10-Q 1 cxdc_10q-093017.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 September 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 November 3, 2017, the registrant had 49,727,731 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
21
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
35
 
 
Item 4. Controls and Procedures
36
 
 
 
PART II. OTHER INFORMATION
36
 
 
 
Item 1. Legal Proceedings
36
 
 
 
Item 1A. Risk Factors
37
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
37
 
 
 
Item 3. Defaults Upon Senior Securities
37
 
 
Item 4. Mine Safety Disclosures
37
 
 
 
Item 5.  Other Information
37
 
 
Item 6.  Exhibits
 37
 
 
 
Signatures
38
 
 

 
2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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


 
 
September 30,
   
December 31,
 
 
 
2017
   
2016
 
 
 
US$
   
US$
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
   
46,767,025
     
168,086,445
 
Restricted cash
   
140,553,482
     
103,489,402
 
Time deposits
   
343,835,224
     
184,806,112
 
Accounts receivable, net of allowance for doubtful accounts
   
139,932,158
     
410,049,559
 
Amounts due from a related party
   
-
     
229,624
 
Inventories
   
408,738,341
     
280,939,008
 
Prepaid expenses and other current assets
   
317,442,321
     
125,310,309
 
    Total current assets
   
1,397,268,551
     
1,272,910,459
 
Property, plant and equipment, net
   
832,164,655
     
806,363,692
 
Land use rights, net
   
26,449,565
     
22,536,397
 
Long-term prepayments to equipment and construction suppliers
   
62,641,904
     
14,167,702
 
Other non-current assets
   
660,952
     
10,521,949
 
    Total assets
   
2,319,185,627
     
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
   
727,089,616
     
444,757,476
 
Bills payable
   
213,225,439
     
148,392,677
 
Accounts payable
   
100,965,200
     
320,013,040
 
Amounts due to related parties
   
282,348
     
11,548
 
Income taxes payable
   
3,170,970
     
897,625
 
Accrued expenses and other current liabilities
   
224,330,573
     
119,339,366
 
    Total current liabilities
   
1,269,064,146
     
1,033,411,732
 
Long-term bank loans, excluding current portion
   
111,497,838
     
249,520,615
 
Deferred income
   
76,189,771
     
69,311,102
 
Other non-current liabilities
   
44,470,279
     
42,420,619
 
    Total liabilities
   
1,501,222,034
     
1,394,664,068
 
 
               
Redeemable Series D convertible preferred stocks (redemption amount of US$219,653,000 and US$212,212,300 as of September 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, 49,748,731 shares and 49,532,541 shares issued, 49,727,731 shares and 49,511,541 shares outstanding as of  September 30, 2017 and December 31, 2016, respectively
   
4,974
     
4,952
 
Treasury stock, 21,000 shares at cost
   
(92,694
)
   
(92,694
)
Additional paid-in capital
   
83,075,318
     
82,606,404
 
Retained earnings
   
669,270,174
     
617,168,735
 
Accumulated other comprehensive loss
   
(31,870,744
)
   
(65,427,831
)
    Total stockholders' equity
   
720,387,128
     
634,259,666
 
Commitments and contingencies
   
-
     
-
 
    Total liabilities, redeemable convertible preferred stocks and stockholders' equity
   
2,319,185,627
     
2,126,500,199
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
3



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

   
Three-Month Period Ended September 30,
   
Nine-Month Period Ended September 30,
 
   
2017
   
2016
   
2017
   
2016
 
   
US$
   
US$
   
US$
   
US$
 
                         
Revenues
   
311,418,943
     
331,847,567
     
862,814,803
     
824,017,387
 
Cost of revenues
   
(264,099,790
)
   
(262,206,936
)
   
(717,614,278
)
   
(659,218,624
)
    Gross profit
   
47,319,153
     
69,640,631
     
145,200,525
     
164,798,763
 
                                 
Selling expenses
   
(858,739
)
   
(338,466
)
   
(2,082,889
)
   
(1,005,640
)
General and administrative expenses
   
(10,403,187
)
   
(8,369,224
)
   
(26,301,440
)
   
(20,034,920
)
Research and development expenses
   
(9,857,475
)
   
(7,864,732
)
   
(25,255,497
)
   
(18,681,018
)
    Total operating expenses
   
(21,119,401
)
   
(16,572,422
)
   
(53,639,826
)
   
(39,721,578
)
                                 
    Operating income
   
26,199,752
     
53,068,209
     
91,560,699
     
125,077,185
 
                                 
Interest income
   
1,894,747
     
1,242,484
     
4,028,299
     
4,472,475
 
Interest expense
   
(10,892,112
)
   
(10,870,903
)
   
(32,865,939
)
   
(32,403,784
)
Foreign currency exchange gains (losses)
   
(2,372,361
)
   
(14,902
)
   
(4,719,423
)
   
356,672
 
Losses on foreign currency option contracts
   
(584,724
)
   
-
     
(584,724
)
   
-
 
Loss on debt extinguishment
   
-
     
(18,963,834
)
   
-
     
(18,963,834
)
Government grant
   
2,955,045
     
1,011,870
     
5,418,498
     
1,438,589
 
    Total non-operating expense, net
   
(8,999,405
)
   
(27,595,285
)
   
(28,723,289
)
   
(45,099,882
)
                                 
    Income before income taxes
   
17,200,347
     
25,472,924
     
62,837,410
     
79,977,303
 
                                 
Income tax expense
   
(3,063,889
)
   
(5,296,118
)
   
(10,735,971
)
   
(15,087,372
)
                                 
    Net income
   
14,136,458
     
20,176,806
     
52,101,439
     
64,889,931
 
                                 
Earnings per common share:
                               
Basic and diluted
   
0.21
     
0.31
     
0.79
     
0.98
 
                                 
Net Income
   
14,136,458
     
20,176,806
     
52,101,439
     
64,889,931
 
                                 
Other comprehensive income (loss)
                               
Foreign currency translation adjustment, net of nil income taxes
   
15,887,423
     
(4,953,926
)
   
33,557,087
     
(18,467,228
)
                                 
Comprehensive income
   
30,023,881
     
15,222,880
     
85,658,526
     
46,422,703
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
 
4


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



   
Nine-Month Period Ended
September 30,
 
   
2017
   
2016
 
   
US$
   
US$
 
Cash flows from operating activities:
           
Net cash provided by (used in) operating activities
   
117,785,202
     
(145,259,464
)
                 
Cash flows from investing activities:
               
Proceeds from maturity of time deposits
   
249,029,754
     
389,418,762
 
Purchase of time deposits
   
(396,036,693
)
   
(286,739,987
)
Purchase of land use rights
   
(3,203,611
)
   
-
 
Purchase of and deposits for property, plant and equipment
   
(338,711,968
)
   
(140,826,457
)
Refund of deposit from an equipment supplier
   
122,322,463
     
-
 
Government grant related to the construction of Sichuan plant
   
7,207,612
     
10,117,282
 
Net cash used in investing activities
   
(359,392,443
)
   
(28,030,400
)
                 
Cash flows from financing activities:
               
Proceeds from bank borrowings
   
571,141,361
     
762,880,805
 
Repayments of bank borrowings
   
(450,252,497
)
   
(424,933,705
)
Redemption of notes payable
   
-
     
(165,366,000
)
Release of restricted cash as collateral for bank borrowings
   
57,055,743
     
46,891,495
 
Placement of restricted cash as collateral for bank borrowings
   
(61,566,506
)
   
(64,058,775
)
Net cash provided by financing activities
   
116,378,101
     
155,413,820
 
                 
Effect of foreign currency exchange rate changes on cash and cash equivalents
   
3,909,720
     
(1,907,442
)
Net decrease in cash and cash equivalents
   
(121,319,420
)
   
(19,783,486
)
                 
Cash and cash equivalents at beginning of period
   
168,086,445
     
119,928,485
 
Cash and cash equivalents at end of period
   
46,767,025
     
100,144,999
 
                 
Supplemental disclosure of cash flow information:
               
Interest paid, net of capitalized interest
   
28,035,022
     
37,645,235
 
Income taxes paid
   
9,098,388
     
14,880,461
 
Non-cash investing activities:
               
Accrual for purchase of equipment and construction included in accrued expenses and other current liabilities
   
6,851,777
     
97,201,202
 

See accompanying notes to unaudited condensed consolidated financial statements.

5




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 and related notes to the condensed consolidated financial statements 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 September 30, 2017, the results of operations and cash flows for the nine-month periods ended September 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 nine-month periods ended September 30, 2017 and 2016, are as follows:
 
   
Three-Month Period Ended September 30,
 
   
2017
   
2016
 
   
US$
   
%
   
US$
   
%
 
Distributor A, located in PRC
   
45,073,914
     
14.5
%
   
47,992,568
     
14.4
%
Distributor B, located in PRC
   
34,507,661
     
11.1
%
   
39,173,767
     
11.8
%
Distributor C, located in PRC
   
23,839,509
     
7.7
%
   
34,149,286
     
10.3
%
Direct Customer D, located in ROK
   
14,117,640
     
4.5
%
   
37,008,440
     
11.2
%
Total
   
117,538,724
     
37.8
%
   
158,324,061
     
47.7
%

 
   
Nine-Month Period Ended September 30,
 
   
2017
   
2016
 
   
US$
   
%
   
US$
   
%
 
Distributor A, located in PRC
   
129,108,116
     
15.0
%
   
122,731,035
     
14.9
%
Distributor B, located in PRC
   
98,428,711
     
11.4
%
   
106,653,182
     
12.9
%
Distributor C, located in PRC
   
75,521,449
     
8.8
%
   
91,437,791
     
11.1
%
Distributor E, located in PRC
   
63,132,381
     
7.3
%
   
85,542,045
     
10.4
%
Total
   
366,190,657
     
42.5
%
   
406,364,053
     
49.3
%

 
6


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.
 
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 44.5% (four distributors) and 62.5% (five distributors)  of the Company's total raw materials purchases for the three-month periods ended September 30, 2017 and 2016, respectively, and 47.0% (four distributors) and 68.1% (five distributors) of the Company's total raw materials purchases for the nine-month periods ended September 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 96.0% of the Company's total equipment purchases for the nine-month period ended September 30, 2016.  The Company didn’t have equipment purchase from these two major equipment distributors for the three-month and nine-month periods ended September 30, 2017, or the three-month period ended September 30, 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:

   
September 30, 2017
   
December 31, 2016
 
   
US$
   
US$
 
RMB denominated bank deposits with:
           
Financial Institutions in the PRC
   
529,330,566
     
464,427,328
 
Financial Institutions in Hong Kong Special Administrative Region ("Hong Kong SAR")
   
8,205
     
7,946
 
Financial Institution in Dubai, United Arab Emirates ("UAE")
   
59
     
-
 
U.S. dollar denominated bank deposits with:
               
Financial Institution in the U.S.
   
28,416
     
20,192
 
Financial Institutions in the PRC
   
18,466
     
18,025
 
Financial Institution in Hong Kong SAR
   
1,753,363
     
1,629,199
 
Financial Institution in Macau Special Administrative Region ("Macau SAR")
   
2,117
     
1,810
 
Financial Institution in Dubai, UAE
   
2,675
     
139,201
 
Euro denominated bank deposits with:
               
Financial institution in Dubai, UAE
   
63
     
-
 
HK dollar denominated bank deposits with:
               
Financial institution in Hong Kong SAR
   
80
     
148
 
Dirham denominated bank deposits with:
               
Financial institution in Dubai, UAE
   
11,721
     
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 amounting to $1,569,885 and $1,207,996 are insured as of September 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.

 
7


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 September 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$48,305,685 and US$33,673,057 as of September 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$87,962,754 and US$69,816,345 as of September 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 September 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$1,512,665 and nil as of September 30, 2017 and December 31, 2016, respectively. On February 11, 2017, the Company entered into a fund support agreement with the People's Government of Shunqing District, Nanchong City, Sichuan Province, pursuant to which the Company was granted RMB10 million (equivalent to US$1.5 million) to support the construction of the Sichuan plant. Such amount has been received in full in the Company’s bank account with reimbursement be subject to the Government’s preapproval and will be released by the Government when the construction progress of the plant is 60%. Such balance is reported as restricted cash.

Short-term bank deposits that are pledged as collateral for foreign currency option contract are reported as restricted cash and amounted to US$2,772,378 and nil as of September 30, 2017 and December 31, 2016, respectively. The cash flows from such bank deposits are reported within operating activities in the condensed consolidated statements of cash flows.

Note 2 - Accounts receivable

Accounts receivable consists of the following:

 
 
September 30, 2017
   
December 31, 2016
 
 
 
US$
   
US$
 
 
       
Accounts receivable
   
139,971,988
     
410,087,666
 
Allowance for doubtful accounts
   
(39,830
)
   
(38,107
)
Accounts receivable, net
   
139,932,158
     
410,049,559
 

As of September 30, 2017 and December 31, 2016, the accounts receivable balances also include notes receivable in the amount of US$253,258 and US$374,296, respectively. As of September 30, 2017 and December 31, 2016, US$97,983,300 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 nine-month periods ended September 30, 2017 and 2016.
 
The following table provides an analysis of the aging of accounts receivable as of September 30, 2017 and December 31, 2016:

 
 
September 30, 2017
   
December 31, 2016
 
 
 
US$
   
US$
 
Aging:
           
– current
   
93,655,150
     
373,108,359
 
– 1-3 months past due
   
34,281,278
     
36,941,200
 
– 4-6 months past due
   
4,393,947
     
-
 
– 7-12 months past due
   
7,601,783
     
-
 
– greater than one year past due
   
39,830
     
38,107
 
Total accounts receivable
   
139,971,988
     
410,087,666
 
 
 
8

 

 
Note 3 - Inventories

Inventories consist of the following:

 
 
September 30, 2017
   
December 31, 2016
 
 
US$
 
US$
 
 
       
Raw materials
   
315,665,762
     
270,605,823
 
Work in progress
   
54,517
     
157,953
 
Finished goods
   
93,018,062
     
10,175,232
 
Total inventories
   
408,738,341
     
280,939,008
 

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

Prepaid expenses and other current assets consist of the following:

 
 
September 30, 2017
   
December 31, 2016
 
 
 
US$
   
US$
 
 
           
Receivables from Hailezi (i)
   
256,892,209
     
88,286,651
 
Receivables from Jiamu  (ii)
   
-
     
20,628,987
 
Advances to suppliers
   
45,330,431
     
3,365,930
 
Value added taxes receivable (iii)
   
8,083,669
     
4,814,920
 
Interest receivable (iv)
   
2,465,875
     
3,231,763
 
Others (v)
   
4,670,137
     
4,982,058
 
    Total prepaid expenses and other current assets
   
317,442,321
     
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 RMB612.5 million (equivalent to US$88.3 million) as of December 31, 2016, 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 September 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$260.5  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$256.9 million) by the end of March 2018. For details, please refer to Note 6.
 
(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. 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 September 30, 2017, Harbin Jiamu Import and Export Co., Ltd. has refunded all the prepayment.  The prepayments and refund were recognized in operating activities in the statements of cash flows.
 
 
9


 
  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:

 
 
September 30, 2017
   
December 31, 2016
 
 
 
US$
   
US$
 
 
           
Machinery, equipment and furniture
   
407,915,827
     
391,149,907
 
Motor vehicles
   
2,797,973
     
2,640,477
 
Workshops and buildings
   
144,816,614
     
119,503,091
 
Construction in progress
   
430,033,881
     
409,257,584
 
    Total property, plant and equipment
   
985,564,295
     
922,551,059
 
Less accumulated depreciation
   
(153,399,640
)
   
(116,187,367
)
    Property, plant and equipment, net
   
832,164,655
     
806,363,692
 

For the three-month and nine-month periods ended September 30, 2017 and 2016, the Company capitalized  US$704,165 and US$627,819, and US$2,073,132and US$1,854,251 of interest costs as a component of the cost of construction in progress, respectively. Depreciation expense on property, plant and equipment was allocated to the following expense items:

   
Three-Month Period Ended
September 30,
 
 
2017
 
2016
 
 
US$
 
US$
 
         
Cost of revenues
   
9,022,402
     
8,181,737
 
General and administrative expenses
   
733,090
     
487,639
 
Research and development expenses
   
1,031,697
     
923,963
 
Selling expense
   
958
     
815
 
    Total depreciation expense
   
10,788,147
     
9,594,154
 

   
Nine-Month Period Ended
September 30,
 
   
2017
 
2016
 
   
US$
 
US$
 
         
Cost of revenues
   
26,657,211
     
19,543,468
 
General and administrative expenses
   
1,938,938
     
1,325,965
 
Research and development expenses
   
3,021,553
     
2,812,167
 
Selling expense
   
2,599
     
1,705
 
    Total depreciation expense
   
31,620,301
     
23,683,305
 

 
 
10

 
Note 6 - Prepayments to equipment and construction suppliers

 
 
September 30, 2017
   
December 31, 2016
 
 
 
US$
   
US$
 
Hailezi (i) 
   
41,648,013
     
-
 
Beijin Construction (ii)
   
14,712,547
     
4,324,636
 
Samim Group FZE (iii)
   
-
     
5,308,737
 
Peaceful (iv)
   
5,105,320
     
-
 
Sichuan Construction
   
753,228
     
907,024
 
Sports City (v)
   
-
     
2,859,952
 
Others
   
422,796
     
767,353
 
    Total Prepayments to equipment and construction suppliers
   
62,641,904
     
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$117.9 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$93.7 million) as of September 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 RMB283.7 million (equivalent to US$42.7 million). Hailezi refunded RMB369.1 million (equivalent to US$55.6 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$376.7 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$260.5  million) as of September 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$256.9 million) by the end of  March 2018 and that part of prepayment has been reclassified as prepaid expenses and other current assets as of September 30, 2017. 
  
(ii)
Since November 15, 2016, Sichuan Xinda entered into decoration contracts with Sichuan Beijin Construction Engineering Company Limited ("Beijin Construction") to perform indoor and outdoor decoration work for a consideration of RMB264.3 million (equivalent to US$39.8 million). Pursuant to the contract with Beijin Construction, Sichuan Xinda has prepaid RMB117.3 million (equivalent to US$17.6 million) as of September 30, 2017, in which RMB18.4 million (equivalent to US$2.9 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$15.0 million). As of September  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 September 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$13.5 million to purchase certain production and testing equipment.  Pursuant to the contract with Peaceful, the Company prepaid RMB33.9 million (equivalent to US$5.1 million) as of September 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 September 30, 2017, the apartments have been occupied by the Company, and the amount has been transferred to property, plant and equipment.
 
 
 
11

 
Note 7 -Foreign currency option contracts

On February 24, 2017, the Company entered into two foreign currency option contracts with Bank of China ("BOC"), Harbin Branch, pursuant to which the Company and BOC both have different options to excise the foreign currency contracts depending on the future currency fluctuation, and the nominal values are US$5.0 million and US$10.0 million respectively, with the defined exchange rates for settlement on March 15, 2018.  Changes in fair value of the above foreign currency options amounted to US$0.2 million and US$0.4 million, respectively, from the date of its inception to September 30, 2017 and were recognized in earnings because they did not qualify or was designated for hedge accounting.

Note 8 – 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
 
 
 
September 30, 2017
   
December 31, 2016
 
 
 
US$
   
US$
 
Unsecured loans
   
373,668,429
     
273,147,455
 
Loans secured by accounts receivable
   
67,802,739
     
50,454,086
 
Loans secured by restricted cash
   
55,000,000
     
32,474,300
 
Current portion of long-term bank loans (note b)
   
230,618,448
     
88,681,635
 
    Total short-term loans, including current portion of long-term bank loans
   
727,089,616
     
444,757,476
 

As of September 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 (1.2350% as of September 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$52.7 million) by accounts receivables of RMB439.2 million (equivalent to US$66.2 million) at an annual interest rate of 4.350% from Harbin Longjiang Bank. The Company repaid the loans in January 2017 and obtained another twenty nine secured loans in a total amount of RMB800 million (equivalent to US$120.5 million) by accounts receivables of RMB1,096.6 million (equivalent to US$165.2 million) at an annual interest rate of 4.350%. The Company repaid ten loans in total RMB350 million (equivalent to US$52.7 million) between June 2017 to September 2017, and retrieved accounts receivables of RMB446.3 million (equivalent to US$67.2 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 (1.3328% as of September 30, 2017) plus 2.0%. This loan was secured by restricted cash of RMB100.0 million (equivalent to US$15.1 million) in the Industrial and Commercial Bank of China in Harbin, China. The interest rate is reset every three months. The company repaid the loan in August, 2017.
 
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 RMB15.0 million (equivalent to US$2.3 million) in Bank of China in Harbin, China.  The Company repaid the loan in September 2017 in advance, with the restricted cash remained restricted until October 2017.
 
12

 

 
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 (1.2350% as of September 30, 2017) plus 1.8%. This loan was secured by restricted cash of RMB18.5 million (equivalent to US$2.8 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$14.1 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$20.5 million) in Bank of China in Harbin, China.

In July, 2017, the Company obtained a one-year secured loan of US$14.0 million from Bank of China (Macau Branch) at an annual interest rate of 2.5%. The loan was secured by restricted cash of RMB107.0 million (equivalent to US$16.1 million) in Bank of China in Harbin, China.

(b) Non-current

 
 
September 30, 2017
   
December 31, 2016
 
 
 
US$
   
US$
 
Secured loans
   
44,170,000
     
90,170,000
 
 
               
Unsecured loans
   
121,291,567
     
73,518,812
 
 
               
Syndicate loan facility
   
176,654,719
     
174,513,438
 
Less: current portion
   
230,618,448
     
88,681,635
 
    Total long-term bank loans, excluding current portion
   
111,497,838
     
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 (1.3328% as of September 30, 2017). The loan is secured by restricted cash of RMB110 million (equivalent to US$16.6 million). In accordance with the requirements of the bank, additional RMB109 million (equivalent to US$16.4 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$15.1 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$6.0 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$39.1 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$12.1 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$4.5 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$3.8 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$6.0 million), RMB25 million (equivalent to US$3.8 million),  RMB100 million (equivalent to US$15.1 million),  RMB25 million (equivalent to US$3.8 million),  RMB100 million (equivalent to US$15.1 million),  RMB20 million (equivalent to US$3.0 million), and RMB75 million (equivalent to US$11.2 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 (1.3328% as of September 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 (1.3328% as of September 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 (1.3328% as of September 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$10.3 million). All of these loans will be due on March 22, 2018.
 
 
13


 
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$3.3 million as of September 30, 2017 for the related loan. Debt issuance costs are presented on the 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 5.935% as of September 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.
 
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$3.8 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$12.1 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$63.3 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 September 30, 2017, the Company had total lines of credit of RMB6,806.8 million (US$1,025.6 million) including unused lines of credit of RMB2,398.6 million (US$361.4 million) with remaining terms less than 12 months and RMB5.0 million (US$0.8 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 September 30, 2017, the Company has met these financial covenants.
 
Maturities on long-term bank loans (including current portion) are as follows:

 
 
September 30, 2017
 
 
 
US$
 
2017
   
28,526,910
 
2018
   
280,441,370
 
2019
   
18,834,094
 
2020
   
14,313,912
 
after 2020
   
-
 
Total
   
342,116,286
 

 
 
 
14


 
 Note 9 - Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:

 
 
September 30, 2017
   
December 31, 2016
 
 
 
US$
   
US$
 
Payables for purchase of property, plant and equipment
   
100,460,840
     
98,472,641
 
Accrued freight expenses
   
7,724,318
     
7,972,067
 
Accrued interest expenses
   
4,570,645
     
885,290
 
Advance from customers (i)
   
94,929,456
     
93,066
 
Non income tax payables
   
4,070,887
     
4,499,161
 
Others (ii)
   
12,574,427
     
7,417,141
 
Total accrued expenses and other current liabilities
   
224,330,573
     
119,339,366
 

(i) Advance from customers mainly represents the advance received from four customers in the PRC for the raw material purchases during the nine-month period ended September 30, 2017.
 
(ii) Others mainly represent accrued payroll and employee benefits, accrued audit and consulting fees, electricity fee and other accrued miscellaneous operating expenses.
 
Note 10 – Related party transactions
 
The Company entered into related party transactions with Harbin Xinda High-Tech Co., Ltd. ("Xinda High-Tech"), an entity controlled by the wife of Mr. Han, the chief executive officer and controlling stockholder of the Company, and Mr. Han's son.  The significant related party transactions are summarized as follows:

 
Three-Month Period Ended September 30,
 
Nine-Month Period Ended September 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
   
160,886
     
179,962
     
428,253
     
549,023
 

The related party balances are summarized as follows:

 
 
September 30, 2017
   
December 31, 2016
 
 
US$
 
US$
 
Amounts due from a related party:
       
Prepaid rent expenses to Xinda High-Tech
   
-
     
229,624
 
 
   
September 30, 2017
   
December 31, 2016
 
   
US$
   
US$
 
Amounts due to related parties                
Rental payable to Xinda High-Tech
   
270,278
     
-
 
Rental payable to Mr Han's son
   
12,070
     
11,548
 
Total
   
282,348
     
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
 
 
 
702,503
 
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
 
 
 
5,880
 
Between August 17, 2014 and August 16, 2016
 
 
15


 
Note 11– 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 nine-month periods ended September 30, 2017 and 2016 were 17.1% and 18.9%, respectively. The effective income tax rate reduced from 18.9% for the nine-month period ended September 30, 2016 to 17.1% for the nine-month period ended September 30, 2017, primarily due to a greater portion of the profit generated by Sichuan Xinda which enjoys preferential tax rate and the increase of 50% additional deduction of R&D expense. The effective income tax rate for the nine-month period ended September 30, 2017 differs from the PRC statutory income tax rate of 25% primarily due to Sichuan Xinda's preferential income tax rate and R&D 50% additional  deduction of the major PRC operating entities.

As of September 30, 2017, the unrecognized tax benefits were US$30,901,693 and the interest relating to unrecognized tax benefits was US$9,023,166, of which the unrecognized tax benefits in 2012 amounting to US$2,889,439 and related accrued interest amounting to US$2,265,320 was classified as current liabilities as 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 12 – Deferred Income
 
On January 26, 2015, the Company entered into a memorandum and a fund support agreement (the "Agreement") with the People's Government of Shunqing District, Nanchong City, Sichuan Province ("Shunqing Government") pursuant to which Shunqing Government, through its investment vehicle, extended to the Company RMB350 million (equivalent to US$52.7 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$24.1 million) from Shunqing Government and RMB6.4 million (equivalent to US$1.0 million) from Ministry of Finance of the People's Republic of China to support the construction 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 September 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 RMB32.3 million (equivalent to US$4.9 million) government grants have been amortized as other income proportionate to the depreciation of the related assets, of which RMB22.8 million (equivalent to US$3.4 million) was amortized in the nine-month period ended September 30, 2017.
 
The Company also received RMB36 million (equivalent to US$5.4 million) from Shunqing Government with respect to interest subsidy for future bank loan. 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 nine-month period ended September 30, 2017.
 
 
16

Note 13 – Other non-current liabilities

 
       
 
 
September 30, 2017
   
December 31, 2016
 
 
US$
 
US$
 
 
       
Income tax payable-noncurrent (i)
   
34,770,100
     
31,602,314
 
Deferred income tax liabilities
   
9,700,179
     
10,818,305
 
Total other non-current liabilities
   
44,470,279
     
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, the unrecognized tax benefits occurred in 2012 and related accrued interest amounting to RMB19.2 million (equivalent to US$2.9 million) and RMB15.0 million (equivalent to US$2.3 million), respectively, were classified as current liabilities.

Note 14 – Stockholders' equity

The changes of each caption of stockholders' equity for the nine-month period ended September 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
   
-
   
-
   
-
   
-
   
-
   
-
   
52,101,439
   
-
   
52,101,439
 
Other comprehensive income
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
33,557,087
   
33,557,087
 
Stock based compensation
   
-
   
-
   
-
   
-
   
-
   
468,936
   
-
   
-
   
468,936
 
Vesting of nonvested shares
   
-
   
-
   
216,190
   
22
   
-
   
(22
)
 
-
   
-
   
-
 
Balance as of September 30, 2017
   
1,000,000
   
100
   
49,727,731
   
4,974
   
(92,694
)
 
83,075,318
   
669,270,174
   
(31,870,744
)
 
720,387,128
 
 
Note 15 – Stock based compensation

Nonvested shares

A summary of the nonvested shares activity for the nine-month period ended September 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
 
Vested
   
(216,190
)
   
5.12
 
Forfeited
   
(24,910
)
   
5.60
 
Outstanding as of  September 30, 2017
   
161,110
     
7.48
 

The Company recognized US$121,890 and US$195,536 of share-based compensation expense in general and administration expenses relating to nonvested shares for the three-month periods ended September 30, 2017 and 2016, respectively, and US$468,936 and US$665,962 of share-based compensation expense in general and administration expenses relating to nonvested shares for the nine-month periods ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there was US$280,811 total unrecognized compensation cost relating to nonvested shares, which is to be recognized over a weighted average period of 0.85 years. 
 
 
17


 
Note 16 - Earnings per share
 
Basic and diluted earnings per share are calculated as follows:
 
   
Three-Month Period Ended September 30,
   
Nine-Month Period Ended September 30,
 
   
2017
   
2016
   
2017
   
2016
 
   
US$
   
US$
   
US$
   
US$
 
Net income
   
14,136,458
     
20,176,806
     
52,101,439
     
64,889,931
 
Less:
                               
Earnings allocated to participating Series D convertible preferred stock
   
(3,432,680
)
   
(4,895,398
)
   
(12,651,945
)
   
(15,736,883
)
Earnings allocated to participating nonvested shares
   
(53,723
)
   
(137,471
)
   
(263,972
)
   
(539,108
)
Net income for basic and diluted earnings per share
   
10,650,055
     
15,143,937
     
39,185,522
     
48,613,940
 
                                 
Denominator
                               
Denominator for basic and diluted earnings per share
   
49,640,785
     
49,496,074
     
49,555,096
     
49,426,752
 
                                 
Earnings per share:
                               
Basic and diluted
   
0.21
     
0.31
     
0.79
     
0.98
 

The following table summarizes potentially dilutive securities excluded from the calculation of diluted earnings per share for the three-month periods and nine-month periods ended September 30, 2017 and 2016 because their effects are anti-dilutive:


 
Three-Month Period Ended September 30,
 
Nine-Month Period Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
                 
Shares issuable upon conversion of Series D convertible preferred stock
   
16,000,000
     
16,000,000
     
16,000,000
     
16,000,000
 

Note 17 - Commitments and contingencies

(1)    Lease commitments

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

 
 
US$
 
Period from October 1, 2017 to December 31, 2017
 
 
381,096
 
Years ending December 31,
 
 
 
 
2018
 
 
1,081,624
 
2019
 
 
222,638
 
2020
 
 
131,043
 
2021
 
 
65,617
 
2022 and thereafter
 
 
508,532
 

 
18

 
Rental expenses incurred for operating leases of plant and office spaces were US$640,731 and US$667,375 for the three-month periods ended September 30, 2017 and 2016, respectively, and US$1,909,315 and US$1,511,433 for the nine-month periods ended September 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.
 
(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 September 30, 2017, the Company has a remaining commitment of RMB54.9 million (equivalent to US$8.3 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 September 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$13.5 million) to purchase certain production and testing equipment. As of September 30, 2017, the Company has a commitment of RMB55.9 million (equivalent to US$8.4 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$35.8 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$3.6 million). As of September 30, 2017, Sichuan Xinda prepaid RMB117.3 million (equivalent to US$17.6 million) of which RMB18.4 million (equivalent to US$2.9 million) was transferred to construction in progress and has a remaining commitment of RMB147.0 million (equivalent to US$22.2 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$337.9 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$334.9 million), and Hailezi agreed to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$256.9 million) by the end of March 2018, out of the total prepayment made by Sichuan Xinda of RMB1,722.9 million (equivalent to US$259.6 million). As of September 30, 2017, Sichuan Xinda prepaid RMB18.0 million (equivalent to US$2.7 million) and has a remaining commitment of RMB1.9 million (equivalent to US$0.3 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$117.9 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 RMB283.7 million (equivalent to US$42.7 million). Hailezi refunded RMB369.1 million (equivalent to US$55.6 million) to HLJ Xinda Group on June 22, 2017. As of September 30, 2017, HLJ Xinda Group has a remaining commitment of RMB31.2 million (equivalent to US$4.6 million).
 
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"). Pursuant to three investment agreements, the project total capital expenditure will be RMB4,015 million (equivalent to be US$605.0 million), among which the investment in fixed assets shall be no less than RMB3,295 million (equivalent to US$496.5 million) in total.
 
(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 September 30, 2017, the Company has a remaining commitment of AED2.1 million (equivalent to US$0.6 million).
 
 
19

 
(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$0.9 million) to decorate office building. As of September 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 September 30, 2017, the Company has a remaining commitment of RMB4.4 million (equivalent to US$0.7 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 September 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 September 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 September 30, 2017 since the lawsuit has been dismissed.
 
 

 
20



 
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 432 certifications from manufacturers in the automobile industry as of September 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 491 professionals and 8 consultants. As a result of the integration of our academic and technological expertise, we have a portfolio of 456 patents, 33 of which we have obtained the patent rights and the remaining 423 of which we have applications pending in China as of September 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 30 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 September 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 annual 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 year of 2016 in our Sichuan plant. As of September 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 2018, bringing total installed production capacity in Dubai Xinda to 25,000 metric tons, targeting high-end products for the overseas market.
 


21



Highlights for the three months ended September 30, 2017 include:
● Revenues were $311.4 million, a decrease of 6.1% from $331.8 million in the third quarter of 2016
● Gross profit was $47.3 million, a decrease of 32.0% from $69.6 million in the third quarter of 2016
● Gross profit margin was 15.2%, compared to 21.0% in the third quarter of 2016
● Net income was $14.1 million, compared to $20.2 million in the third quarter of 2016
● Total volume shipped was 111,852 metric tons, a slightly up 3.0% from 108,633 metric tons in the third quarter of 2016

Results of Operations

The following table sets forth, for the periods indicated, statements of income data in millions of USD:
 
   
Three-Month Period Ended
         
Nine-Month Period Ended
       
 
 
September 30,
   
Change
   
September 30,
   
Change
 
 (in millions, except  percentage)
 
2017
   
2016
   
%
   
2017
   
2016
   
%
 
Revenues
   
311.4
     
331.8
     
(6.1
)%
   
862.8
     
824.0
     
4.7
%
Cost of revenues
   
(264.1
)
   
(262.2
)
   
0.7
%
   
(717.6
)
   
(659.2
)
   
8.9
%
Gross profit
   
47.3
     
69.6
     
(32.0
)%
   
145.2
     
164.8
     
(11.9
)%
Total operating expenses
   
(21.1
)
   
(16.5
)
   
27.9
%
   
(53.6
)
   
(39.7
)
   
35.0
%
Operating income
   
26.2
     
53.1
     
(50.7
)%
   
91.6
     
125.1
     
(26.8
)%
Income before income taxes
   
17.2
     
25.5
     
(32.5
)%
   
62.8
     
80.0
     
(21.5
)%
Income tax expense
   
(3.1
)
   
(5.3
)
   
(41.5
)%
   
(10.7
)
   
(15.1
)
   
(29.1
)%
Net income
   
14.1
     
20.2
     
(30.2
)%
   
52.1
     
64.9
     
(19.7
)%

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

Revenues

Revenues were US$311.4 million in the third quarter ended September 30, 2017, a decrease of US$20.4 million, or 6.1%, compared to US$331.8 million in the same period of last year, as a result of a decrease of 8.3% in the average RMB selling price of our products offset by a slightly increase of 3.0% in sales volume, and 0.6% 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 5.5% for the first nine 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 42.8% in Central China, 61.1% in Southwest China, 0.5% in North China and offset by decrease of 5.1% in South China, 5.2% in East China, and 6.8% in Northeast China, domestic sales during the third quarter of 2017 increased by 0.8% as compared to the same period of the prior year.
 
 
22

 
As for the RMB selling price, the decrease was mainly due to more sales of lower-end product of modified PP in China.
 
Overseas sales were US$14.1 million in the third quarter of 2017 compared to US$37.0 million in the same period of the prior year. As of September 30, 2017, the ROK customer has an outstanding balance of US$59.0 million, among which balance of US$44.9 million was overdue. The Company has experienced a delay in cash collection from the ROK customer mainly due to the customer's tight funding. To better manage the financial risk and take the long-term cooperation into consideration, the Company has signed an addendum with the ROK customer on September 30, 2017 in accordance with its risk management policy while both parties actively defined the payment term, negotiated the pricing associated with the Company's sales of high-end products.

The ROK customer has made payments of US$62.6 million for the first three quarters of 2017 and expects to pay off the overdue outstanding balance in the fourth quarter of 2017.
 
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 September 30,
             
 
 
2017
   
2016
   
Change in
   
Change in
 
 
 
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
Plastic Alloy
   
83.3
     
26.7
%
   
114.2
     
34.4
%
   
(30.9
)
   
(27.1
)%
 
                                               
Modified Polypropylene (PP)
   
65.6
     
21.1
%
   
45.4
     
13.7
%
   
20.2
     
44.5
%
 
                                               
Modified Polyamide 66 (PA66)
   
60.0
     
19.3
%
   
70.1
     
21.1
%
   
(10.1
)
   
(14.4
)%
 
                                               
Modified Polyamide 6 (PA6)
   
47.1
     
15.1
%
   
78.8
     
23.7
%
   
(31.7
)
   
(40.2
)%
 
                                               
Modified Polylactic acid (PLA)
   
35.0
     
11.2
%
   
1.2
     
0.4
%
   
33.8
     
2,816.7
%
 
                                               
Modified Acrylonitrile butadiene styrene (ABS)
   
12.4
     
4.0
%
   
10.5
     
3.1
%
   
1.9
     
18.1
%
 
                                               
Polyphenylene Oxide (PPO)
   
4.0
     
1.3
%
   
5.2
     
1.6
%
   
(1.2
)
   
(23.1
)%
 
                                               
Polyoxymethylenes (POM)
   
3.7
     
1.2
%
   
5.2
     
1.6
%
   
(1.5
)
   
(28.8
)%
 
                                               
Raw Materials
   
0.3
     
0.1
%
   
1.2
     
0.4
%
   
(0.9
)
   
(75.0
)%
 
                                               
Total Revenues
   
311.4
     
100
%
   
331.8
     
100
%
   
(20.4
)
   
(6.1
)%
 
 
 
 
23


 
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 September 30,
             
 
 
2017
   
2016
   
Change in
   
Change in
 
 
 
MT
   
%
   
MT
   
%
   
MT
   
%
 
Modified Polypropylene (PP)
   
43,530
     
38.9
%
   
26,319
     
24.2
%
   
17,211
     
65.4
%
 
                                               
Plastic Alloy
   
25,968
     
23.2
%
   
33,450
     
30.8
%
   
(7,482
)
   
(22.4
)%
 
                                               
Modified Polyamide 6 (PA6)
   
16,680
     
14.9
%
   
23,603
     
21.7
%
   
(6,923
)
   
(29.3
)%
 
                                               
Modified Polyamide 66 (PA66)
   
14,128
     
12.6
%
   
17,527
     
16.1
%
   
(3,399
)
   
(19.4
)%
 
                                               
Modified Acrylonitrile butadiene styrene (ABS)
   
6,051
     
5.4
%
   
4,299
     
4.0
%
   
1,752
     
40.8
%
 
                                               
Modified Polylactic acid (PLA)
   
3,750
     
3.4
%
   
209
     
0.2
%
   
3,541
     
1,694.3
%
 
                                               
Polyphenylene Oxide (PPO)
   
690
     
0.6
%
   
810
     
0.7
%
   
(120
)
   
(14.8
)%
 
                                               
Polyoxymethylenes (POM)
   
1,055
     
1.0
%
   
1,695
     
1.6
%
   
(640
)
   
(37.8
)%
 
                                               
Raw Materials
   
0.0
     
0.0
%
   
721
     
0.7
%
   
(721
)
   
(100
)%
 
                                               
Total Sales Volume
   
111,852
     
100
%
   
108,633
     
100
%
   
3,219
     
3.0
%

The Company continued to shift production mix from traditional lower-end products to higher-end products such as PLA 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.

During the third quarter of 2017, the Company also implemented a marketing strategy of offering lower-end products with lower RMB pricing to enter the new regional markets in Central China and Southwest China.

Gross Profit and Gross Profit Margin

 
Three-Month Period Ended September 30,
 
Change
 
(in millions, except percentage)
2017
 
2016
 
Amount
 
%
 
Gross Profit
 
$
47.3
 
 
$
69.6
 
 
$
(22.3
 )
(32.0
)%
Gross Profit Margin
 
 
15.2
%
 
 
21.0
%
 
 
 
 
(5.8
)%

Gross profit was US$47.3 million in the third quarter ended September 30, 2017, compared to US$69.6 million in the same period of 2016. Our gross margin decreased to 15.2% during the third quarter ended September 30, 2017 from 21.0% during the same quarter of 2016 primarily due to (i) the usage of higher-pricing PA raw materials inventory during the third quarter of 2017 leading to higher cost of goods sold, (ii) lower sales of higher-end products in Dubai Xinda; and (iii) implementing a marketing strategy of offering lower-end products with lower RMB pricing to enter the new regional markets in Central China and Southwest China, for the third quarter ended September 30, 2017 as compared to that of the prior year.
 
24


 
General and Administrative Expenses
 
 
Three-Month Period Ended September 30,
 
Change
 
(in millions, except percentage)
2017
 
2016
 
Amount
 
%
 
General and Administrative Expenses
 
$
10.4
 
 
$
8.4
 
 
$
2.0
 
23.8
%
as a percentage of revenues
 
 
3.3
%
 
 
2.5
%
 
 
 
 
0.8
%

General and administrative (G&A) expenses were US$10.4 million for the quarter ended September 30, 2017 compared to US$8.4 million in the same period in 2016, representing an increase of 23.8%, or US$2.0 million. This increase is primarily due to the increase of (i) US$2.2 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 depreciation and amortization; and partially offset by the decrease of (iii) US$0.3 million in professional fee; (iv) US$0.2 million in travelling and transportation.

Research and Development Expenses
 
 
Three-Month Period Ended September 30,
 
Change
 
(in millions, except percentage)
2017
 
2016
 
Amount
 
%
 
Research and Development Expenses
 
$
9.8
 
 
$
7.9
 
 
$
1.9
 
24.1
%
as a percentage of revenues
 
 
3.2
%
 
 
2.4
%
 
 
 
 
0.8
%

Research and development (R&D) expenses were US$9.8 million during the quarter ended September 30,  2017 compared with US$7.9 million during the same period in 2016, an increase of US$1.9 million, or 24.1%. 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;  and (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.
 
As of September 30, 2017, the number of ongoing research and development projects was 366. We expect to complete and commence to realize economic benefits on approximately 25% of the projects in the near term. The remaining projects are expected to be carried out for a longer period.

Operating Income
Total operating income was US$26.2 million in the third quarter ended September 30, 2017 compared to $53.1 million in the same period of 2016, representing a decrease of 50.7% or US$26.9 million. This decrease is primarily due to lower gross margin, higher G&A expenses and higher R&D expenses.

Interest Income (Expenses)
 
 
 
Three-Month Period Ended September 30,
   
Change
 
(in millions, except percentage)
 
2017
   
2016
   
Amount
   
%
 
Interest Income
 
$
1.9
   
$
1.2
   
$
0.7
     
58.3
%
Interest Expenses
   
(10.9
)
   
(10.9
)
   
0.0
     
0.0
%
Net Interest Expenses
 
$
(9.0
)
 
$
(9.7
)
 
$
(0.7
)
   
7.2
%
as a percentage of revenues
   
(2.9
)%
   
(2.9
)%
           
0.0
%
 
Net interest expenses were US$9.0 million for the three-month period ended September 30, 2017, compared to $9.7 million in the same period of 2016, representing a decrease of 7.2% or US$0.7 million, primarily due to the increase of interest income resulting from the increase of average deposit balance in the amount of US$503.1 million for the three-month period ended September 30, 2017 compared to US$355.8 million for the same period in 2016, and an increase of the average interest rate to 1.5% for the three-month period ended September 30, 2017 compared to 1.4 % of the same period in 2016.
 
25

 
Income Taxes

 
Three-Month Period Ended September 30,
 
Change
 
(in millions, except percentage)
2017
 
2016
 
Amount
 
%
 
Income before Income Taxes
 
$
17.2
   
$
25.5
   
$
(8.3
)
   
(32.5
)%
Income Tax Expense
   
(3.1
)
   
(5.3
)
   
2.2
     
(41.5
)%
Effective income tax rate
   
17.8
%
   
20.8
%
           
(3.0
)%

The effective income tax rates for the three-month periods ended September 30, 2017 and 2016 were 17.8% and 20.8%, 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 50% additional deduction of R&D expense. The effective income tax rate for the three-month ended September 30, 2017 differs from the PRC statutory income tax rate of 25% primarily due to Sichuan Xinda's preferential income tax rate and R&D 50% additional deduction of the major PRC operating entities.
 
Our PRC and Dubai subsidiaries have US$529.4 million of cash and cash equivalents, restricted cash and time deposits as of September 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$14.1 million in the third quarter of 2017 compared to a net income of US$20.2 million in the same quarter of 2016.

Nine months ended September 30, 2017 compared to nine months ended September 30, 2016
 
Revenues
Revenues were US$862.8 million in the nine-month period ended September 30, 2017, an increase of US$38.8 million, or 4.7%, compared with US$824.0 million in the same period of last year, due to approximately 9.8% increase in sales volume, offset by the 1.3% decrease in the average RMB selling price of our products, and 3.3% 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 5.5% for the first nine 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 72.5% in Central China, 31.9% in South China, 56.4% in Southwest China and 11.5% in North China, and 1.7% in Northeast China, PRC domestic sales during the nine-month period ended September 30, 2017 increased by 8.6% as compared to the same period of the prior year.
 
As for the RMB selling price, the decrease was mainly due to more sales of lower-end products of PP in China.
 
Overseas sales were US$47.1 million compared to US$72.7 million in the same period of the prior year. The ROK customer has an outstanding balance of US$59.0 million, among which balance of US$44.9 million was overdue as of September 30, 2017. The Company has experienced a delay in cash collection from the ROK customer mainly due to the customer's tight funding. To better manage the financial risk and take the long-term cooperation into consideration, the Company has signed an addendum with the ROK customer on September 30, 2017 in accordance with its risk management policy while both parties actively defined the payment term, negotiated the pricing associated with the Company's sales of high-end products.
 
The ROK customer has made payments of US$62.6 million in the first three quarters of 2017 and expects to pay off the overdue outstanding balance in the fourth quarter of 2017.
 

 
26

The following table summarizes the breakdown of revenues by categories in millions of US$:
 (in millions, except percentage)
 
Revenues
For the Nine-month Period Ended September 30,
             
 
 
2017
   
2016
   
Change in
   
Change in
 
 
 
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
Plastic Alloy
   
247.8
     
28.8
%
   
274.0
     
33.3
%
   
(26.2
)
   
(9.6
)%
 
                                               
Modified Polyamide 66 (PA66)
   
200.2
     
23.2
%
   
181.4
     
22.0
%
   
18.8
     
10.4
%
 
                                               
Modified Polyamide 6 (PA6)
   
164.1
     
19.0
%
   
189.4
     
23.0
%
   
(25.3
)
   
(13.4
)%
 
                                               
Modified Polypropylene (PP)
   
153.4
     
17.8
%
   
128.4
     
15.6
%
   
25.0
     
19.5
%
 
                                               
Modified Polylactic acid (PLA)
   
47.0
     
5.4
%
   
1.3
     
0.2
%
   
45.7
     
3,515.4
%
 
                                               
Modified Acrylonitrile butadiene styrene (ABS)
   
26.9
     
3.1
%
   
29.1
     
3.5
%
   
(2.2
)
   
(7.6
)%
 
                                               
Polyphenylene Oxide (PPO)
   
14.7
     
1.7
%
   
11.4
     
1.4
%
   
3.3
     
28.9
%
 
                                               
Polyoxymethylenes (POM)
   
8.4
     
1.0
%
   
6.9
     
0.8
%
   
1.5
     
21.7
%
 
                                               
Raw Materials
   
0.3
     
0.0
%
   
2.1
     
0.2
%
   
(1.8
)
   
(85.7
)%
Total Revenues
   
862.8
     
100
%
   
824.0
     
100
%
   
38.8
     
4.7
%

The following table summarizes the breakdown of metric tons (MT) by product mix:
 
(in MTs, except percentage)
 
Sales Volume
For the Nine-month Period Ended September 30,
             
 
 
2017
   
2016
             
 
 
MT
   
%
   
MT
   
%
   
Change in
MT
   
Change in
%
 
Modified Polypropylene (PP)
   
97,850
     
32.4
%
   
72,738
     
26.5
%
   
25,112
     
34.5
%
 
                                               
Plastic Alloy
   
80,971
     
26.9
%
   
84,365
     
30.7
%
   
(3,394
)
   
(4.0
)%
 
                                               
Modified Polyamide 6 (PA6)
   
53,504
     
17.7
%
   
55,376
     
20.2
%
   
(1,872
)
   
(3.4
)%
 
                                               
Modified Polyamide 66 (PA66)
   
46,718
     
15.5
%
   
44,571
     
16.2
%
   
2,147
     
4.8
%
 
                                               
Modified Acrylonitrile butadiene styrene (ABS)
   
12,653
     
4.2
%
   
11,936
     
4.3
%
   
717
     
6.0
%
 
                                               
Modified Polylactic acid (PLA)
   
4,944
     
1.6
%
   
220
     
0.1
%
   
4,724
     
2,147.3
%
 
                                               
Polyoxymethylenes (POM)
   
2,669
     
0.9
%
   
2,245
     
0.8
%
   
424
     
18.9
%
 
                                               
Polyphenylene Oxide (PPO)
   
2,360
     
0.8
%