
     
267,839,589
 
Cost of revenues
   
(164,965,762
)
   
(109,395,422
)
   
(306,777,202
)
   
(201,350,671
)
    Gross profit
   
 37,184,596
     
35,267,352
     
66,340,727
     
66,488,918
 
                                 
Selling expenses
   
(47,218
)
   
(53,064
)
   
(109,992
)
   
(182,752
)
General and administrative expenses
   
(2,855,659
)
   
(2,281,661
)
   
(6,339,574
)
   
(4,635,796
)
Research and development expenses
   
(5,775,769
)
   
(4,610,458
)
   
(10,786,688
)
   
(7,065,497
)
    Total operating expenses
   
(8,678,646
)
   
(6,945,183
)
   
(17,236,254
)
   
(11,884,045
)
                                 
    Operating income
   
 28,505,950
     
 28,322,169
     
49,104,473
     
 54,604,873
 
                                 
Interest income
   
1,470,113
     
1,418,287
     
2,539,717
     
2,420,016
 
Interest expense
   
(3,374,738
)
   
(913,643
)
   
(6,310,724
)
   
(1,399,043
)
Foreign currency exchange gains (losses)
   
877,423
     
 (708,611
)
   
1,366,616
     
 (717,263)
 
Change in fair value of warrants liability
   
400,007
     
1,528,614
     
420,331
     
1,862,319
 
Government grant
   
1,172
     
-
     
210,091
     
-
 
Change in fair value of embedded derivative liability
   
-
     
298
     
-
     
312
 
    Total non-operating income (expense), net
   
(626,023
)
   
 1,324,945
     
(1,773,969)
     
 2,166,341
 
                                 
    Income before income taxes
   
 27,879,927
     
29,647,114
     
47,330,504
     
56,771,214
 
                                 
Income tax expense
   
(7,073,314)
     
(6,874,387
)
   
(12,073,036
)
   
(13,436,079
)
                                 
    Net income
   
20,806,613
     
22,772,727
     
35,257,468
     
43,335,135
 
                                 
Earnings per common share:
                               
Basic
   
0.32
     
0.36
     
0.55
     
0.68
 
Diluted
   
0.32
     
0.33
     
0.55
     
0.65
 
                                 
Net Income
   
20,806,613
     
22,772,727
     
35,257,468
     
43,335,135
 
                                 
Other comprehensive income (loss)
                               
Foreign currency translation adjustment, net of nil income taxes
   
3,758,011
     
(1,946,740
)
   
4,639,287
     
(2,026,563
)
                                 
Comprehensive income
   
24,564,624
     
20,825,987
     
39,896,755
     
41,308,572
 

 
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,
 
   
2013
   
2012
 
   
US$
   
US$
 
Cash flows from operating activities:
           
Net cash provided by operating activities
   
38,925,612
     
29,360,005
 
                 
Cash flows from investing activities:
               
Proceeds from maturity of time deposits
   
56,618,325
      -  
Purchase of time deposits
   
(182,063,524
)
   
-
 
Purchases of property, plant and equipment
   
(13,419,444)
     
(37,490,885
)
Net cash used in investing activities
   
(138,864,643
)
   
(37,490,885
)
                 
Cash flows from financing activities:
               
Proceeds from bank borrowings
   
226,906,170
     
70,412,507
 
Repayments of bank borrowings
   
(146,861,566
)
   
(54,273,011
Release of restricted cash
   
1,629,354
     
-
 
Placement of restricted cash as collateral for bank borrowings
   
(888,846)
     
-
 
Dividends paid to redeemable Series C convertible preferred stockholders
   
-
     
(60
Net cash provided by financing activities
   
80,785,112
     
16,139,436
 
                 
Effect of foreign currency exchange rate changes on cash and cash equivalents
   
1,343,214
     
(1,263,433
)
Net increase (decrease) in cash and cash equivalents
   
(17,810,705
)
   
6,745,123
 
                 
Cash and cash equivalents at beginning of period
   
83,822,602
     
       135,482,386
 
Cash and cash equivalents at end of period
   
66,011,897
     
142,227,509
 
                 
Supplemental disclosure of cash flow information:
               
Interest paid
   
4,476,797
     
1,399,043
 
Income taxes paid
   
11,108,922
     
12,271,078
 
                 

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 (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. 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, 2012 was derived from the audited consolidated financial statements of China XD Plastics Company Limited (“China XD Plastics”) and subsidiaries (collectively 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, 2012, 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, 2013, the results of operations for the three-month and six-month periods ended June 30, 2013 and 2012, and the cash flows for the six-month periods ended June 30, 2013 and 2012, have been made.

The preparation of consolidated financial statements in accordance with U.S. 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 probability of the redemption of redeemable Series D convertible preferred stock, 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 People’s Republic of China (“PRC).  The Company's sales are highly concentrated.  Sales to four and five major distributors, which individually exceeded 10% of the Company's revenues for the three-month and six-month periods ended June 30, 2013 and 2012 , are as follows:
 
   
Three-Month Period Ended June 30,
 
   
2013
   
2012
 
   
US$
   
%
   
US$
   
%
 
Distributor A
   
62,636,042
     
31.0%
     
 9,647,079
     
6.7%
 
Distributor B
   
 37,851,945
     
18.7%
     
 47,867,834
     
33.1%
 
Distributor C
   
 29,715,013
     
14.7%
     
 20,755,970
     
14.3%
 
Distributor D
   
 27,043,818
     
13.4%
     
 20,671,303
     
14.3%
 
Total
   
 157,246,818
     
77.8%
     
98,942,186
     
68.4%
 
 
   
Six-Month Period Ended June 30,
 
   
2013
   
2012
 
   
US$
   
%
   
US$
   
%
 
Distributor A
   
105,637,897
     
28.3%
     
 18,506,579
     
6.9%
 
Distributor B
   
 81,383,863
     
21.8%
     
 88,003,676
     
32.9%
 
Distributor C
   
 52,579,111
     
14.1%
     
 40,344,851
     
15.1%
 
Distributor D
   
 50,068,717
     
13.4%
     
 39,433,344
     
14.7%
 
Distributor E
   
 42,853,294
     
11.5%
     
 23,393,157
     
8.7%
 
Total
   
 332,522,882
     
89.1%
     
 209,681,607
     
78.3%
 
 
The Company expects revenues from these distributors 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.


 
5

 
Purchase concentration of Raw materials and Production Equipment

The principal raw materials used for the Company's production of modified plastics products are plastic resins, such as polypropylene, ABS and nylon. 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 95% and 99% of the Company’s total raw material purchases for the three-month periods ended June 30, 2013 and 2012, respectively, and 97% and 99% of the Company's total raw material purchase for the six-month periods ended June 30, 2013 and 2012, 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.
 
The Company has three production facilities, all of which are located in Harbin, Heilongjiang province of the PRC.  The Company purchased equipment from a major equipment distributor, which accounted for nil and 99% of the Company’s total purchases for the three-month periods ended June 30, 2013 and 2012, respectively, and accounted for 35% and 99% of the Company's total equipment purchases for the six-month periods ended June 30, 2013 and 2012, respectively. A change of the 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.  The majority owner of the equipment distributor is also the majority owner of a major raw material supplier that supplied approximately 18% and 26% of the Company’s total raw material purchases for the three-month periods ended June 30, 2013 and 2012, and 18% and 26% of the Company’s total raw material purchases for the six-month periods ended June 30, 2013 and 2012, respectively.  In addition, the majority owner of the equipment distributor is also the majority owner of sales Distributor D presented above.

Cash concentration

Cash and cash equivalents, restricted cash and time deposits maintained at banks consist of the following:
 
   
June 30, 2013
   
December 31, 2012
 
   
US$
   
US$
 
RMB denominated bank deposits with:
           
Financial Institutions in the PRC
   
252,388,790
     
140,788,222
 
                 
U.S. dollar denominated bank deposits with:
               
Financial Institution in the U.S.
   
94,127
     
18,391
 
Financial Institutions in the PRC
   
12
     
7,828,156
 
Financial Institution in Hong Kong Special Administrative Region
   
546,609
     
11,287
 
 
The bank deposits with financial institutions in the PRC are not insured by any government authority.  To limit exposure to credit risk, 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.

Short-term bank deposits that are pledged as collateral for bills payable relating to purchase of raw materials are reported as restricted cash and amounted to US$7,739,434 and US$10,914,753 as of June 30, 2013 and December 31, 2012, respectively. Upon maturity and repayment of the bills payable, which is generally within 6 months, the cash becomes available for use by the Company. Short-term bank deposits that are pledged as collateral for letter of credit relating to purchase of raw materials are reported as restricted cash and amounted to US$8,961 and US$1,225,402 as of June 30, 2013 and December 31, 2012. The cash will be available for use by the Company after 60 days since the issuance of the letter of credit. The 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.

Short-term bank deposits that are pledged as collateral for short-term bank borrowings are reported as restricted cash and amounted to US$4,114,120 and US$4,775,204 as of June 30, 2013 and December 31, 2012, respectively. The cash flows from such bank deposits are reported within cash flows from financing activities in the condensed consolidated statements of cash flows.


 
6

 
Note 2 - Accounts receivable

Accounts receivable consist of the following:

   
June 30, 2013
   
December 31, 2012
 
   
US$
   
US$
 
             
Accounts receivable
    207,261,590       143,991,818  
Allowance for doubtful accounts
    (146,543 )     (148,054 )
    Accounts receivable, net
    207,115,047       143,843,764  

As of June 30, 2013 and December 31, 2012, the accounts receivable balances also include notes receivable in the amount of US$4,249,497 and US$927,390, respectively.  As of June 30, 2013 and December 31, 2012, US$120,260,952 and US$95,338,947 of accounts receivable are pledged for the short-term bank loans respectively.

There was no accrual of additional provision or write-off of accounts receivable for the three-month and six-month periods ended June 30, 2013 and 2012.
 
Note 3 - Inventories

Inventories consist of the following:

 
June 30, 2013
 
December 31, 2012
 
 
US$
 
US$
 
         
Raw materials
   
36,341,023
     
70,672,300
 
Work in progress
   
211,325
     
110,964
 
Finished goods
   
65,886,847
     
7,479,807
 
    Total inventories
   
102,439,195
     
78,263,071
 
 
There were no write down of inventories for the three-month and six-month periods ended June 30, 2013 and 2012.
 
Note 4 – Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

   
June 30, 2013
   
December 31, 2012
 
   
US$
   
US$
 
             
Advances to suppliers
    1,771,732       4,355,607  
Interest receivable
    1,735,704       1,145,244  
Other
    2,424,303       589,381  
    Total prepaid expenses and other current assets
    5,931,739       6,090,232  
 
Prior to February 2013, the Company paid deposits to domestic and international suppliers for the principal raw materials ordered. The Company made 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. Starting from March 2013, the Company switched to 30 days credit terms for purchases from its domestic suppliers.  All advances to suppliers as of June 30, 2013 are related to the purchase of raw materials, which were subsequently received by the Company in July 2013.
 
Interest receivable mainly represents the interests earned from the three-month or six-month time deposits, as well as from the restricted cash.
 
Other mainly includes value added taxes receivables, other prepaid expenses and staff advances.
 

 
7

 
Note 5 – Property, plant and equipment, net

Property, plant and equipment consist of the following:
 
   
June 30, 2013
   
December 31, 2012
 
   
US$
   
US$
 
                 
Machinery, equipment and furniture
   
203,965,334
     
193,999,396
 
Motor vehicles
   
1,561,149
     
1,438,596
 
Workshops and buildings
   
42,578,183
     
40,357,145
 
Construction in progress
   
3,644,100
     
10,471,463
 
    Total property, plant and equipment
   
251,748,766
     
246,266,600
 
Less accumulated depreciation
   
(33,368,620
   
(22,486,467
)
    Property, plant and equipment, net
   
218,380,146
     
223,780,133
 
 
For the six-month periods ended June 30, 2013 and 2012, no interest expense was capitalized as a component of the cost of construction in progress as the amount was inconsequential. Depreciation expense on property, plant and equipment was allocated to the following expense items:
 

   
Six-Month Period Ended June 30,
 
   
2013
   
2012
 
   
US$
   
US$
 
Cost of revenues
    8,943,524       4,313,127  
General and administrative expenses
    726,013       115,289  
Research and development expenses
    795,964       513,541  
    Total depreciation expense
    10,465,501       4,941,957  
 
Note 6 – Short-term loans

     
June 30, 2013
   
December 31, 2012
 
     
US$
   
US$
 
               
Unsecured loans
     
133,737,413
     
65,970,048
 
Loans secured by accounts receivable
     
89,288,624
     
72,229,981
 
Loans secured by bank deposits
     
14,053,182
     
23,876,021
 
                   
    Total short-term bank loans  
(a)
   
237,079,219
     
162,076,050
 
                   
Interest-free loan secured by land use rights 
(b)
   
8,146,772
     
-
 
                   
    Total short-term loans
     
245,225,991
     
162,076,050
 

(a) 
As of June 30, 2013 and December 31, 2012, the Company’s short-term bank loans bear a weighted average interest rate of 6.0% 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.
 
As of June 30, 2013, the Company had total lines of credit with remaining terms less than 12 months of RMB1,537.1 million (US$250.5 million), of which RMB99.3 million (US$16.2 million) was unused.  These lines of credit are from PRC banks in Harbin, Heilongjiang province and contain certain financial covenants such as total stockholders’ equity, debt asset ratio, current ratio, contingent liability ratio and net profit. As of June 30, 2013, the Company has met these financial covenants.
 
(b)  
On April 11, 2013, the Company obtained a one-year interest-free loan in the amount of RMB50 million (equivalent to US$8 million) from a company affiliated with the People’s Government of Shunqing District, Nanchong City, Sichuan Province (“Shunqing Government”). The loan was issued to support the Company’s construction of a 300,000 metric ton plastics production project and affiliated R&D center and training center project in Yinghua Industrial Park, Shunqing District, Nanchong City, Sichuan Province (“Construction of Sichuan Plant). The loan will be secured by a land use right to be granted to the Company in connection with the Project.
 
 
 
8

 
Note 7 - Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:
 
   
June 30, 2013
   
December 31, 2012
 
   
US$
   
US$
 
             
Payables for purchase of property, plant and equipment
   
 26,952,428
     
30,029,901
 
Other
   
 5,141,028
     
4,413,082
 
Accrued expenses and other current liabilities
   
32,093,456
     
34,442,983
 

Other mainly represent accrued freight expenses, non income tax payables, accrued payroll and employee benefits, accrued interest expenses, and other accrued miscellaneous operating expenses.

Note 8 – Related party transactions

The Company entered into related party transactions with Harbin Xinda High-Tech Co., Ltd. (“Xinda High-Tech”), an entity controlled by the wife of Mr. Han, the chief executive officer and controlling stockholder of the Company, Mr. Han 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,
 
   
2013
 
2012
   
2013
   
2012
 
   
US$
 
US$
   
US$
   
US$
 
Costs and expenses resulting from transactions with  related parties:
                           
Rental expenses for plant and office spaces
(a)
200,218
   
160,354
     
398,270
     
256,089
 
 
The balances due from and to the related parties are summarized as follows:
 
     
June 30, 2013
 
December 31, 2012
     
US$
 
US$
Amounts due from related parties:
         
Prepaid rent expenses to Xinda High-Tech
(a)
   
-
 
219,360
Prepaid rent expenses to Mr. Han’s son
(a)
   
8,147
 
-
Total
     
8,147
 
219,360
             
Amounts due to a related party:
           
Rent payable to Xinda High-Tech
(b)
   
170,743
 
-

(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
   
20,250
     
668,020
 
Between May 1, 2012 and April 30, 2015
Office building
   
250
     
  8,147
 
Between January 1, 2012 and December 31, 2013
Office building
   
3,394
     
  110,601
 
Between May 1, 2012 and April 30, 2013
Office building
   
3,394
     
110,601
 
Between May 1, 2013 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$16,294).  The period of the lease is from January 1, 2013 to December 31, 2013.
 
Total rental expenses paid or payable to Xinda High-Tech and Mr. Han’s son amounted to US$200,218 and US$160,354 for the three-month periods ended June 30, 2013 and 2013, and US$398,270 and US$256,089 for the six-month periods ended June 30, 2013 and 2012.


 
9

 
Note 9 – Income tax

The effective income tax rates for the six-month periods ended June 30, 2013 and 2012 were 25.5% and 23.7%, respectively. The effective income tax rate for the six-month period ended June 30, 2013 differs from the PRC statutory income tax rate of 25% primarily due to the increase of valuation allowance and tax rate differential for non-PRC entities.
 
As of and for the three-month and six-month periods ended June 30, 2013, 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 10 - Warrants

The following is a summary of outstanding warrants as of June 30, 2013:

Warrants
   
Exercise Price
 
Number of Warrants
Outstanding
   
Remaining
Contractual Life
 
     
US$
       
Years
 
Series A investor warrants
   
4.9
 
1,320,696
   
1.42
 
Series A placement agent warrants
   
5.5
 
117,261
   
1.42
 
Series C placement agent warrants
   
7.5
 
166,667
   
0.02
 
    Total        
1,604,624
       

The fair values of the warrants as of June 30, 2013 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
 
35.0%
   
35.0%
   
68.2%
 
Expected dividends yield
   
0%
   
0%
   
0%
 
Fair value of underlying common stock (per share)
   
4.11
   
4.11
   
4.11
 
Risk-free interest rate (per annum)
   
0.24%
   
0.24%
   
0.04%
 

During the three-month and six-month period ended June 30, 2013, no warrants were exercised.  

 
 
10

 
Note 11 – Stockholders’ equity

The changes of each caption of stockholders’ equity for the six-month period ended June 30, 2013 are as follows:

   
Series B Preferred Stock
 
Common Stock
      Additional        
Accumulated Other
 
Total
 
   
Number
of Shares
 
Amount
 
Number
of Shares
 
Amount
 
Treasury Stock
 
Paid-in
Capital
   
Retained
Earnings
 
Comprehensive
Income
 
Stockholders’ Equity
 
       
US$
     
US$
                       
Balance as of January 1, 2013
 
1,000,000
 
100
 
47,563,772
 
4,758
   
(92,694
)
 
72,583,910
     
177,208,492
   
14,658,258
   
264,362,824
 
Net income
 
-
 
-
 
-
 
-
   
-
   
-
     
 35,257,468
   
-
   
 35,257,468
 
Other comprehensive income
 
-
 
-
 
-
 
-
   
-
   
-
     
-
   
 4,639,287
   
 4,639,287
 
Vesting of unvested shares
 
-
 
-
 
225,000
 
23
   
-
   
(23
)
   
-
   
-
   
-
 
Stock based
compensation
 
-
 
-
 
-
 
-
   
-
   
590,038
     
-
   
-
   
590,038
 
Balance as of
June 30, 2013
 
1,000,000
 
100
 
47,788,772
 
4,781
   
(92,694
)
 
73,173,925
     
 212,465,960
   
 19,297,545
   
 304,849,617
 

Note 12 – Stock based compensation

A summary of stock option activity 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, 2012
   
148,500
     
8.01
       
Granted      -        -        
Exercised      -        -        
Forfeited      -        -        
Expired
   
-
     
-
       
Outstanding as of June 30, 2013
   
148,500
     
8.01
 
7.11
 
-
Vested and expected to vest as of June 30, 2013
   
148,500
     
8.01
 
7.11
 
-
 
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, 2013 and 2012, respectively, and US$92,625 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, 2013 and 2012, respectively. As of June 30, 2013, there was US$18,860 of total unrecognized compensation cost relating to stock options, which is to be recognized over a period of 0.10 years.
 
On May 8, 2013, the board of directors approved the grant of 26,361 nonvested shares to three independent directors, all of which vest on November 8, 2013.
 
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, 2012
    513,000       4.66  
Granted     26,361       3.85  
Vested
    (225,000 )     4.35  
Outstanding as of June 30, 2013
    314,361       4.81  

The Company recognized US$142,856 and US$70,775 of share-based compensation expense in general and administration expenses relating to nonvested shares for the three-month periods ended June 30, 2013 and 2012, respectively, and US$497,413 and US$141,557 of share-based compensation expense in general and administration expenses relating to nonvested shares for the six-month periods ended June 30, 2013 and 2012, respectively. As of June 30, 2013, there was US$707,944 total unrecognized compensation cost relating to nonvested shares, which is to be recognized over a weighted average period of 1.69 years.
 
 
11

 
Note 13 - 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,
 
   
2013
   
2012
   
2013
   
2012
 
   
US$
   
US$
   
US$
   
US$
 
Numerator:
                               
Net income
   
20,806,613
     
22,772,727
     
35,257,468
     
43,335,135
 
Less: Dividends to Series C convertible preferred stockholders
   
-
     
(30)
     
-
     
(60)
 
Net income available to common stockholders
   
20,806,613
     
22,772,697
     
35,257,468
     
43,335,075
 
Less:
                               
Earnings allocated to participating Series C convertible preferred stock
   
-
     
(156)
     
-
     
(296)
 
Earnings allocated to participating Series D convertible preferred stock
   
(5,195,421)
     
(5,725,900)
     
(8,803,806)
     
(10,896,045)
 
Earnings allocated to participating nonvested shares
   
(93,518)
     
(31,433)
     
(183,776)
     
(66,139)
 
Net income for basic earnings per share
   
15,517,674
     
17,015,208
     
26,269,886
     
32,372,595
 
                                 
Changes in fair value of derivative liabilities - Series A investor warrants
   
-
     
(1,341,917)
     
-
     
(1,629,711)
 
Net income for dilutive earnings per share
   
15,517,674
     
15,673,291
     
26,269,886
     
30,742,884
 
                                 
Denominator:
                               
Denominator for basic earnings per share:
                               
Weighted average number of common stock outstanding
     47,788,772      
47,545,938
     
47,742,778
     
47,536,652
 
Series A investor warrants
    -      
6,725
      -      
44,264
 
Denominator for diluted earnings per share
   
47,788,772
       47,552,663      
47,742,778
     
47,580,916
 
                                 
Earnings per share:
                               
Basic
   
0.32
     
0.36
     
0.55
     
0.68
 
Diluted
   
0.32
     
0.33
     
0.55
     
0.65
 
 


 
 
12

 

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, 2013 and 2012 because their effects are anti-dilutive:
 
   
Three-Month Period Ended June 30,
   
Six-Month Period Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Shares issuable upon conversion of Series D convertible preferred stock
   
16,000,000
     
16,000,000
     
16,000,000
     
16,000,000
 
Shares issuable upon exercise of Series A investor warrant
   
1,320,696
     
-
     
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
   
148,500
     
297,000
     
148,500
     
297,000
 
 
 
Note 14 - Commitments and contingencies

(1)  
Lease commitments
 
Future minimum lease payments under non-cancellable operating leases agreements as of June 30, 2013 were as follows. 

   
US$
 
Period from July 1, 2013 to December 31, 2013
   
  493,084
 
Years ending December 31,
       
2014
   
  963,453
 
2015
   
  388,499
 
2016
   
101,022
 
2017 and thereafter
   
58,929
 
 
Rental expenses incurred for operating leases of plant and equipment and office spaces were US$200,998 and US$181,791 for the three-month periods, and US$419,165 and US$297,495 for the six-month periods ended June 30, 2013 and 2012, 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. The company’s leases do not contain any contingent rent payments terms.
 
(2) 
Plant construction
 
Pursuant to the agreement with Harbin Shengtong Engineering Plastics Co. Ltd.(“Harbin Shengtong”), the Company has a remaining commitment of RMB199.9 Million (equivalent to US$32.6 Million) as of June 30, 2013, for the acquisition of the land use rights and a plant consisting of five workshops and a building (the “Project”) in Harbin upon completion in exchange for a total consideration of RMB463 million (approximately US$75.4 million) in cash. Harbin Shengtong is responsible to complete the construction of the plant and workshops according to the Company’s specifications.  Once the Project is fully completed and accepted by the Company, Harbin Shengtong shall transfer titles of the Project to the Company.  As of June 30, 2013, five workshops were completed and placed into the service by the Company.  The titles of the five workshops, the building and the related land use rights are expected to be transferred to the Company once the Project is completed in the second half of 2013.
 
On March 8, 2013, Xinda Holding (HK) Company Limited (“Xinda Holding (HK)”), a wholly owned subsidiary of the Company, entered into an Investment Agreement with Shunqing Government, pursuant to which Xinda Holding (HK) will invest RMB1.8 billion (equivalent to US$294 million) in property, plant and equipment and approximately RMB0.6 billion (equivalent to US$98 million) in working capital, for the Construction of Sichuan Plant.

Note 15 - Subsequent events
 
On July 29, 2013, the Company’s Board of Directors approved the grant of (i) 192,370 nonvested shares to certain executive officers and employees which vest on August 7, 2016; (ii) 674,205 nonvested shares to 16 consultants and two independent directors which vest on February 7, 2014.
 
 
 
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 263 certifications from manufacturers in the automobile industry as of June 30, 2013. 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 139 professionals including 16 consultants, of which two consultants are members of Chinese Academy of Engineering, and one consultant 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 78 patents, one of which we have obtained the patent rights and the remaining 77 of which we have applications pending in China as of June 30, 2013.
 
Our products include seven categories: modified polypropylene (PP), modified engineering plastics, modified polyamides (PA), environmentally-friendly plastics, alloy plastics, polyether ether ketone (PEEK) and modified acrylonitrile butadiene styrene (ABS).  The Company's products are primarily used in the production of exterior and interior trim and functional components of more than 24 automobile brands and 80 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, 2013, we had approximately 390,000 metric tons of production capacity across 83 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwan conveyer systems, including the newly launched three additional factory buildings with 30 production lines completed the trial-run in December 2012 and further expanded our annual capacity potential by approximately 135,000 metric tons and support our future growth in 2013 and beyond.
 
 
 
14

 
 
Highlights for the three months ended June 30, 2013 include:
 
 Revenue was $202.2 million, an increase of 39.7% from $144.7 million in the second quarter of 2012
 Gross profit was $37.2 million, an increase of 5.4% from $35.3 million in the second quarter of 2012
 Gross profit margin was 18.4%, compared to 24.4% in the second quarter of 2012
 Net income was $20.8 million, compared to $22.8 million in the second quarter of 2012
 Total volume shipped was 69,915 metric tons, up 29.8% from 53,866 metric tons in the second quarter of 2012
 
Results of Operations
 
The following table sets forth, for the periods indicated, statements of income data in thousands of USD:

(in millions, except  percentage)
 
Three Months Ended
         
Six Months Ended
     
   
June 30,
     
Change
   
June 30,
   
Change
   
2013 
 
2012
   
%
   
2013
   
2012
   
%
Revenues
 
202.2
 
  144.7
     
39.7
%
   
373.1
     
267.8
     
39.3
 %
Cost of revenues
 
(165.0
  (109.4
)    
50.8
%
   
(306.8
)
   
(201.3
)    
52.4
Gross profit
 
37.2
 
  35.3
     
5.4
%
   
66.3
     
66.5
     
(0.3
)%
Total operating expenses
 
(8.7
  (6.9
)    
26.1
%
   
(17.2
   
(11.9
)    
44.5
%
Operating income
 
28.5
 
  28.4
     
0.4
%
   
49.1
     
54.6
     
(10.1
)%
Income before income taxes
 
27.9
 
  29.6
     
(6.1
)%
   
47.3
     
56.8
     
(16.7
)%
Income tax expense
 
(7.1
)
  (6.8
   
2.9
%
   
(12.0
)
   
(13.5
)    
(11.1
)%
Net income
 
20.8
 
  22.8
     
(8.8
)%
   
35.3
     
43.3
     
(18.5
)%
 
Three Months Ended June 30, 2013 compared to three months ended June 30, 2012

Revenues

Revenues were US$202.2 million in the second quarter ended June 30, 2013, an increase of US$57.5 million, or 39.7%, compared to US$144.7 million in the same period of last year, due to approximately 29.8% increase in sales volume and 3.3% increase in the average RMB 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 additional 30 production lines which commenced production in December 2012, as well as the marketing efforts to develop new customers, in particular those in Eastern and Southwestern China. 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 RMB selling price was due to the shift of product mix towards higher-end products.

 
 
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,
               
     
2013
   
2012
               
     
Amount
     
%
   
Amount
     
%
   
Change in Amount
     
Change in
%
Modified Polypropylene (PP)
   
60.8
     
30.1
%
   
71.6
     
49.4
%
   
(10.8
)
   
(15.1
)%
                                                 
Engineering Plastics
   
47.1
     
23.3
%
   
25.9
     
17.9
%
   
21.2
     
81.9
%
                                                 
Modified Polyamide (PA)
   
38.6
     
19.1
%
   
12.2
     
8.5
%
   
26.4
     
216.4
%
                                                 
Environment Friendly Plastics
   
31.5
     
15.6
%
   
15.2
     
10.5
%
   
16.3
     
107.2
 %
                                                 
Alloy Plastics
   
14.2
     
7.0
%
   
12.9
     
8.9
%
   
1.3
     
10.1
%
                                                 
Modified Acrylonitrile Butadiene Styrene (ABS)
   
9.5
     
4.7
%
   
4.8
     
3.3
%
   
4.7
     
97.9
%
                                                 
     Sub-total
   
201.7
     
99.8
%
   
142.6
     
98.5
%
   
59.1
     
41.4
%
                                                 
After-sales Service
   
0.5
     
0.2
%
   
2.1
     
1.5
%
   
(1.6
)
   
(76.2
)%
Total Revenues
   
202.2
     
100
%
   
144.7
     
100
%
   
57.5
     
39.7
%

The reduction of after-sales service fee was due to the discounts given to our distributors as part of our marketing strategy to further penetrate our less-developed markets, especially in East China and Southwest China.
 
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,
               
     
2013
   
2012
               
     
MT
     
%
   
MT
     
%
   
Change in 
MT
     
Change in 
%
Modified Polypropylene (PP)
   
30,337
     
43.4
%
   
34,354
     
63.7
%
   
(4,017
)
   
(11.7
)%
                                                 
Engineering Plastics
   
9,506
     
13.6
%
   
5,121
     
9.5
%
   
4,385
     
85.6
                                                 
Modified Polyamide (PA)
   
7,976
     
11.4
%
   
2,536
     
4.7
%
   
5,440
     
214.5
%
                                                 
Environment Friendly Plastics
   
14,385
     
20.6
%
   
6,600
     
12.3
%
   
7,785
     
118.0
%
                                                 
Alloy Plastics
   
4,361
     
6.2
%
   
3,495
     
6.5
%
   
866
     
24.8
%
                                                 
Modified Acrylonitrile Butadiene Styrene (ABS)
   
3,350
     
4.8
%
   
1,760
     
3.3
%
   
1,590
     
90.3
%
                                                 
Total sales volume
   
69,915
     
100
%
   
53,866
     
100
%
   
16,049
     
29.8
%

The Company has shifted product mix from traditional Modified Polypropylene (PP) to higher-end products such as Modified Polyamide (PA), Environmental Friendly Plastics, modified ABS, and Engineering 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, U.S. and Japanese joint ventures, which tend to use more and higher-end modified plastics in quantity per vehicle in China.

Gross Profit and Gross Profit Margin

   
Three-Month Period Ended June 30,
   
Change
 
(in millions, except percentage)
 
2013
   
2012
   
Amount
   
%
 
Gross Profit
 
$
37.2
   
$
35.3
   
$
1.9
     
5.4%
 
Gross Profit Margin
   
18.4%
     
24.4%
             
(6.0)%
 

Gross profit was US$37.2 million in the second quarter ended June 30, 2013 compared to US$35.3 million in the same period of 2012, representing an increase of 5.4%. Our gross margin decreased to 18.4% in the second quarter ended June 30, 2013 from 24.4% during the same quarter of 2012.

 
 
16

 
 
The decrease of gross profit margin was primarily due to:
 
(i)  
The decrease of gross profit margin was primarily due to an average 6.4% discount on the listed prices for the three month period ended June 30, 2013 to distributors as part of our marketing initiatives to increase our market share in Eastern China and Southwestern China.  The discount,is primarily aimed at further expanding into the Eastern China and Southwestern China market. As a result, revenues contribution from Eastern China and Southwest China grew to 29.8% and 4.8% during the three-month period ended June 30, 2013 compared to 21.5% and nil in the same period of 2012, respectively. We plan to maintain such discount rate for the rest of 2013.

(ii)  
The decrease of gross profit margin was also due to increase in shipping expenses to US$3.4 million in the three months ended June 30, 2013 from US$0.3 million in the three months ended June 30, 2012. We started managing logistics on our own to better serve our customers in a more timely manner and to better understand our customer demands and control our sales channel since the first quarter of 2013. Such arrangement is expected to continue in the future.
 
General and Administrative Expenses

   
Three-Month Period Ended June 30,
   
Change
 
(in millions, except percentage)
 
2013
   
2012
   
Amount
   
%
 
General and Administrative Expenses
 
$
2.9
   
$
2.2
   
$
0.7
     
31.8
%
as a percentage of revenues
    1.4 %     1.6 %             (0.2 %)

General and administrative (G&A) expenses were US$2.9 million in the second quarter ended June 30, 2013 compared to US$2.2 million in the same period in 2012, representing an increase of 31.8%, or US$0.7 million, primarily due to the increase of professional fees and bank charges. On a percentage basis, G&A expenses in the second quarter of 2013 decreased to 1.4% of revenues from 1.6% in the second quarter of 2012.

Research and Development Expenses

   
Three–Month Period Ended June 30,
   
Change
 
(in millions, except percentage)
 
2013
   
2012
   
Amount
   
%
 
Research and Development Expenses
 
$
5.8
   
$
4.6
   
$
1.2
     
26.1
%
as a percentage of revenues
   
2.9
%
   
3.2
%
           
(0.3
)%

Research and development (“R&D”) expenses were US$5.8 million during the quarter ended June 30, 2013 compared with US$4.6 million during the same period in 2012, an increase of US$1.2 million, or 26.1%, reflecting increased research and development activities on new products primarily in consumption of raw materials for various experiments for automotive applications from automobile manufacturers as well as other non-automotive applications.  As of June 30, 2013, the number of ongoing research and development projects was 156.  The consumption of raw materials for these projects accounted for 90% of total R&D expenses for the quarter ended June 30, 2013.
 
We expect to complete and realize economic benefits on approximately 25% 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 and medical devices.

Operating Income

Total operating income was US$28.5 million in the quarter ended June 30, 2013 compared to US$28.4 million in the same period of 2012, representing an increase of 0.4% or US$0.1 million. This increase is primarily due to higher gross profit, partially offset by higher G&A and R&D expenses.
 
 
17

 

Interest Income (Expenses)
 
   
Three-Month Period Ended June 30,
   
Change
 
(in millions, except percentage)
 
2013
   
2012
   
Amount
   
%
 
Interest Income
 
$
1.5
   
$
1.4
   
$
0.1
     
7.1
%
Interest Expenses
   
(3.4
)
 
 
(0.9
)    
(2.5
)
   
277.8
%
Net Interest Income (Expenses)
 
$
(1.9
 
$
0.5
   
$
(2.4
)
   
(480.0
)%
as a percentage of revenues
   
(1.0
)%
   
0.3
%
           
(1.3
)%
 
Net interest expense was US$1.9 million in the quarter ended June 30, 2013, compared to net interest income of US$0.5 million in the same period of 2012, primarily due to increase of short-term loans to meet the need of our future capacity expansion in Southwest China. The average loan balance for the three months ended June 30, 2013 was US$218.4 million as compared to US$33.0 million as of that of the prior year, leading to US$2.5 million more interest expense.
 
Income Taxes

   
Three–Month Period Ended June 30,
   
Change
 
(in millions, except percentage)
 
2013
   
2012
   
Amount
   
%
 
Income before Income Taxes
 
$
27.9
   
$
29.6
   
$
(1.7
)
   
(5.7
)%
Income Tax Expense
   
(7.1
   
(6.8
   
(0.3
   
4.4
%
Effective income tax rate
   
 25.4
   
23.2
%
           
2.2
%

The effective income tax rates for the three-month periods ended June 30, 2013 and 2012 were 25.4% and 23.2%, respectively. The effective income tax rate for the three-month period ended June 30, 2013 differs from the PRC statutory income tax rate of 25% primarily due to the increase of valuation allowance against deferred income tax assets and tax rate differential for non-PRC entities.
 
Our PRC subsidiaries have US$252.4 million of cash and cash equivalents, restricted cash and time deposits as of June 30, 2013, which is planned to be indefinitely 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$20.8 million in the second quarter of 2013 compared to net income of US$22.8 million in the same quarter of 2012.

Six Months Ended June 30, 2013 compared to six months ended June 30, 2012

Revenues

Revenues were US$373.1 million for the six months ended June 30, 2013, an increase of US$105.3 million, or 39.3%, compared to US$267.8 million in the same period of last year, due to approximately 31.5% increase in sales volume and 3.8% increase in the average RMB 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 additional 30 production lines which commenced production in December 2012, as well as the marketing efforts to develop new customers, in particular those in Eastern and Southwestern China. 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 RMB selling price was due to the shift of product mix towards higher-end products.
 
 
 
18

 
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,