10-Q 1 cxdc_10q-063015.htm FORM 10-Q FOR THE PERIOD ENDED 6/30/2015
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2015

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 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 No

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
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
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 No

As of August 3, 2015, the registrant had 49,151,796 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
16
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
29
 
 
Item 4. Controls and Procedures
29
 
 
 
PART II. OTHER INFORMATION
30
 
 
 
Item 1. Legal Proceedings
30
 
 
 
Item 1A. Risk Factors
30
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
30
 
 
 
Item 3. Defaults Upon Senior Securities
30
 
 
Item 4. Mine Safety Disclosures
30
 
 
 
Item 5. Exhibits
30
 
 
 
Signatures
31
 
 
1

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

   
June 30,
2015
   
December 31,
2014
 
   
US$
   
US$
 
ASSETS
       
Current assets:
       
Cash and cash equivalents
   
52,702,280
     
45,456,612
 
Restricted cash
   
43,587,432
     
12,545,772
 
Time deposits
   
231,779,552
     
238,532,702
 
Accounts receivable, net
   
211,803,068
     
203,998,138
 
Amounts due from a related party
   
-
     
220,262
 
Inventories
   
287,072,414
     
249,797,244
 
Prepaid expenses and other current assets
   
9,384,107
     
11,253,828
 
    Total current assets
   
836,328,853
     
761,804,558
 
Property, plant and equipment, net
   
315,022,041
     
318,324,600
 
Land use rights, net
   
18,707,621
     
11,896,542
 
Prepayments to equipment and construction suppliers
   
294,418,527
     
182,259,578
 
Other non-current assets
   
40,904,920
     
25,499,744
 
    Total assets
   
1,505,381,962
     
1,299,785,022
 
                 
                 
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
 
Current liabilities:
               
Short-term bank loans, including current portion of long-term bank loans
   
217,468,948
     
99,735,422
 
Bills payable
   
50,561,363
     
43,389,928
 
Accounts payable
   
190,971,174
     
152,073,014
 
Amounts due to related parties
   
141,834
     
-
 
Income taxes payable
   
4,864,511
     
3,269,115
 
Accrued expenses and other current liabilities
   
25,534,299
     
24,484,583
 
  Total current liabilities
   
489,542,129
     
322,952,062
 
Long-term bank loans, excluding current portion
   
130,407,653
     
174,274,446
 
Notes payable
   
148,750,658
     
148,617,057
 
Income taxes payable
   
18,460,593
     
14,025,825
 
Deferred income tax liabilities
   
15,797,125
     
16,951,551
 
Deferred income
   
28,972,444
     
-
 
    Total liabilities
   
831,930,602
     
676,820,941
 
                 
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, 49,182,284 shares and 49,172,796 shares issued, 49,161,284 shares and 49,151,796 shares outstanding as of June 30, 2015 and December 31, 2014, respectively
   
4,917
     
4,916
 
Treasury stock, 21,000 shares at cost
   
(92,694
)
   
(92,694
)
Additional paid-in capital
   
81,262,157
     
80,875,787
 
Retained earnings
   
482,706,335
     
431,823,706
 
Accumulated other comprehensive income
   
11,994,080
     
12,775,801
 
    Total stockholders' equity
   
575,874,895
     
525,387,616
 
Commitments and contingencies
   
-
     
-
 
    Total liabilities, redeemable convertible preferred stock and stockholders' equity
   
1,505,381,962
     
1,299,785,022
 

 
 
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,
 
 
 
2015
   
2014
   
2015
   
2014
 
 
 
US$
   
US$
   
US$
   
US$
 
 
               
Revenues
   
265,412,742
     
264,208,995
     
487,339,137
     
487,789,670
 
Cost of revenues
   
(213,919,846
)
   
(211,909,052
)
   
(387,203,965
)
   
(388,841,389
)
    Gross profit
   
51,492,896
     
52,299,943
     
100,135,172
     
98,948,281
 
 
                               
Selling expenses
   
(438,041
)
   
(135,625
)
   
(734,861
)
   
(257,953
)
General and administrative expenses
   
(6,592,032
)
   
(4,553,144
)
   
(11,556,790
)
   
(8,349,508
)
Research and development expenses
   
(6,659,310
)
   
(13,355,881
)
   
(12,473,173
)
   
(21,986,615
)
    Total operating expenses
   
(13,689,383
)
   
(18,044,650
)
   
(24,764,824
)
   
(30,594,076
)
 
                               
    Operating income
   
37,803,513
     
34,255,293
     
75,370,348
     
68,354,205
 
 
                               
Interest income
   
2,466,291
     
3,454,649
     
4,894,362
     
6,490,014
 
Interest expense
   
(11,038,295
)
   
(11,614,261
)
   
(21,667,648
)
   
(20,194,238
)
Foreign currency exchange gains (losses)
   
322,056
     
406,479
     
231,641
     
(72,711
)
Gains (losses) on foreign currency forward contracts
   
305,825
     
(934,765
)
   
660,344
     
(934,765
)
Change in fair value of warrants liability
   
-
     
(906,006
)
   
-
     
(1,068,745
)
Government grant
   
4,814
     
12,974
     
4,814
     
1,324,213
 
    Total non-operating expense, net
   
(7,939,309
)
   
(9,580,930
)
   
(15,876,487
)
   
(14,456,232
)
 
                               
    Income before income taxes
   
29,864,204
     
24,674,363
     
59,493,861
     
53,897,973
 
 
                               
Income tax expense
   
(4,385,601
)
   
(4,837,703
)
   
(8,611,232
)
   
(12,065,262
)
 
                               
    Net income
   
25,478,603
     
19,836,660
     
50,882,629
     
41,832,711
 
 
                               
Earnings per common share:
                               
Basic and diluted
   
0.39
     
0.30
     
0.77
     
0.64
 
 
                               
Net Income
   
25,478,603
     
19,836,660
     
50,882,629
     
41,832,711
 
 
                               
Other comprehensive income (loss)
                               
Foreign currency translation adjustment, net of nil income taxes
   
(616,961
)
   
1,346,532
     
(781,721
)
   
(12,842,203
)
 
                               
Comprehensive income
   
24,861,642
     
21,183,192
     
50,100,908
     
28,990,508
 

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,
 
   
2015
   
2014
 
   
US$
   
US$
 
Cash flows from operating activities:
       
Net cash provided by operating activities
   
71,660,883
     
61,291,114
 
                 
Cash flows from investing activities:
               
Proceeds from maturity of time deposits
   
237,499,197
     
259,984,756
 
Purchase of time deposits
   
(231,080,300
)
   
(362,130,254
)
Purchase of land use rights
   
(6,904,447
)
   
-
 
Purchase of and deposits for property, plant and equipment
   
(119,535,975
)
   
(86,442,465
)
Net cash used in investing activities
   
(120,021,525
)
   
(188,587,963
)
                 
Cash flows from financing activities:
               
Proceeds from bank borrowings
   
323,407,459
     
422,150,363
 
Repayments of bank borrowings
   
(238,181,426
)
   
(383,003,049
)
Proceeds from issuance of the Notes
   
-
     
148,396,175
 
Payment of issuance costs of the Notes
   
-
     
(3,970,357
)
Proceeds from the exercise of Series A investor warrants
   
-
     
596,740
 
Release of restricted cash as collateral for bank borrowings
   
-
     
3,243,383
 
Placement of restricted cash as collateral for bank borrowings
   
(29,729,123
)
   
(20,595,485
)
Net cash provided by financing activities
   
55,496,910
     
166,817,770
 
                 
Effect of foreign currency exchange rate changes on cash and cash equivalents
   
109,400
     
(2,211,225
)
Net increase in cash and cash equivalents
   
7,245,668
     
37,309,696
 
                 
Cash and cash equivalents at beginning of period
   
45,456,612
     
95,545,904
 
Cash and cash equivalents at end of period
   
52,702,280
     
132,855,600
 
                 
Supplemental disclosure of cash flow information:
               
Interest paid, net of capitalized interest
   
20,159,080
     
12,985,268
 
Income taxes paid
   
3,706,530
     
23,029,798
 

Non-cash investing and financing activities:
       
Government grant related to construction in the form of repayment of bank loan on behalf of the Company by the government
   
11,267,062
     
-
 
Accrual for purchase of equipment and construction
   
295,893
     
564,103
 

 
 
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 ("SEC"). The condensed consolidated balance sheet as of December 31, 2014 was derived from the audited consolidated financial statements of China XD Plastics Company Limited ("China XD") 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, 2014, 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 on March 16, 2015.

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, 2015, the results of operations for the three-month and six-month periods ended June 30, 2015 and 2014, and the cash flows for the six-month periods ended June 30, 2015 and 2014, 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, the useful lives of property, plant and equipment, the collectibility of accounts receivable, the fair values of 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 primarily through approved distributors in the People's Republic of China (the "PRC"). To a lesser extent, the Company also sells its products to an overseas customer in the Republic of Korea (the "ROK"). The Company's sales are highly concentrated.  Sales to distributors and end customer, which individually exceeded 10% of the Company's revenues for the three month and six months periods ended June 30, 2015 and 2014, are as follows:

 
 
Three-Month Period Ended June 30,
 
 
 
2015
   
2014
 
 
 
US$
   
%
   
US$
   
%
 
Distributor A
   
47,121,285
     
17.8
%
   
46,122,237
     
17.5
%
Distributor B
   
38,766,823
     
14.6
%
   
34,853,678
     
13.2
%
Distributor C
   
32,232,229
     
12.1
%
   
35,872,313
     
13.6
%
Distributor D
   
28,722,000
     
10.8
%
   
36,194,327
     
13.7
%
Distributor E
   
27,377,033
     
10.3
%
   
22,881,624
     
8.7
%
Direct Customer F, located in ROK
   
29,139,000
     
11.0
%
   
19,970,900
     
7.6
%
Total
   
203,358,370
     
76.6
%
   
195,895,079
     
74.3
%
 
 
5

 

 
 
 
Six-Month Period Ended June 30,
 
 
 
2015
   
2014
 
 
 
US$
   
%
   
US$
   
%
 
Distributor A
   
82,134,181
     
16.9
%
   
82,477,849
     
16.9
%
Distributor B
   
71,578,657
     
14.7
%
   
67,433,893
     
13.8
%
Distributor C
   
58,437,523
     
12.0
%
   
68,405,706
     
14.0
%
Distributor D
   
51,380,046
     
10.5
%
   
69,391,812
     
14.2
%
Distributor E
   
49,664,900
     
10.2
%
   
42,212,473
     
8.7
%
Direct Customer F, located in ROK
   
64,085,900
     
13.2
%
   
19,970,900
     
4.1
%
Total
   
377,281,207
     
77.5
%
   
349,892,633
     
71.7
%


The Company expects revenues from these distributors and the customer to continue to represent a substantial portion of its revenue in the future. Any factor adversely affecting the automobile industry in the PRC, electronic application industry in the ROK 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 of raw materials and equipment
 
The principal raw materials used for the Company's production of modified plastics products are plastic resins, such as polypropylene, ABS and nylon. Company purchased its raw materials through five and eight distributors, which individually exceeded 10% of the Company's total raw material purchases, accounted for approximately 71.8% and 81.1% of the Company's total raw materials purchases for the three-month periods ended June 30, 2015 and 2014, respectively, and 67.1% and 79.0% of the Company's total raw materials purchases for the six-month periods ended June 30, 2015 and 2014, 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 purchased equipment from two major equipment distributors, which accounted for 96.1% and 98.6% of the Company's total equipment purchases for the three-month periods ended June 30, 2015 and 2014, respectively, and accounted for 97.9% and 97.5% of the Company's total equipment purchases for the six-month periods ended June 30, 2015 and 2014.  Management believes that other suppliers could provide similar equipment 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 majority owner of one of the major equipment distributors, that supplied approximately 3.4% and nil of the Company's total equipment purchases for the three-month periods ended June 30, 2015 and 2014, respectively, and 37.4% and 3.0% of the Company's total equipment purchases for the six-month periods ended June 30, 2015 and 2014, respectively, 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, 2015
   
December 31, 2014
 
   
US$
   
US$
 
RMB denominated bank deposits with:
       
Financial Institutions in the PRC
   
353,954,158
     
311,377,750
 
Financial Institutions in Hong Kong Special Administrative Region ("Hong Kong SAR")
   
4,212
     
2,617
 
Financial Institution in Dubai, United Arab Emirates ("UAE")
   
8,183
     
170
 
U.S. dollar denominated bank deposits with:
               
Financial Institution in the U.S.
   
195,624
     
770,704
 
Financial Institutions in the PRC
   
17,142
     
17,139
 
Financial Institution in Hong Kong SAR
   
323,962
     
1,366,224
 
Financial Institution in Macau Special Administrative Region ("Macau SAR")
   
4,104,707
     
47,868
 
Financial Institution in Dubai, UAE
   
4,870,136
     
481,179
 
Euro denominated bank deposits with:
               
Financial institution in Hong Kong SAR
   
-
     
83,017
 
Financial institution in Dubai, UAE
   
3,091
     
3,355
 
HK dollar denominated bank deposits with:
               
Financial institution in Hong Kong SAR
   
394
     
581
 
Dirham denominated bank deposits with:
               
Financial institution in Dubai, UAE
   
14,562
     
112,815
 
 
 
6


 



The bank deposits with financial institutions in the PRC are insured by the government authority up to RMB500,000. The bank deposits with financial institutions in the HK SAR are insured by the government authority up to HK$500,000. The bank deposits with financial institutions in the Macau SAR are insured by the government authority up to MOP$500,000. The bank deposits with financial institutions in UAE 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, HK SAR and Macau SAR with acceptable credit rating.

Cash deposits in bank that are restricted as to withdrawal or usage for up to 12 months are reported as restricted cash in the condensed consolidated balance sheets and excluded from cash in the condensed consolidated statements of cash flows. Cash deposits that are restricted for period beyond 12 months from the balance sheet date are included in other non-current assets in the condensed consolidated balance sheets.

Short-term bank deposits that are pledged as collateral for bills payable relating to purchases of raw materials are reported as restricted cash and amounted to US$13,768,349 and US$11,868,855 as of June 30, 2015 and December 31, 2014, 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 purchases of raw materials are reported as restricted cash and amounted to nil and US$676,917 as of June 30, 2015 and December 31, 2014, respectively. The cash will be available for use by the Company 90 days from 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.
 
Cash deposits in the amount of US$17,744,510 were restricted relating to the government grant as of June 30, 2015 (note 12), and included in other non-current assets.  The cash flows from the pledged bank deposits, which relate to government grant for construction of assets, are reported within cash flows from investing 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$13,723,281 and nil as of June 30, 2015 and December 31, 2014, respectively. Short-term bank deposits that are pledged as collateral for long-term bank borrowings are reported as restricted cash and amounted to US$16,095,802 and nil as of June 30, 2015 and December 31, 2014, respectively. Long-term bank deposits that are pledged as collateral for issuance of letter of guarantee are reported as other non-current assets and amounted to US$17,705,382 and US$17,728,782 as of June 30, 2015 and December 31, 2014, respectively. The cash flows from such bank deposits are reported within cash flows from financing activities in the condensed consolidated statements of cash flows.
 
Note 2 - Accounts receivable

Accounts receivable consists of the following:

 
 
June 30, 2015
   
December 31, 2014
 
 
 
US$
   
US$
 
 
   
Accounts receivable
   
211,912,835
     
204,108,050
 
Allowance for doubtful accounts
   
(109,767
)
   
(109,912
)
Accounts receivable, net
   
211,803,068
     
203,998,138
 
 
As of June 30, 2015 and December 31, 2014, the accounts receivable balances also include notes receivable in the amount of US$1,472,406 and US$921,907, respectively. As of June 30, 2015 and December 31, 2014, nil and US$50,473,063 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, 2015 and 2014.
 
7

 

 
Note 3 - Inventories

Inventories consist of the following:
 
June 30, 2015
 
December 31, 2014
 
 
US$
 
US$
 
 
   
Raw materials
 
 
256,203,379
   
 
241,853,814
 
Work in progress
   
226,881
     
207,181
 
Finished goods
   
30,642,154
     
7,736,249
 
Total inventories
   
287,072,414
     
249,797,244
 
 
There were no write down of inventories for the three-month and six-month periods ended June 30, 2015 and 2014.
 
Note 4 – Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:
 
June 30, 2015
 
December 31, 2014
 
 
US$
 
US$
 
     
Advances to suppliers
   
247,022
     
168,614
 
Value added taxes receivables
   
2,283,841
     
6,407,547
 
Interest receivable
   
3,438,119
     
3,351,672
 
Others
   
3,415,125
     
1,325,995
 
    Total prepaid expenses and other current assets
   
9,384,107
     
11,253,828
 

Others mainly include prepaid interest expenses and staff advances.
 
Note 5 – Property, plant and equipment, net

Property, plant and equipment consist of the following:
 
 
 
June 30, 2015
   
December 31, 2014
 
 
 
US$
   
US$
 
 
       
Machinery, equipment and furniture
   
263,516,693
     
209,509,700
 
Motor vehicles
   
1,984,993
     
1,854,985
 
Workshops and buildings
   
79,383,200
     
79,009,346
 
Construction in progress
   
48,887,660
     
93,970,716
 
    Total property, plant and equipment
   
393,772,546
     
384,344,747
 
Less accumulated depreciation
   
(78,750,505
)
   
(66,020,147
)
    Property, plant and equipment, net
   
315,022,041
     
318,324,600
 
 
 
8

 
 


For the three-month and six-month periods ended June 30, 2015, the Company capitalized US$168,306 of interest costs as a component of the cost of construction in progress, respectively. Depreciation expense on property, plant and equipment was allocated to the following expense items:
 
 
Three-Month Period Ended
June 30,
 
 
2015
 
2014
 
 
US$
 
US$
 
     
Cost of revenues
   
5,525,990
     
4,638,160
 
General and administrative expenses
   
403,135
     
319,502
 
Research and development expenses
   
901,082
     
527,963
 
Selling expense
   
223
     
-
 
    Total depreciation expense
   
6,830,430
     
5,485,625
 
 
 
Six-Month Period Ended
June 30,
 
 
2015
 
2014
 
 
US$
 
US$
 
 
   
Cost of revenues
   
10,305,578
     
9,508,815
 
General and administrative expenses
   
778,263
     
621,783
 
Research and development expenses
   
1,696,801
     
959,972
 
Selling expense
   
223
     
-
 
    Total depreciation expense
   
12,780,865
     
11,090,570
 

 
Note 6 - Prepayments to equipment suppliers
 
On March 8, 2013, Xinda Holding (HK) Co, Ltd. ("Xinda Holding (HK)") entered into an investment agreement with Nanchong Government, pursuant to which Xinda Holding (HK) will invest RMB1.8 billion (equivalent to US$289.7 million) in property, plant and equipment and approximately RMB0.6 billion (equivalent to US$96.6 million) in working capital, for the construction of the Sichuan plant. In December 2013, the Company entered into an equipment purchase contract with Harbin Jiamu Import & Export Trading Co., Ltd ("Jiamu") for a total consideration of RMB1,629.3 million (equivalent to US$262.3 million) to purchase 70 production lines and RMB89.7 million (equivalent to US$14.4 million) to purchase testing equipment. As of June 30, 2015 and December 31, 2014, the Company has paid RMB1,375.2 million (equivalent to US$221.4 million) and RMB1,130.9 million (equivalent to US$182.3 million) for production lines and testing equipment, respectively.
 
On January 5, 2015, AL Composites Materials FZE ("AL Composites") entered into an equipment purchase contract with Peaceful Treasure Limited ("Peaceful") for a total consideration of US$271.2 million to purchase certain production and testing equipment. Pursuant to the contract with Peaceful, the Company has paid US$65.6 million as prepayments as of June 30, 2015.
 
Note 7 – Fair value measurement
 
Short-term financial instruments, including cash and cash equivalents, restricted cash, time deposits, accounts receivable, amounts due from a related party, short-term bank loans, bills payable, accounts payable, amounts due to related parties, income taxes payable and accrued expenses and other current liabilities - carrying amounts approximate fair values because of the short maturity of these instruments.

Long-term bank loans - fair value is based on the amount of future cash flows associated with each loan discounted at the Company's current borrowing rate for similar debt instruments of comparable terms. The carrying value of the long-term bank loans approximate their fair values as the long-term bank loans carry interest rates which approximate rates currently offered by the Company's banks for similar debt instruments of comparable maturities.

Notes payable - fair values of the Company's notes payable are estimated based on quoted market prices which are categorized as Level 1 measurement in the fair value hierarchy. As of June 30, 2015, the carrying amount and estimated fair value of the notes payable were US$ 148,750,658 and US$ 146,062,500, respectively.

Derivative assets on foreign currency forward contract- fair value is determined using a discount cash flow model, which discounts the difference between the forward contract exchange rate from the quoted curve and the contract rate multiplied by the notional amounts. It considers the following significant inputs: risk-free rate and foreign exchange rate.
 
9

 

 
Note 8 – Borrowings

(a) Current
 
 
 
June 30, 2015
   
December 31, 2014
 
 
 
US$
   
US$
 
 
       
Unsecured loans
   
70,821,530
     
47,223,028
 
Secured loans by accounts receivable
   
-
     
40,292,686
 
Guaranteed loans by a third-party (ii)
   
27,362,863
     
-
 
Secured loans by restricted cash (iii)
   
35,600,000
     
-
 
Current portion of long-term bank loans (note b) 
   
83,684,555
     
12,219,708
 
 
               
        Total short-term loans, including current portion of long-term bank loans
   
217,468,948
     
99,735,422
 
 
(i)  As of June 30, 2015 and December 31, 2014, the Company's short-term bank loans bear a weighted average interest rate of 4.03% and 5.7% per annum, respectively. All short-term bank loans mature at various times within one year and contain no renewal terms.
 
(ii)   On February 11, 2015, the Company obtained RMB140 million (US$22.6 million) bank loan at an annual interest rate of 5.32%, from Bank of Communications, and RMB100 million (US$16.1 million) bank loan at an annual interest rate of 5.32%, from Bank of Construction banks in Nanchong City, Sichuan. These two loans were guaranteed by an investment company affiliated with the People's Government of Shunqing District, Nanchong City, Sichuan Province ("Shunqing Government") and were issued to support the Company's construction of a production plant in Nanchong City, Sichuan and will be paid off in five installments. The first installment in the amount of RMB70 million (US$11.3 million) was paid on April 30,2015. The last installment will become due and payable on November 30, 2015.
 
(iii)
On January 15, 2015, the Company obtained a 350-day secured loan of US$12.0 million from HSBC Bank Middle East Limited in Dubai, UAE at an annual interest rate of 3-month London Inter-Bank Offered Rate ("LIBOR") (0.2832% as of June 30, 2015) plus 1.8%. On February 2, 2015, the Company obtained another 351-day secured loan of US$16.6 million from HSBC Bank Middle East Limited in Dubai, UAE at an interest rate of 3-month LIBOR (0.2832% as of June 30, 2015) plus 1.8%. These loans were secured by restricted cash of RMB39.3 million (equivalent to US$6.3 million) by the HSBC bank in Harbin, China.
 
In June 2015, the Company obtained a one-year secured loan of US$7.0 million from Bank of China Luxemburg Branch at an annual interest rate of one-year LIBOR (0.7715% as of June 30, 2015) plus 0.75%. These loans were secured by restricted cash of RMB45.9 million (equivalent to US$7.4 million) by the Bank of China in Harbin, China.

(b) Non-current
 
 
June 30, 2015
 
December 31, 2014
 
 
US$
 
US$
 
 
   
Secured loans
   
83,164,800
     
70,000,000
 
Unsecured loans
   
130,927,408
     
116,494,154
 
Less: current portion
   
83,684,555
     
12,219,708
 
    Total long-term bank loans, excluding current portion
   
130,407,653
     
174,274,446
 

 
10

 

 

During March and April 2014, the Company obtained two 15-month unsecured loans of RMB50 million (equivalent to US$8.0 million) at an interest rate of 6.15% per annum from the Bank of Heilongjiang. The Company repaid these loans in advance by the end of March 2015.

On June 12, 2014, the Company obtained a three-year secured loan of US$70 million from Bank of China at interest rate of 3-month LIBOR (0.2832% as of June 30, 2015). The loan is secured by restricted cash of US$17.7million. The Company has repaid US$2 million on June 9, 2015.

On January 23, 2015, the Company obtained a two-year unsecured loan of RMB100 million (equivalent to US$16.1 million) at an annual interest rate of 6.0% from Agriculture Bank of China.

On January 27, 2015, the Company obtained a one and half year secured loan of US$15.2 million from Bank of China, at an interest rate of LIBOR (0.2832% as of June 30, 2015) plus 1.5%. The interest rate is reset every three months. The loan is secured by restricted cash of RMB100 million (equivalent to US$16.1 million).

On April 22, 2015, the Company obtained a two-year unsecured loan of RMB40 million (equivalent to US$6.4 million) at an annual interest rate of 5.75% from Agriculture Bank of China.

As of June 30, 2015, the Company had total lines of credit of RMB3,348.5 million (US$538.8 million). As of June 30, 2015, the Company has unused lines of credit of RMB1,222.9 million (US$196.8 million) with remaining terms less than 12 months and RMB134.3million (US$21.6 million) with remaining terms beyond 12 months.

Certain lines of credit contain financial covenants such as total stockholders' equity, debt asset ratio, current ratio, contingent liability ratio and net profit. As of June 30, 2015, the Company has met these financial covenants.


Note 9 - Accrued expenses and other current liabilities
 
Accrued expenses and other current liabilities consist of the following:
   
June 30, 2015
   
December 31, 2014
 
   
US$
   
US$
 
Payables for purchase of property, plant and equipment
   
7,182,356
     
7,234,607
 
Accrued freight expenses
   
3,211,971
     
1,688,431
 
Accrued interest expenses
   
9,784,921
     
9,031,741
 
Others
   
5,355,051
     
6,529,804
 
Total accrued expenses and other current liabilities
   
25,534,299
     
24,484,583
 

Others mainly represent accrued payroll and employee benefits, non income taxes payables and other accrued miscellaneous operating expenses.
 

Note 10 – 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, 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,
 
   
2015
 
2014
 
2015
   
2014
 
   
US$
 
US$
 
US$
   
US$
 
Costs and expenses resulting from transactions with related parties:
                       
Rental expenses for plant and office spaces
   
165,500
 
   
195,677
     
360,714
     
395,588
 
 
 
11

 
 




The related party balances are summarized as follows:

 
 
June 30, 2015
 
 
December 31, 2014
 
 
US$
 
US$
 
Amounts due from a related party:
   
Prepaid rent expenses to Xinda High-Tech
   
-
     
220,262
 
Total:
   
-
     
220,262
 
 
Amounts due to a related party:
       
Rental payable to Xinda High-Tech
   
128,195
     
-
 
Rental payable to Mr Han's son
   
13,639
     
-
 
Total:
   
141,834
     
-
 
 
 
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
Office building
 
 
23,894
 
 
 
766,851
 
Between January 1, 2014 and December 31, 2018
 
The Company rents the following facilities in Harbin, Heilongjiang province from Mr. Han's son:
Premise Leased
 
Area (M2)
 
 
Annual Rental Fee (US$)
 
Period of Lease
Facility
 
 
3,134
 
 
 
16,047
 
Between January 1, 2015 and December 31, 2015
Facility
 
 
200
 
 
 
6,419
 
Between August 17, 2014 and August 16, 2015

Note 11– Income taxes
 
Pursuant to an approval from the local tax authority in July 2013, Sichuan Xinda Enterprise Group Co., Ltd. ("Sichuan Xinda Group"), a subsidiary of China XD, became a qualified enterprise located in the western region of the PRC, which entitled it to a preferential income tax rate of 15% from January 1, 2013 to December 31, 2020. Under the current laws of Dubai, AL Composites is exempted from income taxes.

The effective income tax rate for the six-month periods ended June 30, 2015 and 2014 were 14.3% and 22.3%, respectively. The effective income tax rate for the six-month period ended June 30, 2015 differs from the PRC statutory income tax rate of 25% primarily due to the above mentioned Dubai exempt from income taxes, Sichuan Xinda Group's preferential income tax rate, and Sichuan Xinda Group's R&D expense bonus tax deduction, partially offsetting by effect of tax rate differential on entities not subject to PRC income tax, effect of non-deductible expenses and increase of valuation allowances against deferred income tax assets of certain subsidiaries, which were at cumulative loss position.
As of June 30, 2015, the unrecognized tax benefits were US$18,460,593 and the interest relating to unrecognized tax benefits was US$2,038,387.  No penalties expense related to unrecognized tax benefits were recorded. The Company is currently unable to provide an estimate of a range of the total amount of unrecognized tax benefits that is reasonably possible to change significantly within the next twelve months.
 
12


Note 12 – Deferred Income

On January 26, 2015, the Company entered into a memorandum and a fund support agreement with the People's Government of Shunqing District, Nanchong City, Sichuan Province ("Shunqing Government") pursuant to which Shunqing Government, through its investment vehicle, extended to the Company RMB110 million (equivalent to US$17.7 million) interest free fund to support  the construction of the Sichuan plant. In June 2015, the Company received additional RMB70 million (equivalent to US$11.2 million) from Shunqing Government in the form of government repayment of bank loans on behalf of the Company. Since both funding are related to construction of long-term assets, the amounts were recognized as government grant, which is included in deferred income on the unaudited condensed consolidated balance sheet, and to be recognized as other income in the consolidated statement of comprehensive income over the periods and in the proportions in which depreciation expense on the long-term assets is recognized.

Note 13 – Stockholders' equity

The changes of each caption of stockholders' equity for the six-month period ended June 30, 2015 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, 2015
   
1,000,000
     
100
     
49,151,796
     
4,916
     
(92,694
)
   
80,875,787
     
431,823,706
     
12,775,801
     
525,387,616
 
Net income
   
-
     
-
     
-
     
-
     
-
     
-
     
50,882,629
     
-
     
50,882,629
 
Other comprehensive loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(781,721
)
   
(781, 721
)
Stock based compensation
   
-
     
-
     
-
     
-
     
-
     
386,371
     
-
     
-
     
386,371
 
Vesting of nonvested shares
   
-
     
-
     
9,488
     
1
     
-
     
(1
)
   
-
     
-
     
-
 
Balance as of June 30, 2015
   
1,000,000
     
100
     
49,161,284
     
4,917
     
(92,694
)
   
81,262,157
     
482,706,335
     
11,994,080
     
575,874,895
 
 
Note 14 – Stock based compensation

A summary of the nonvested shares activity for the six-month ended June 30, 2015 is as follows:
 
 
 
Number of Nonvested
Shares
   
Weighted Average
Grant date Fair Value
 
 
     
US$
 
Outstanding as of December 31, 2014
   
647,288
     
5.00
 
Vested
   
(9,488
)
   
4.15
 
Forfeited
   
(47,830
)
   
4.63
 
Outstanding as of June 30, 2015
   
589,970
     
5.04
 
 
The Company recognized US$130,645 and US$122,091 of share-based compensation expense in general and administration expenses relating to nonvested shares for the three-month periods ended June 30, 2015 and 2014, respectively, and US$386,371 and US$532,939 of share-based compensation expense in general and administration expenses relating to nonvested shares for the six-month periods ended June 30, 2015 and 2014, respectively. As of June 30, 2015, there was US$1,219,064 total unrecognized compensation cost relating to nonvested shares, which is to be recognized over a weighted average period of 1.26 years. 



13

 
 
Note 15 - 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,
 
 
 
2015
   
2014
   
2015
   
2014
 
 
 
US$
   
US$
   
US$
   
US$
 
Net income
   
25,478,603
     
19,836,660
     
50,882,629
     
41,832,711
 
Less:
                               
Earnings allocated to participating Series D convertible preferred stock
   
(6,199,413
)
   
(4,869,197
)
   
(12,379,759
)
   
(10,284,553
)
Earnings allocated to participating nonvested shares
   
(230,996
)
   
(119,614
)
   
(466,567
)
   
(352,376
)
Net income for basic and diluted earnings per share
   
19,048,194
     
14,847,849
     
38,036,303
     
31,195,782
 
 
                               
Denominator
                               
Denominator for basic and diluted earnings per share
   
49,161,284
     
48,789,480
     
49,159,344
     
48,532,252
 
 
                               
Earnings per share:
                               
Basic and diluted
   
0.39
     
0.30
     
0.77
     
0.64
 

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, 2015 and 2014 because their effects are anti-dilutive:
 
 
Three-Month Period Ended June 30,
 
Six-Month Period Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
       
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
   
-
     
438,038
     
-
     
438,038
 
Shares issuable upon exercise of Series A placement agent warrant
   
-
     
117,261
     
-
     
117,261
 
 
Note 16 - Commitments and contingencies

(1)    Lease commitments
 
Future minimum lease payments under non-cancellable operating leases agreements as of June 30, 2015 were as follows. 
   
US$
 
Period from July 1, 2015 to December 31, 2015
   
651,896
 
Years ending December 31,
       
2016
   
1,099,595
 
2017
   
963,302
 
2018
   
892,443
 
2019
   
112,866
 
2020 and thereafter
   
1,147,475
 


Rental expenses incurred for operating leases of plant and office spaces were US$499,500 and US$302,480 for the three-month periods ended June 30, 2015 and 2014, respectively, and US$728,649 and US$620,708 for the six-month periods ended June 30, 2015 and 2014, 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)   Sichuan plant construction and equipment

On March 8, 2013, Xinda Holding (HK) entered into an investment agreement with Shunqing Government, pursuant to which Xinda Holding (HK) will invest RMB1.8 billion (equivalent to US$289.7 million) in property, plant and equipment and approximately RMB0.6 billion (equivalent to US$96.6 million) in working capital, for the construction of Sichuan plant.  As of June 30, 2015, the Company has a remaining commitment of RMB215.3 million (equivalent to US$34.6 million) mainly for facility construction, and RMB343.8 million (equivalent to US$55.3 million) for the acquisition of equipments.
 
14

 


(3)    Dubai plant construction and equipment

On January 5, 2015, AL Composites entered into an equipment purchase contract with Peaceful for a total consideration of US$271.2 million to purchase certain production and testing equipment.  As of June 30, 2015, the Company has a remaining commitment of US$205.6 million for the remaining equipment acquisition. On January 25, 2015, AL Composites entered into a facility purchase contract with Zettachem International Limited for a total consideration of AED12.5 million (equivalent to US$3.4 million). As of June 30, 2015, the Company has a remaining commitment of US$0.3 million.

(4)   Xinda Group equipment
 
During the six-month period ended June 31, 2015, Xinda Group entered into a series of equipment purchase contracts with Jiamu for a total consideration of RMB93.2 million (equivalent to US$15.0 million). As of June 30, 2015, the Company has a remaining commitment of RMB85.2 million (equivalent to US$13.7 million) for the remaining equipment acquisition.
(5)    Contingencies

The Company and certain of its officers were named as defendants in two putative securities class action lawsuits filed on July 15, 2014 and July 16, 2014 in the United States District Court for the Southern District of New York. The Company, after consultation with its legal counsel, believes that the lawsuits are without merit and intends to vigorously defend against them.  Nevertheless, there is a possibility that a loss may have been incurred. In accordance with ASC Topic 450, no loss contingency was accrued as of June 30, 2015 since the possible loss or range of loss cannot be reasonably estimated.
 
 
 
15

 


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, and to a lesser extent, in Dubai, UAE. 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 339 certifications from manufacturers in the automobile industry as of June 30, 2015. 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 257 professionals and 8 consultants, including one consultant who is a member 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 207 patents, six of which we have obtained the patent rights and the remaining 201 of which we have applications pending in China as of June 30, 2015.
 
Our products include eleven categories: Modified Polypropylene (PP), Modified Acrylonitrile Butadiene Styrene (ABS), Modified Polyamide 66 (PA66), Modified Polyamide 6 (PA6), Plastic Alloy, Modified Polyoxymethylenes (POM), Modified Polyphenylene Oxide (PPO), Modified Polyphenylene Sulfide (PPS), Modified Polyimide (PI), Modified Polylactic acid (PLA) and Poly Ether Ether Ketone (PEEK). 

The Company's products are primarily used in the production of exterior and interior trim and functional components of more than 27 automobile brands and 80 automobile models manufactured in China, including Audi, Mercedes Benz, BMW, Buick, Chevrolet, VW Passat, Golf and Jetta, Mazda, and Toyota. 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, with the construction of Sichuan plant underway. In addition, we completed and run the trial production in the plant in Dubai, UAE with additional 2,500 metric tons ("Phase 1") targeting high-end products for the overseas markets.  As of June 30, 2015, in domestic market, we had approximately 390,000 metric tons of production capacity across 84 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwanese conveyer systems. In December 2013, we broke ground on the construction of our fourth production base in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, expecting to bring total installed production capacity to 690,000 metric tons with additional 70 new production lines at the completion of the construction of our fourth production base. Sichuan Xinda Group has supplied to its customers since 2013, backed by production capacity in our Harbin production base. To streamline the management in Sichuan, the Company completed a restructuring in July 2015 by merging its subsidiary in Nanchong City, the entire registered capital (US$99.99 million) of which was owned by Xinda (Heilongjiang) Investment Co., Ltd, into Sichuan Xinda Group.  The Company expects Sichuan facility to be completed around the end of 2015 and early 2016. In order to meet the increasing demand from our customer in ROK and to develop potential overseas markets, on January 25, 2015, AL Composites Materials FZE obtained a leased property of approximately 10,000 square meters from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE with constructed building comprising a warehouse, office and service block with lease term granted 15 years. The Company is planning to complete installing 75 production lines with additional 16,200 metric tons ("Phase 2") of annual production capacity in that property by the end of 2015, bringing total production capacity in Dubai to 18,700 metric tons.
 

16


Highlights for the three months ended June 30, 2015 include:

● Revenues were $265.4 million, an increase of 0.5% from $264.2 million in the second quarter of 2014
● Gross profit was $51.5 million, a decrease of 1.5% from $52.3 million in the second quarter of 2014
● Gross profit margin was 19.4%, compared to 19.8% in the second quarter of 2014
● Net income was $25.5 million, compared to $19.8 million in the second quarter of 2014
● Total volume shipped was 84,833 metric tons, up 4.0% from 81,584 metric tons in the second quarter of 2014

  
Results of Operations
 
The following table sets forth, for the periods indicated, statements of income data in millions of USD:
 
(in millions, except  percentage)
 
Three-Month Period Ended
       
Six-Month Period Ended
     
 
 
June 30,
   
Change
   
June 30,
   
Change
 
 
 
2015
   
2014
   
%
   
2015
   
2014
   
%
 
Revenues
   
265.4
     
264.2
     
0.5
%
   
487.3
     
487.8
     
(0.1
)%
Cost of revenues
   
(213.9
)
   
(211.9
)
   
0.9
%
   
(387.2
)
   
(388.9
)
   
(0.4
)%
Gross profit
   
51.5
     
52.3
     
(1.5
)%
   
100.1
     
98.9
     
1.2
%
Total operating expenses
   
(13.7
)
   
(18.0
)
   
(23.9
)%
   
(24.8
)
   
(30.6
)
   
(19.0
)%
Operating income
   
37.8
     
34.3
     
10.2
%
   
75.3
     
68.3
     
10.2
%
Income before income taxes
   
29.9
     
24.7
     
21.1
%
   
59.4
     
53.8
     
10.4
%
Income tax expense
   
(4.4
)
   
(4.9
)
   
(10.2
)%
   
(8.5
)
   
(12.0
)
   
(29.2
)%
Net income
   
25.5
     
19.8
     
28.8
%
   
50.9
     
41.8
     
21.8
%

Three months ended June 30, 2015 compared to three months ended June 30, 2014

Revenues
 
Revenues were US$265.4 million in the second quarter ended June 30, 2015, an increase of US$1.2 million, or 0.5%, compared to US$264.2 million in the same period of last year, due to approximately 4.0% increase in sales volume and 3.4% decrease in the average selling price of our products.

Vehicle sales in China grew by 1.4% in the first half of 2015, the slowest rate in approximately 24 years, amid which the State-backed auto association revised 2015 full year forecast to 3% amid the economy slowdown in the world's largest car market. The Chinese government's anti-monopoly probe against luxury automobile manufacturers by the state and dealers backlashed against automakers. Both contributed to the lower-than-expected growth rate. Further, both automakers and parts manufacturers in China experienced pricing pressure from 2014 to the present. The unusual volatility of the Chinese stock market since June 2015 also seemed to have certain negative impact on consumer sentiments. As a result, plastic fabricators have been seeking newer products utilizing lower cost raw materials and more cost-efficient formulations. The pricing of the majority of our existing products remained stable while our newly launched products have relatively lower average selling price in response to customer demand in China. As previously disclosed, the Company has started marketing its higher-end products to customers overseas since early 2014 to better allocate its limited production capacity, diversify its business and reduce its concentration in the Chinese market. The increase of revenues recognized by AL Composites Materials FZE ("AL Composites") from oversea market in the ROK was more than such decline.
 
17

 
 
(i) Domestic market

For the three months ended June 30, 2015, we had a decrease of 2.9% in sales volume and 6.6% in the average RMB selling price of our products, as compared with those of last year.  However more sales were achieved in Southwest China because of our marketing efforts to develop new customers. As for the selling price, the decrease was mainly in lower-end product of modified PA6 and PA66 that we recently reformulated for customers in China in response to pricing pressure caused by the slowdown in China's auto industry.

(ii) Overseas market
For the three months ended June 30, 2015, we had an increase of 61.1% in sales volume partially offset by 9.4% decrease in the average selling price as compared with those of last year. The products sold in overseas market are mainly higher-end products such as PA66 and Plastic Alloys with much higher selling price for engine bonnet, oil pump, fuse hose and other higher-end auto engine related applications, high-end appliance components, and circuit boards etc. The Company expects continuing growth opportunities in oversea markets, including the ROK.

The following table summarizes the breakdown of revenues by categories in millions of US$:
 
(in millions, except percentage)
 
Revenues
For the Three-Month Period Ended June 30,
         
   
2015
   
2014
         
   
Amount
   
%
   
Amount
   
%
   
Change in
Amount
   
Change in
%
 
Modified Polyamide 66 (PA66)
   
53.0
     
20.0
%
   
53.3
     
20.2
%
   
(0.3
)
   
(0.6
)%
                                                 
Modified Polyamide 6 (PA6)
   
52.1
     
19.6
%
   
62.6
     
23.7
%
   
(10.5
)
   
(16.8
)%
                                                 
Plastic Alloy
   
99.0
     
37.3
%
   
78.7
     
29.8
%
   
20.3
     
25.8
%
                                                 
Modified Polypropylene (PP)
   
44.6
     
16.8
%
   
55.5
     
21.0
%
   
(10.9
)
   
(19.6
)%
                                                 
Modified Acrylonitrile butadiene styrene (ABS)
   
10.8
     
4.1
%
   
9.6
     
3.6
%
   
1.2
     
12.5
%
                                                 
Polyoxymethylenes (POM)
   
0.9
     
0.3
%
   
0.9
     
0.3
%
   
0.0
     
0.0
%
                                                 
Polyphenylene Oxide (PPO)
   
3.3
     
1.3
%
   
3.1
     
1.2
%
   
0.2
     
6.5
%
                                                 
Raw Materials
   
1.7
     
0.6
%
   
0.5
     
0.2
%
   
1.2
     
240.0
%
                                                 
Total Revenues
   
265.4
     
100
%
   
264.2
     
100
%
   
1.2
     
0.5
%

 
 
 
18

 
 
The following table summarizes the breakdown of metric tons (MT) by product mix:
 
(in MTs, except percentage)
 
Sales Volume
For the Three-Month Period Ended June 30,
         
 
 
2015
   
2014
         
 
 
MT
   
%
   
MT
   
%
   
Change in
MT
   
Change in
%
 
Modified Polyamide 66 (PA66)
   
12,342
     
14.5
%
   
9,448
     
11.6
%
   
2,894
     
30.6
%
 
                                               
Modified Polyamide 6 (PA6)
   
14,399
     
17.0
%
   
12,481
     
15.3
%
   
1,918
     
15.4
%
 
                                               
Plastic Alloy
   
28,357
     
33.5
%
   
25,426
     
31.1
%
   
2,931
     
11.5
%
 
                                               
Modified Polypropylene (PP)
   
23,542
     
27.8
%
   
29,500
     
36.2
%
   
(5,958
)
   
(20.2
)%
 
                                               
Modified Acrylonitrile butadiene styrene (ABS)
   
4,185
     
4.9
%
   
3,727
     
4.6
%
   
458
     
12.3
%
 
                                               
Polyoxymethylenes (POM)
   
270
     
0.3
%
   
271
     
0.3
%
   
(1
)
   
0.4
%
 
                                               
Polyphenylene Oxide (PPO)
   
453
     
0.5
%
   
431
     
0.5
%
   
22
     
5.1
%
 
                                               
Raw Materials
   
1,285
     
1.5
%
   
300
     
0.4
%
   
985
     
328.3
%
 
Total Sales Volume
   
84,833
     
100
%
   
81,584
     
100
%
   
3,249
     
4.0
%

The Company continued to shift production mix from traditional Modified Polypropylene (PP) to higher-end products such as PA6 and Plastic Alloy, primarily due to (i) the greater growth potential of advanced modified plastics in luxury automobile models in China, (ii) the stronger demand as a result of promotion by the Chinese government for clean energy vehicles and (iii) better quality from and consumer recognition of higher-end cars made by automotive manufacturers from Chinese and Germany joint ventures, and U.S. and Japanese joint ventures, which manufacturers tend to use more and higher-end modified plastics in quantity per vehicle in China. In addition, the Company sold primarily higher-end PA66 and Plastic Alloy to the newly developed customer in the Republic of Korea. 
 
Gross Profit and Gross Profit Margin
 
Three-Month Period Ended June 30,
 
Change
 
(in millions, except percentage)
2015
 
2014
 
Amount
%
 
Gross Profit
 
$
51.5
 
 
$
52.3
 
 
$
(0.8
)
(1.5
)%
Gross Profit Margin
 
 
19.4
%
 
 
19.8
%
 
 
 
(0.4
)%

 
Gross profit was US$51.5 million in the second quarter ended June 30, 2015 compared to US$52.3 million in the same period of 2014, representing a decrease of 1.5%. Our gross margin decreased to 19.4% during the quarter ended June 30, 2015 from 19.8% during the same quarter of 2014 primarily due to pricing pressure resulting from the slow down of the auto industry in China, and the increase of depreciation expenses as production facility in Dubai were put in operation and no more orders for two individual products from the Korean customer. The average selling price of our products reduced by 3.4% for the quarter ended June 30, 2015 as compared to that of the prior year.


 
 
19

 

 
General and Administrative Expenses
 
 
Three-Month Period Ended June 30,
 
Change
(in millions, except percentage)
2015
 
2014
 
Amount
%
General and Administrative Expenses
$
6.6
 
$
4.5
 
$
2.1
46.7
%
as a percentage of revenues
 
2.5
%
 
1.8
%
 
 
0.7
%
 
General and administrative (G&A) expenses were US$6.6 million in the quarter ended June 30, 2015 compared to US$4.5 million in the same period in 2014, representing an increase of 46.7%, or US$2.1 million. This increase is primarily due to the increase of (i) US$0.7 million of stamp duties in connection with our business expansion; (ii) US$ 0.7 million of expenses incurred for the opening of temporary exhibition centre in Sichuan; (iii) US$0.7 million of other miscellaneous expenses.  
 
Research and Development Expenses
 
 
Three-Month Period Ended June 30,
 
Change
 
(in millions, except percentage)
2015
 
2014
 
Amount
 
%
 
Research and Development Expenses
$
6.7
 
$
13.4
 
$
(6.7)
       
(50.0)
%
as a percentage of revenues
 
2.5
%
 
5.1
%
 
 
 
(2.6)
%

Research and development expenses were US$6.7 million during the quarter ended June 30, 2015 compared with US$13.4 million during the same period in 2014, a decrease of US$6.7 million, or 50.0%, reflecting the Company's efforts to adjust research and development activities on new products primarily for industrialized applications from automotive to other advanced fields such as ships, airplanes, high-speed rail, 3D printing materials, biodegradable plastics, and medical devices, etc..  
 
As of June 30, 2015, the number of ongoing research and development projects was 144. We expect to complete and commence to 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.

Operating Income
 
Total operating income was US$37.8 million in the second quarter ended June 30, 2015 compared to $34.3 million in the same period of 2014, representing an increase of 10.2% or US$ 3.5 million. This increase is primarily due to lower research and developed expenses, partially offset by higher general and administrative expenses.

Interest Income (Expenses)
 
 
 
Three-Month Period Ended June 30,
   
Change
 
(in millions, except percentage)
 
2015
   
2014
   
Amount
   
%
 
Interest Income
 
$
2.5
   
$
3.5
   
$
(1.0
)
   
(28.6
)%
Interest Expenses
   
(11.0
)
   
(11.7
)
   
0.7
     
(6.0
)%
Net Interest Expenses
 
$
(8.5
)
 
$
(8.2
)
 
$
(0.3
)
   
3.7
%
as a percentage of revenues
   
(3.2
)%
   
(3.1
)%
           
(0.1
)%


Net interest expense was US$8.5 million for the three-month period ended June 30, 2015, compared to net interest expense of US$8.2 million in the same period of 2014, primarily due to (i) the decrease of interest income was caused by the decrease of average deposit balance in the amount of US$344.5 million for the three months ended June 30, 2015 compared to US$442.4 million for the same period of 2014, combined the decrease of average interest rate of 2.8% for the three month period ended June 30, 2015 compared to 3.0% for the same period of 2014; and (ii) the decrease of interest expense was caused by the decrease of average interest rate 5.3% for the three months ended June 30, 2015 compared to 5.7% as for the three months ended June 30, 2014, and offset by the increase of short-term and long-term loans in the amount of US$409.9 million for the three months ended June 30, 2015 compared to US$374.4 million of prior year.
 
20

 

Gains (losses) on foreign currency forward contracts

 
Three–Month Period Ended June 30,
 
Change
 
(in millions, except percentage)
2015
 
2014
 
Amount
 
%
 
Gain (losses) on foreign currency forward contracts
 
$
0.3
 
 
$
(0.9
 
$
1.2
 
 
 
(133.3
)%
as a percentage of revenues
 
 
0.1
%
 
 
(0.4
 
 
 
 
 
 
0.5
%

During the three-month period ended June 30, 2015, the Company settled the foreign currency forward contract which was entered into to manage its exposure to foreign currency risks with a notional amount of US$50M.  Due to the decrease of foreign exchange rate (USD to RMB) from April 1, 2015 and the settlement date during the three-month period ended June 30, 2015, the Company had a gain of US$0.3 million on foreign currency forward contracts.
During the three-month period ended June 30, 2014, the Company settled the foreign currency forward contract which was entered into to manage its exposure to foreign currency risks with a notional amount of US$80M.  Due to the increase of foreign exchange rate (USD to RMB) during the three-month period ended June 30, 2014, the Company had a loss of US$0.9 million on foreign currency forward contracts.
Income Taxes

 
Three–Month Period Ended June 30,
 
Change
 
(in millions, except percentage)
2015
 
2014
 
Amount
 
%
 
Income before Income Taxes
$
 
29.9
 
$
 
24.7
 
$
 
5.2
 
21.1
%
Income Tax Expense
 
 
(4.4
)
 
 
(4.9
)
 
 
0.5
 
(10.2
)%
Effective income tax rate
 
 
14.7
%
 
 
19.8
%
 
 
 
 
(5.1
)%


The effective income tax rate for the three-month periods ended June 30, 2015 and 2014 was 14.7% and 19.8%, respectively. The decrease was primarily due Sichuan Xinda Group's R&D expense bonus tax deduction. The decrease was partially offsetting by effect of tax rate differential on entities not subject to PRC income tax, effect of non-deductible expenses and increase of valuation allowances against deferred income tax assets of certain subsidiaries, which were at cumulative loss position.
 
Our PRC and Dubai subsidiaries have US$363.5 million of cash and cash equivalents, restricted cash and time deposits as of June 30, 2015, which are planned to be indefinitely reinvested in the PRC and Dubai. The distributions from our PRC and Dubai 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 related to PRC withholding income taxes on undistributed earnings of our PRC subsidiaries. In addition, due to our policy of indefinitely reinvesting our earnings in Dubai, UAE, we have not provided for deferred income tax liabilities related to AL Composites in Dubai, UAE, on undistributed earnings.
 
Net Income

As a result of the above factors, we had a net income of US$25.5 million in the second quarter of 2015 compared to a net income of US$19.8 million in the same quarter of 2014.
 
Six months ended June 30, 2015 compared to six months ended June 30, 2014

Revenues
 
Revenues were US$487.3 million in the six-month period ended June 30, 2015, a decrease of US$0.5 million, or 0.1%, compared with US$487.8 million in the same period of last year, due to approximately 2.6% increase in sales volume and 2.7% decrease in the average selling price of our products.
 
(i) Domestic market
 
For the six months ended June 30, 2015, we had a decrease of 8.6% in the average RMB selling price of our products while the sales volume remained the same compared with those of last year.  However more sales were achieved in South China, Central China and Southwest China because of our marketing efforts to develop new customers. As for the RMB selling price, the decrease was mainly in lower-end product of modified PA6 and PA66 that we recently reformulated for customers in China in response to pricing pressure caused by the slowdown in China's auto industry.

(ii) Overseas market

For the six months ended June 30, 2015, we had a significant increase of 255% in sales volume partially offset by 9.6% decrease in the average selling price as compared with those of last year, The products sold in overseas market are mainly higher-end products such as PA66 and Plastic Alloys with much higher selling price for engine bonnet, oil pump, fuse hose and other higher-end auto engine related applications, high-end appliance components, and circuit boards etc. The Company expects continuing growth opportunities in oversea markets, including the ROK.
 
21


 


 
The following table summarizes the breakdown of revenues by categories in millions of US$: 
 
(in millions, except percentage)
 
Revenues
For the Six -Month Period Ended June 30,
             
   
2015
   
2014
             
   
Amount
   
%
   
Amount
   
%
   
Change in
Amount
   
Change in
%
 
Modified Polyamide 66 (PA66)
   
89.1
     
18.3
%
   
112.0
     
23.0
%
   
(22.9
)
   
(20.4
)%
                                                 
Modified Polyamide 6 (PA6)
   
95.0
     
19.5
%
   
114.4
     
23.5
%
   
(19.4
)
   
(17.0
)%
                                                 
Plastic Alloy
   
191.2
     
39.2
%
   
130.4
     
26.7
%
   
60.8
     
46.6
%
                                                 
Modified Polypropylene (PP)
   
84.1
     
17.3
%
   
104.8
     
21.5
%
   
(20.7
)
   
(19.8
)%
                                                 
Modified Acrylonitrile butadiene styrene (ABS)
   
19.2
     
3.9
%
   
19.2
     
3.9
%
   
0.0
 
   
0.0
%
                                                 
Polyoxymethylenes (POM)
   
1.4
     
0.3
%
   
2.1
     
0.4
%
   
(0.7
)
   
(33.3
)%
                                                 
Polyphenylene Oxide (PPO)
   
6.2
     
1.3
%
   
4.2
     
0.9
%
   
2.0
     
47.6
%
                                                 
Raw Materials
   
1.1
     
0.2
%
   
0.7
     
0.1
%
   
0.4
     
57.1
%
                                                 
Total Revenues
   
487.3
     
100
%
   
487.8
     
100
%
   
(0.5
)
   
(0.1
)%

22

 
 
The following table summarizes the breakdown of metric tons (MT) by product mix:
 
(in MTs, except percentage)
 
Sales Volume
For the Six-Month Period Ended June 30,
         
 
 
2015
   
2014
         
 
 
MT
   
%
   
MT
   
%
   
Change in
MT
   
Change in
%
 
Modified Polyamide 66 (PA66)
   
20,789
     
13.5
%
   
19,719
     
13.1
%
   
1,070
     
5.4
%
 
                                               
Modified Polyamide 6 (PA6)
   
26,380
     
17.1
%
   
22,669
     
15.1
%
   
3,711
     
16.4
%
 
                                               
Plastic Alloy
   
52,500
     
34.0
%
   
45,733
     
30.4
%
   
6,767
     
14.8
%
 
                                               
Modified Polypropylene (PP)
   
44,485
     
28.8
%
   
53,452
     
35.6
%
   
(8,967
)
   
(16.8
)%
 
                                               
Modified Acrylonitrile butadiene styrene (ABS)
   
7,491
     
4.9
%
   
7,086
     
4.7
%
   
405
     
5.7
%
 
                                               
Polyoxymethylenes (POM)
   
408
     
0.3
%
   
600
     
0.4
%
   
(192
)
   
(32.0
)%