10-Q 1 cxdc_10q-063017.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, 2017

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
Emerging growth company 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
 
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, 2017, the registrant had 49,511,541 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
20
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
32
   
Item 4. Controls and Procedures
33
     
PART II. OTHER INFORMATION
34
     
Item 1. Legal Proceedings
34
     
Item 1A. Risk Factors
34
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
34
     
Item 3. Defaults Upon Senior Securities
34
   
Item 4. Mine Safety Disclosures
34
     
Item 5.  Other Information
34
   
Item 6.  Exhibits  35
     
Signatures
36


 
1




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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


   
June 30,
   
December 31,
 
   
2017
   
2016
 
   
US$
   
US$
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
   
279,825,075
     
168,086,445
 
Restricted cash
   
120,145,627
     
103,489,402
 
Time deposits
   
159,718,942
     
184,806,112
 
Accounts receivable, net of allowance for doubtful accounts
   
151,980,751
     
410,049,559
 
Amounts due from a related party
   
-
     
229,624
 
Inventories
   
363,248,245
     
280,939,008
 
Prepaid expenses and other current assets
   
306,549,365
     
125,310,309
 
    Total current assets
   
1,381,468,005
     
1,272,910,459
 
Property, plant and equipment, net
   
826,047,915
     
806,363,692
 
Land use rights, net
   
26,043,444
     
22,536,397
 
Long-term prepayments to equipment and construction suppliers
   
63,078,310
     
14,167,702
 
Other non-current assets
   
616,333
     
10,521,949
 
    Total assets
   
2,297,254,007
     
2,126,500,199
 
                 
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCKS AND STOCKHOLDERS' EQUITY
 
Current liabilities:
               
Short-term loans, including current portion of long-term bank loans
   
642,154,361
     
444,757,476
 
Bills payable
   
167,860,757
     
148,392,677
 
Accounts payable
   
124,016,718
     
320,013,040
 
Amounts due to related parties
   
117,742
     
11,548
 
Income taxes payable
   
2,080,940
     
897,625
 
Accrued expenses and other current liabilities
   
259,555,171
     
119,339,366
 
    Total current liabilities
   
1,195,785,689
     
1,033,411,732
 
Long-term bank loans, excluding current portion
   
195,614,172
     
249,520,615
 
Deferred income
   
75,743,684
     
69,311,102
 
Other non-current liabilities
   
42,292,640
     
42,420,619
 
    Total liabilities
   
1,509,436,185
     
1,394,664,068
 
                 
Redeemable Series D convertible preferred stocks (redemption amount of US$219,653,000 and US$212,212,300 as of June 30, 2017 and December 31, 2016, respectively)
   
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, 49,532,541 shares and 49,532,541 shares issued, 49,511,541 shares and 49,511,541 shares outstanding as of  June 30, 2017 and December 31, 2016, respectively
   
4,952
     
4,952
 
Treasury stock, 21,000 shares at cost
   
(92,694
)
   
(92,694
)
Additional paid-in capital
   
82,953,450
     
82,606,404
 
Retained earnings
   
655,133,716
     
617,168,735
 
Accumulated other comprehensive loss
   
(47,758,167
)
   
(65,427,831
)
    Total stockholders' equity
   
690,241,357
     
634,259,666
 
Commitments and contingencies
   
-
     
-
 
    Total liabilities, redeemable convertible preferred stocks and stockholders' equity
   
2,297,254,007
     
2,126,500,199
 
 
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,
 
   
2017
   
2016
   
2017
   
2016
 
   
US$
   
US$
   
US$
   
US$
 
                         
Revenues
   
313,555,663
     
277,139,662
     
551,395,860
     
492,169,820
 
Cost of revenues
   
(250,446,461
)
   
(216,795,181
)
   
(453,514,488
)
   
(397,011,688
)
    Gross profit
   
63,109,202
     
60,344,481
     
97,881,372
     
95,158,132
 
                                 
Selling expenses
   
(705,337
)
   
(382,038
)
   
(1,224,150
)
   
(667,174
)
General and administrative expenses
   
(8,844,582
)
   
(6,596,023
)
   
(15,898,253
)
   
(11,665,697
)
Research and development expenses
   
(9,546,922
)
   
(5,906,719
)
   
(15,398,022
)
   
(10,816,286
)
    Total operating expenses
   
(19,096,841
)
   
(12,884,780
)
   
(32,520,425
)
   
(23,149,157
)
                                 
    Operating income
   
44,012,361
     
47,459,701
     
65,360,947
     
72,008,975
 
                                 
Interest income
   
970,293
     
1,615,728
     
2,133,552
     
3,229,991
 
Interest expense
   
(11,951,851
)
   
(10,628,222
)
   
(21,973,827
)
   
(21,532,881
)
Foreign currency exchange gains (losses)
   
(1,870,977
)
   
(56,091
)
   
(2,347,062
)
   
371,574
 
Government grant
   
1,023,922
     
218,286
     
2,463,453
     
426,719
 
    Total non-operating expense, net
   
(11,828,613
)
   
(8,850,299
)
   
(19,723,884
)
   
(17,504,597
)
                                 
    Income before income taxes
   
32,183,748
     
38,609,402
     
45,637,063
     
54,504,378
 
                                 
Income tax expense
   
(4,119,756
)
   
(5,253,628
)
   
(7,672,082
)
   
(9,791,254
)
                                 
    Net income
   
28,063,992
     
33,355,774
     
37,964,981
     
44,713,124
 
                                 
Earnings per common share:
                               
Basic and diluted
   
0.43
     
0.51
     
0.58
     
0.68
 
                                 
Net Income
   
28,063,992
     
33,355,774
     
37,964,981
     
44,713,124
 
                                 
Other comprehensive income (loss)
                               
Foreign currency translation adjustment, net of nil income taxes
   
13,751,361
     
(18,440,326
)
   
17,669,664
     
(13,513,302
)
                                 
Comprehensive income
   
41,815,353
     
14,915,448
     
55,634,645
     
31,199,822
 
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,   
 
   
2017
   
2016
 
   
US$
   
US$
 
Cash flows from operating activities:
           
Net cash provided by (used in) operating activities
   
152,688,570
     
(93,887,642
)
                 
Cash flows from investing activities:
               
Proceeds from maturity of time deposits
   
244,825,478
     
236,818,725
 
Purchase of time deposits
   
(215,714,244
)
   
(286,909,102
)
Purchase of land use rights
   
(6,214,207
)
   
-
 
Purchase of and deposits for property, plant and equipment
   
(281,550,529
)
   
(40,022,079
)
Refund of deposit from an equipment supplier
   
75,197,802
     
-
 
Government grant related to the construction of Sichuan plant
   
7,136,482
     
8,809,473
 
Net cash used in investing activities
   
(176,319,218
)
   
(81,302,983
)
                 
Cash flows from financing activities:
               
Proceeds from bank borrowings
   
441,425,024
     
399,343,916
 
Repayments of bank borrowings
   
(311,342,509
)
   
(280,843,603
)
Release of restricted cash as collateral for bank borrowings
   
40,627,054
     
28,378,420
 
Placement of restricted cash as collateral for bank borrowings
   
(40,653,838
)
   
(32,492,262
)
Net cash provided by financing activities
   
130,055,731
     
114,386,471
 
                 
Effect of foreign currency exchange rate changes on cash and cash equivalents
   
5,313,547
     
(1,143,417
)
Net increase (decrease) in cash and cash equivalents
   
111,738,630
     
(61,947,571
)
                 
Cash and cash equivalents at beginning of period
   
168,086,445
     
119,928,485
 
Cash and cash equivalents at end of period
   
279,825,075
     
57,980,914
 
                 
Supplemental disclosure of cash flow information:
               
Interest paid, net of capitalized interest
   
17,323,875
     
20,737,714
 
Income taxes paid
   
7,353,371
     
10,654,265
 
Non-cash investing and financing activities:
               
Accrual for purchase of equipment and construction included in accrued expenses and other current liabilities
   
5,379,730
     
88,224,035
 
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, 2016 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, 2016, 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, 2017.

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, 2017, the results of operations and cash flows for the six-month periods ended June 30, 2017 and 2016, 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 an overseas customer in the Republic of Korea (the "ROK"). The Company's sales are highly concentrated.  Sales to distributors and end customer individually exceeded 10% of the Company's revenues for the three-month and six-month periods ended June 30, 2017 and 2016, are as follows:
 
   
Three-Month Period Ended June 30,
 
   
2017
   
2016
 
   
US$
   
%
   
US$
   
%
 
Distributor A, located in PRC
   
41,816,369
     
13.3
%
   
39,632,852
     
14.3
%
Distributor B, located in PRC
   
35,410,723
     
11.3
%
   
31,669,861
     
11.4
%
Direct Customer C, located in ROK
   
32,956,525
     
10.5
%
   
35,499,160
     
12.8
%
Distributor D, located in PRC
   
29,450,243
     
9.4
%
   
28,827,605
     
10.4
%
Distributor E, located in PRC
   
23,287,806
     
7.4
%    
30,270,133
     
10.9
%
Total
   
162,921,666
     
51.9
%
   
165,899,611
     
59.8
%


   
Six-Month Period Ended June 30,
 
   
2017
   
2016
 
   
US$
   
%
   
US$
   
%
 
Distributor A, located in PRC
   
84,034,202
     
15.2
%
   
74,738,467
     
15.2
%
Distributor B, located in PRC
   
63,921,050
     
11.6
%
   
67,479,415
     
13.7
%
Distributor D, located in PRC
   
51,681,940
     
9.4
%
   
57,288,505
     
11.6
%
Distributor E, located in PRC
   
41,620,526
     
7.5
%
   
55,755,981
     
11.3
%
Total
   
241,257,718
     
43.7
%
   
255,262,368
     
51.8
%

 
The Company expects revenues from these distributors and end customer to continue to represent a substantial portion of its revenue in the future. Any factor adversely affecting the automobile industry in the PRC or the business operations of these customers will have a material effect on the Company's business, financial position and results of operations.
 
 
 
5

 

 
Purchase concentration of raw materials and equipment

The principal raw materials used for the Company's production of modified plastics products are plastic resins, such as polypropylene, ABS and nylon.
The Company purchases its raw materials through a limited number of distributors, which individually exceeded 10% of the Company's total raw material purchases, accounted for approximately 71.1%  (six distributors) and 77.6% (six distributors)  of the Company's total raw materials purchases for the three-month periods ended June 30, 2017 and 2016, respectively, and 60.0% (five distributors) and 81.6% (six distributors) of the Company's total raw materials purchases for the six-month periods ended June 30, 2017 and 2016, 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 nil and 96.5% of the Company's total equipment purchases for the three-month periods ended June 30, 2017 and 2016, respectively, and accounted for nil and 96.4% of the Company's total equipment purchases for the six-month periods ended June 30, 2017 and 2016.  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. 
 
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, 2017
   
December 31, 2016
 
   
US$
   
US$
 
RMB denominated bank deposits with:
           
Financial Institutions in the PRC
   
557,716,302
     
464,427,328
 
Financial Institutions in Hong Kong Special Administrative Region ("Hong Kong SAR")
   
8,147
     
7,946
 
Financial Institution in Dubai, United Arab Emirates ("UAE")
   
58
     
-
 
U.S. dollar denominated bank deposits with:
               
Financial Institution in the U.S.
   
15,624
     
20,192
 
Financial Institutions in the PRC
   
18,553
     
18,025
 
Financial Institution in Hong Kong SAR
   
1,836,796
     
1,629,199
 
Financial Institution in Macau Special Administrative Region ("Macau SAR")
   
3,395
     
1,810
 
Financial Institution in Dubai, UAE
   
72,559
     
139,201
 
HK dollar denominated bank deposits with:
               
Financial institution in Hong Kong SAR
   
89
     
148
 
Dirham denominated bank deposits with:
               
Financial institution in Dubai, UAE
   
18,121
     
53,647
 

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 Hong Kong 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. The bank deposits with financial institutions in the Dubai, UAE are not insured by the government authority. Total bank deposits amounted to $1,669,394 and $1,207,996 are insured as of June 30, 2017 and December 31, 2016, 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.
 
 
 
6


 
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 and cash equivalents in the condensed consolidated statements of cash flows. Cash deposits of nil and US$9,917,832 as of June 30, 2017 and December 31, 2016 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 and also excluded from cash and cash equivalents in the condensed consolidated statements of cash flows.

Short-term bank deposits that are pledged as collateral for bills payable relating to purchases of raw materials are reported as restricted cash and amounted to US$37,285,221 and US$33,673,057 as of June 30, 2017 and December 31, 2016, 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 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$81,379,901 and US$69,816,345 as of June 30, 2017 and December 31, 2016, 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 nil and US$9,917,832 as of June 30, 2017 and December 31, 2016, 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 US$1,480,505 and nil as of June 30, 2017 and December 31, 2016, respectively. The cash flows from the government grant, which related to construction, are reported within cash flows from investing activities in the condensed consolidated statements of cash flows.

Note 2 - Accounts receivable

Accounts receivable consists of the following:

   
June 30, 2017
   
December 31, 2016
 
   
US$
   
US$
 
         
Accounts receivable
   
152,019,772
     
410,087,666
 
Allowance for doubtful accounts
   
(39,021
)
   
(38,107
)
Accounts receivable, net
   
151,980,751
     
410,049,559
 

As of June 30, 2017 and December 31, 2016, the accounts receivable balances also include notes receivable in the amount of US$1,749,171 and US$374,296, respectively. As of June 30, 2017 and December 31, 2016, US$62,358,433 and US$63,301,966 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, 2017 and 2016.
 
 
7


 
The following table provides an analysis of the aging of accounts receivable as of June 30, 2017 and December 31, 2016:

   
June 30, 2017
   
December 31, 2016
 
   
US$
   
US$
 
Aging:
           
– current
   
119,945,456
     
373,108,359
 
– 1-3 months past due
   
133,427
     
36,941,200
 
– 4-6 months past due
   
31,901,868
     
-
 
– 7-12 months past due
   
-
     
-
 
– greater than one year past due
   
39,021
     
38,107
 
Total accounts receivable
   
152,019,772
     
410,087,666
 

Note 3 - Inventories

Inventories consist of the following:

   
June 30, 2017
   
December 31, 2016
 
 
US$
 
US$
 
         
Raw materials
   
285,560,234
     
270,605,823
 
Work in progress
   
56,891
     
157,953
 
Finished goods
   
77,631,120
     
10,175,232
 
Total inventories
   
363,248,245
     
280,939,008
 

There were no write down of inventories for the three-month and six-month periods ended June 30, 2017 and 2016.
 
Note 4 – Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

   
June 30, 2017
   
December 31, 2016
 
   
US$
   
US$
 
             
Receivables from Hailezi (i)
   
251,678,067
     
88,286,651
 
Receivables from Jiamu  (ii)
   
-
     
20,628,987
 
Advances to suppliers
   
39,001,786
     
3,365,930
 
Value added taxes receivable (iii)
   
8,655,950
     
4,814,920
 
Interest receivable (iv)
   
1,713,633
     
3,231,763
 
Others (v)
   
5,499,929
     
4,982,058
 
    Total prepaid expenses and other current assets
   
306,549,365
     
125,310,309
 


(i)     In September 2016, the Company's two subsidiaries, Heilongjiang Xinda Enterprise Group Company Limited ("HLJ Xinda Group") and Sichuan Xinda Enterprise Group Co., Ltd ("Sichuan Xinda") each entered into equipment purchase contracts with Harbin Hailezi Science and Technology Co., Ltd. ("Hailezi") to purchase production equipment, testing equipment and storage facility. Pursuant to the contracts with Hailezi, HLJ Xinda Group and Sichuan Xinda have prepaid RMB349.1 million (equivalent to US$50.3 million) and RMB263.4 million (equivalent to US$38.0 million) as of December 31, 2016, respectively, which was recognized in investing activities in the statements of cash flows. In November 2016, the three parties agreed to terminate the contracts and Hailezi agreed to refund all the prepayment. As of June 30, 2017, Hailezi has refunded the abovementioned prepayment to HLJ Xinda Group and Sichuan Xinda.

In March 2017, Sichuan Xinda signed a series of contracts with Hailezi to purchase production equipment, and prepaid RMB1,728.9 million (equivalent to  US$255.2  million) to Hailezi, which was recognized in investing activities in the statements of cash flows. In June 2017, the two parties agreed to partially terminate the contracts and Hailezi agreed to refund the prepayment amounting to RMB1,704.9 million (equivalent to US$251.7 million) by the end of March 2018. For details, please refer to Note 6.
 
 
8

 

(ii)   Sichuan Xinda prepaid RMB143.1 million (equivalent to US$20.6 million) to purchase equipment from Harbin Jiamu Import and Export Co., Ltd. in November 2016, which was recognized in operating activities in the statements of cash flows. As Harbin Jiamu Import and Export Co., Ltd. had cancelled its registration and transferred its business to Harbin Jiamu Science and Technology Co., Ltd., Harbin Jiamu Import and Export Co., Ltd. agreed to refund the prepayment.  As of June 30, 2017, Harbin Jiamu Import and Export Co., Ltd. has refunded all the prepayment.

  The majority owner of Hailezi is also the majority owner of Harbin Jiamu Import and Export Co., Ltd and Harbin Jiamu Science and Technology Co., Ltd. (collectedly "Jiamu"), which is one of the major equipment distributors.

(iii)  Value added taxes receivables mainly represent the input taxes on purchasing equipment by Sichuan Xinda, which are to be net off with output taxes.  Value added taxes receivables were recognized in operating activities in condensed consolidated statements of cash flows.

(iv)  Interest receivable mainly represents interest income accrued from time deposits and restricted cash.

(v)  Others mainly include prepaid miscellaneous service fee, staff advance and prepaid rental fee.
 
Note 5 – Property, plant and equipment, net

Property, plant and equipment consist of the following:

   
March 31, 2017
   
December 31, 2016
 
   
US$
   
US$
 
             
Machinery, equipment and furniture
   
399,820,471
     
391,149,907
 
Motor vehicles
   
2,709,245
     
2,640,477
 
Workshops and buildings
   
142,550,886
     
119,503,091
 
Construction in progress
   
420,825,979
     
409,257,584
 
    Total property, plant and equipment
   
965,906,581
     
922,551,059
 
Less accumulated depreciation
   
(139,858,666
)
   
(116,187,367
)
    Property, plant and equipment, net
   
826,047,915
     
806,363,692
 

For the three-month and six-month periods ended June 30, 2017 and 2016, the Company capitalized US$692,599 and US$625,324, and US$1,341,181 and US$1,226,431 of interest costs as a component of the cost of construction in progress. Depreciation expense on property, plant and equipment was allocated to the following expense items:

     
Three-Month Period Ended June 30,   
 
 
 
 
2017
US$
 
 
 
2016
US$
 
         
Cost of revenues
 
 
8,807,659
   
 
5,681,237
 
General and administrative expenses
   
644,530
     
435,142
 
Research and development expenses
   
998,140
     
942,387
 
Selling expenses
   
866
     
506
 
    Total depreciation expense
   
10,451,195
     
7,059,272
 

 
 
9


 
   
Six-Month Period Ended
June 30,
 
   
2017
 
2016
 
   
US$
 
US$
 
         
Cost of revenues
   
17,634,809
     
11,361,731
 
General and administrative expenses
   
1,205,848
     
838,326
 
Research and development expenses
   
1,989,856
     
1,888,204
 
Selling expense
   
1,641
     
890
 
    Total depreciation expense
   
20,832,154
     
14,089,151
 

Note 6 - Prepayments to equipment and construction suppliers

   
June 30, 2017
   
December 31, 2016
 
   
US$
   
US$
 
Hailezi (i) 
   
40,802,684
     
-
 
Beijin Construction (ii)
   
16,449,133
     
4,324,636
 
Samim Group FZE (iii)
   
-
     
5,308,737
 
Peaceful (iv)
   
5,001,697
     
-
 
Sichuan Construction
   
705,175
     
907,024
 
Sports City (v)
   
-
     
2,859,952
 
Others
   
119,621
     
767,353
 
    Total Prepayments to equipment and construction suppliers
   
63,078,310
     
14,167,702
 



(i)
On September 26, 2016 and February 28, 2017, HLJ Xinda Group entered into two equipment purchase contracts with Hailezi for a total consideration of RMB782.2 million (equivalent to US$115.5 million) to purchase storage facility and other equipment, which will be used for upgrading the storage system of warehouse located in Harbin, China. Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB621.6 million (equivalent to US$91.8 million) as of June 30, 2017. Due to a redesign of outdoor storage facility in June 2017, HLJ Xinda Group entered into a supplementary agreement with Hailezi, which decreased the original contracts amounts to RMB 283.7 million (equivalent to US$41.9 million). Hailezi refunded RMB369.1 million (equivalent to US$54.5 million) to HLJ Xinda Group on June 22, 2017. The prepayment and refund were recognized in investing activities in the statements of cash flows.
 
On March 17, 2017, Sichuan Xinda entered into a definitive agreement with the People's Government of Shunqing District, Nanchong City of Sichuan Province for the production of 300,000 metric tons of bio-composite materials and additive manufacturing and 20,000 metric tons of functional masterbatch, a high-end color additive process in plastics manufacturing ("the Nanchong Project"). The Nanchong Project will be located in a land area of 250 mu (equivalent to 41.2 acres), with 215 mu designated for bio-composite materials and additive manufacturing production and 35 mu to be designated for functional masterbatch production. The projected total capital expenditures for the project is approximately RMB2.5 billion (estimated to be US$357 million) with anticipated completion by the end of December 2018.
 
In connection with the Nanchong Project, Sichuan Xinda entered into equipment purchase contracts with Hailezi to purchase production equipment and testing equipment. Pursuant to the contracts with Hailezi, Sichuan Xinda has prepaid RMB1,728.9 million (equivalent to  US$255.2  million) as of June 30, 2017. By the end of June 2017, in order to ensure the traceability of the product and management of supply chain, Sichuan Xinda expected to launch an integrated ERP system, which resulted in the equipment to be purchased under the original contracts with Hailezi not meeting the production requirements. Hailezi agreed to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$251.7 million) by the end of  March 2018 and that part of prepayment has been reclassified as prepaid expenses and other current assets as of June 30, 2017.
 
 
 
 
10

 
(ii)
On November 15, 2016, Sichuan Xinda entered into decoration contract with Sichuan Beijin Construction Engineering Company Limited ("Beijin Construction") to perform indoor and outdoor decoration work for a consideration of RMB237.6 million (equivalent to US$35.0 million). Pursuant to the contract with Beijin Construction, Sichuan Xinda has prepaid RMB117.3 million (equivalent to US$17.3 million) as of June 30, 2017, in which RMB5.5 million (equivalent to US$0.9 million) was transferred to construction in progress. The prepayment was recognized in investing activities in the statements of cash flows.

(iii)
On September 21, 2016, AL Composites Materials FZE ("Dubai Xinda") entered into a purchase contract with Samim Group FZE pertaining approximately 22,324 square meters property  in JAFZA in Dubai, UAE with constructed building including a warehouse, office and service block for a total consideration of AED55.3 million (equivalent to US$14.9 million). As of June 30, 2017, the Company has prepaid the full amount of the contract, which was recognized in investing activities in the statements of cash flow. As of June 30 2017, the building has been delivered, and the amount has been transferred to property, plant and equipment.
 
(iv)
On October 20, 2016, Sichuan Xinda entered into an equipment purchase contract with Peaceful Treasure Limited ("Peaceful") for a total consideration of US$12.9 million to purchase certain production and testing equipment.  Pursuant to the contract with Peaceful, the Company prepaid RMB33.9 million (equivalent to US$5.0 million) as of June 30, 2017, which was recognized in investing activities in the statements of cash flows.
 
(v)
In September, 2016, Dubai Xinda entered into apartments purchase contracts with Dubai Sports City LLC ("Sports City") for a total consideration of AED14.0 million (equivalent to US$3.8 million), which was recognized in investing activities in the statements of cash flows. As of June 30, 2017, the apartments have been occupied by the Company, and the amount has been transferred to property, plant and equipment.
 
Note 7 – Borrowings

The Company has credit facilities with several banks under which they draw short-term and long-term bank loans as described below.

(a)  Current
 
   
June 30, 2017
   
December 31, 2016
 
   
US$
   
US$
 
Unsecured loans
   
392,654,699
     
273,147,455
 
Loans secured by accounts receivable
   
48,860,416
     
50,454,086
 
Loans secured by restricted cash
   
56,874,300
     
32,474,300
 
Current portion of long-term bank loans (note b)
   
143,764,946
     
88,681,635
 
    Total short-term loans, including current portion of long-term bank loans
   
642,154,361
     
444,757,476
 

As of June 30, 2017 and December 31, 2016, the Company's short-term bank loans (including the current portion of long-term bank loans) bear a weighted average interest rate of 4.0% and 4.0% per annum, respectively. All short-term bank loans mature at various times within one year.

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 (1.2239% as of June 30, 2017) plus 1.8%. This loan was secured by restricted cash of RMB25.5 million (equivalent to US$3.8 million) in the HSBC Bank in Harbin, China. The company repaid the loan on January 23, 2017.

In August 2016, the Company obtained ten six-month secured loans in a total amount of RMB350 million (equivalent to US$50.5 million) by accounts receivables of RMB439.2 million (equivalent to US$64.8 million) at an annual interest rate of 4.350% from Harbin Longjiang Bank. The Company repaid the loans in January 2017 and obtained another ten six-month secured loans in a total amount of RMB350 million (equivalent to US$51.7 million) by accounts receivables of RMB446.3 million (equivalent to US$65.9 million) at an annual interest rate of 4.350%. The Company repaid one loan of RMB19 million (equivalent to US$2.8 million) in June 2017, and released accounts receivables in the amount of RMB23.9 million (equivalent to US$3.5 million).

In August 2016, the Company obtained a one-year secured loan of US$13.9 million from Industrial and Commercial Bank of China (Abu Dhabi Branch) at an interest of three-month LIBOR (1.2992% as of June 30, 2017) plus 2.0%. This loan was secured by restricted cash of RMB100.0 million (equivalent to US$14.8 million) in the Industrial and Commercial Bank of China in Harbin, China. The interest rate is reset every three months.
 
11

 

On October 7, 2016, the Company obtained a one-year secured loan of US$2.0 million from Bank of China (Macau Branch) at an annual interest rate of 1.8%. The loan was secured by restricted cash of RMB24.0 million (equivalent to US$3.5 million) in Bank of China in Harbin, China.

In January 2017, the Company obtained a one-year secured loan of US$12.0 million from HSBC Middle East at an annual interest rate of one-month LIBOR (1.2239% as of June 30, 2017) plus 1.8%. This loan was secured by restricted cash of RMB18.5 million (equivalent to US$2.7 million) in the HSBC Bank in Harbin, China.

In January, 2017, the Company obtained a one-year secured loan of US$12.0 million from Bank of China (Macau Branch) at an annual interest rate of 2.3%. The loan was secured by restricted cash of RMB94.0 million (equivalent to US$13.9 million) in Bank of China in Harbin, China. 

In February, 2017, the Company obtained a one-year secured loan of US$17.0 million from Bank of China (Abu Dhabi Branch) at an annual interest rate of 2.3%. The loan was secured by restricted cash of RMB136.0 million (equivalent to US$20.1 million) in Bank of China in Harbin, China. In accordance with the requirements of the bank, additional RMB5.0 million (equivalent to US$0.7 million) is pledged as restricted cash for this short-term bank loan in February, 2017.
 
(b) Non-current

   
June 30, 2017
   
December 31, 2016
 
   
US$
   
US$
 
Secured loans
   
44,170,000
     
90,170,000
 
                 
Unsecured loans
   
118,829,712
     
73,518,812
 
                 
Syndicate loan facility
   
176,379,406
     
174,513,438
 
Less: current portion
   
143,764,946
     
88,681,635
 
    Total long-term bank loans, excluding current portion
   
195,614,172
     
249,520,615
 

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 (1.2992% as of June 30, 2017). The loan is secured by restricted cash of RMB110 million (equivalent to US$16.2 million). In accordance with the requirements of the bank, additional RMB109 million (equivalent to US$16.1 million) is pledged as restricted cash for this long-term bank loan on July 22, 2016. The Company repaid US$4 million in 2015, US$5 million on June 9, 2016, US$15 million on December 9, 2016, and US$46 million on June 9, 2017.

On January 23, 2015, the Company obtained two two-year unsecured loans in the total amount of RMB100 million (equivalent to US$14.8 million) from Agriculture Bank of China at an annual interest rate of 6.0%. Both loans were due and repaid by the Company in January 2017.

On April 22, 2015, the Company obtained a two-year unsecured loan of RMB40 million (equivalent to US$5.9 million) from Agriculture Bank of China at an annual interest rate of 5.75%. The Company repaid the loan on April 20, 2017.

In October and November, 2015, the Company obtained three long term unsecured loans of RMB260 million (equivalent to US$38.4 million) from Bank of China at an annual interest rate of 4.75%. In January 2016, the Company obtained a long term unsecured loan of RMB80 million (equivalent to US$11.8 million) from Bank of China at an annual interest rate of 4.75%. On December 9, 2016, the Company obtained a long term unsecured loan of RMB30 million (equivalent to US$4.4 million) from Bank of China at an annual interest rate of 4.75%. On March 23, 2017, the Company obtained a long term unsecured loan of RMB25.0 million (equivalent to US$3.7 million) from Bank of China at an annual interest rate of 4.75%. The Company repaid RMB10 million (equivalent to US$1.5 million) on April 28, 2017. RMB40 million (equivalent to US$5.9 million), RMB25 million (equivalent to US$3.7 million), RMB100 million (equivalent to US$14.8 million), RMB25 million (equivalent to US$3.7 million),  RMB100 million (equivalent to US$14.8 million),  RMB20 million (equivalent to US$3.0 million), and RMB75 million (equivalent to US$10.9 million) will be repaid on October 28, 2017, April 28, 2018, October 28, 2018, April 28, 2019, October 28, 2019, April 28, 2020 and October 28, 2020, respectively.

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 (1.2992% as of June 30, 2017) 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 (1.2992% as of June 30, 2017) 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 (1.2992% as of June 30, 2017) 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$10.2 million). All of these loans will be due on March 22, 2018.

On August 22, 2016, Xinda Holding (HK) Company Limited (“Xinda Holding (HK)”) a wholly owned subsidiary of the Company, entered into a facility agreement for a loan facility in an aggregate amount of US$180 million with a consortium of banks and financial institutions led by Standard Chartered Bank (Hong Kong) Limited. The Company paid arrangement fees and legal fees in the amount of US$6.77 million of which the unamortized balance is US$3.6 million as of June 30, 2017 for the related loan. Debt issuance costs are presented on the condensed consolidated balance sheets as a direct deduction from the carrying amount of the loan and amortized to interest expense using the effective interest rate of 5.783% as of June 30, 2017. US$22.5 million, US$22.5 million, US$45.0 million and US$90.0 million of the principal amount will be repaid on November 22, 2017, February 22, 2018, May 22, 2018 and August 22, 2018, respectively.
 
12

 

On November 7, 2016, the Company obtained a fifteen-month secured loan of US$3.3 million from Industrial and Commercial Bank of China (Abu Dhabi Branch) at an annual interest rate of 2.2%. The loan is secured by restricted cash of RMB25 million (equivalent to US$3.7 million). The loan will be due on February 7, 2018.

On November 30, 2016, the Company obtained a fifteen-month secured loan of US$10.5 million from Industrial and Commercial Bank of China (Abu Dhabi Branch) at an annual interest rate of 2.2%. The loan is secured by restricted cash of RMB80 million (equivalent to US$11.8 million). The loan will be due on February 28, 2018.

In January 2017, the Company obtained three short-term unsecured loans of RMB420 million (equivalent to US$62 million) from Nanchong Shuntou Development Group Co., Ltd. at an annual interest rate of 4.35%. In accordance with the renewal agreements in June 2017, the repayment terms were extended and the loans will be due on December 31, 2018.
 
As of June 30, 2017, the Company had total lines of credit of RMB8,088.6 million (US$1,194.0 million) including unused lines of credit of RMB3,593.2 million (US$530.4 million) with remaining terms less than 12 months and RMB5.0 million (US$0.7 million) with remaining terms beyond 12 months.
 
Certain lines of credit contain financial covenants such as total stockholders' equity, debt asset ratio, contingent liability ratio and net profit. As of June 30, 2017, the Company has met these financial covenants.

Maturities on long-term bank loans (including current portion) are as follows:

   
June 30, 2017
 
   
US$
 
2017
   
28,404,581
 
2018
   
278,499,336
 
2019
   
18,451,819
 
2020
   
14,023,382
 
after 2020
   
-
 
Total
   
339,379,118
 


 Note 8 - Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:

   
June 30, 2017
   
December 31, 2016
 
   
US$
   
US$
 
Payables for purchase of property, plant and equipment
   
99,240,338
     
98,472,641
 
Accrued freight expenses
   
8,917,570
     
7,972,067
 
Accrued interest expenses
   
3,673,319
     
885,290
 
Advance from customers (i)
   
134,052,246
     
93,066
 
Non income tax payables
   
4,473,761
     
4,499,161
 
Others (ii)
   
9,197,937
     
7,417,141
 
Total accrued expenses and other current liabilities
   
259,555,171
     
119,339,366
 

(i) Advance from customers mainly represents the advance received from five customers in the PRC for the raw material purchases during the first half year of 2017.

(ii) Others mainly represent accrued payroll and employee benefits, accrued audit and consulting fees, electricity fee and other accrued miscellaneous operating expenses.

13



Note 9 – 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,
 
   
2017
   
2016
 
2017
   
2016
 
   
US$
   
US$
 
US$
   
US$
 
Costs and expenses resulting from transactions with related parties:
                       
Rental expenses for plant and office spaces
   
93,810
     
184,525
     
267,366
     
369,061
 


The related party balances are summarized as follows:

   
June 30, 2017
   
December 31, 2016
 
 
US$
 
US$
 
Amounts due from a related party:
       
Prepaid rent expenses to Xinda High-Tech
   
-
     
229,624
 
Total
   
-
     
229,624
 
 
 
   
June 30, 2017
   
December 31, 2016
 
   
US$
   
US$
 
Amounts due to related parties
           
Rental payable to Xinda High-Tech
   
105,917
     
-
 
Rental payable to Mr Han's son
   
11,825
     
11,548
 
Total
   
117,742
     
11,548
 
 
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
     
695,570
 
Between January 1, 2014 and December 31, 2018

The Company rented the following facilities in Harbin, Heilongjiang Province from Mr. Han's son:
Premise Leased
 
Area (M2)
   
Annual Rental Fee (US$)
 
Period of Lease
Facility
   
200
     
5,822
 
Between August 17, 2014 and August 16, 2016

 
14

 

Note 10– Income tax

Pursuant to an approval from the local tax authority in July 2013, Sichuan Xinda, 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, Dubai Xinda, a subsidiary of China XD, is exempted from income taxes.

The effective income tax rates for the six-month periods ended June 30, 2017 and 2016 were 16.8% and 18.0%, respectively. The effective income tax rate reduced from 18.0% for the six-month period ended June 30, 2016 to 16.8% for the six-month period ended June 30, 2017, primarily due to a greater portion of the profit generated by Sichuan Xinda which enjoys preferential tax rate and the increase of super deduction of R&D expense. The effective income tax rate for the six-month period ended June 30, 2017 differs from the PRC statutory income tax rate of 25% primarily due to the effect of tax rate difference on various subsidiaries not subject to the PRC statutory income tax rate.
 
As of June 30, 2017, the unrecognized tax benefits were US$29,472,797 and the interest relating to unrecognized tax benefits was US$7,704,366, of which the unrecognized tax benefits in 2012 amounting to US$2,830,792 and related accrued interest amounting to US$2,091,955 was classified as current liabilities due to that the five-year tax assessment period will expire on May 31, 2018. 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 11 – 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, extended to the Company RMB350 million (equivalent to US$51.7 million) to support the construction of the Sichuan plant, which has been received in full in the form of government repayment of bank loans on behalf of the Company.

In addition, the Company has received RMB159.8 million (equivalent to US$23.6 million) from Shunqing Government and RMB6.4 million (equivalent to US$0.9 million) from Ministry of Finance of the People's Republic of China to support the construction and RMB2.2 million (equivalent to US$0.3 million) special funds of ministerial key research projects from Ministry of Science and Technology of PRC as of June 30, 2017.

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.

The Sichuan factory has been operational since July 2016. A cumulative RMB24.8 million (equivalent to US$3.7 million) government grants have been amortized as other income proportionate to the depreciation of the related assets, of which RMB15.3 million (equivalent to US$2.2 million) was amortized in the six-month period ended June 30, 2017.

The Company also received RMB36 million (equivalent to US$5.3 million) from Shunqing Government with respect to interest subsidy for future bank. A cumulative RMB16.4 million (equivalent to US$2.4 million) government grants have been amortized as other income in line with the amount of related loan interest paid, of which RMB1.4 million (equivalent to US$0.2 million) was amortized in the six-month period ended June 30, 2017.


15


Note 12 – Other non-current liabilities

         
   
June 30, 2017
   
December 31, 2016
 
 
US$
 
US$
 
         
Income tax payable-noncurrent (i)
   
32,254,416
     
31,602,314
 
Deferred income tax liabilities
   
10,038,224
     
10,818,305
 
Total other non-current liabilities
   
42,292,640
     
42,420,619
 

(i) Income tax payable-noncurrent represents the cumulative balance of unrecognized tax benefits since 2013 and related accrued interest. As the five-year tax assessment period for unrecognized tax benefits occurred in 2012 will expire on May 31, 2018, so unrecognized tax benefits occurred in 2012 and related accrued interest amounting to RMB19.2 million (equivalent to US$2.8 million) and RMB14.2 million (equivalent to US$2.1 million), respectively, were classified as current liabilities.

Note 13 – Stockholders' equity

The changes of each caption of stockholders' equity for the six-month period ended June 30, 2017 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, 2017
   
1,000,000
     
100
     
49,511,541
     
4,952
     
(92,694
)
   
82,606,404
     
617,168,735
     
(65,427,831
)
   
634,259,666
 
Net income
   
-
     
-
     
-
     
-
     
-
     
-
     
37,964,981
     
-
     
37,964,981
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
17,669,664
     
17,669,664
 
Stock based compensation
   
-
     
-
     
-
     
-
     
-
     
347,046
     
-
     
-
     
347,046
 
Vesting of nonvested shares
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Balance as of June 30, 2017
   
1,000,000
     
100
     
49,511,541
     
4,952
     
(92,694
)
   
82,953,450
     
655,133,716
     
(47,758,167
)
   
690,241,357
 

 Note 14 – Stock based compensation

Nonvested shares

A summary of the nonvested shares activity for the six-month ended June 30, 2017 is as follows:

   
Number of Nonvested
Shares
   
Weighted Average
Grant date Fair Value
 
     
US$
 
Outstanding as of December 31, 2016
   
402,210
     
6.10
 
Forfeited
   
(24,910
)
   
5.60
 
Outstanding as of June 30, 2017
   
377,300
     
6.13
 

The Company recognized US$181,688 and US$248,244 of share-based compensation expense in general and administration expenses relating to nonvested shares for the three-month periods ended June 30, 2017 and 2016, respectively, and US$347,046 and US$470,424 of share-based compensation expense in general and administration expenses relating to nonvested shares for the six-month periods ended June 30, 2017 and 2016, respectively. As of June 30, 2017, there was US$398,782 total unrecognized compensation cost relating to nonvested shares, which is to be recognized over a weighted average period of 0.53 years. 


16




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,
 
   
2017
   
2016
   
2017
   
2016
 
   
US$
   
US$
   
US$
   
US$
 
Net income
   
28,063,992
     
33,355,774
     
37,964,981
     
44,713,124
 
Less:
                               
Earnings allocated to participating Series D convertible preferred stocks
   
(6,814,870
)
   
(8,088,078
)
   
(9,219,142
)
   
(10,843,682
)
Earnings allocated to participating nonvested shares
   
(160,703
)
   
(292,624
)
   
(217,469
)
   
(395,191
)
Net income for basic and diluted earnings per share
   
21,088,419
     
24,975,072
     
28,528,370
     
33,474,251
 
                                 
Denominator
                               
Denominator for basic and diluted earnings per share
   
49,511,541
     
49,406,191
     
49,511,541
     
49,391,710
 
                                 
Earnings per share:
                               
Basic and diluted
   
0.43
     
0.51
     
0.58
     
0.68
 

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, 2017 and 2016 because their effects are anti-dilutive:

 
Three-Month Period Ended June 30,
 
Six-Month Period Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
                 
Shares issuable upon conversion of Series D convertible preferred stocks
   
16,000,000
     
16,000,000
     
16,000,000
     
16,000,000
 

Note 16 - Commitments and contingencies

(1)    Lease commitments

Future minimum lease payments under non-cancellable operating leases agreements as of June 30, 2017 were as follows. 

   
US$
 
Period from July 1, 2017 to December 31, 2017
   
807,056
 
Years ending December 31,
       
2018
   
1,305,429
 
2019
   
255,127
 
2020
   
166,317
 
2021
   
102,881
 
2022 and thereafter
   
797,325
 

Rental expenses incurred for operating leases of plant and office spaces were US$894,643 and US$449,002 for the three-month periods ended June 30, 2017 and 2016, respectively, and US$1,554,993 and US$844,058 for the six-month periods ended June 30, 2017 and 2016, 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.

17


(2)   Sichuan plant construction and equipment purchase

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 in property, plant and equipment and approximately RMB0.6 billion in working capital, for the construction of Sichuan plant.  As of June 30, 2017, the Company has a remaining commitment of RMB63.9 million (equivalent to US$9.4 million) mainly for facility construction.

In September 2016, Sichuan Xinda entered into equipment purchase contracts with Hailezi for a consideration of RMB17.0 million (equivalent to US$2.5 million) to purchase storage facility and testing equipment. Afterward, Sichuan Xinda cancelled two contracts with Hailezi for a consideration of RMB1.6 million (equivalent to US$0.2 million). As of June 30, 2017, Sichuan Xinda prepaid RMB6.0 million (equivalent to US$0.9 million) and has a remaining commitment of RMB9.4 million (equivalent to US$1.4 million).

On October 20, 2016, Sichuan Xinda entered into an equipment purchase agreement purchase contract with Peaceful for a total consideration of RMB89.8 million (equivalent to US$13.3 million) to purchase certain production and testing equipment. As of June 30, 2017, the Company has a commitment of RMB55.9 million (equivalent to US$8.3 million).

On November 15, 2016, Sichuan Xinda entered into decoration contract with Beijin Construction  to perform indoor and outdoor decoration work for a consideration of RMB237.6 million (equivalent to US$35.0 million).  On February 20, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform outdoor decoration work for a consideration of RMB2.9 million (equivalent to US$0.4 million). On June 10, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform ground decoration work for a consideration of RMB23.8 million (equivalent to US$3.5 million). As of June 30, 2017, Sichuan Xinda prepaid RMB117.3 million (equivalent to US$17.3 million) of which RMB5.5 million (equivalent to US$0.9 million) was transferred to construction in progress and has a remaining commitment of RMB147.0 million (equivalent to US$21.6  million).

In connection with the Nanchong Project mentioned in Note 6 (i), Sichuan Xinda entered into equipment purchase contracts with Hailezi for a consideration of RMB2,242.8 million (equivalent to US$331.1 million) to purchase production equipment and testing equipment in March 2017.  By the end of June 2017, Sichuan Xinda expected to launch an integrated ERP system, which resulted in the equipment to be purchased under the original contracts with Hailezi not meeting the production requirements. Thus the original contracts have been terminated with the amount of RMB2,222.9 million (equivalent to US$328.1 million), and Hailezi agreed to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$251.7 million) by the end of March 2018, out of the total prepayment made by Sichuan Xinda of RMB1,722.9 million (equivalent to US$254.3 million). As of June 30, 2017, Sichuan Xinda prepaid RMB18.0 million (equivalent to US$2.6 million) and has a remaining commitment of RMB1.9 million (equivalent to US$0.4 million).

(3)    Heilongjiang plant construction and equipment purchase

On September 26, 2016 and February 28, 2017, HLJ Xinda Group entered into two equipment purchase contracts with Hailezi for a total consideration of RMB782.2 million (equivalent to US$115.5 million) to purchase storage facility and other equipment. Due to a redesign of outdoor storage facility in June 2017, HLJ Xinda Group entered into a supplementary agreement with Hailezi, which decreased the original contracts amounts to RMB 283.7 million (equivalent to US$41.9 million). Hailezi refunded RMB369.1 million (equivalent to US$54.5 million) to HLJ Xinda Group on June 22, 2017. As of June 30, 2017, HLJ Xinda Group has a remaining commitment of RMB31.2 million (equivalent to US$4.6 million).
 
(4)    Dubai plant construction and equipment

On April 28, 2015, Dubai Xinda 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, 2017, the Company has a remaining commitment of AED3.3 million (equivalent to US$0.9 million).
 

 
18


(5)    Xinda Beijing Investment office building decoration

On March 30, 2017, Xinda CI (Beijing) Investment Holding Co., Ltd. ("Xinda Beijing Investment") entered into a decoration contract with Beijing Fangyuan Decoration Engineering Co., Ltd for a total consideration of RMB5.8 million (equivalent to US$0.8 million) to decorate office building. As of June 30, 2017, the decoration work in the amount of RMB1.4 million (equivalent to US$0.2 million) was recorded in construction in progress. As of June 30, 2017, the Company has a remaining commitment of RMB4.4 million (equivalent to US$0.6 million).

On June 9, 2017, Xinda Beijing Investment entered into a decoration contract with Beijing Zhonghongwufang Stone Co., Ltd for a total consideration of RMB1.2 million (equivalent to US$0.2 million) to decorate office building. As of June 30, 2017, the decoration work in the amount of RMB0.6 million (equivalent to US$0.1 million) was recorded in construction in progress. As of June 30, 2017, the Company has a remaining commitment of RMB0.6 million (equivalent to US$0.1 million).

(6)    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 Consolidated Class Action Complaint without prejudice. On May 6, 2016, the lead plaintiffs moved the Court for leave to amend the Consolidated Class Action Complaint.  On June 24, 2016, the Company filed its opposition to the lead plaintiffs’ motion.  On August 8, 2016, in conjunction with filing the reply brief in support of their motion, the lead plaintiffs moved to strike certain documents referred to in the Company’s opposition.  The Company filed its opposition to the lead plaintiffs’ motion to strike on September 16, 2016.  On March 8, 2017, the Court entered an Order in the Company’s favor denying the lead plaintiffs’ motion for leave to amend and denying the lead plaintiffs’ motion to strike.  The time for the lead plaintiffs to appeal the dismissal of their lawsuits has expired.  In accordance with ASC Topic 450, no loss contingency was accrued as of June 30, 2017 since the lawsuit has been dismissed.
Note 17 - Subsequent events
On July 21, 2017, Heilongjiang Xinda Enterprise Group Company Limited (“HLJ Xinda Group) entered into three investment agreements with the Management Committee of Harbin Economic- Technological Development Zone with respect to the industrial project for 300,000 metric tons of biological composite materials, the industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics and the industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory (the "HLJ Project"). This Project will help the Company to expand its product mix into bio-based composites, 3D printing materials and functional masterbatch materials while maintaining our traditional petroleum-based materials, paving the path to non-auto applications and further diversifying the company's business as a key element of the Company's strategic plan. Pursuant to three investment agreements, HLJ Xinda Group will invest RMB 4,015 million (equivalent to be US$592.7 million), among which the investment in fixed assets shall be no less than RMB3,295 million (equivalent to US$486.4 million) in total.

 
19



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 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 420 certifications from manufacturers in the automobile industry as of June 30, 2017. 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 381 professionals and 8 consultants. As a result of the integration of our academic and technological expertise, we have a portfolio of 441 patents, 33 of which we have obtained the patent rights and the remaining 408 of which we have applications pending in China as of June 30, 2017.

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 29 automobile brands and 92 automobile models manufactured in China, including Audi, Mercedes Benz, BMW, Toyota, Buick, Chevrolet, Mazda, Volvo, Ford, Citroen, Jinbei, VW Passat, Golf, Jetta, etc.  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, 2017, HLJ Xinda Group 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, mainly backed by production capacity in our Harbin production plant till we installed 50 production lines with production capacity of 216,000 metric tons in the second half of 2016 in our Sichuan plant. As of June 30, 2017, there is still construction ongoing on the site of our Sichuan plant which is to be expected to be completed by the end of the first quarter of 2018. In order to meet the increasing demand from our customer in the ROK and to develop potential overseas markets, Dubai Xinda obtained one leased property and two purchased properties, approximately 52,530 square meters in total, including one leased 10,000 square meters, and two purchased 20,206 and 22,324 square meters on January 25, 2015, June 28, 2016 and September 21, 2016, respectively, from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE, with constructed building comprising warehouses, offices and service blocks. In addition to the earlier 10 trial production lines in Dubai Xinda, the Company is planning to complete installing 45 production lines with 12,000 metric tons of annual production capacity by first quarter of 2018, and an additional 50 production lines with 13,000 metric tons of annual production capacity by end of second quarter of 2018, bringing total installed production capacity in Dubai Xinda to 25,000 metric tons, targeting high-end products for the overseas market.
 
20

 

Highlights for the three months ended June 30, 2017 include:
● Revenues were $313.6 million, an increase of 13.2% from $277.1 million in the second quarter of 2016
● Gross profit was $63.1 million, a increase of 4.6% from $60.3 million in the second quarter of 2016
● Gross profit margin was 20.1%, compared to 21.8% in the second quarter of 2016
● Net income was $28.1 million, compared to $33.3 million in the second quarter of 2016
● Total volume shipped was 104,617 metric tons, up 17.0% from 89,403 metric tons in the second quarter of 2016

Results of Operations

The following table sets forth, for the periods indicated, statements of income data in thousands of USD:
 
(in millions, except  percentage)
 
Three-Month Period Ended
         
Six-Month Period Ended
       
   
June 30,
   
Change
   
June 30,
   
Change
 
   
2017
   
2016
   
%
   
2017
   
2016
   
%
 
Revenues
   
313.6
     
277.1
     
13.2
%
   
551.4
     
492.2
     
12.0
%
Cost of revenues
   
(250.5
)
   
(216.8
)
   
15.5
%
   
(453.5
)
   
(397.0
)
   
14.2
%
Gross profit
   
63.1
     
60.3
     
4.6
%
   
97.9
     
95.2
     
2.8
%
Total operating expenses
   
(19.1
)
   
(12.9
)
   
48.1
%
   
(32.5
)
   
(23.2
)
   
40.1
%
Operating income
   
44.0
     
47.4
     
(7.2
)%
   
65.4
     
72.0
     
(9.2
)%
Income before income taxes
   
32.2
     
38.6
     
(16.6
)%
   
45.7
     
54.5
     
(16.1
)%
Income tax expense
   
(4.1
)
   
(5.3
)
   
(22.6
)%
   
(7.7
)
   
(9.8
)
   
(21.4
)%
Net income
   
28.1
     
33.3
     
(15.6
)%
   
38.0
     
44.7
     
(15.0
)%

Three months ended June 30, 2017 compared to three months ended June 30, 2016

Revenues

Revenues were US$313.6 million in the second quarter ended June 30, 2017, an increase of US$36.5 million, or 13.2%, compared to US$277.1 million in the same period of last year, as a result of an increase of 17.0% in sales volume, an increase of 1.8% in the average RMB selling price of our products, and 5.0% negative impact from exchange rate due to weakening RMB against US dollars, as compared with those of last year.

According to the China Association of Automobile Manufacturers, Automobile production in China increased by 4.6% for the first six months of 2017 as compared to the same period of 2016. An improvement in macroeconomic conditions since 2016 has improved business conditions. Driven by increased growth of 166.2% in Central China, 76.7% in Southwest China, 49.1% in South China, 22.1% in North China, 7.7% in East China, and 5.1% in Northeast China, domestic sales during the second quarter of 2017 increased by 16.2% as compared to the same period of the prior year.

As for the RMB selling price, the increase was mainly due to more sales of higher end product of modified PA66, Plastic Alloy, PLA and PPO in China.

Overseas sales were US$33.0 million in the second quarter of 2017 compared to US$35.7 million in the same period of the prior year. The ROK customer has an outstanding balance of US$65.1 million, among which balance of US$31.9 million was overdue as of June 30, 2017. The ROK customer has made payment of US$42.5 million in the first half year of 2017 and expect to pay off the outstanding balance in the third quarter of 2017.
 
 
 
21


 
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,  
             
   
2017
   
2016
   
Change in
   
Change in
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
Plastic Alloy
   
101.9
     
32.5
%
   
99.8
     
36
%
   
2.1
     
2.1
%
                                                 
Modified Polyamide 66 (PA66)
   
75.4
     
24.0
%
   
60.4
     
21.8
%
   
15.0
     
24.8
%
                                                 
Modified Polyamide 6 (PA6)
   
59.4
     
18.9
%
   
59.5
     
21.5
%
   
(0.1
)
   
(0.2
)%
                                                 
Modified Polypropylene (PP)
   
49.8
     
15.9
%
   
43.1
     
15.6
%
   
6.7
     
15.5
%
                                                 
Modified Polylactic acid (PLA)
   
12.0
     
3.8
%
   
0.1
     
0.0
%
   
11.9
     
11,900.0
%
                                                 
Modified Acrylonitrile butadiene styrene (ABS)
   
8.1
     
2.7
%
   
10.0
     
3.6
%
   
(1.9
)
   
(19.0
)%
                                                 
Polyphenylene Oxide (PPO)
   
4.8
     
1.5
%
   
2.8
     
1.0
%
   
2.0
     
71.4
%
                                                 
Polyoxymethylenes (POM)
   
2.2
     
0.7
%
   
0.9
     
0.3
%
   
1.3
     
144.4
%
                                                 
Raw Materials
   
0.0
     
0
%
   
0.5
     
0.2
%
   
(0.5
)
   
(100.0
)%
                                                 
Total Revenues
   
313.6
     
100
%
   
277.1
     
100
%
   
36.5
     
13.2
%

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,
             
   
2017
   
2016
   
Change in
   
Change in
 
   
MT
   
%
   
MT
   
%
   
MT
   
%
 
Modified Polypropylene (PP)
   
30,893
     
29.5
%
   
24,242
     
27.1
%
   
6,651
     
27.4
%
                                                 
Plastic Alloy
   
30,483
     
29.1
%
   
28,131
     
31.5
%
   
2,352
     
8.4
%
                                                 
Modified Polyamide 6 (PA6)
   
18,821
     
18.0
%
   
16,953
     
19.0
%
   
1,868
     
11.0
%
                                                 
Modified Polyamide 66 (PA66)
   
17,982
     
17.3
%
   
14,804
     
16.5
%
   
3,178
     
21.5
%
                                                 
Modified Acrylonitrile butadiene styrene (ABS)
   
3,738
     
3.6
%
   
4,102
     
4.6
%
   
(364
)
   
(8.9
)%
                                                 
PLA
   
1,183
     
1.1
%
   
10
     
0.0
%
   
1,173
     
11,730.0
%
                                                 
Polyphenylene Oxide (PPO)
   
765
     
0.7
%
   
420
     
0.5
%
   
345
     
82.1
%
                                                 
Polyoxymethylenes (POM)
   
752
     
0.7
%
   
280
     
0.3
%
   
472
     
168.6
%
                                                 
Raw Materials
   
0.0
     
0.0
%
   
461
     
0.5
%
   
(461
)
   
(100.0
)%
                                                 
Total Sales Volume
   
104,617
     
100
%
   
89,403
     
100
%
   
15,214
     
17.0
%

The Company continued to shift production mix from traditional ABS to higher-end products such as PA66, POM, PLA and PPO, primarily due to (i) 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.
 
 
22

 

Gross Profit and Gross Profit Margin

 
Three-Month Period Ended June 30,
 
Change
 
(in millions, except percentage)
2017
 
2016
 
Amount
   
%
 
Gross Profit
 
$
63.1
   
$
60.3
   
$
2.8
     
4.6
%
Gross Profit Margin
   
20.1
%    
21.8
%            
(1.7
)%

Gross profit was US$63.1 million in the second quarter ended June 30, 2017, compared to US$60.3 million in the same period of 2016.   Our gross margin decreased to 20.1% during the second quarter ended June 30, 2017 from 21.8% during the same quarter of 2016 primarily due to the lower gross margin of higher-end products in domestic market for the second quarter ended June 30, 2017 as compared to that of the prior year.

 
General and Administrative Expenses

 
Three-Month Period Ended June 30,
 
Change
 
(in millions, except percentage)
2017
 
2016
 
Amount
   
%
 
General and Administrative Expenses
 
$
8.8
   
$
6.6
   
$
2.2
     
33.3
%
as a percentage of revenues
   
2.8
%    
2.4
%            
0.4
%

General and administrative (G&A) expenses were US$8.8 million for the quarter ended June 30, 2017 compared to US$6.6 million in the same period in 2016, representing an increase of 33.3%, or US$2.2 million. This increase is primarily due to the increase of (i) US$1.3 million in salary and welfare which was resulted from the increase in the number of management and general staff from supporting departments and in the average salary and bonus; (ii) US$0.3 million in professional fee; (iii) US$0.2 million in depreciation and amortization; (iv) US$0.1 million in taxation and (v) US$0.1 million in rental fee.

Research and Development Expenses

 
Three–Month Period Ended June 30,
 
Change
 
(in millions, except percentage)
2017
 
2016
 
Amount
   
%
 
Research and Development Expenses
 
$
9.5
   
$
5.9
   
$
3.6
     
61.0
%
as a percentage of revenues
   
3.0
%    
2.1
%            
0.9
%

Research and development (R&D) expenses were US$9.5 million during the quarter ended June 30,  2017 compared with US$5.9 million during the same period in 2016, an increase of US$3.6 million, or 61.0%. This increase was primarily due to (i) elevated R&D activities to meet the higher quality requirements of potential customers from Europe mainly engaged in automobile accessories industry;  (ii) increased efforts directed towards applications in new electrical equipment and electronics, alternative energy applications, power devices, aviation equipment and ocean engineering, in addition to other new products primarily for advanced industrialized applications in the automobile sector and in new verticals such as ships, airplanes, high-speed rail, 3D printing materials, biodegradable plastics, and medical devices; and (iii) an increase in depreciation expenses after additional R&D equipment was put into use at Sichuan Xinda.

As of June 30, 2017, the number of ongoing research and development projects was 286. 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.



23

Operating Income

Total operating income was US$44.0 million in the second quarter ended June 30, 2017 compared to $47.4 million in the same period of 2016, representing a decrease of 7.2% or US$3.4 million. This decrease is primarily due to higher G&A expenses and higher R&D expenses.

Interest Income (Expenses)
 
   
Three-Month Period Ended June 30,
   
Change
 
(in millions, except percentage)
 
2017
   
2016
   
Amount
   
%
 
Interest Income
 
$
1.0
   
$
1.6
   
$
(0.6
)
   
(37.5
)%
Interest Expenses
   
(12.0
)
   
(10.6
)
   
(1.4
)
   
13.2
%
Net Interest Expenses
 
$
(11.0
)
 
$
(9.0
)
 
$
(2.0
)
   
22.2
%
as a percentage of revenues
   
(3.5
)%
   
(3.3
)%
           
(0.2
)%
Net interest expenses were US$11.0 million for the three-month period ended June 30, 2017, compared to $9.0 million in the same period of 2016, representing an  increase of 22.2% or US$2.0 million, primarily due to (i) the increase of interest expense due to the increase of average short-term and long-term loan balance in amount of US$849.0 million for the three-month period ended June 30, 2017 compared to US$496.6 million for the same period in 2016, which was partially offset by the decrease of weighted loan interest rate of 4.9% for the three-month period ended June 30, 2017 as compared to 5.2% of the same period of 2016.and (ii) a decrease of interest income resulting from the average interest rate decreased to 1.5% for the three-month period ended June 30, 2017 compared to 2.4 % of the same period in 2016, and  the decrease of average deposit balance in the amount of US$266.9 million for the three-month period ended June 30, 2017 compared to US$409.6 million for the same period in 2016.
Income Taxes

   
Three-Month Period Ended June 30,
   
Change
 
(in millions, except percentage)
 
2017
   
2016
   
Amount
   
%
 
Income before Income Taxes
 
$
32.2
   
$
38.6
   
$
(6.4
)
   
(16.6
)%
Income Tax Expense
   
(4.1
)
   
(5.3
)
   
1.2
     
(22.6
)%
Effective income tax rate
   
12.8
%
   
13.6
%
           
(0.8
)%

The effective income tax rates for the three-month periods ended June 30, 2017 and 2016 were 12.8% and 13.6%, respectively. The decrease of effective income tax rate was primarily due to a greater portion of the profit generated by Sichuan Xinda which enjoys preferential tax rate and the increase of super deduction of R&D expense. The effective income tax rate for the three-month ended June 30, 2017 differs from the PRC statutory income tax rate of 25% primarily due to the effect of tax rate difference on various subsidiaries not subject to the PRC statutory income tax rate.

Our PRC and Dubai subsidiaries have US$557.8 million of cash and cash equivalents, restricted cash and time deposits as of June 30, 2017, 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 Xinda in Dubai, UAE, on undistributed earnings.
 
Net Income

As a result of the above factors, we had a net income of US$28.1 million in the second quarter of 2017 compared to a net income of US$33.3 million in the same quarter of 2016.

 
24


 
Six months ended June 30, 2017 compared to six months ended June 30, 2016
Revenues
Revenues were US$551.4 million in the six-month period ended June 30, 2017, an increase of US$59.2 million, or 12.0%, compared with US$492.2 million in the same period of last year, due to approximately 14.4% increase in sales volume, 2.8% increase in the average RMB selling price of our products, and 5.0% negative impact from exchange rate due to weakening RMB against US dollars, as compared with those of last year.
According to the China Association of Automobile Manufacturers, Automobile production in China increased by 4.6% for the first six months of 2017 as compared to the same period of 2016. An improvement in macroeconomic conditions since 2016 has improved business conditions. Driven by increased growth of 100.6% in Central China, 70.5% in South China, 53.0% in Southwest China and 18.4% in North China, and 6.8% in Northeast China, domestic sales during the six-month period ended June 30, 2017 increased by 13.6% as compared to the same period of the prior year.

As for the RMB selling price, the increase was mainly due to more sales of higher-end products in domestic market of PA66, PLA and PPO in China.

Overseas sales were US$33.0 million in H1 2017 compared to US$35.7 million in the same period of the prior year. The ROK customer has an outstanding balance of US$65.1 million, among which balance of US$31.9 million was overdue as of June 30, 2017. The ROK customer has made payment of US$42.5 million in the first half year of 2017 and expects to pay off the outstanding balance in the third quarter of 2017.
The following table summarizes the breakdown of revenues by categories in millions of US$: 
 (in millions, except percentage)
 
Revenues
For the Six-Month Period Ended June 30,
             
   
2017
   
2016
   
Change in
   
Change in
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
Modified Polyamide 66 (PA66)
   
140.1
     
25.4
%
   
111.3
     
22.6
%
   
28.8
     
25.9
%
                                                 
Plastic Alloy
   
164.6
     
29.9
%
   
159.8
     
32.5
%
   
4.8
     
3.0
%
                                                 
Modified Polyamide 6 (PA6)
   
117.0
     
21.2
%
   
110.6
     
22.4
%
   
6.4
     
5.8
%
                                                 
Modified Polypropylene (PP)
   
87.8
     
15.9
%
   
83.0
     
16.9
%
   
4.8
     
5.8
%
                                                 
Modified Acrylonitrile butadiene styrene (ABS)
   
14.5
     
2.6
%
   
18.6
     
3.8
%
   
(4.1
)
   
(22.0
)%
                                                 
PLA
   
12.1
     
2.2
%
   
0.1
     
0.0
%
   
12.0
     
12,000.0
%
                                                 
Polyphenylene Oxide (PPO)
   
10.6
     
1.9
%
   
6.2
     
1.3
%
   
4.4
     
71.0
%
                                                 
Polyoxymethylenes (POM)
   
4.7
     
0.9
%
   
1.7
     
0.3
%
   
3.0
     
176.5
%
                                                 
Raw Materials
   
0.0
     
0.0
%
   
0.9
     
0.2
%
   
(0.9
)
   
(100.0
)%
Total Revenues
   
551.4
     
100
%
   
492.2
     
100
%
   
59.2
     
12.0
%
 
 
25

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,
             
   
2017
   
2016
             
   
MT
   
%
   
MT
   
%
   
Change in
MT
   
Change in
%
 
Modified Polyamide 66 (PA66)
   
32,590
     
17.2
%
   
27,044
     
16.3
%
   
5,546
     
20.5
%
                                                 
Plastic Alloy
   
55,003
     
28.9
%
   
50,915
     
30.6
%
   
4,088
     
8.0
%
                                                 
Modified Polyamide 6 (PA6)
   
36,825
     
19.4
%
   
31,773
     
19.1
%
   
5,052
     
15.9
%
                                                 
Modified Polypropylene (PP)
   
54,321
     
28.6
%
   
46,419
     
27.9
%
   
7,902
     
17.0
%
                                                 
Modified Acrylonitrile butadiene styrene (ABS)
   
6,600
     
3.5
%
   
7,637
     
4.6
%
   
(1,037
)
   
(13.6
)%
                                                 
PLA
   
1,194
     
0.6
%
   
11
     
0.0
%
   
1,183
     
10,754.5
%
                                                 
Polyphenylene Oxide (PPO)
   
1,670
     
0.9
%
   
930
     
0.6
%
   
740
     
79.6
%
                                                 
Polyoxymethylenes (POM)
   
1,614
     
0.8
%
   
550
     
0.3
%
   
1,064
     
193.5
%
                                                 
Raw Materials
   
216
     
0.1
%
   
879
     
0.6
%
   
(663
)
   
(75.4
)%
Total Sales Volume
   
190,033
     
100
%
   
166,158
     
100
%
   
23,875
     
14.4
%


The Company continued to shift production mix from traditional ABS to higher-end products such as PA66, PA6, POM and PPO, primarily due to (i) 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.

Gross Profit and Gross Profit Margin
 
Six-Month Period Ended June 30,
 
Change
 
(in millions, except percentage)
2017
 
2016
 
Amount
 
%
 
Gross Profit
 
$
97.9
   
$
95.2
   
$
2.7
     
2.8
%
Gross Profit Margin
   
17.8
%    
19.3
%            
(1.5
)%
Gross profit was US$97.9 million during the six months ended June 30, 2017, as compared to US$95.2 million in the same period of 2016.   Our gross margin decreased to 17.8% during the six months ended June 30, 2017 from 19.3% during the same quarter of 2016 primarily due to the lower gross margin of higher-end products in domestic market during the six months ended June 30, 2017 as compared to that of the prior year.
General and Administrative Expenses
 
Six-Month Period Ended June 30,
   
Change
 
(in millions, except percentage)
2017
 
2016
   
Amount
 
%
 
General and Administrative Expenses
 
$
15.9
   
$
11.7
    $ 4.2      
35.9
%
as a percentage of revenues
   
2.9
%    
2.4
%            
0.5
%
 
General and administrative (G&A) expenses were US$15.9 million in the six-month period ended June 30, 2017 compared to US$11.7 million in the same period in 2016, representing an increase of 35.9%, or US$4.2 million. This increase is primarily due to the increase of (i) US$3.7 million in salary and welfare which was due to the increase in the number of management and general staff from supporting departments and in the average salary; (ii) US$0.3 million of depreciation and amortization.
 
26

 
Research and Development Expenses
 
Six-Month Period Ended June 30,
 
Change
 
(in millions, except percentage)
2017
 
2016
 
Amount
   
%
 
Research and Development Expenses
 
$
15.4
   
$
10.8
   
$
4.6
     
42.6
%
as a percentage of revenues
   
2.8
%    
2.2
%            
0.6
%

Research and development (R&D) expenses were US$15.4 million during for the six months ended June 30, 2017 compared with US$10.8 million during the same period in 2016, an increase of US$4.6 million, or 42.6%. This increase was primarily due to (i) elevated research and development activities to meet the higher quality requirements of potential customers from Europe mainly engaged in automobile accessories industry;  (ii) increased efforts directed towards applications in new electrical equipment and electronics, alternative energy applications, power devices, aviation equipment and ocean engineering, in addition to other new products primarily for advanced industrialized applications in the automobile sector and in new verticals such as ships, airplanes, high-speed rail, 3D printing materials, biodegradable plastics, and medical devices; and (iii) an increase in depreciation expenses after additional R&D equipment was put into use at Sichuan Xinda.