10-Q 1 cxdc_10q-063016.htm FORM 10-Q
 
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, 2016

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, 2016, the registrant had 49,406,191 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
18
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
31
   
Item 4. Controls and Procedures
31
     
PART II. OTHER INFORMATION
32
     
Item 1. Legal Proceedings
32
     
Item 1A. Risk Factors
32
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
32
     
Item 3. Defaults Upon Senior Securities
32
   
Item 4. Mine Safety Disclosures
32
     
Item 5. Exhibits
32
     
Signatures
33
 
 
1




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 
CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
June 30,
2016
   
December 31,
2015
 
   
US$
   
US$
 
ASSETS
       
Current assets:
       
Cash and cash equivalents
   
57,980,914
     
119,928,485
 
Restricted cash
   
64,502,724
     
50,852,327
 
Time deposits
   
282,452,648
     
237,626,806
 
Accounts receivable, net
   
200,490,313
     
234,542,739
 
Amounts due from a related party
   
-
     
244,836
 
Inventories
   
421,961,166
     
294,665,195
 
Prepaid expenses and other current assets
   
51,054,446
     
15,675,848
 
    Total current assets
   
1,078,442,211
     
953,536,236
 
Property, plant and equipment, net
   
810,183,747
     
571,746,507
 
Land use rights, net
   
23,809,904
     
24,506,837
 
Prepayments to equipment and construction suppliers
   
14,415,697
     
183,226,006
 
Other non-current assets
   
12,677,399
     
18,966,622
 
    Total assets
   
1,939,528,958
     
1,751,982,208
 
                 
                 
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
               
Short-term bank loans, including current portion of long-term bank loans
   
422,158,665
     
284,339,089
 
Bills payable
   
47,029,799
     
33,522,287
 
Accounts payable
   
195,336,669
     
257,417,000
 
Amounts due to related parties
   
131,394
     
8,439
 
Income taxes payable
   
2,989,790
     
6,881,946
 
Notes payable
   
146,231,067
     
-
 
Accrued expenses and other current liabilities
   
223,664,783
     
140,988,712
 
  Total current liabilities
   
1,037,542,167
     
723,157,473
 
Long-term bank loans, excluding current portion
   
81,672,771
     
107,481,709
 
Notes payable
   
-
     
145,634,996
 
Deferred income
   
71,254,125
     
62,039,050
 
Other non-current liabilities
   
41,767,586
     
38,046,917
 
    Total liabilities
   
1,232,236,649
     
1,076,360,145
 
                 
Redeemable Series D convertible preferred stock (redemption amount of US$197,775,400 and US$184,461,800 as of June 30, 2016 and December 31, 2015)
   
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, 49,427,191 shares and 49,344,284 shares issued, 49,406,191 shares and 49,323,284 shares outstanding as of June 30, 2016 and December 31, 2015, respectively
   
4,941
     
4,933
 
Treasury stock, 21,000 shares at cost
   
(92,694
)
   
(92,694
)
Additional paid-in capital
   
82,390,348
     
81,919,932
 
Retained earnings
   
560,269,109
     
515,555,985
 
Accumulated other comprehensive loss
   
(32,855,960
)
   
(19,342,658
)
    Total stockholders’ equity
   
609,715,844
     
578,045,598
 
Commitments and contingencies
   
-
     
-
 
    Total liabilities, redeemable convertible preferred stock and stockholders’ equity
   
1,939,528,958
     
1,751,982,208
 

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,
 
 
 
2016
   
2015
   
2016
   
2015
 
 
 
US$
   
US$
   
US$
   
US$
 
 
               
Revenues
   
277,139,662
     
265,412,742
     
492,169,820
     
487,339,137
 
Cost of revenues
   
(216,795,181
)
   
(213,919,846
)
   
(397,011,688
)
   
(387,203,965
)
    Gross profit
   
60,344,481
     
51,492,896
     
95,158,132
     
100,135,172
 
 
                               
Selling expenses
   
(382,038
)
   
(438,041
)
   
(667,174
)
   
(734,861
)
General and administrative expenses
   
(6,596,023
)
   
(6,592,032
)
   
(11,665,697
)
   
(11,556,790
)
Research and development expenses
   
(5,906,719
)
   
(6,659,310
)
   
(10,816,286
)
   
(12,473,173
)
    Total operating expenses
   
(12,884,780
)
   
(13,689,383
)
   
(23,149,157
)
   
(24,764,824
)
 
                               
    Operating income
   
47,459,701
     
37,803,513
     
72,008,975
     
75,370,348
 
 
                               
Interest income
   
1,615,728
     
2,466,291
     
3,229,991
     
4,894,362
 
Interest expense
   
(10,628,222
)
   
(11,038,295
)
   
(21,532,881
)
   
(21,667,648
)
Foreign currency exchange gains (losses)
   
(56,091
)
   
322,056
     
371,574
     
231,641
 
Gains on foreign currency forward contracts
   
-
     
305,825
     
-
     
660,344
 
Government grant
   
218,286
     
4,814
     
426,719
     
4,814
 
    Total non-operating expense, net
   
(8,850,299
)
   
(7,939,309
)
   
(17,504,597
)
   
(15,876,487
)
 
                               
    Income before income taxes
   
38,609,402
     
29,864,204
     
54,504,378
     
59,493,861
 
 
                               
Income tax expense
   
(5,253,628
)
   
(4,385,601
)
   
(9,791,254
)
   
(8,611,232
)
 
                               
    Net income
   
33,355,774
     
25,478,603
     
44,713,124
     
50,882,629
 
 
                               
Earnings per common share:
                               
Basic and diluted
   
0.51
     
0.39
     
0.68
     
0.77
 
 
                               
Net Income
   
33,355,774
     
25,478,603
     
44,713,124
     
50,882,629
 
 
                               
Other comprehensive loss
                               
Foreign currency translation adjustment, net of nil income taxes
   
(18,440,326
)
   
(616,961
)
   
(13,513,302
)
   
(781,721
)
 
                               
Comprehensive income
   
14,915,448
     
24,861,642
     
31,199,822
     
50,100,908
 

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,
 
 
 
2016
   
2015
 
 
 
US$
   
US$
 
Cash flows from operating activities:
       
Net cash provided by (used in) operating activities
   
(93,887,642
)
   
71,660,883
 
 
               
Cash flows from investing activities:
               
Proceeds from maturity of time deposits
   
236,818,725
     
237,499,197
 
Purchase of time deposits
   
(286,909,102
)
   
(231,080,300
)
Purchase of land use rights
   
-
     
(6,904,447
)
Purchase of and deposits for property, plant and equipment
   
(40,022,079
)
   
(119,535,975
)
Government grant related to the construction of Sichuan plant
   
8,809,473
     
-
 
Net cash used in investing activities
   
(81,302,983
)
   
(120,021,525
)
 
               
Cash flows from financing activities:
               
Proceeds from bank borrowings
   
399,343,916
     
323,407,459
 
Repayments of bank borrowings
   
(280,843,603
)
   
(238,181,426
)
Release of restricted cash as collateral for bank borrowings
   
28,378,420
     
-
 
Placement of restricted cash as collateral for bank borrowings
   
(32,492,262
)
   
(29,729,123
)
Net cash provided by financing activities
   
114,386,471
     
55,496,910
 
 
               
Effect of foreign currency exchange rate changes on cash and cash equivalents
   
(1,143,417
)
   
109,400
 
Net increase (decrease) in cash and cash equivalents
   
(61,947,571
)
   
7,245,668
 
 
               
Cash and cash equivalents at beginning of period
   
119,928,485
     
45,456,612
 
Cash and cash equivalents at end of period
   
57,980,914
     
52,702,280
 
 
               
Supplemental disclosure of cash flow information:
               
Interest paid, net of capitalized interest
   
20,737,714
     
20,159,080
 
Income taxes paid
   
10,654,265
     
3,706,530
 
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 included in accrued expenses and other current liabilities
   
88,224,035
     
295,893
 


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, 2015 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, 2015, 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 15, 2016.

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, 2016, the results of operations for the three-month and six-month periods ended June 30, 2016 and 2015, and the cash flows for the six-month periods ended June 30, 2016 and 2015, have been made.

The preparation of condensed 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the recoverability of the carrying amounts of property, plant and equipment, the realizability of inventories, the useful lives of property, plant and equipment, the collectability of accounts receivable, the fair values of 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 overseas customers 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-month periods ended June 30, 2016 and 2015, are as follows:

 
 
Three-Month Period Ended June 30,
 
 
 
2016
   
2015
 
 
 
US$
   
%
   
US$
   
%
 
Distributor A, located in PRC
   
39,632,852
     
14.3
%
   
47,121,285
     
17.8
%
Distributor B, located in PRC
   
31,669,861
     
11.4
%
   
38,766,823
     
14.6
%
Distributor C, located in PRC
   
30,270,133
     
10.9
%
   
27,377,033
     
10.3
%
Distributor D, located in PRC
   
28,827,605
     
10.4
%
   
32,232,229
     
12.1
%
Distributor E, located in PRC
   
16,204,373
     
5.8
%
   
28,722,000
     
10.8
%
Direct Customer F, located in ROK
   
35,499,160
     
12.8
%
   
-
     
0.0
%
Direct Customer G, located in ROK
   
-
     
0.0
%
   
29,139,000
     
11.0
%
Total
   
182,103,984
     
65.6
%
   
203,358,370
     
76.6
%
 
 
5

 
 


   
Six-Month Period Ended June 30,
 
   
2016
   
2015
 
   
US$
   
%
   
US$
   
%
 
Distributor A, located in PRC
   
74,738,467
     
15.2
%
   
82,134,181
     
16.9
%
Distributor B, located in PRC
   
67,479,415
     
13.7
%
   
71,578,657
     
14.7
%
Distributor C, located in PRC
   
55,755,981
     
11.3
%
   
49,664,900
     
10.2
%
Distributor D, located in PRC
   
57,288,505
     
11.6
%
   
58,437,523
     
12.0
%
Distributor E, located in PRC
   
38,406,499
     
7.8
%
   
51,380,046
     
10.5
%
Direct Customer G, located in ROK
   
-
     
0.0
%
   
64,085,900
     
13.2
%
Total
   
293,668,867
     
59.6
%
   
377,281,207
     
77.5
%

 
The Company expects revenues from these distributors and end customers (other than Direct Customer G) 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. The Company purchased its raw materials through a limited number of distributors, which individually exceeded 10% of the Company's total raw material purchases, accounted for approximately 77.6% (six distributors)  and 71.8% (five distributors) of the Company's total raw materials purchases for the three-month periods ended June 30, 2016 and 2015, respectively, and 81.6% (six distributors) and 67.1% (five distributors) of the Company's total raw materials purchases for the six-month periods ended June 30, 2016 and 2015, 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 96.5% and 96.1% of the Company's total equipment purchases for the three-month periods ended June 30, 2016 and 2015, respectively, and accounted for 96.4% and 97.9% of the Company's total equipment purchases for the six-month periods ended June 30, 2016 and 2015.  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, is also the majority owner of Distributor E presented above.

Cash concentration

Cash and cash equivalents, short-term restricted cash, time deposits and long-term restricted cash included in other non-current assets mentioned below maintained at banks consist of the following:

   
June 30, 2016,
   
December 31, 2015
 
   
US$
   
US$
 
RMB denominated bank deposits with:
       
Financial Institutions in the PRC
   
414,281,521
     
417,430,412
 
Financial Institutions in Hong Kong Special Administrative Region ("Hong Kong SAR")
   
8,602
     
13,778
 
Financial Institution in Dubai, United Arab Emirates ("UAE")
   
17,830
     
3,023
 
U.S. dollar denominated bank deposits with:
               
Financial Institution in the U.S.
   
318,162
     
226,010
 
Financial Institutions in the PRC
   
67,637
     
17,109
 
Financial Institution in Hong Kong SAR
   
42,568
     
63,854
 
Financial Institution in Macau Special Administrative Region ("Macau SAR")
   
14,968
     
37,120
 
Financial Institution in Dubai, UAE
   
411,835
     
7,474,960
 
Euro denominated bank deposits with:
               
Financial institution in Dubai, UAE
   
3,155
     
3,011
 
HK dollar denominated bank deposits with:
               
Financial institution in Hong Kong SAR
   
206
     
336
 
Dirham denominated bank deposits with:
               
Financial institution in Dubai, UAE
   
139,982
     
37,278
 

 
6

 

 
The bank deposits with financial institutions in the PRC are insured by the government authority for up to RMB500,000. The bank deposits with financial institutions in the HK SAR are insured by the government authority for up to HK$500,000. The bank deposits with financial institutions in the Macau SAR are insured by the government authority for up to MOP$500,000. Total bank deposits amounted to $1,391,694 and $1,690,764 are insured as of June 30, 2016 and December 31, 2015, respectively. The Company has not experienced any losses in uninsured bank deposits and does not believe that it is exposed to any significant risks on cash held in bank accounts. To limit exposure to credit risk, the Company primarily places bank deposits with large financial institutions in the PRC, Hong Kong SAR, Macau SAR and Dubai, UAE 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 of US$10,375,196 and US$16,907,470 as of June 30, 2016 and December 31, 2015 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$12,248,582 and US$8,069,475 as of June 30, 2016 and December 31, 2015, respectively. Upon maturity and repayment of the bills payable, which is generally within 6 months, the cash becomes available for use by the Company. 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.

Short-term bank deposits that are pledged as collateral for short-term and long-term bank borrowings are reported as restricted cash and amounted to US$41,669,078 and US$32,010,452 as of June 30, 2016 and December 31, 2015, 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$10,375,196 and US$16,907,470 as of June 30, 2016 and December 31, 2015, respectively. The cash flows from such bank deposits are reported within cash flows from financing activities in the condensed consolidated statements of cash flows.

Short-term bank deposits that are related to government grant are reported as restricted cash and amounted to U$10,585,064 and US$10,772,400 as June 30, 2016 and December 31, 2015, respectively.  The amount is reported as non-cash investing and financing activities in the condensed consolidated statements of cash flows.

Note 2 - Accounts receivable

Accounts receivable consists of the following:

   
June 30, 2016
   
December 31, 2015
 
   
US$
   
US$
 
     
Accounts receivable
   
200,530,177
     
234,583,370
 
Allowance for doubtful accounts
   
(39,864
)
   
(40,631
)
Accounts receivable, net
   
200,490,313
     
234,542,739
 

As of June 30, 2016 and December 31, 2015, the accounts receivable balances also include notes receivable in the amount of US$341,024 and US$2,048,186, respectively. As of June 30, 2016 and December 31, 2015, US$73,641,325 and US$54,664,219 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, 2016 and 2015.
 
 
7


 
The following table provides an analysis of the aging of accounts receivable as of June 30, 2016 and December 31, 2015:
 
   
June 30, 2016
   
December 31, 2015
 
   
US$
   
US$
 
Aging:
       
– current
   
200,490,313
     
234,396,244
 
– 1-3 months past due
   
-
     
146,495
 
– 4-6 months past due
   
-
     
-
 
– 7-12 months past due
   
-
     
-
 
– greater than one year past due
   
39,864
     
40,631
 
Total accounts receivable
   
200,530,177
     
234,583,370
 

Note 3 - Inventories

Inventories consist of the following:

   
June 30, 2016
   
December 31, 2015
 
 
US$
 
US$
 
     
Raw materials
   
394,938,565
     
287,995,933
 
Work in progress
   
175,434
     
164,034
 
Finished goods
   
26,847,167
     
6,505,228
 
Total inventories
   
421,961,166
     
294,665,195
 

There were no write down of inventories for the three-month and six-month periods ended June 30, 2016 and 2015.

Note 4 – Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

   
June 30, 2016
   
December 31, 2015
 
   
US$
   
US$
 
         
Receivables due from a customer in the ROK
   
-
     
9,471,222
 
Interest receivable
   
3,257,727
     
3,306,974
 
Value added taxes receivables
   
38,763,061
     
698,286
 
Advances to suppliers
   
4,393,320
     
68,354
 
Others (i)
   
4,640,338
     
2,131,012
 
    Total prepaid expenses and other current assets
   
51,054,446
     
15,675,848
 

(i) Others mainly include prepaid miscellaneous service fees, staff advances and prepaid rental fee.

8



Note 5 – Property, plant and equipment, net

Property, plant and equipment consist of the following:

   
June 30, 2016
   
December 31, 2015
 
   
US$
   
US$
 
         
Machinery, equipment and furniture
   
316,589,584
     
258,173,175
 
Motor vehicles
   
2,309,311
     
2,009,440
 
Workshops and buildings
   
92,909,638
     
76,924,199
 
Construction in progress
   
499,853,899
     
323,955,531
 
    Total property, plant and equipment
   
911,662,432
     
661,062,345
 
Less accumulated depreciation
   
(101,478,685
)
   
(89,315,838
)
    Property, plant and equipment, net
   
810,183,747
     
571,746,507
 

All of the property, plant and equipment, net as of June 30, 2016 and December 31, 2015 were located in the PRC, except for US$346.5 million and US$83.8  million of property, plant and equipment, net were located in Dubai, UAE. 

For the three-month and six-month periods ended June 30, 2016 and 2015, the Company capitalized US$625,324 and US$168,306, and US$1,226,431 and 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,
 
 
 
2016
   
2015
 
 
 
US$
   
US$
 
 
       
Cost of revenues
   
5,681,237
     
5,525,990
 
General and administrative expenses
   
435,142
     
403,135
 
Research and development expenses
   
942,387
     
901,082
 
Selling expense
   
506
     
223
 
    Total depreciation expense
   
7,059,272
     
6,830,430
 
 
 
 
Six-Month Period Ended
June 30, 
 
 
 
 2016  
2015
 
   
US$ 
 
US$
 
 
   
Cost of revenues
   
11,361,731
     
10,305,578
 
General and administrative expenses
   
838,326
     
778,263
 
Research and development expenses
   
1,888,204
     
1,696,801
 
Selling expense
   
890
     
223
 
    Total depreciation expense
   
14,089,151
     
12,780,865
 

 
9

 
 

Note 6 - Prepayments to equipment suppliers

   
June 30, 2016
   
December 31, 2015
 
   
US$
   
US$
 
         
Jiamu (i)
   
11,128,200
     
11,712,843
 
Peaceful (ii)
   
-
     
170,009,200
 
Bagader Trading (iii)
   
1,225,030
     
-
 
Others
   
2,062,467
     
1,503,963
 
Total Prepayments to equipment and construction suppliers
   
14,415,697
     
183,226,006
 
 
(i) In December 2013, the Company entered into an equipment purchase contract with Harbin Jiamu Import & Export Trading Co., Ltd ("Jiamu Trading") for a consideration of RMB89.7 million to purchase testing equipment. In August 2015, the Company signed a supplemental contract with Harbin Jiamu Science and Technology Co., Ltd. (together with Jiamu Trading as "Jiamu") to purchase testing equipment for a consideration of RMB16.3 million (equivalent to US$2.5 million). The balance of Jiamu as of June 30, 2016 and December 31, 2015 mainly represents the prepayment for testing equipment.

(ii) 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. As of June 30, 2016, all production equipment for a total amount of US$264.7 were delivered to the Company.

(iii) On June 28, 2016, AL Composites entered into a facility purchase contract with Bagader Trading EST for a total consideration of AED45 million (equivalent to US$12.3 million). Pursuant to the contract with Bagader Trading, the Company has paid AED 4.5 million (equivalent to US$1.2 million) as prepayments as of June 30, 2016.

Note 7 – Fair value measurement

Short-term financial instruments, including cash and cash equivalents, restricted cash, time deposits, accounts receivable, 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, 2016, the carrying amount and estimated fair value of the notes payable were US$146,231,067 and US$114,375,000 respectively.
 
 
10

 

Note 8 – Borrowings

(a)  Current
 
   
June 30, 2016
   
December 31, 2015
 
   
US$
   
US$
 
Unsecured loans
   
220,933,439
     
64,555,795
 
Loans secured by accounts receivable
   
57,304,862
     
43,037,196
 
Loans secured by restricted cash
   
32,100,000
     
27,100,000
 
Current portion of long-term bank loans (note (b))
   
111,820,364
     
149,646,098
 
                 
    Total short-term loans, including current portion of long-term bank loans
   
422,158,665
     
284,339,089
 
 
As of June 30, 2016 and December 31, 2015, the Company's short-term bank loans (including the current portion of long-term bank loans) bear a weighted average interest rate of 4.1% and 4.2% per annum, respectively. All short-term bank loans mature at various times within one year and contain no renewal terms.

In July 2015, the Company obtained a one-year secured loan of US$3.5 million from Bank of China Luxemburg Branch at an annual interest rate of one-year LIBOR (1.2303% as of June 30, 2016) plus 0.75%. These loans were secured by restricted cash of RMB23.0 million (equivalent to US$3.5 million) by the Bank of China in Harbin, China.

In January 2016, the Company obtained a one-year secured loan of US$12 million from HSBC Middle East at an annual interest rate of one-month LIBOR (0.4651% as of June 30, 2016) plus 1.8%. These loans were secured by restricted cash of RMB17.8 million (equivalent to US$2.7 million) by the HSBC Bank in Harbin, China.

In January 2016, the Company obtained a one-year secured loan of US$16.6 million from HSBC Middle East at an annual interest rate of one-month LIBOR (0.4651% as of June 30, 2016) plus 1.8%. These loans were secured by restricted cash of RMB25.5 million (equivalent to US$3.8 million) by the HSBC Bank in Harbin, China.

On February 18, 2016, the Company obtained a six-month secured loan of RMB30 million (equivalent to US$4.5 million) by accounts receivable of RMB39.2 million (equivalent to US$5.9 million) at an annual interest rate of 4.300% from ICBC in Harbin. 

In April 2016, the Company obtained nine six-month secured loans with a total amount of RMB350 million (equivalent to US$52.8 million) by accounts receivables of RMB449.2 million (equivalent to US$67.7 million) at an annual interest rate of 4.350% from Harbin Longjiang Bank.

(b) Non-current
 
   
June 30, 2016
   
December 31, 2015
 
   
US$
   
US$
 
Secured loans
   
91,400,000
     
81,164,800
 
Unsecured loans
   
102,093,135
     
175,963,007
 
Less: current portion
   
111,820,364
     
149,646,098
 
Total long-term bank loans, excluding current portion
   
81,672,771
     
107,481,709
 

On June 12, 2014, the Company obtained a three-year secured loan of US$70 million from Bank of China Paris Branch at interest rate of three-month LIBOR (0.6541% as of June 30, 2016). The loan is secured by restricted cash of RMB110 million (equivalent to US$16.6 million). The Company repaid US$4 million in 2015, and repaid US$5 million on June 9, 2016. The loan in the amount of US$15 million is due on December 9, 2016, and the remaining of the loan amounted to US$46 million is due on June 9, 2017.

On December 11, 2014, the Company obtained a two-year unsecured loan of RMB197 million (equivalent to US$29.7 million) from Bank of Communication at an annual interest rate of 6.60%. The loan is due on December 10, 2016.
 
 
11

 

 

On January 23, 2015, the Company obtained two two-year unsecured loans in the total amount of RMB100 million (equivalent to US$15.1 million) at an annual interest rate of 6.0% from Agriculture Bank of China. The amount of RMB 45 million is due on January 12 and the remaining amount of RMB 55 million is due on January 19, 2017. On April 22, 2015, the Company obtained a two-year unsecured loan of RMB40 million (equivalent to US$6 million) at an annual interest rate of 5.75% from Agriculture Bank of China. The loan is due on April 20, 2017.

In October and November, 2015, the Company obtained three five-year unsecured loans of RMB260 million (equivalent to US$39.2 million) at an annual interest rate of 4.75% from Bank of China. In January 2016, the Company obtained one four-year unsecured loans of RMB80 million (equivalent to US$12.1 million) at an annual interest rate of 4.75% from Bank of China. All of these loans are due on October 28, 2020.

On May 13, 2016, the Company obtained two two-year secured loans of US$14.3 million from China Construction Bank (Dubai) at an interest of three-month LIBOR (0.6541% as of June 30, 2016) plus 1.6%.  On May 17, 2016, the Company obtained two two-year secured loans of US$12.3 million from China Construction Bank (Dubai) at an interest of three-month LIBOR (0.6541% as of June 30, 2016) plus 1.6%. On May 22, 2016, the Company obtained a two-year secured loan of US$3.8 million from China Construction Bank (Dubai) at an interest of three-month LIBOR (0.6541% as of June 30, 2016) plus 1.6%. The interest rate is reset every three months. These loans are secured by restricted cash of RMB68.8 million (equivalent to US$10.4 million). All of these loans are due on March 22, 2018.

As of June 30, 2016, the Company had total lines of credit of RMB5,356.0 million (US$807.7 million) including unused lines of credit of RMB1,368.9 million (US$206.5 million) with remaining terms less than 12 months and RMB646.0 million (US$97.4 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, 2016, 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, 2016
   
December 31, 2015
 
   
US$
   
US$
 
Payables for purchase of property, plant and equipment
   
129,668,126
     
42,524,903
 
Accrued freight expenses
   
2,459,663
     
1,579,936
 
Accrued interest expenses
   
7,934,070
     
7,800,481
 
Advance from customers (i)
   
75,198,592
     
82,009,002
 
Non income tax payables
   
5,238,290
     
4,353,730
 
Others (ii)
   
3,166,042
     
2,720,660
 
Total accrued expenses and other current liabilities
   
223,664,783
     
140,988,712
 

(i) Advance from customers mainly represent the advance received from two customers in the PRC for the raw material purchases during the 4th quarter of 2015. The Company delivered raw material in the amount of USD 6,810,410 to these two customers during the six-month periods ended June 30, 2016.

(ii) Others mainly represent accrued payroll and employee benefits and other accrued miscellaneous operating expenses.
 
 
 
12


 
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,
 
 
 
2016
   
2015
 
2016
   
2015
 
 
 
US$
   
US$
 
US$
   
US$
 
Costs and expenses resulting from transactions with related parties:
 
   
   
   
 
Rental expenses for plant and office spaces
   
184,525
     
165,500
     
369,061
     
360,714
 

The related party balances are summarized as follows:
 
 
 
June 30, 2016
   
December 31, 2015
 
 
US$
 
US$
 
Amounts due from a related party:
   
Prepaid rent expenses to Xinda High-Tech
   
-
     
244,836
 
Total:
   
-
     
244,836
 
 
Amounts due to a related party:
 
June 30, 2016
   
December 31, 2015
 
Rental payable to Xinda High-Tech
   
120,107
     
-
 
Rental payable to Mr Han's son
   
11,287
     
8,439
 
Total:
   
131,394
     
8,439
 
 

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
     
732,010
 
Between January 1, 2014 and December 31, 2018

The Company rents the following facility in Harbin, Heilongjiang province from Mr. Han's son:
 
Premise Leased
Area (M2)
 
Annual Rental Fee (US$)
 
Period of Lease
Facility
   
200
     
6,127
 
Between August 17, 2014 and August 16, 2016

 
13


 

Note 11– Income tax

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 Materials FZE ("AL Composites"), a subsidiary of China XD, is exempted from income taxes.

The effective income tax rates for the six-month periods ended June 30, 2016 and 2015 were 18.0% and 14.3%, respectively.  The effective income tax rate increased from 14.3% for the six-month period ended June 30, 2015 to 18.0% for the six-month period ended June 30, 2016, primarily due to less sales to overseas market of Dubai Xinda which was exempted from income taxes. The effective income tax rate for the six-month period ended June 30, 2016 differs from the PRC statutory income tax rate of 25% primarily due to the effect of tax rate differential on entities not subject to PRC income tax, super deduction of R&D expense and partially offset by the effect of non-deductible expenses.

As of June 30, 2016, the unrecognized tax benefits were US$24,993,661 and the interest relating to unrecognized tax benefits was US$4,269,280.  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.

Note 12 – Deferred Income

On January 26, 2015, the Company entered into a memorandum and a fund support agreement (the "Agreement") with the People's Government of Shunqing District, Nanchong City, Sichuan Province ("Shunqing Government") pursuant to which Shunqing Government, through its investment vehicle, will extend to the Company RMB350 million (equivalent to US$52.8 million) to support the construction of the Sichuan plant. As of June 30, 2016, the Company has received RMB280 million (equivalent to US$42.2 million) in total from Shunqing Government in the form of government repayment of bank loans on behalf of the Company. The Company also received RMB70 million (equivalent to US$10.6 million) pursuant to the Agreement for which the amount was restricted to use subject to the progress of the construction, which has been recorded as restricted cash as of June 30, 2016.

In addition, the Company has received RMB89.9 million (equivalent to US$13.6 million) from Shunqing Government and RMB6.4 million (equivalent to US$1.0 million) from Ministry of Finance of the People's Republic of China to support the construction as of June 30, 2016.

Since the funding is related to construction of long-term assets, the amounts were recognized as government grant, which is included in deferred income on the condensed consolidated balance sheets, and to be recognized as other income in the condensed consolidated statements of comprehensive income over the periods and in the proportions in which depreciation expense on the long-term assets is recognized.

In addition, the Company also received RMB36 million (equivalent to US$5.4 million) from Shunqing Government with respect to interest subsidy for further loan borrowing cost as of June 30, 2016, among which RMB9.8 million (equivalent to US$1.5 million) have been recognized as other income when related interest expense was recognized as of June 30, 2016.

Note 13 – Other non-current liabilities
 
   
June 30, 2016
   
December 31, 2015
 
   
US$
   
US$
 
         
Income tax payable-noncurrent (i)
   
29,262,941
     
24,172,693
 
Deferred income tax liabilities
   
12,504,645
     
13,874,224
 
Total other non-current liabilities
   
41,767,586
     
38,046,917
 
 
(i) Income tax payable-noncurrent represents the accumulative balance of unrecognized tax benefits and related accrued interest.
 
 
 
14

 

Note 14 – Redeemable Series D convertible preferred stock

According to the securities purchase agreement of the Redeemable Series D Convertible Preferred Stock (the “Series D preferred stock”), the Company has the right to require each holder of the Series D preferred stock to convert Series D preferred stock into common stock from September 28, 2014, as the Company has met the performance target for each of the fiscal years ended December 31, 2011, 2012 and 2013, respectively. Since the Series D preferred stock is not redeemable currently and is not probable that the Series D preferred stock will become redeemable, an adjustment of the carrying value of the Series D preferred stock to the redemption amount is not necessary.
 
Note 15 – Stockholders’ equity

The changes of each caption of stockholders’ equity for the six-month period ended June 30, 2016 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
Loss
   
Stockholders’
Equity
 
       
US$
       
US$
                     
Balance as of January 1, 2016
   
1,000,000
     
100
     
49,323,284
     
4,933
     
(92,694
)
   
81,919,932
     
515,555,985
     
(19,342,658
)
   
578,045,598
 
Net income
   
-
     
-
     
-
     
-
     
-
     
-
     
44,713,124
     
-
     
44,713,124
 
Other comprehensive loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(13,513,302
)
   
(13,513,302
)
Stock based compensation
   
-
     
-
     
-
     
-
     
-
     
470,424
     
-
     
-
     
470,424
 
Vesting of nonvested shares
   
-
     
-
     
82,907
     
8
     
-
     
(8
)
   
-
     
-
     
-
 
Balance as of June 30, 2016
   
1,000,000
     
100
     
49,406,191
     
4,941
     
(92,694
)
   
82,390,348
     
560,269,109
     
(32,855,960
)
   
609,715,844
 

 Note 16 – Stock based compensation

Nonvested shares

A summary of the nonvested shares activity for the six-month ended June 30, 2016 is as follows:

   
Number of Nonvested
Shares
   
Weighted Average
Grant date Fair Value
 
       
US$
 
Outstanding as of December 31, 2015
   
614,727
     
5.54
 
Vested
   
(10,907
)
   
3.08
 
Forfeited
   
(27,770
)
   
5.04
 
Outstanding as of  June 30, 2016
   
576,050
     
5.60
 

The Company recognized US$248,244 and US$130,645 of share-based compensation expense in general and administration expenses relating to nonvested shares for the three-month periods ended June 30, 2016 and 2015, respectively, and US$470,424 and US$386,371 of share-based compensation expense in general and administration expenses relating to nonvested shares for the six-month periods ended June 30, 2016 and 2015, respectively. As of June 30, 2016, there was US$1,304,494 total unrecognized compensation cost relating to nonvested shares, which is to be recognized over a weighted average period of 1.16 years. 

 
 
15


 

Note 17 - 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,
 
 
 
2016
   
2015
   
2016
   
2015
 
 
 
US$
   
US$
   
US$
   
US$
 
Net income
   
33,355,774
     
25,478,603
     
44,713,124
     
50,882,629
 
Less:
                               
Earnings allocated to participating Series D convertible preferred stock
   
(8,088,078
)
   
(6,199,413
)
   
(10,843,682
)
   
(12,379,759
)
Earnings allocated to participating nonvested shares
   
(292,624
)
   
(230,996
)
   
(395,191
)
   
(466,567
)
Net income for basic and diluted earnings per share
   
24,975,072
     
19,048,194
     
33,474,251
     
38,036,303
 
 
                               
Denominator
                               
Denominator for basic and diluted earnings per share
   
49,406,191
     
49,161,284
     
49,391,710
     
49,159,344
 
 
                               
Earnings per share:
                               
Basic and diluted
   
0.51
     
0.39
     
0.68
     
0.77
 

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, 2016 and 2015 because their effects are anti-dilutive:
 
 
Three-Month Period Ended June 30,
 
Six-Month Period Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
       
Shares issuable upon conversion of Series D convertible preferred stock
   
16,000,000
     
16,000,000
     
16,000,000
     
16,000,000
 

 
Note 18 - Commitments and contingencies

(1)    Lease commitments

Future minimum lease payments under non-cancellable operating leases agreements as of June 30, 2016 were as follows. 

   
US$
 
Period from July 1, 2016 to December 31, 2016
   
495,307
 
Years ending December 31,
       
2017
   
             1,272,455
 
2018
   
                984,733
 
2019
   
                113,999
 
2020
   
                113,999
 
2021
   
                113,999
 
After 2021
   
930,994
 

Rental expenses incurred for operating leases of plant and office spaces were US$449,002 and US$499,500 for the three-month periods ended June 30, 2016 and 2015, respectively, and US$844,058 and US$728,649 for the six-month periods ended June 30, 2016 and 2015, 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) Company Limited ("Xinda Holding (HK)") entered into an investment agreement with Shunqing Government, pursuant to which Xinda Holding (HK) will invest RMB1.8 billion in property, plant and equipment and approximately RMB0.6 billion in working capital, for the construction of Sichuan plant.  As of June 30, 2016, the Company has a remaining commitment of RMB88.9 million (equivalent to US$13.4 million) mainly for facility construction, and RMB17.9 million (equivalent to US$2.7 million) for the acquisition of equipment.



16


(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, 2016, the Company has a remaining commitment of US$5.9 million for the remaining equipment acquisition. On April 28, 2015, AL Composites entered into a warehouse construction contract with Falcon Red Eye Contracting Co. L.L.C. for a total consideration of AED6.7 million (equivalent to US$1.8 million). As of June 30, 2016, the Company has a remaining commitment of US$0.9 million. On June 28, 2016, AL Composites entered into a plant purchasing contract with Bagader Trading Est for a total consideration of ADE45.0 million (equivalent to US$12.3 million).As of June 20, 2016, the Company has a remaining commitment of US$11.0 million.

(4)  Xinda Group equipment
 
As of June 30, 2016, Xinda Group has a remaining commitment of RMB9.7 million (equivalent to US$1.5 million) for the acquisition of equipment.

(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. On March 23, 2016, the Court issued an Opinion and Order dismissing the Complaint without prejudice. On May 6, 2016, plaintiffs moved the Court for leave to amend the Complaint.  On June 24, 2016, the Company filed its opposition to the plaintiffs' motion. The plaintiffs' reply to the Company's opposition is due August 8, 2016. The Company, after consultation with its legal counsel, continues to believe that the lawsuits are without merit and will continue 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, 2016 since the possible loss or range of loss cannot be reasonably estimated.
 
Note 19 - Subsequent Events

On June 30, 2016, the Company announced to redeem all of the 11.75% guaranteed senior notes due on February 4, 2019 (the "Notes") outstanding on August 29, 2016 (the “Redemption Date”) at redemption price equal to 100% of the principal amount of the Notes plus the Applicable Premium (as defined in the Indenture) as of the Redemption Date (the “Redemption Price”) plus accrued and unpaid interest up to (but not including) the Redemption Date. The Notes has an aggregate principal amount of US$ 150,000,000 and the estimated carrying amount of US$146,432,000 on August 29, 2016. The redemption amount on Redemption Date is estimated to be approximately US$ 165,285,000 and accrued and unpaid interest up to (but not including) the Redemption Date equal to approximately US$1,224,000. Loss upon extinguishment of the Notes in the amount of approximately US$ 18,853,000 representing the difference between the redemption amount and the net carrying amount of the Notes, is to be recognized in the statement of comprehensive income in the quarter ended September 30, 2016.


 
 
 
17

 
 

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. Through our wholly-owned operating subsidiaries in China and 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 379 certifications from manufacturers in the automobile industry as of June 30, 2016. 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 338 professionals and 14 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 357 patents, 29 of which we have obtained the patent rights and the remaining 328 of which we have applications pending in China as of June 30, 2016.

Our products include eleven categories: Modified Polypropylene (PP), Modified Acrylonitrile Butadiene Styrene (ABS), Modified Polyamide 66 (PA66), Modified Polyamide 6 (PA6), Modified Polyoxymethylenes (POM), Modified Polyphenylene Oxide (PPO), Plastic Alloy, 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 28 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 plants in Harbin, Heilongjiang in the PRC. As of June 30, 2016, 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 plant in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, expecting to bring total domestic installed production capacity to 690,000 metric tons with additional 70 new production lines at the completion of the construction of our fourth production plant. Sichuan Xinda has supplied to its customers since 2013, backed by production capacity in our Harbin production plant. 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.  During the second quarter of 2016, we installed 20 production lines stationed in completed plants in our Sichuan plant, which was launched on July 7, 2016. There is still construction ongoing on the site of our Sichuan plant to be expected to be completed by the end of 2016. In addition, we completed the trial production in the plant in Dubai, UAE with additional 2,500 metric tons of production capacity ("Phase 1") targeting high-end products for the overseas markets. In order to meet the increasing demand from our customers in the ROK and to develop potential overseas markets, on January 25, 2015, AL Composites Materials FZE ("AL Composites") 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 a lease term of 15 years. The Company is planning to complete installing 75 production lines with additional 14,000 metric tons ("Phase 2") of annual production capacity in that property around the end of 2016, bringing total production capacity in Dubai to 16,500 metric tons.  On June 28, 2016, AL Composite signed a lease agreement pertaining approximately 20,206 square meters property in JAFZA in Dubai, UAE with constructed building including a warehouse, office and service block with a minimum term of 10 years and further extension of 10 additional years.


 
 

18




 

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

● Revenues were $277.1 million, an increase of 4.4% from $265.4 million in the second quarter of 2015
● Gross profit was $60.3 million, an increase of 17.1% from $51.5 million in the second quarter of 2015
● Gross profit margin was 21.8%, compared to 19.4% in the second quarter of 2015
● Net income was $33.3 million, compared to $25.5 million in the second quarter of 2015
● Total volume shipped was 89,403 metric tons, up 5.4% from 84,833 metric tons in the second quarter of 2015
 
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
 
 
 
2016
   
2015
   
%
   
2016
   
2015
   
%
 
Revenues
   
277.1
     
265.4
     
4.4
%
   
492.2
     
487.3
     
1.0
%
Cost of revenues
   
(216.8
)
   
(213.9
)
   
1.4
%
   
(397.0
)
   
(387.2
)
   
2.5
%
Gross profit
   
60.3
     
51.5
     
17.1
%
   
95.2
     
100.1
     
(4.9
)%
Total operating expenses
   
(12.9
)
   
(13.7
)
   
(5.8
)%
   
(23.2
)
   
(24.8
)
   
(6.5
)%
Operating income
   
47.4
     
37.8
     
25.4
%
   
72.0
     
75.3
     
(4.4
)%
Income before income taxes
   
38.6
     
29.9
     
29.1
%
   
54.5
     
59.4
     
(8.2
)%
Income tax expense
   
(5.3
)
   
(4.4
)
   
(20.5
)%
   
(9.8
)
   
(8.5
)
   
15.3
%
Net income
   
33.3
     
25.5
     
30.6
%
   
44.7
     
50.9
     
(12.2
)%

Three months ended June 30, 2016 compared to three months ended June 30, 2015

Revenues
Revenues were US$277.1 million in the second quarter ended June 30, 2016, an increase of US$11.7 million, or 4.4%, compared to US$265.4 million in the same period of last year, due to 4.0% increase in the average RMB selling price of our products and 4.5% negative impact from exchange rate due to weakening RMB against US dollars, and approximately 5.4% increase in sales volume.
 
In order to stimulate the growth of the auto industry, on September 29, 2015, the Chinese government implemented a tax incentive policy of 50% reduction of the sales tax for eligible purchase of vehicles with engines of 1.6 liters and less.  This helped the recovery of vehicle sales in China since the fourth quarter of 2015.  Passenger vehicles production increased by 7.3% in the first half year of 2016 compared to the same period of the prior year. The Company has been actively marketing its higher-end products to customers to better allocate its production capacity, diversifying its business to reduce its concentration in the Chinese market. Driven by accelerating growth of 18.9% in Central China and 80.5% in South China, domestic sales during the second quarter of 2015 increased by 4.4% as compared to the same period of the prior year.
 
Oversea sales was US$35.7 million in the second quarter of 2016 compared to US$29.1 million in the same period of the prior year due to the supply to a new ROK customer in the second quarter of 2016. The customer has made payment of US$9.4 million in the second quarter of 2016 with unpaid balance of US$26.3 million.



19





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,
         
   
2016
   
2015
   
Change in
   
Change in
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
Modified Polyamide 66 (PA66)
   
60.4
     
21.8
%
   
53.0
     
20.0
%
   
7.4
     
14.0
%
                                                 
Modified Polyamide 6 (PA6)
   
59.5
     
21.5
%
   
52.1
     
19.6
%
   
7.4
     
14.2
%
                                                 
Plastic Alloy
   
99.8
     
36.0
%
   
99.0
     
37.3
%
   
0.8
     
0.8
%
                                                 
Modified Polypropylene (PP)
   
43.1
     
15.6
%
   
44.6
     
16.8
%
   
(1.5
)
   
(3.4
)%
                                                 
Modified Acrylonitrile butadiene styrene (ABS)
   
10.0
     
3.6
%
   
10.8
     
4.1
%
   
(0.8
)
   
(7.4
)%
                                                 
Polyoxymethylenes (POM)
   
0.9
     
0.3
%
   
0.9
     
0.3
%
   
0.0
     
0.0
%
                                                 
Polyphenylene Oxide (PPO)
   
2.8
     
1.0
%
   
3.3
     
1.3
%
   
(0.5
)
   
(15.2
)%
                                                 
Modified Polylactic acid (PLA)
   
0.1
     
0.0
%
   
-
     
-
     
0.1
     
n/
a
                                                 
Raw Materials
   
0.5
     
0.2
%
   
1.7
     
0.6
%
   
(1.2
)
   
(70.6
)%
Total Revenues
   
277.1
     
100
%
   
265.4
     
100
%
   
11.7
     
4.4
%

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,
         
   
2016
   
2015
   
Change in
   
Change in
 
   
MT
   
%
   
MT
   
%
   
MT
   
%
 
Modified Polyamide 66 (PA66)
   
14,804
     
16.5
%
   
12,342
     
14.5
%
   
2,462
     
19.9
%
                                                 
Modified Polyamide 6 (PA6)
   
16,953
     
19.0
%
   
14,399
     
17.0
%
   
2,554
     
17.7
%
                                                 
Plastic Alloy
   
28,131
     
31.5
%
   
28,357
     
33.5
%
   
(226
)
   
(0.8
)%
                                                 
Modified Polypropylene (PP)
   
24,242
     
27.1
%
   
23,542
     
27.8
%
   
700
     
3.0
%
                                                 
Modified Acrylonitrile butadiene styrene (ABS)
   
4,102
     
4.6
%
   
4,185
     
4.9
%
   
(83
)
   
(2.0
)%
                                                 
Polyoxymethylenes (POM)
   
280
     
0.3
%
   
270
     
0.3
%
   
10
     
3.7
%
                                                 
Polyphenylene Oxide (PPO)
   
420
     
0.5
%
   
453
     
0.5
%
   
(33
)
   
(7.3
)%
                                                 
Modified Polylactic acid (PLA)
   
10
     
0.0
%
   
-
     
-
     
10
     
n/
a
                                                 
Raw Materials
   
461
     
0.5
%
   
1,285
     
1.5
%
   
(824
)
   
(64.1
)%
                                                 
Total Sales Volume
   
89,403
     
100
%
   
84,833
     
100
%
   
4,570
     
5.4
%

 

The Company continued to shift production mix from traditional Modified Polypropylene (PP) to higher-end products such as PA66, PA6 and POM, 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 end 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.
 
 

 
20


Gross Profit and Gross Profit Margin
 
Three-Month Period Ended June 30,
 
 
Change
 
(in millions, except percentage)
2016
 
 
2015
 
 
Amount
     %
 
Gross Profit
 
$
60.3
 
 
$
51.5
 
 
$
8.8
   
17.1
%
Gross Profit Margin
 
 
21.8
%
 
 
19.4
%
 
 
 
     
2.4
%

 
Gross profit was US$60.3 million in the second quarter ended June 30, 2016 compared to US$51.5 million in the same period of 2016, representing an increase of 17.1%. Our gross margin increased to 21.8% during the quarter ended June 30, 2016 from 19.4% during the same quarter of 2015 primarily due to  higher contribution from our higher-margin products sold overseas.

General and Administrative Expenses

 
Three-Month Period Ended June,
 
Change
 
(in millions, except percentage)
2016
 
2015
 
Amount
   
%
 
General and Administrative Expenses
 
$
6.6
   
$
6.6
   
$
0.0
   
 
0.0
%
as a percentage of revenues
   
2.4
%
   
2.5
%
           
(0.1
)%

General and administrative (G&A) expenses were stable as US$6.6 million in the quarter ended June 30, 2016 compared to US$6.6 million in the same period in 2015.

Research and Development Expenses

 
Three–Month Period Ended June 30,
 
Change
 
(in millions, except percentage)
2016
 
2015
 
Amount
 
%
 
Research and Development Expenses
 
$
5.9
   
$
6.7
   
$
(0.8
)
 
(11.9
)%
as a percentage of revenues
   
2.1
%
   
2.5
%
           
(0.4
)%

R&D expenses were US$5.9 million in the quarter ended June 30, 2016 compared with US6.7 million during the same period in 2015, a decrease of US$0.8 million, or 11.9%, reflecting our improved efficiency in R&D projects and 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.

As of June 30, 2016, the number of ongoing research and development projects was 187. 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$47.4 million in the second quarter ended June 30, 2016 compared to $37.8 million in the same period of 2015, representing an increase of 25.4% or US$9.6 million. This increase is primarily due to higher gross margin, and lower research and developed expenses, with stable general and administrative expenses.
 
 
 
21


 

Interest Income (Expenses)
 
 
 
Three-Month Period Ended June 30,
   
Change
 
(in millions, except percentage)
 
2016
   
2015
   
Amount
   
%
 
Interest Income
 
$
1.6
   
$
2.5
   
$
(0.9
)
   
(36.0
)%
Interest Expenses
   
(10.6
)
   
(11.0
)
   
0.4
     
(3.6
)%
Net Interest Expenses
 
$
(9.0
)
 
$
(8.5
)
 
$
(0.5
)
   
5.9
%
as a percentage of revenues
   
(3.3
)%
   
(3.2
)%
           
(0.1
)%


Net interest expense was US$9.0 million for the three-month period ended June 30, 2016, compared to net interest expense of US$8.5 million in the same period of 2015, primarily due to (i) the decrease of interest income was caused by the decrease of average interest rate of 2.4% for the three month period ended June 30, 2016 compared to 3.1% for the same period of 2015, which was partially offset by the increase of average deposit balance in the amount of US$409.6 million for the three months ended June 30, 2016 compared to US$344.5 million for the same period of 2015; and partially offset by (ii) the decrease of interest expense which was caused by the decrease of average interest rate 5.2% for the three months ended June 30, 2016 as compared to 5.3% for the three months ended June 30, 2015, which was partially offset by the increase of short-term and long-term loans in the amount of US$496.6 million for the three months ended June 30, 2016 as compared to US$409.9 million of prior year.

Income Taxes

 
Three–Month Period Ended June 30,
 
Change
 
(in millions, except percentage)
2016
 
2015
 
Amount
 
%
 
Income before Income Taxes
 
$
38.6
   
$
29.9
   
$
8.7
     
29.1
%
Income Tax Expense
   
(5.3
)
   
(4.4
)
   
(0.9
)
   
20.5
%
Effective income tax rate
   
13.6
%
   
14.7
%
           
(1.1
)%


The effective income tax rate for the three-month periods ended June 30, 2016 and 2015 was 13.6% and 14.7%, respectively. The decrease was primarily due to Heilongjiang Xinda Group's R&D expense super 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. The effective income tax rate for the three-month period ended June 30, 2016 differs from the PRC statutory income tax rate of 25% primarily due to the effect of tax rate differential on entities not subject to PRC income tax, super deduction of R&D expense and partially offset by the effect of non-deductible expenses.

Our PRC and Dubai subsidiaries have US$405.0 million of cash and cash equivalents, restricted cash and time deposits as of June 30, 2016, 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 tax 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 Dubai Composites in Dubai, UAE, on undistributed earnings.

Net Income

As a result of the above factors, we had a net income of US$33.3 million in the second quarter of 2016 compared to a net income of US$$25.5 million in the same quarter of 2015.
 
 
22

 
 
Six months ended June 30, 2016 compared to six months ended June 30, 2015

Revenues
 
Revenues were US$492.2 million in the six-month period ended June 30, 2016, an increase of US$4.9 million, or 1.0%, compared with US$487.3 million in the same period of last year, due to approximately 7.8% increase in sales volume and 6.3% decrease in the average selling price of our products.
 
For the six months ended June 30, 2016, we had an increase of 3.1% in the average RMB selling price of our products while the sales volume increased by 9.6% compared with those of last year in the domestic market. 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 increase was mainly due to higher-end product of modified PA6 and PA66 in China.

For the six months ended June 30, 2016 in the overseas market, we had a significant decrease of 41.9% in sales volume and 4.0% decrease in the average selling price as compared with those of last year, primarily due to the ongoing suspension of supply to a major ROK customer in the first half of 2016.
 
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,
   
   
 
 
 
2016
   
2015
   
   
 
 
 
Amount
   
%
   
Amount
   
%
   
Change in
Amount
   
Change in
%
 
Modified Polyamide 66 (PA66)
   
111.3
     
22.6
%
   
89.1
     
18.3
%
   
22.2
     
24.9
%
 
                                               
Modified Polyamide 6 (PA6)
   
110.6
     
22.4
%
   
95.0
     
19.5
%
   
15.6
     
16.4
%
 
                                               
Plastic Alloy
   
159.8
     
32.5
%
   
191.2
     
39.2
%
   
(31.4
)
   
(16.4
)%
 
                                               
Modified Polypropylene (PP)
   
83.0
     
16.9
%
   
84.1
     
17.3
%
   
(1.1
)
   
(1.3
)%
 
                                               
Modified Acrylonitrile butadiene styrene (ABS)
   
18.6
     
3.8
%
   
19.2
     
3.9
%
   
(0.6
)
   
(3.1
)%
 
                                               
Polyoxymethylenes (POM)
   
1.7
     
0.3
%
   
1.4
     
0.3
%
   
0.3
     
21.4
%
 
                                               
Polyphenylene Oxide (PPO)
   
6.2
     
1.3
%
   
6.2
     
1.3
%
   
0.0
     
0.0
%
 
                                               
Modified Polylactic acid (PLA)
   
0.1
     
0.0
%
   
-
     
-
     
0.1
     
n/
a
                                                 
Raw Materials
   
0.9
     
0.2
%
   
1.1
     
0.2
%
   
(0.2
)
   
(18.2
)%
 
                                               
Total Revenues
   
492.2
     
100
%
   
487.3
     
100
%
   
4.9
     
1.0
%


 
 
23

 
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,
         
 
 
2016
   
2015
         
 
 
MT
   
%
   
MT
   
%
   
Change in
MT
   
Change in
%
 
Modified Polyamide 66 (PA66)
   
27,044
     
16.3
%
   
20,789
     
13.5
%
   
6,255
     
30.1
%
 
                                               
Modified Polyamide 6 (PA6)
   
31,773
     
19.1
%
   
26,380
     
17.1
%
   
5,393
     
20.4
%