10-Q 1 cxdc_10q-033119.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 March 31, 2019

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, if any, every Interactive Data File required to be submitted 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
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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
CXDC  NASDAQ Global Market
 
As of May 10, 2019, the registrant had were 50,948,841 shares of common stock, par value US$0.0001 per share, outstanding.
 


 

TABLE OF CONTENTS
 
 
PAGE
PART I. FINANCIAL INFORMATION
3
     
Item 1. Financial Statements
3
     
 
Unaudited Condensed Consolidated Balance Sheets
3
     
 
Unaudited Condensed Consolidated Statements of Comprehensive Income
4
     
 
Unaudited Condensed Consolidated Statements of Cash Flows
5
     
 
Notes to the Unaudited Condensed Consolidated Financial Statements
6
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
26
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
39
   
Item 4. Controls and Procedures
39
     
PART II. OTHER INFORMATION
 
     
Item 1. Legal Proceedings
40
     
Item 1A. Risk Factors
40
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
40
     
Item 3. Defaults Upon Senior Securities
40
   
Item 4. Mine Safety Disclosures
40
     
Item 5. Exhibits
40
     
Signatures
41



2

 
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

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

 
 
     
 
 
March 31,
   
December 31,
 
 
 
2019
   
2018
 
   
US$
   
US$
 
ASSETS
           
Current assets:
           
Cash
   
78,891,580
     
41,301,817
 
Restricted cash
   
427,321,731
     
325,690,023
 
Accounts receivable, net of allowance for doubtful accounts
   
154,051,127
     
294,688,288
 
Inventories
   
793,243,874
     
620,033,195
 
Prepaid expenses and other current assets
   
96,270,070
     
132,218,528
 
    Total current assets
   
1,549,778,382
     
1,413,931,851
 
Property, plant and equipment, net
   
770,413,511
     
775,941,280
 
Land use rights, net
   
30,213,879
     
29,796,795
 
Long-term prepayments to equipment and construction suppliers
   
524,297,914
     
530,636,319
 
Operating lease right-of-use assets, net
   
15,918,647
     
-
 
Other non-current assets
   
3,171,583
     
3,212,986
 
    Total assets
   
2,893,793,916
     
2,753,519,231
 
 
               
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
 
Current liabilities:
               
Short-term bank loans, including current portion of long-term bank loans
   
723,302,348
     
729,666,920
 
Bills payable
   
730,318,556
     
618,166,453
 
Accounts payable
   
40,865,322
     
84,958,469
 
Amounts due to related parties
   
18,995,751
     
18,365,738
 
Income taxes payable
   
16,337,961
     
15,975,367
 
Operating lease liabilities, current
   
2,304,598
     
-
 
Accrued expenses and other current liabilities
   
82,423,884
     
126,926,898
 
    Total current liabilities
   
1,614,548,420
     
1,594,059,845
 
Long-term bank loans, excluding current portion
   
188,183,909
     
111,808,244
 
Deferred income
   
100,255,791
     
99,583,477
 
Operating lease liabilities, non-current
   
14,666,805
     
-
 
Other non-current liabilities
   
103,993,582
     
101,573,772
 
    Total liabilities
   
2,021,648,507
     
1,907,025,338
 
 
               
Redeemable Series D convertible preferred stock (redemption amount of US$290,491,100 and US$280,650,800 as of March 31, 2019 and  December 31, 2018, 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, 50,969,841 shares issued, 50,948,841 shares outstanding as of  March 31, 2019 and December 31, 2018, respectively
   
5,097
     
5,097
 
Treasury stock, 21,000 shares at cost
   
(92,694
)
   
(92,694
)
Additional paid-in capital
   
86,633,582
     
86,633,582
 
Retained earnings
   
728,084,605
     
717,103,890
 
Accumulated other comprehensive loss
   
(40,061,746
)
   
(54,732,547
)
    Total stockholders' equity
   
774,568,944
     
748,917,428
 
Commitments and contingencies
   
-
     
-
 
    Total liabilities, redeemable convertible preferred stock and stockholders' equity
   
2,893,793,916
     
2,753,519,231
 

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 March 31,
 
   
2019
   
2018
 
   
US$
   
US$
 
             
Revenues
   
301,466,007
     
310,453,033
 
Cost of revenues
   
(251,136,339
)
   
(256,585,577
)
    Gross profit
   
50,329,668
     
53,867,456
 
                 
Selling expenses
   
(277,820
)
   
(1,051,009
)
General and administrative expenses
   
(8,775,385
)
   
(8,875,009
)
Research and development expenses
   
(10,062,186
)
   
(5,049,898
)
    Total operating expenses
   
(19,115,391
)
   
(14,975,916
)
                 
    Operating income
   
31,214,277
     
38,891,540
 
                 
Interest income
   
435,779
     
2,312,623
 
Interest expense
   
(17,500,277
)
   
(12,894,205
)
Foreign currency exchange losses
   
(2,140,865
)
   
(3,955,808
)
Losses on foreign currency option contracts
   
-
     
(520,981
)
Gains on disposal of a subsidiary
   
518,491
     
-
 
                 
Government grant
   
2,094,937
     
1,477,559
 
    Total non-operating expense, net
   
(16,591,935
)
   
(13,580,812
)
                 
    Income before income taxes
   
14,622,342
     
25,310,728
 
                 
Income tax expense
   
(3,641,627
)
   
(6,210,827
)
                 
    Net income
   
10,980,715
     
19,099,901
 
                 
Earnings per common share:
               
Basic and diluted
   
0.16
     
0.29
 
                 
Net income
   
10,980,715
     
19,099,901
 
                 
Other comprehensive income
               
Foreign currency translation adjustment, net of nil income taxes
   
14,670,801
     
29,661,410
 
                 
Comprehensive income
   
25,651,516
     
48,761,311
 


See accompanying notes to unaudited condensed consolidated financial statements.


4

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


   
Three-Month Period Ended March 31,
 
   
2019
   
2018
 
   
US$
   
US$
 
Cash flows from operating activities:
           
Net cash provided by operating activities
   
66,949,790
     
28,429,789
 
                 
Cash flows from investing activities:
               
Purchase of time deposits
   
-
     
(163,426,937
)
Proceeds from maturity of time deposits
   
-
     
119,741,660
 
Purchase of and deposits for property, plant and equipment
   
(11,471,899
)
   
(64,469,960
)
Refund of deposit from an equipment supplier
   
-
     
60,054,417
 
Government grant related to the industrial project for 300,000 metric tons biological composite materials
   
-
     
6,953,816
 
Cash disposed for sales of a subsidiary
   
(3,217
)
   
-
 
Net cash used in investing activities
   
(11,475,116
)
   
(41,147,004
)
                 
Cash flows from financing activities:
               
Proceeds from bank borrowings
   
357,291,327
     
251,134,403
 
Repayment of bank borrowings
   
(281,123,795
)
   
(347,339,779
)
Proceeds from interest-free advances from related parties
   
289,298
     
-
 
Net cash provided by (used in) financing activities
   
76,456,830
     
(96,205,376
)
                 
Effect of foreign currency exchange rate changes on cash, cash equivalents, and restricted cash
   
7,289,967
     
10,101,313
 
Net increase (decrease) in cash, cash equivalents, and restricted cash
   
139,221,471
     
(98,821,278
)
                 
Cash, cash equivalents, and restricted cash at beginning of period
   
366,991,840
     
320,091,665
 
Cash, cash equivalents, and restricted cash at end of period
   
506,213,311
     
221,270,387
 
                 
Supplemental disclosure of cash flow information:
               
Interest paid, net of capitalized interest
   
13,316,939
     
11,062,464
 
Income taxes paid
   
2,276,847
     
7,064,571
 
Non-cash investing and financing activities:
               
Accrual for purchase of property, plant and equipment
   
1,181,670
     
196,911
 

The following table shows a reconciliation of cash, cash equivalents and restricted cash on the condensed consolidated balance sheets to that presented in the above condensed consolidated statements of cash flows.
             
   
March 31,
   
March 31,
 
   
2019
   
2018
 
   
US$
   
US$
 
Cash and cash equivalents
   
78,891,580
     
50,814,789
 
Restricted cash
   
427,321,731
     
170,455,598
 
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
   
506,213,311
     
221,270,387
 
                 

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 and 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, 2018 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, 2018, and the related consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, included in the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2019.

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 March 31, 2019, the results of operations and cash flows for the three-month periods ended March 31, 2019 and 2018, 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 accruals for tax uncertainties and other contingencies, and the discount rate used to determine the present value of the lease payments. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.

(b) Accounting pronouncement adopted in 2019

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). The new guidance requires the recognition of lease assets and liabilities for operating leases with terms of more than 12 months, in addition to those currently recorded, on the Company’s consolidated balance sheets. Presentation of leases within the consolidated statements of comprehensive income and consolidated statements of cash flows will be generally consistent with the current lease accounting guidance. The Company has adopted this ASU on January 1, 2019 using a modified retrospective approach by recognizing a cumulative-effect adjustment to the opening balance of retained earnings. This adoption approach resulted in a balance sheet presentation that was not be comparable to the prior period in the first year of adoption. Additionally, the Company used the package of practical expedients that allowed the Company to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. The Company also elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases. The adoption of the standard resulted in recognition of right-of-use (“ROU”) assets and lease liabilities of approximately US$16.1 million and US$16.8 million, respectively, as of January 1, 2019. The difference between the initial operating right-of-use asset and operating lease liability of US$0.8 million was accrued rent previously recognized under ASC 840. There was no cumulative effect on retained earnings as of January 1, 2019 as a result of adoption.

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. The Company has adopted the standard on January 1, 2019, and there was no material impact on its consolidated financial statements as a result of the adoption.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The new guidance largely aligns the accounting for share-based awards issued to employees and nonemployees. Existing guidance for employee awards will apply to non-employee share-based transactions with limited exceptions. The new guidance also clarifies that any share based payment awards issued to customers should be evaluated under ASC 606, Revenue from Contracts with Customers. The Company has adopted the standard on January 1, 2019, and there was no material impact on its consolidated financial statements as a result of the adoption.
 
 
6


 
(c) Significant concentrations and risks

Sales concentration

The Company sells its products primarily through approved distributors in the People's Republic of China (the "PRC"). The Company's sales are highly concentrated. Sales to distributors individually exceeded 10% of the Company's revenues for the three-month periods ended March 31, 2019 and 2018, are as follows:

 
For the Three-Month Period Ended March 31,
 
 
2019
 
2018
 
 
US$
 
%
 
US$
 
%
 
Distributor A, located in PRC
   
56,499,732
     
18.7
%
   
47,731,909
     
15.4
%
Distributor B, located in PRC
   
33,931,975
     
11.3
%
   
29,867,832
     
9.6
%
Distributor C, located in PRC
   
32,491,923
     
10.8
%
   
35,567,286
     
11.5
%
Distributor D, located in PRC
   
21,968,499
     
7.3
%
   
32,353,013
     
10.4
%
Total
   
144,892,129
     
48.1
%
   
145,520,040
     
46.9
%

The Company expects revenues from these distributors 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 substantially all of its raw materials through a limited number of distributors.  Raw material purchases from these distributors, which individually exceeded 10% of the Company's total raw material purchases, accounted for approximately 37.8% (three distributors) and 30.3% (three distributors), of the Company's total raw material purchases for the three-month periods ended March 31, 2019 and 2018, 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.

Cash concentration

Cash and short-term restricted cash mentioned below maintained at banks consist of the following:

   
March 31,
2019
   
December 31,
2018
 
   
US$
   
US$
 
Renminbi (“RMB”) denominated bank deposits with:
           
Financial Institutions in the PRC
   
505,806,079
     
366,773,172
 
Financial Institutions in Hong Kong Special Administrative Region ("Hong Kong SAR")
   
8,134
     
8,134
 
Financial Institutions in Dubai, UAE
   
59
     
-
 
United States (“U.S.”) dollar denominated bank deposits with:
               
Financial Institution in the U.S.
   
6,131
     
40,390
 
Financial Institutions in the PRC
   
17,052
     
17,050
 
Financial Institution in Hong Kong SAR
   
39,299
     
131,892
 
Financial Institution in Macau Special Administrative Region ("Macau SAR")
   
6,095
     
6,144
 
Financial Institution in Dubai, UAE
   
581
     
14,464
 
Hong Kong dollar denominated bank deposits with:
               
Financial institution in Hong Kong SAR
   
156
     
156
 
Dirham denominated bank deposits with:
               
Financial institution in Dubai, UAE
   
329,725
     
438
 

 
7


 
The bank deposits with financial institutions in the PRC are insured by the government authority for up to RMB500,000. The bank deposits with financial institutions in the Hong Kong SAR are insured by the government authority for up to HK$500,000. The bank deposits with financial institutions in the Macau SAR are insured by the government authority for up to MOP$500,000. The bank deposits with financial institutions in the Dubai, UAE are not insured by the government authority. Total bank deposits amounted to $1,509,352 and $1,442,481 are insured as of March 31, 2019 and December 31, 2018, respectively. The Company has not experienced any losses in uninsured bank deposits and does not believe that it is exposed to any significant risks on cash held in bank accounts. To limit exposure to credit risk, the Company primarily places bank deposits with large financial institutions in the PRC, Hong Kong SAR, Macau SAR and Dubai, UAE with acceptable credit rating.

Cash deposits in bank that are restricted as to withdrawal or usage for up to 12 months are reported as restricted cash in the consolidated balance sheets.

Short-term bank deposits that are pledged as collateral for bills payable relating to purchases of raw materials are reported as restricted cash and amounted to US$300,296,989 and US$202,568,664 as of March 31, 2019 and December 31, 2018, respectively. Upon maturity and repayment of the bills payable, which is generally within 6 months, the cash becomes available for use by the Company.

Short-term bank deposits that are related to government grant are reported as restricted cash and amounted to US$1,499,691 and US$1,469,935 as of March 31, 2019 and December 31, 2018, respectively. 

Short-term bank deposits that are pledged as collateral for issuance of letter of guarantee are reported as restricted cash amounted to US$72,250,687 and US$70,885,301 as of March 31, 2019 and December 31, 2018, respectively.

Short-term bank deposits that are pledged as repayment to settle US$45.0 million of syndicated loans obtained from Standard Chartered Bank are reported as restricted cash and amounted to US$51,789,252 and US$50,766,123 as of March 31, 2019 and December 31, 2018, respectively.

Short-term bank deposits that are pledged as collateral to settle US$14.9 million of short-term bank loans obtained from Postal Savings Bank of China are reported as restricted cash and amounted to US$1,485,112 and nil as of March 31, 2019 and December 31, 2018, respectively.
 
Note 2 – Accounts receivable
 
Accounts receivable consists of the following:

   
March 31,
2019
   
December 31,
2018
 
   
US$
   
US$
 
         
Accounts receivable
   
154,090,385
     
294,726,804
 
Allowance for doubtful accounts
   
(39,258
)
   
(38,516
)
Accounts receivable, net
   
154,051,127
     
294,688,288
 

As of March 31, 2019 and December 31, 2018, the accounts receivable balances also include notes receivable in the amount of US$148,511 and US$27,392, respectively. As of March 31, 2019 and December 31, 2018, US$96,402,983 and US$94,581,170, respectively, of accounts receivable are pledged for the short-term bank loans. 

There was no accrual of additional provision or write-off of accounts receivable for the three-month periods ended March 31, 2019 and 2018.
 
8

 

The following table provides an analysis of the aging of accounts receivable as of March 31, 2019 and December 31, 2018:
 
   
March 31,
2019
   
December 31,
2018
 
   
US$
   
US$
 
Aging:
           
– current
   
95,781,698
     
218,458,862
 
– 1-3 months past due
   
15,305,123
     
31,386,341
 
– 4-6 months past due
   
89,204
     
109,412
 
– 7-12 months past due
   
10,746,881
     
42,532,170
 
– greater than one year past due
   
32,167,479
     
2,240,019
 
Total accounts receivable
   
154,090,385
     
294,726,804
 
 
Note 3 – Inventories

Inventories consist of the following:

   
March 31,
2019
   
December 31,
2018
 
 
US$
 
US$
 
         
Raw materials and work in progress
   
750,862,984
     
612,701,274
 
Finished goods
   
42,380,890
     
7,331,921
 
Total inventories
   
793,243,874
     
620,033,195
 

There were no write down of inventories for the three-month periods ended March 31, 2019 and 2018.

Note 4 – Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

   
March 31,
2019
   
December 31,
2018
 
   
US$
   
US$
 
             
Value added taxes receivables (i)
   
2,798,160
     
4,700,702
 
Advances to suppliers (ii)
   
46,604,400
     
104,469,023
 
Interest receivable (iii)
   
840,767
     
826,729
 
Consideration for sales of Shanghai Sales (iv)
   
7,425,559
     
7,285,231
 
Receivables from Shanghai Sales for the prepayment to a supplier (v)
   
16,081,972
     
-
 
Others (vi)
   
22,519,212
     
14,936,843
 
Total prepaid expenses and other current assets
   
96,270,070
     
132,218,528
 

(i) Value added taxes receivables mainly represent the input taxes on purchasing equipment by Heilongjiang Xinda Enterprise Group Company Limited (“HLJ Xinda Group”) and Sichuan Xinda, which are to be net off with output taxes. Value added taxes receivables were recognized in operating activities in consolidated statements of cash flows.
 
 
9


(ii) Advances to suppliers are the advances to purchase raw materials as of March 31, 2019.

(iii) Interest receivable mainly represents interest income accrued from restricted cash.

(iv) On December 18, 2018, HLJ Xinda Group entered into an agreement with Mr. Xiaohui Gao, General Manager of Heilongjiang Xinda Enterprise Group Shanghai New Materials Sales Company Limited (“Shanghai Sales”), to transfer the wholly owned equity from HLJ Xinda Group to Mr. Gao for a total consideration of RMB50.0 million (equivalent to US$7.4 million). Pursuant to the contract, the Company completed the legal transfer on December 19, 2018 and the full consideration of $7.4 million was received on April 11, 2019.

(v) In March 2019, HLJ Xinda Group entered into an agreement with Shanghai Sales, to transfer the proprietorship of the prepaid RMB108.3 million (equivalent to US$16.1 million) to Shanghai Caohejing Kangqiao Science & Green River Construction & Development Co., Ltd. ("Green River") to Shanghai Sales. Pursuant to the agreement, Shanghai Sales will pay the RMB108.3 million (equivalent to US$16.1 million) to HLJ Xinda Group by the end of June 2019. For details, please refer to Note 6.

(vi) Others mainly include prepaid miscellaneous service fee and staff advance.

Note 5 – Property, plant and equipment, net

Property, plant and equipment consist of the following:

   
March 31,
2019
   
December 31,
2018
 
   
US$
   
US$
 
             
Machinery, equipment and furniture
   
587,775,600
     
580,735,482
 
Motor vehicles
   
2,810,727
     
2,658,487
 
Workshops and buildings
   
160,475,642
     
157,976,839
 
Construction in progress
   
220,310,743
     
217,194,285
 
    Total property, plant and equipment
   
971,372,712
     
958,565,093
 
Less accumulated depreciation
   
(200,959,201
)
   
(182,623,813
)
    Property, plant and equipment, net
   
770,413,511
     
775,941,280
 

 
 
 
10

For the three-month periods ended March 31, 2019 and 2018, the Company capitalized US$387,324 and US$643,788 of interest costs as a component of the cost of construction in progress. Depreciation expense on property, plant and equipment was allocated to the following expense items:

 
Three-Month Period Ended March 31,
 
 
2019
 
2018
 
 
US$
 
US$
 
Cost of revenues
   
13,458,983
     
9,568,618
 
Selling expenses
   
1,823
     
1,430
 
General and administrative expenses
   
686,523
     
794,625
 
Research and development expenses
   
1,022,123
     
911,640
 
    Total depreciation expense
   
15,169,452
     
11,276,313
 

Note 6 - Prepayments to equipment and construction suppliers

   
March 31,
2019
   
December 31,
2018
 
   
US$
   
US$
 
             
Hailezi (i)
   
511,758,267
     
502,087,116
 
Green River (ii)
   
-
     
15,778,057
 
Beijin Construction (iii)
   
7,006,972
     
6,867,269
 
Sichuan Construction (iv)
   
5,312,422
     
5,539,471
 
Others  
   
220,253
     
364,406
 
    Total Prepayments to equipment and construction suppliers
   
524,297,914
     
530,636,319
 

(i) On September 26, 2016 and February 28, 2017, HLJ Xinda Group entered into equipment purchase contracts with Hailezi for a total consideration of RMB782.2 million (equivalent to US$116.2 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 prepaid RMB621.6 million (equivalent to US$92.3 million) during the first quarter of 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 contract amount to RMB283.7 million (equivalent to US$42.1 million). Hailezi refunded RMB369.1 million (equivalent to US$54.8 million) to HLJ Xinda Group on June 22, 2017. As of March 31, 2019, HLJ Xinda Group has prepaid RMB252.5 million (equivalent to US$37.5 million). 

On July 21, 2017, 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"). In order to fulfill the agreements, HLJ Xinda Group entered into an equipment purchase contract with Hailezi to purchase production equipment in November 2017, which will be used for 100,000 metric tons of engineering plastics located in Harbin, for a consideration of RMB939.7 million (equivalent to US$139.6million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB920.9 million (equivalent to US$136.8 million) as of March 31, 2019.
 

 
11


In connection with the HLJ project, on June 25, 2018, HLJ Xinda Group entered into another equipment purchase contract with Hailezi to purchase production equipment, which will be used for 300,000 metric tons of biological based composite material, located in Harbin, for a consideration of RMB749.8 million (equivalent to US$111.4 million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB300.7 million (equivalent to US$44.6 million) as of March 31, 2019.
 
In connection with the HLJ Project, on July 12, 2018, HLJ Xinda Group entered into an equipment purchase contract with Hailezi to purchase production equipment, which will be used for 300,000 metric tons of biological based composite material, located in Harbin, for a consideration of RMB1,157.0 million (equivalent to US$171.8 million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB240.8 million (equivalent to US$35.8 million) as of March 31, 2019.
 
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 (equivalent to US$371.3 million).

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 prepaid RMB1,728.9 million (equivalent to  US$256.8 million) in the first quarter of year 2017. In 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$253.2 million) by the end of March 2018, the remaining uncancelled amount is RMB24.0 (equivalent to US$3.6 million). As of December 31, 2017, Sichuan Xinda signed a supplementary agreement with Hailezi, pursuant to the agreement, Sichuan Xinda agreed to pay RMB12.4 million (equivalent to US$1.8 million) to Hailezi for the compensation of Hailezi due to the termination of the purchase contracts. As of March 31, 2019, Hailezi has refunded the above-mentioned prepayment.  The Company received the testing equipment in the amount of RMB3.2 million (equivalent to US$0.5 million) in November 2018, the remaining balance of the uncancelled prepayment as of March 31, 2019 is RMB20.8 million (equivalent to US$3.1 million).

In connection with  the Nanchong Project, on June 21, 2018, Sichuan Xinda entered into another equipment purchase contract with Hailezi to purchase production equipment and testing equipment for a consideration of RMB1,900 million (equivalent to US$282.3 million). Pursuant to the contracts with Hailezi, Sichuan Xinda has prepaid RMB1,710 million (equivalent to US$254.0 million) as of March 31, 2019.
 
 
12


The table below summarized the balance of prepayments to Hailezi for each of the projects as of March 31, 2019 and December 31, 2018, and the movements of the prepayments:
 
(in millions US$)
 
Year
 
Projects
 
Balance as of
December 31, 2018
   
Prepaid / (Utilized) in 2019
   
Effect of foreign currency exchange rate changes
   
Balance as of
March 31, 2019
 
2017
 
Storage system
   
36.8
     
-
     
0.7
     
37.5
 
2017
 
HLJ project
   
134.2
     
-
     
2.6
     
136.8
 
2018
 
HLJ project
   
43.8
     
-
     
0.8
     
44.6
 
2018
 
HLJ project
   
35.1
     
-
     
0.7
     
35.8
 
2017
 
Nanchong project
   
3.0
     
-
     
0.1
     
3.1
 
2018
 
Nanchong project
   
249.2
     
-
     
4.8
     
254.0
 
Total
   
502.1
     
-
     
9.7
     
511.8
 

(ii) In December 2017, HLJ Xinda Group entered into a building purchase contract with Shanghai Caohejing Kangqiao Science & Green River Construction & Development Co., Ltd. for a total consideration of RMB216.6 million (equivalent to US$32.2 million), with a total area of 13,972.64 square meters with a prepaid RMB108.3 million (equivalent to US$16.1 million).

In March 2019, HLJ Xinda Group entered into an agreement with Shanghai Sales, to transfer the proprietorship of the prepaid RMB108.3 million (equivalent to US$16.1 million) to Shanghai Sales. Pursuant to the agreement, Shanghai Sales will pay the RMB108.3 million (equivalent to US$16.1 million) to HLJ Xinda Group by the end of June 2019. In consequence, the prepayment has been reclassified as prepaid expenses and other current assets.

(iii) 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 RMB237.6 million (equivalent to US$35.4 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 September 10, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform ground decoration work for a consideration of RMB23.8 million (equivalent to US$3.5 million). Pursuant to the contracts with Beijin Construction, Sichuan Xinda has prepaid RMB120.9 million (equivalent to US$18.0 million) as of March 31, 2019, of which RMB74.0 million (equivalent to US$11.0 million) was transferred to construction in progress. The prepayment was recognized in investing activities in the statements of cash flows.

(iv) As of March 31, 2019, Sichuan Construction primarily consisted of prepayments made to Peaceful Treasure Limited ("Peaceful"). On October 20, 2016, Sichuan Xinda entered into an equipment purchase contract with Peaceful for a total consideration of RMB89.8 million (equivalent to US$13.3 million) to purchase certain production and testing equipment. The Company prepaid RMB33.9 million (equivalent to US$5.0 million) as of March 31, 2019.

Note 7 – Losses on 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 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. The Company recognized losses on the above foreign currency option contracts amounting to US$0.5 million in the three-month period ended March 31, 2018.
 
 
13

 
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

 
March 31,
 
December 31,
 
 
2019
 
2018
 
 
US$
 
US$
 
Unsecured loans
   
394,064,008
     
418,198,508
 
Loans secured by accounts receivable
   
66,830,029
     
65,567,082
 
Loans secured by restricted cash
   
84,351,118
     
69,500,000
 
Current portion of long-term bank loans (note b)
   
178,057,193
     
176,401,330
 
    Total short-term loans, including current portion of long-term bank loans
   
723,302,348
     
729,666,920
 


As of March 31, 2019 and December 31, 2018, the Company's short-term bank loans (including the current portion of long-term bank loans) bear a weighted average interest rate of 5.2% and 4.7% per annum, respectively. All short-term bank loans mature at various times within one year and contain no renewal terms.
 
During year 2018, the Company obtained thirty-four loans in a total amount of RMB1,350.0 million (equivalent to US$200.5 million) secured by accounts receivables of RMB1,948.9 million (equivalent to US$289.4 million) at an annual interest rate of 4.350%. The Company repaid twenty-one loans in total RMB900.0 million (equivalent to US$133.7 million), and retrieved accounts receivables of RMB1,299.8 million (equivalent to US$193.0 million) in year 2018.  As of March 31, 2019, the remaining loans secured by accounts receivables were RMB450.0 million (equivalent to US$66.8 million).

In July 2017, the Company obtained a one-year secured loan of US$14.0 million from Bank of China (Paris Branch) at an annual interest rate of 2.5%. The loan was secured by restricted cash of RMB107.0 million (equivalent to US$15.9 million) in Bank of China in Harbin, China. In accordance with the renewal agreement on July 19, 2018, the repayment term of the loan was extended and the loan was subsequently repaid in April 2019.
 
In October 2017, the Company obtained a one-year secured loan of US$5.0 million from Bank of China (Paris Branch) at an annual interest rate of 2.5%. The loan was secured by restricted cash of RMB37.5 million (equivalent to US$5.6 million) in Bank of China in Harbin, China. In accordance with the renewal agreement on July 19, 2018, the repayment term of the loan was extended and the loan was subsequently repaid in April 2019.
 
In October 2017, the Company obtained a one-year secured loan of US$5.5 million from Bank of China (Paris Branch) at an annual interest rate of 2.5%. The loan was secured by restricted cash of RMB42.0 million (equivalent to US$6.2 million) in Bank of China in Harbin, China. In accordance with the renewal agreement on July 19, 2018, the repayment term of the loan was extended and the loan was subsequently repaid in April 2019.
 
In May 2018, the Company obtained a three-month secured short-term loan of US$45.0 million from Standard Chartered Bank with the interest rate at 1.5% per annum over LIBOR payable on the last day of its interest period. The loan was secured by restricted cash of RMB300.0 million (equivalent to US$44.6 million) in Standard Chartered Bank in Harbin, China.  The Company did not repay the loan on time which is due on August 17, 2018 due to the stricter foreign exchange control in the PRC. Management is in the discussion with the Standard Chartered Bank to resolve this matter.
 
14

 

In January 2019, the Company obtained a nine-month secured short-term loan of RMB100.0 million (equivalent to US$14.9 million) from Postal Savings Bank of China at an annual interest rate of 4.35%. The loan was secured by restricted cash of RMB10.0 million (equivalent to US$1.5 million) in Postal Savings Bank of China.
 
(b) Non-current

   
March 31,
2019
   
December 31,
2018
 
   
US$
   
US$
 
Secured loans
   
76,433,573
     
2,177,985
 
Unsecured loans
   
199,807,529
     
196,031,589
 
Syndicate loan facility
   
90,000,000
     
90,000,000
 
Less: current portion
   
(178,057,193
)
   
(176,401,330
)
Total long-term bank loans, excluding current portion
   
188,183,909
     
111,808,244
 

 
In October and November 2015, the Company obtained three long term unsecured loans of RMB260.0 million (equivalent to US$38.6 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 RMB80.0 million (equivalent to US$11.9 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 RMB30.0 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$3.7 million) from Bank of China at an annual interest rate of 4.75%. The Company repaid RMB10.0 million (equivalent to US$1.5 million) on April 28, 2017, RMB40.0 million (equivalent to US$6.0 million) on October 28, 2017, RMB25.0 million (equivalent to US$3.7 million) on April 28, 2018 and RMB100.0 million (equivalent to US$14.9 million) on October 28, 2018. RMB25.0 million (equivalent to US$3.7 million), RMB100.0 million (equivalent to US$14.9 million), RMB20.0 million (equivalent to US$3.0 million), and RMB75.0 million (equivalent to US$11.0 million) will be repaid on April 28, 2019, October 28, 2019, April 28, 2020 and October 28, 2020, respectively.
 
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$180.0 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 for the related loan, which were all amortized as of March 31, 2019. 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 6.205% as of March 31, 2019. The Company repaid US$22.5 million, US$22.5 million and US$45.0 million on November 22, 2017, February 22, 2018 and May 22, 2018, respectively. US$90.0 million of the principal amount should be repaid on August 22, 2018. The loans were not repaid on time due to the stricter foreign exchange control in the PRC. As of March 31, 2019, the Company totally pledged RMB348.7 million (equivalent to US$51.8 million) restricted cash to secure the repayment of the above loan. In accordance with the renewal agreement in March 2019, the repayment term of the above loan was extended to April 15, 2019. However, the Company did not subsequently repay the loan on April 15, 2019 due to the stricter foreign exchange control in the PRC. Management is in the discussion with the Standard Chartered Bank to resolve this matter.
 
During 2017, the Company obtained four long-term unsecured loans of RMB430.0 million (equivalent to US$63.9 million) from Nanchong Shuntou Development Group Co., Ltd. at an annual interest rate of 4.35%. In accordance with the renewal agreements on April 02, 2019, the repayment terms of the four loans were extended and the loans will be due on September 30, 2019.


15



On December 1, 2017, the Company obtained a seven-year unsecured loan of RMB526.3 million (equivalent to US$78.2 million) from Longjiang Bank, Harbin Branch at an annual interest rate of 4.9%. The Company borrowed another long-term loan in amount of RMB169.1 million (equivalent to US$25.1 million) in January 2018 at an annual interest rate of 4.9%.  RMB15.0 million (equivalent to US$2.2 million), RMB20.0 million (equivalent to US$3.0 million), RMB35.0 million (equivalent to US$5.2 million), RMB35.0 million (equivalent to US$5.2 million), RMB70.0 million (equivalent to US$10.4 million), RMB70.0 million (equivalent to US$10.4 million) and RMB450.4 million (equivalent to US$66.9 million) will be repaid on June 30, 2019, December 30, 2019, June 30, 2020, December 30, 2020, June 30, 2021, December 30, 2021, and after 2021, respectively.
 
On December 26, 2018, the Company obtained a five-year secured loan of AED8.0 million (equivalent to US$2.2 million) from National Bank of Umm Al Qaiwain at an interest rate of three-month EBOR (2.79% as of March 31, 2019) plus 3.75%. The long-term loan was secured by an undated cheque of AED8.8 million (US$2.4 million) favouring the bank provided by Dubai Xinda. The cheque would not be cashed by the bank unless Dubai Xinda defaults. Principal will be repaid in ten half-yearly installments of AED0.8 million (equivalent to US$0.2 million) each.

On January 22, 2019, the Company obtained a two-year secured loan of RMB500.0 million (equivalent to US$74.2 million) from China Construction Bank. The long-term loan was secured by the right of equity income of Sichuan Xinda, which was previously held by HLJ Xinda Group. The registration of pledge was completed on January 7, 2019.
 
Maturities on long-term bank loans (including current portion) are as follows:

 
 
 
March 31, 2019
 
 
 
US$
 
2019
   
178,057,193
 
2020
   
24,939,940
 
2021
   
95,482,749
 
2022
   
27,167,609
 
After 2022
   
40,593,611
 
Total
   
366,241,102
 
 
 

 
16

 Note 9 – Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:

   
March 31,
2019
   
December 31,
2018
 
   
US$
   
US$
 
Payables for purchase of property, plant and equipment
   
12,922,814
     
53,059,897
 
Accrued freight expenses
   
31,252,409
     
25,908,990
 
Accrued interest expenses
   
12,628,239
     
8,873,532
 
Contract liabilities (i)
   
1,775,010
     
16,105,245
 
Non income tax payables
   
4,049,713
     
6,425,236
 
Others (ii)
   
19,795,699
     
16,553,998
 
Total accrued expenses and other current liabilities
   
82,423,884
     
126,926,898
 

(i) Contract liabilities mainly represent the advance received from customers in the PRC for the finished goods and raw materials purchases as of March 31, 2019. The change in contract liabilities primarily represents the cash received, less amounts recognized as revenues during the period.
(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 related party transactions are summarized as follows:
 
 
Three-Month Period Ended March 31,
 
 
2019
 
2018
 
 
US$
 
US$
 
Transactions with related parties:
       
Interest-free advances from a senior management employee of HLJ Xinda Group
   
289,298
     
-
 
 
The related party balances are summarized as follows:
 
 
   
 
March 31,
2019
 
December 31,
2018
 
 
US$
 
US$
 
Amounts due to related parties:
       
Mr. Jie Han (i)
   
10,098,760
     
9,907,915
 
Mr. Jie Han’s wife (i)
   
3,232,606
     
3,180,965
 
Mr. Jie Han’s son (i)
   
742,556
     
728,523
 
Senior management employees in HLJ Xinda Group and Sichuan Xinda (ii)
   
4,921,829
     
4,548,335
 
Total amounts due to related parties
   
18,995,751
     
18,365,738
 
 
               
 
(i) During the year ended December 31, 2018, the Company received RMB68.0 million (equivalent to US$10.1 million) from Mr. Jie Han, the Chairman of the Company, RMB21.8 million (equivalent to US$3.2 million) from Ms. Limei Sun, the wife of Mr. Jie Han, RMB5.0 million (equivalent to US$0.7 million) from Mr. Tiexin Han, the son of Mr. Jie Han. 
 
(ii) In August 2018, the Company received RMB10.0 million (equivalent to US$1.5 million) each from three senior management employees (Messers Junjie Ma, Yuchong Jia, Guangjun Jiao) of Sichuan Xinda as interest-free advances to Sichuan Xinda. During the year ended December 31, 2018, the Company also received RMB1.2 million (equivalent to US$0.2 million) from a senior management employee (Mr. Rujun Dai) of HLJ Xinda Group as interest-free advances to HLJ Xinda Group. During the three-month period ended March 31, 2019, the Company received another RMB1.9 million (equivalent to US$0.3 million) from Mr. Rujun Dai.
 
 
17


 
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 three-month periods ended March 31, 2019 and 2018 were 24.9% and 24.5%, respectively.  The effective income tax rate increased from 24.5% for the three-month period ended March 31, 2018 to 24.9% for the three-month period ended March 31, 2019, primarily due to the decrease of Sichuan Xinda's profit before tax ("PBT") ratio. The effective income tax rate for the three-month period ended March 31, 2019 differs from the PRC statutory income tax rate of 25% primarily due to Sichuan Xinda's preferential income tax rate and  75% additional deduction of R&D expenses of the major PRC operating entities.
 
As of March 31, 2019, the unrecognized tax benefits were US$34,626,289 and the interest relating to unrecognized tax benefits was US$13,710,137, of which the unrecognized tax benefits in year 2013 amounting to US$3,752,714 and related accrued interest amounting to US$3,164,360 were classified as current liabilities as the five-year tax assessment period will expire on May 31, 2019. 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$52.0 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 RMB332.2 million (equivalent to US$49.3 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 March 31, 2019.

The Company has also received RMB45.0 million (equivalent to US$6.7 million) from Harbin Bureau of Finance for Biomedical composites project as of March 31, 2019.
 
18

 

Since the funding is related to the construction of long-term assets, the amounts were recognized as government grant, which is included in deferred income on the consolidated balance sheets, and to be recognized as other income in the 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 RMB80.2 million (equivalent to US$11.9 million) government grants have been amortized as other income proportionate to the depreciation of the related assets, of which RMB8.7 million (equivalent to US$1.3 million) was amortized in the three-month period ended March 31, 2019.

The Company also received RMB36.0 million (equivalent to US$5.3 million) from Shunqing Government with respect to interest subsidy for bank loans. 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 accrued.

Note 13 – Other non-current liabilities
 
           
    March 31,     December 31,  
   
2019
   
2018
 
   
US$
   
US$
 
Income tax payable-noncurrent (i)
   
95,285,414
     
92,461,068
 
Deferred income tax liabilities
   
6,312,385
     
6,716,921
 
Others
   
2,395,783
     
2,395,783
 
Total other non-current liabilities
   
103,993,582
     
101,573,772
 

(i) Income tax payable-noncurrent represents the repatriation tax, the accumulative balance of unrecognized tax benefits since 2013 and related accrued interest. According to the Tax Cuts and Jobs Act enacted on December 22, 2017, the management recognized  the amount of U.S. tax corporate income tax is US$70,965,148 based on the deemed repatriation to the United States of accumulated earnings mandated by the U.S. tax reform, US$17,031,636 of which due payable in 2018 and 2019 was classified as current liabilities.

Note 14 – Stockholders' equity

The changes of each caption of stockholders' equity for the three-month period ended March 31, 2019 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 (Loss)
   
Stockholders'
Equity
 
         
US$
         
US$
                               
Balance as of January 1, 2019
   
1,000,000
     
100
     
50,948,841
     
5097
     
(92,694
)
   
86,633,582
     
717,103,890
     
(54,732,547
)
   
748,917,428
 
Net income
   
-
     
-
     
-
     
-
     
-
     
-
     
10,980,715
     
-
     
10,980,715
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
14,670,801
     
14,670,801
 
Balance as of March 31, 2019
   
1,000,000
     
100
     
50,948,841
     
5097
     
(92,694
)
   
86,633,582
     
728,084,605
     
(40,061,746
)
   
774,568,944
 

 
19


 
Note 15 - Earnings per share

Basic and diluted earnings per share are calculated as follows:

   
Three-Month Period Ended March 31,
 
   
2019
   
2018
 
   
US$
   
US$
 
             
Numerator:
           
Net income
   
10,980,715
     
19,099,901
 
                 
Less:
               
Earnings allocated to participating Series D convertible preferred stock
   
(2,624,264
)
   
(4,638,091
)
Earnings allocated to participating nonvested shares
   
-
     
(46,703
)
Net income for basic and dilutive earnings per share
   
8,356,451
     
14,415,107
 
                 
Denominator:
               
Denominator for basic and diluted earnings per share
   
50,948,841
     
49,727,731
 
                 
Earnings per share:
               
Basic and diluted
   
0.16
     
0.29
 
 
The following table summarizes potentially dilutive securities excluded from the calculation of diluted earnings per share for the three-month periods ended March 31, 2019 and 2018 because their effects are anti-dilutive:

 
Three-Month Period Ended March 31,
 
 
2019
 
2018
 
         
Shares issuable upon conversion of Series D convertible preferred stock
   
16,000,000
     
16,000,000
 

 
 
20

Note 16 - Commitments and contingencies
 
(1)   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 RMB1,800 million (equivalent to US$267.3 million) in property, plant and equipment and approximately RMB600 million (equivalent to US$89.1 million) in working capital, for the construction of Sichuan plant.  As of March 31, 2019, the Company has a remaining commitment of RMB54.8 million (equivalent to US$8.1 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 March 31, 2019, 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 contract with Peaceful for a total consideration of RMB89.8 million (equivalent to US$13.3 million) to purchase certain production and testing equipment. As of March 31, 2019, the Company has a commitment of RMB55.9 million (equivalent to US$8.3 million).

On November 15, 2016, Sichuan Xinda entered into decoration contract with Beijin Construction  to perform indoor and outdoor decoration work for a consideration of RMB237.6 million (equivalent to US$35.4 million).  On February 20, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform outdoor decoration work for a consideration of RMB2.9 million (equivalent to US$0.4 million). On June 10, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform ground decoration work for a consideration of RMB23.8 million (equivalent to US$3.5 million). As of March 31, 2019, Sichuan Xinda prepaid RMB120.9 million (equivalent to US$18.0 million) of which RMB74.0 million (equivalent to US$11.0 million) was transferred to construction in progress and has a remaining commitment of RMB143.4 million (equivalent to US$21.3 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$333.1 million) to purchase production equipment and testing equipment in March 2017.  By the end of June 2017, Sichuan Xinda expected to launch an integrated ERP system, which resulted in the equipment to be purchased under the original contracts with Hailezi not meeting the production requirements. Thus the original contracts have been terminated with the amount of RMB2,222.9 million (equivalent to US$330.1 million), and Hailezi agreed to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$253.2 million) by the end of March 2018, out of the total prepayment made by Sichuan Xinda of RMB1,722.9 million (equivalent to US$255.9 million). As of June 30, 2018, Hailezi has refunded the prepayment in the amount of RMB1,704.9 million (equivalent to US$253.2 million). As of March 31, 2019, 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).

In connection with the Nanchong Project, on June 21, 2018, Sichuan Xinda entered into another equipment purchase contracts with Hailezi to purchase production equipment and testing equipment for a consideration of RMB1,900 million (equivalent to US$282.3 million). Pursuant to the contracts with Hailezi, Sichuan Xinda have prepaid RMB1,710 million (equivalent to US$254.0 million) at the end of March 2019, and has a remaining commitment of RMB190 million (equivalent to US$28.3 million).
  
 
 
21

 
(2)  Heilongjiang plant construction and equipment purchase

In connection with the equipment purchase contracts with Hailezi signed on September 26, 2016 and February 28, 2017 mentioned in Note 6 (i), HLJ Xinda Group has a remaining commitment of RMB31.2 million (equivalent to US$4.6 million) as of March 31, 2019.

In connection with the "HLJ Project" mentioned in Note 6 (i), pursuant to the three investment agreements, the project total capital expenditure will be RMB4,015.0 million (equivalent to be US$596.3million), among which the investment in fixed assets shall be no less than RMB3,295.0 million (equivalent to US$489.3 million) in total. Pursuant to the contracts with Hailezi signed in November 2017 mentioned in Note 6 (i), HLJ Xinda Group has a remaining commitment of RMB18.8 million (equivalent to US$2.8 million) as of March 31, 2019.

In connection with the HLJ project, on June 25, 2018, HLJ Xinda Group entered into another equipment purchase contract with Hailezi to purchase production equipment, which will be used for 300,000 metric tons of biological based composite material, located in Harbin, for a consideration of RMB749.8 million (equivalent to US$111.4 million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB300.7 million (equivalent to US$44.6 million) as of March 31, 2019, and has a remaining commitment of RMB449.1 million (equivalent to US$66.8 million).

In connection with the HLJ Project, on July 12, 2018, Heilongjiang Xinda Enterprise Group Company Limited (“HLJ Xinda Group”) entered into an equipment purchase contract with Hailezi to purchase production equipment, which will be used for 300,000 metric tons of biological based composite material, located in Harbin, for a consideration of RMB1,157.0 million (equivalent to US$171.8 million). Pursuant to the contract with Hailezi, HLJ Xinda has prepaid RMB240.8 million (equivalent to US$35.8 million) as of March 31, 2019, and has a remaining commitment of RMB916.2 million (equivalent to US$136.0 million).

(3)  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 March 31, 2019, the Company has a remaining commitment of AED1.6 million (equivalent to US$0.4 million).

(4)  Xinda CI (Beijing) 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 March 31, 2019, the decoration work in the amount of RMB2.0 million (equivalent to US$0.3 million) was recorded in construction in progress. As of March 31, 2019, the Company has a remaining commitment of RMB3.8 million (equivalent to US$0.6 million).

On June 9, 2017, Xinda CI (Beijing) 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 March 31, 2019, the decoration work in the amount of RMB0.6 million (equivalent to US$0.1 million) was recorded in construction in progress. As of March 31, 2019, the Company has a remaining commitment of RMB0.6 million (equivalent to US$0.1 million).
 
 
22

 
Note 17 - Revenues

Revenues consist of the following:
 
 
Three-Month Period Ended March 31,
 
 
 
2019
   
2018
 
 
 
US$
   
US$
 
 
           
Modified Polyamide 66 (PA66)
   
83,878,245
     
81,785,392
 
Modified Polyamide 6 (PA6)
   
66,168,094
     
64,041,001
 
Plastic Alloy
   
63,136,625
     
78,566,416
 
Modified Polypropylene (PP)
   
37,057,054
     
50,215,551
 
Modified Acrylonitrile butadiene styrene (ABS)
   
13,447,629
     
8,596,982
 
Polyoxymethylenes (POM)
   
2,596,461
     
2,123,385
 
Polyphenylene Oxide (PPO)
   
16,859,150
     
4,169,561
 
Polylactide (PLA)
   
16,511,356
     
20,881,846
 
Polyethylene (PE)
   
1,772,744
     
-
 
Raw materials
   
38,649
     
72,899
 
    Total Revenue
   
301,466,007
     
310,453,033
 

The following table provides sales by major customer group for the three-month periods ended March 31, 2019 and 2018:
 
           
   
Three-Month Period Ended March 31,
 
   
2019
   
2018
 
   
US$
   
US$
 
Distributors
   
282,883,471
     
303,538,842
 
Direct customers
   
18,543,887
     
6,841,292
 
Others
   
38,649
     
72,899
 
Total
   
301,466,007
     
310,453,033
 

Note 18 - Gains on disposal of a subsidiary

On November 13, 2018, HLJ Xinda Group entered into an agreement with Shanghai Sales, to transfer the wholly owned equity of Heilongjiang Xinda Enterprise Group (Shanghai) New Materials Research and Development Co., Ltd. ("Shanghai New Materials R&D") from HLJ Xinda Group to Shanghai Sales with no consideration as a result of group restructuring to streamline resources and improve operating efficiency.

The legal transfer was completed on February 1, 2019 and the Company recorded gains of US$0.5 million on disposal of Shanghai New Materials R&D for the three-month period ended March 31, 2019.
 
 
23


 
Note 19 - Leases

As discussed in Note 1, effective January 1, 2019, the Company adopted Topic 842. At the inception of a contract, the Company determines if the arrangement is, or contains, a lease. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Rent expense is recognized on a straight-line basis over the lease term.
The Company has made certain accounting policy elections whereby it does not recognize ROU assets or lease liabilities for short-term leases (those with original terms of 12-months or less). All of the Company’s existing leases as of March 31, 2019 were classified as operating leases. As of March 31, 2019, the Company had operating leases for land and office with remaining terms expiring from 2022 through 2037 and a weighted average remaining lease term of 18.01 years. Weighted average discount rate used in the calculation of the lease liabilities was 6.7%. The discount rate reflects the estimated incremental borrowing rate, which includes an assessment of the credit rating to determine the rate that the Company would have to pay to borrow, on a collateralized basis for a similar term, an amount equal to the lease payments in a similar economic environment.

Lease cost for the three-month period ended March 31, 2019 is as follows:

   
Three-Month Period Ended March 31,
 
   
2019
 
   
US$
 
Operating lease cost
   
423,571
 
Short-term lease cost
   
179,195
 
Total lease cost
   
602,766
 

As of March 31, 2019, the maturities of the operating lease liabilities are as follows:

   
Remaining Lease Payments
US$
 
2019
   
1,036,925
 
2020
   
1,385,329
 
2021
   
1,407,790
 
2022
   
1,408,148
 
2023
   
1,423,965
 
Thereafter
   
22,010,068
 
Total remaining lease payments
   
28,672,225
 
Less:  imputed interest
   
(11,700,822
)
Total operating lease liabilities
   
16,971,403
 
Less: current portion
   
(2,304,598
)
Non-current operating lease  liabilities
   
14,666,805
 
Weighted-average remaining lease term
 
18 years
 
Weighted-average discount rate
   
6.7
%
 
Supplemental cash flow information related to leases is as follows:
   
Three-Month Period Ended March 31,
 
Supplemental disclosure of cash flow information:
 
2019
 
Cash paid for amounts included in the measurement of lease liabilities:
 
US$
 
Operating cash flows from operating leases
   
128,517
 
Right-of-use assets obtained in exchange for new lease liabilities:
       
Operating lease
   
16,075,213
 
 
 
 
24


 
As previously disclosed in the consolidated financial statement for the year ended December 31, 2018 and under the previous lease standard (Topic 840), future minimum annual lease payments for the years subsequent to December 31, 2018 and in aggregate are as follows:

 
 
US$
 
Years ended December 31,
     
2019
   
2,174,439
 
2020
   
1,486,007
 
2021
   
1,486,007
 
2022
   
1,446,251
 
2023
   
1,482,593
 
Thereafter
   
21,176,139
 

Rental expenses incurred for operating leases of plant and equipment and office spaces were US$2,455,509 in 2018.
 

25


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 489 certifications from manufacturers in the automobile industry as of March 31, 2019. 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 67 professionals and 7 consultants. As a result of the integration of our academic and technological expertise, we have a portfolio of 476 patents, 32 of which we have obtained the patent rights and the remaining 444 of which we have applications pending in China as of March 31, 2019.

Our products include twelve 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), Poly Ether Ether Ketone (PEEK), and Polyethylene (PE).
 
 
26


 
The Company's products are primarily used in the production of exterior and interior trim and functional components of 31 automobile brands and 103 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 March 31, 2019, in Harbin, Heilongjiang Province, we had approximately 290,000 metric tons of production capacity across 64 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, which we expect will bring total domestic installed production capacity to 590,000 metric tons with the addition of 70 new production lines upon the completion of the construction of our fourth production plant. Sichuan Xinda has been supplying to its customers since 2013. We installed 50 production lines in the second half of 2016 in our Sichuan plant with production capacity of 216,000 metric tons during the year of 2017 and an additional 10 production lines in July 2018, bringing the total capacity to 259,200 metric tons. As of March 31, 2019, 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 third quarter of 2019. In order 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 completed installing 45 production lines with 11,250 metric tons of annual production capacity by the end of November 2018, and  an additional 40 production lines with 13,000 metric tons of annual production capacity were still in construction ongoing, expected to be completed by the end of 2019, bringing total installed production capacity in Dubai Xinda to 24,250 metric tons, targeting high-end products for the overseas market.
  
In July 2017, the HLJ Xinda Group launched new industrial development project with the Management Committee of Harbin Economic-Technological Development Zone. It includes an industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics, which we expect will be completed by the end of the second quarter of 2019. Also included is an industrial project for 300,000 metric tons of biological composite materials, an industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory, all of which we expect to be completed by the end of July 2019.

Highlights for the three months ended March 31, 2019 include:

●    Revenues were $301.5 million, a decrease of 2.9% from $310.5 million in the first quarter of 2018
●    Gross profit was $50.3 million compared to $53.9 million in the first quarter of 2018
●    Gross profit margin decreased to 16.7% from 17.4% in the first quarter of 2018
●    Net income was $11.0 million compared to $19.1 million in the first quarter of 2018
●    Total volume shipped was 94,444 metric tons, down 11.1% from 106,236 metric tons in the first quarter of 2018
 
 
27


 
Results of Operations

The following table sets forth, for the periods indicated, statements of income data in thousands of USD:

   
Three-Month Period Ended March 31,
 
(in thousands, except percentages)
 
2019
   
2018
 
   
Amount
   
%
   
Amount
   
%
 
Revenues
 
$
301,466
     
100
%
 
$
310,453
     
100
%
Cost of revenues
 
$
251,136
     
83
%
 
$
256,586
     
83
%
Gross profit
 
$
50,330
     
17
%
 
$
53,867
     
17
%
Total operating expenses
 
$
19,115
     
6
%
 
$
14,976
     
5
%
Operating income
 
$
31,214
     
11
%
 
$
38,891
     
12
%
Income before income taxes
 
$
14,622
     
5
%
 
$
25,311
     
8
%
Income tax expenses
 
$
3,642
     
1
%
 
$
6,211
     
2
%
Net income
 
$
10,981
     
4
%
 
$
19,100
     
6
%

Three months ended March 31, 2019 compared to three months ended March 31, 2018

Revenues

Revenues were US$301.5 million in the first quarter ended March 31, 2019, a decrease of US$9.0 million, or 2.9%, compared to US$310.5 million in the same period of last year. This was due to approximately 11.1% decrease in sales volume, and 6.5% negative impact from exchange rate due to depreciation of RMB against US dollars, and partially offset by 15.7% increase in the average selling price, as compared with those of the same period of last year.

(i) Domestic market

For the three months ended March 31, 2019, revenue from domestic market decreased by US$14.7 million as a combined result of: a decrease of 11.8% in sales volume; and a depreciation of RMB against USD by 6.5%; partially offset by an increase of 14.3% in the average RMB selling price of our products, as compared with those of last year.
 
According to the China Association of Automobile Manufacturers, automobile production and sales in China decreased by 9.8% and 11.3%, respectively, for the first quarter of 2019 as compared to the same period of 2018. As weakening in macroeconomic conditions since summer of 2018 continued to exacerbate auto business environment, our domestic sales during the first quarter of 2019 decreased by 4.9% as compared to the same period of the prior year, including 26.9% decrease in Southwest China and 22.0% decrease in East China. 

Thanks to our positive efforts to expand our customer bases and to meet their new requirements, the Company has increased significant growth of 13.6% in North China, and 12.0% in South China,

As for the RMB selling price, the increase of 14.3% was mainly due to more sales of higher-end products such as modified POM and PPO, and sales of new categories of higher-end products of PA66 and PA6 produced with high-priced raw materials for higher selling price in China.

 

 
28

 
(ii) Overseas market

For the three months ended March 31, 2019, revenues from overseas market was US$5.8 million as compared to US$54,854 of that in 2018.
 
After a successful trial production at our production base in Dubai in November 2018, the Company has tried to develop new overseas customers besides the existing customer in the Republic of Korea, and has established business relationships with new customers in UAE and India, and shipped products to the end users in Europe. We are optimistic about the prospect of our business expansion overseas.

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 March 31,
             
   
2019
   
2018
   
Change in
   
Change in
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
Modified Polyamide 66 (PA66)
   
83.9
     
27.8
%
   
81.8
     
26.3
%
   
2.1
     
2.6
%
                                                 
Plastic Alloy
   
63.1
     
20.9
%
   
78.6
     
25.3
%
   
(15.5
)
   
(19.7
)%
                                                 
Modified Polyamide 6 (PA6)
   
66.2
     
22.0
%
   
64.0
     
20.6
%
   
2.2
     
3.4
%
                                                 
Modified Polypropylene (PP)
   
37.1
     
12.3
%
   
50.2
     
16.2
%
   
(13.1
)
   
(26.1
)%
                                                 
Modified Acrylonitrile butadiene styrene (ABS)
   
13.4
     
4.4
%
   
8.6
     
2.8
%
   
4.8
     
55.8
%
                                                 
Polyoxymethylenes (POM)
   
2.6
     
0.9
%
   
2.1
     
0.7
%
   
0.5
     
23.8
%
                                                 
Polyphenylene Oxide (PPO)
   
16.9
     
5.6
%
   
4.3
     
1.4
%
   
12.6
     
293.0
%
                                                 
Modified Polylactic acid (PLA)
   
16.5
     
5.5
%
   
20.9
     
6.7
%
   
(4.4
)
   
(21.1
)%
                                                 
Polyethylene (PE)
   
1.8
     
0.6
%
   
0.0
     
0.0
%
   
1.8
     
N/A
 
                                                 
Raw Materials
   
0.0
     
0.0
%
   
0.0
     
0.0
%
   
0.0
     
0.0
%
Total Revenues
   
301.5
     
100
%
   
310.5
     
100
%
   
(9.0
)
   
(2.9
)%



29


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 March 31,
             
   
2019
   
2018
   
Change in
   
Change in
 
   
MT
   
%
   
MT
   
%
   
MT
   
%
 
Modified Polyamide 66 (PA66)
   
16,985
     
18.0
%
   
19,591
     
18.4
%
   
(2,606
)
   
(13.3
)%
                                                 
Plastic Alloy
   
21,658
     
22.9
%
   
26,787
     
25.2
%
   
(5,129
)
   
(19.1
)%
                                                 
Modified Polyamide 6 (PA6)
   
17,344
     
18.4
%
   
20,896
     
19.7
%
   
(3,552
)
   
(17.0
)%
                                                 
Modified Polypropylene (PP)
   
24,908
     
26.4
%
   
31,613
     
29.8
%
   
(6,705
)
   
(21.2
)%
                                                 
Modified Acrylonitrile butadiene styrene (ABS)
   
6,633
     
7.0
%
   
3,923
     
3.7
%
   
2,710
     
69.1
%
                                                 
Polyoxymethylenes (POM)
   
785
     
0.8
%
   
610
     
0.6
%
   
175
     
28.7
%
                                                 
Polyphenylene Oxide (PPO)
   
3,217
     
3.4
%
   
690
     
0.6
%
   
2,527
     
366.2
%
                                                 
Modified Polylactic acid (PLA)
   
1,594
     
1.7
%
   
2,126
     
2.0
%
   
(532
)
   
(25.0
)%
                                                 
Polyethylene (PE)
   
1,320
     
1.4
%
   
-
     
0.0
%
   
1,320
     
N/A
 
                                                 
Total Sales Volume
   
94,444
     
100
%
   
106,236
     
100
%
   
(11,792
)
   
(11.1
)%

The Company continued to shift production mix from traditional lower-end products such as PP to higher-end products such as POM and PPO, primarily due to (i) greater growth potential of advanced modified plastics in luxury automobile models in China, (ii) the stronger demand as a result of promotion by the Chinese government for clean energy vehicles and (iii) better quality demand from and consumer recognition of higher-end cars made by automotive manufacturers from Chinese and Germany joint ventures, Sino-U.S. and Sino-Japanese joint ventures, which manufacturers tend to use more and higher-end modified plastics in quantity per vehicle in China.
 
Gross Profit and Gross Profit Margin

   
Three-Month Period Ended March 31,
 
Change
 
(in millions, except percentage)
 
2019
 
2018
 
Amount
   
%
 
Gross Profit
   
$
50.3
   
$
53.9
   
$
(3.6
)
   
(6.7
)%
Gross Profit Margin
     
16.7
%
   
17.4
%
           
(0.7
)%

Gross profit was US$50.3 million in the quarter ended March 31, 2019, compared to US$53.9 million in the same period of 2018, representing a decrease of 6.7% or US$3.6 million. Our gross margin decreased to 16.7% during the quarter ended March 31, 2019 from 17.4% during the same quarter of 2018 primarily due to the adopted lower-priced strategy as a new entrant to new higher-end products of PA6 and PA66 in domestic market for the first quarter ended March 31, 2019 as compared to that of the prior year.

General and Administrative Expenses

   
Three-Month Period Ended March 31,
 
Change
 
(in millions, except percentage)
 
2019
 
2018
 
Amount
   
%
 
General and Administrative Expenses
   
$
8.8
   
$
8.9
   
$
(0.1
)
   
(1.1
)%
as a percentage of revenues
     
2.9
%
   
2.9
%
           
0.0
%

General and administrative (G&A) expenses were US$8.8 million in the quarter ended March 31, 2019 compared to US$8.9 million in the same period in 2018, representing a decrease of 1.1%, or US$0.1 million. The decrease was primarily due to our approach on optimizing management structure and enhancing efficiency, leading to the decrease of (i) US$0.9 million in salary and welfare, and partially offset by the increase of (ii) US$0.8 million in professional fees.
 
 
30


 
Research and Development Expenses

   
Three-Month Period Ended March 31,
 
Change
 
(in millions, except percentage)
 
2019
   
2018
 
Amount
   
%
 
Research and Development Expenses
   
$
10.1
   
$
5.0
   
$
5.1
     
102.0
%
as a percentage of revenues
     
3.3
%
   
1.6
%
           
1.7
%

R&D expenses were US$10.1 million during the quarter ended March 31, 2019 compared with US$5.0 million during the same period in 2018, an increase of US$5.1 million, or 102.0%. This significant increase was primarily due to (i) elevated R&D activities to meet the new higher specification requirements from potential customers, especially overseas; 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 March 31, 2019, the number of ongoing research and development projects was 355. We expect to complete and commence to realize economic benefits from approximately 25% of the projects in the near term. The remaining projects are expected to be carried out for a longer period. The majority of the projects are in the field of modified plastics in automotive applications and the rest are in advanced fields such as ships, airplanes, high-speed rail, medical devices, etc.

Operating Income

Total operating income was US$31.2 million in the first quarter ended March 31, 2019 compared to $38.9 million in the same period of 2018, representing a decrease of 19.8% or US$7.7 million. This decrease is primarily due to the lower gross margin, higher R&D expenses, partially offset by the lower general & administration expenses and selling expenses.

Interest Income (Expenses)

   
Three-Month Period Ended March 31,
   
Change
 
(in millions, except percentage)
 
2019
   
2018
   
Amount
   
%
 
Interest Income
 
$
0.4
   
$
2.3
   
$
(1.9
)
   
(82.6
)%
Interest Expenses
   
(17.5
)
   
(12.9
)
   
(4.6
)
   
35.7
%
Net Interest Expenses
   
(17.1
)
   
(10.6
)
   
(6.5
)
   
61.3
%
as a percentage of revenues
   
(5.7
)%
   
(3.3
)%
           
(2.4
)%

Net interest expenses were US$17.1 million for the three-month period ended March 31, 2019, compared to $10.6 million in the same period of 2018, representing an increase of 61.3% or US$6.5 million, primarily due to (i) the increase of average short-term and long-term loan balance in amount of US$990.1 million for the three months ended March 31, 2019 compared to US$854.2 million for the same period in 2018; (ii) the increase of interest expense resulting from the average loan interest rate increased to 4.91% for the three months ended March 31, 2019 compared to 4.72% of the same period in 2018; (iii) the decrease of average deposit balance in amount of US$242.4 million for the first quarter ended March 31, 2019 compared to US$626.8 million for the same period in prior year; and (iv) the decrease of interest income resulting from the average deposit interest rate decreased to 0.72% for the first quarter ended March 31, 2019 compared to 1.52% of the same period in 2018.
 

 
31

Income Taxes

 
Three-Month Period Ended March 31,
 
Change
 
(in millions, except percentage)
2019
 
2018
 
Amount
   
%
 
Income before Income Taxes
 
$
14.6
   
$
25.3
   
$
(10.7
)
   
(42.3
)%
Income Tax Expense
   
(3.6
)
   
(6.2
)
   
2.6
     
(41.9
)%
Effective income tax rate
   
24.9
%
   
24.5
%
           
0.4
%
 
The effective income tax rates for the three-month periods ended March 31, 2019 and 2018 were 24.9% and 24.5%, respectively.  The effective income tax rate increased from 24.5% for the three-month period ended March 31, 2018 to 24.9% for the three-month period ended March 31, 2019, primarily due to the decrease of Sichuan Xinda's profit before tax ("PBT") ratio. The effective income tax rate for the three-month period ended March 31, 2019 differs from the PRC statutory income tax rate of 25% primarily due to Sichuan Xinda's preferential income tax rate and  75% additional deduction of R&D expenses of the major PRC operating entities.

Our PRC and Dubai subsidiaries have US$506.2 million of cash and restricted cash as of March 31, 2019, which are planned to be indefinitely reinvested in the PRC and Dubai. 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$11.0 million in the first quarter of 2019 compared to a net income of US$19.1 million in the same quarter of 2018.
 
 

 
32

Selected Balance Sheet Data as of March 31, 2019 and December 31, 2018:
 
 
     
 
 
March 31, 2019
   
December 31, 2018
   
Change
 
(in millions, except percentage)
             
Amount
   
%
 
Cash
   
78.9
     
41.3
     
37.6
     
91.0
%
Restricted cash
   
427.3
     
325.7
     
101.6
     
31.2
%
Accounts receivable, net of allowance for doubtful accounts
   
154.1
     
294.7
     
(140.6
)
   
(47.7
)%
Inventories
   
793.2
     
620.0
     
173.2
     
27.9
%
Prepaid expenses and other current assets
   
96.3
     
132.2
     
(35.9
)
   
(27.2
)%
Property, plant and equipment, net
   
770.4
     
775.9
     
(5.5
)
   
(0.7
)%
Land use rights, net
   
30.2
     
29.8
     
0.4
     
1.3
%
Long-term prepayments to equipment and construction suppliers
   
524.3
     
530.6
     
(6.3
)
   
(1.2
)%
Operating right of use assets, net
   
15.9
     
-
     
15.9
     
N/A
 
Other non-current assets
   
3.2
     
3.2
     
-
     
0.0
%
     Total assets
   
2,893.8
     
2,753.5
     
140.3
     
5.1
%
Short-term  bank loans, including current portion of long-term bank loans
   
723.3
     
729.7
     
(6.4
)
   
(0.9
)%
Bills payable
   
730.3
     
618.2
     
112.1
     
18.1
%
Accounts payable
   
40.9
     
85.0
     
(44.1
)
   
(51.9
)%
Amounts due to related parties
   
19.0
     
18.4
     
0.6
     
3.3
%
Income taxes payable, including noncurrent portion
   
101.1
     
99.2
     
1.9
     
1.9
%
Accrued expenses and other current liabilities
   
82.4
     
126.9
     
(44.5
)
   
(35.1
)%
Long-term bank loans, excluding current portion
   
188.2
     
111.8
     
76.4
     
68.3
%
Deferred income
   
100.3
     
99.6
     
0.7
     
0.7
%
Operating lease liabilities, non-current
   
14.7
     
-
     
14.7
     
N/A
 
Redeemable Series D convertible preferred stock
   
97.6
     
97.6
     
-
     
-
 
Stockholders' equity
   
774.6
     
748.9
     
25.7
     
3.4
%


Our financial condition continued to improve as measured by an increase of 3.4% in stockholders' equity as of March 31, 2019 as compared to that of December 31, 2018. Cash and restricted cash increased by 37.9% or US$139.2 million due to the increase of net cash provided by financing activities and operating activities. Inventories increased by 27.9% as a result of more purchases of the raw materials and the Company's strategy to stock up the finished goods for the upcoming orders. Prepaid expenses and other current assets decreased by 27.2% or US$35.9 million because (i) advances to suppliers for purchasing raw materials decreased by US$57.9 million; and partially offset by (ii) HLJ Xinda Group has reclassified US$16.1 million of long-term prepayments to Green River to receivables due from Shanghai sales; (iii) others mainly including prepaid miscellaneous service fee and staff advance. and interest receivable increased by US$5.9 million. The aggregate short-term and long-term bank loans increased by 8.3% due to using the line of credits to support operating and investing activities in HLJ Xinda Group and Sichuan Xinda. We define the manageable debt level as the sum of aggregate short-term and long-term loans over total assets.
 

 
33

LIQUIDITY AND CAPITAL RESOURCES
Our financial condition continued to improve as measured by an increase of 3.4% in stockholders' equity as of March 31, 2019 as compared to that of December 31, 2018. Cash and restricted cash increased by 37.9% or US$139.2 million due to the increase of net cash provided by financing activities and operating activities. Inventories increased by 27.9% as a result of increased purchases of the raw materials and the Company's strategy to stock up on finished goods for the upcoming orders. Prepaid expenses and other current assets decreased by 27.2% or US$35.9 million due to (i) advances to suppliers for purchasing raw materials decreased by US$57.9 million; and partially offset by (ii) HLJ Xinda Group reclassified US$16.1 million of long-term prepayments to Green River to receivables due from Shanghai sales; (iii) others increased by US$5.9 million. The aggregate short-term and long-term bank loans increased by 8.3% due to using the line of credits to support operating and investing activities in HLJ Xinda Group and Sichuan Xinda. We define the manageable debt level as the sum of aggregate short-term and long-term loans over total assets.
 
A summary of lines of credit for the three-month period ended March 31, 2019 and the remaining line of credit as of March 31, 2019 is as below: 

 (in millions)
 
March 31, 2019
 
   
Lines of Credit, Obtained
   
Remaining
Available
 
Name of Financial Institution
 
Date of Approval
 
RMB
   
USD
   
USD
 
Bank of Communication
 
August 6, 2018
   
120.0
     
17.8
     
-
 
China Everbright Bank
 
July 17, 2018
   
100.0
     
14.9
     
10.4
 
Bank of China
 
July 28, 2017
   
390.0
     
57.9
     
-
 
Bank of Longjiang, Heilongjiang
 
September 12, 2017
   
924.8
     
137.3
     
-
 
Industrial & Commercial Bank of China (ICBC)
 
September 5, 2018
   
1,300.0
     
193.1
     
90.0
 
Agricultural Bank of China
 
September 3, 2018
   
200.0
     
29.7
     
-
 
Export-Import Bank of China
 
August 22, 2018
   
200.0
     
29.7
     
-
 
Postal Savings Bank of China
 
April 19, 2018
   
400.0
     
59.4
     
44.6
 
Sichuan Tianfu Bank
 
February 12, 2018
   
50.0
     
7.4
     
-
 
Nanchong Shuntou Development Group Ltc.
 
January 30,2018
   
430.0
     
63.9
     
-
 
Standard Chartered Bank
 
August 22, 2016
   
913.1
     
135.6
     
0.6
 
Daqing State owned assets management company
 
December 1, 2017
   
24.7
     
3.7
     
-
 
Nanchong Rural Commercial Bank
 
January 30, 2018
   
250.0
     
37.1
     
-
 
Bank of Inner Mongolia
 
August 16, 2018
   
40.0
     
5.9
     
-
 
Harbin Rural Commercial Bank
 
July 31, 2018
   
350.0
     
52.0
     
-
 
Jianxin Financial Asset Investment Co,. Ltd.
 
March 29, 2019
   
110.0
     
16.3
     
-
 
Subtotal (credit term<=1 year)
       
5,802.6
     
861.7
     
145.6
 
Bank of China
 
July 28, 2016
   
275.0
     
40.8
     
26.7
 
Bank of Longjiang, Heilongjiang
 
November 28, 2017
   
665.0
     
98.8
     
0.7
 
National Bank of Umm Al Qaiwain
 
September 26, 2018
   
14.7
     
2.2
     
-
 
China Construction Bank
 
March 31, 2019
   
500.0
     
74.2
     
-
 
Subtotal (credit term>1 year)
       
1,454.7
     
216.0
     
27.4
 
Total
       
7,257.3
     
1,077.7
     
173.0
 

As of March 31, 2019, we have contractual obligations to pay (i) lease commitments in the amount of US$28.7 million, including US$1.4 million due in one year; (ii) equipment acquisition and facility construction in the amount of US$279.0 million; and (iii) long-term bank loan in the amount of US$386.2 million (including principals and interests).

We expect that we will be able to meet our needs to fund operations, capital expenditures and other commitments in the next 12 months primarily with our cash and cash equivalents, operating cash flows and bank borrowings. 

We may, however, require additional cash resources due to changes in business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could result in additional dilution to stockholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financial covenants that would restrict operations. Financing may not be available in amounts or on terms acceptable to us, or at all.
 

 
34

The following table sets forth a summary of our cash flows for the periods indicated.

   
Three-Month Period Ended March 31,
 
(in millions US$)
 
2019
   
2018
 
Net cash provided by operating activities
   
66.9
     
28.4
 
Net cash used in investing activities
   
(11.5
)
   
(41.1
)
Net cash provided by (used in) financing activities
   
76.5
     
(96.2
)
Effect of foreign currency exchange rate changes on cash, cash equivalents and restricted cash
   
7.3
     
10.1
 
Net decrease in cash, cash equivalents, and restricted cash
   
139.2
     
(98.8
)
Cash, cash equivalents, and restricted cash at the beginning of period
   
367.0
     
320.1
 
Cash, cash equivalents, and restricted cash at the end of period
   
506.2
     
221.3
 

Operating Activities

Net cash provided by operating activities was US$66.9 million for the three-month period ended March 31, 2019, as compared to US$28.4 million for the three-month period ended March 31, 2018, primarily due to (i) the decrease of approximately US$134.9 million in cash operating payments, including raw material purchases, rental and personnel costs, (ii) the decrease of US$4.8 million in income tax payments (iii) the decrease of US$1.6 million option contracts loss, (iv) the increase of US$0.5 million received from government grant, partially offset by (v) the decrease of approximately US$99.3 million in cash collected from our customers for the three-month period ended March 31, 2019, (v) the increase of US$2.3 million interest payments and (vi) the decrease of US$1.7 million in interest income received.

Investing Activities

Net cash used in the investing activities was US$11.5 million for the three-month period ended March 31, 2019 as compared to US$41.1 million for the same period of last year, mainly due to (i) the decrease of US$163.4 million purchase of time deposits, (ii) the decrease of US$53.0 million purchase of property, plant and equipment and partially offset by (iii) the decrease of US$119.7 million proceeds from maturity of time deposits, (iv) the decrease of US$60.1 million refund of deposit from an equipment supplier and (v) the decrease of US$7.0 million government grant related to the industrial project for 300,000 metric tons biological composite materials.

Financing Activities

Net cash provided by the financing activities was US$76.5 million for the three-month period ended March 31, 2019, as compared to US$96.2 million used in financing activities for the same period of last year, primarily as a result of (i) the increase of the proceeds of US$106.2 million from bank borrowings and (ii) the increase of US$0.3 million interest-free proceeds from related parties, and partially offset by (iii) the decrease of US$66.2 million repayments of bank borrowings.

As of March 31, 2019, our cash and restricted cash balance was US$506.2 million, as compared to US$367.0 million at December 31, 2018.

Days Sales Outstanding ("DSO") has decreased from 84 days for the year ended December 31, 2018 to 67 days for the quarter ended March 31, 2019 as a result of faster accounts receivable collection from the domestic customers.
 
 
35


 
We believe that our DSO is well below industry average Industry Standard Customer and Supplier Payment Terms (days) as below:
 
 
 Three-month period ended March 31, 2019 
 Year ended December 31, 2018
Customer Payment Term 
 Payment in advance/up to 90 days  
 Payment in advance/up to 90 days
Supplier Payment Term
 Payment in advance/up to 90 days
 Payment in advance/up to 90 days

Inventory turnover days have increased from 178 days for the year ended December 31, 2018 to 253 days for the quarter ended March 31, 2019. Turnover days of payables have decreased from 53 days for the year ended December 31, 2018 to 23 days for the quarter ended March 31, 2019.

Based on past performance and current expectations, we believe our cash and cash equivalents provided by operating activities and financing activities will satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations for at least the next 12 months.

The majority of the Company's revenues and expenses were denominated primarily in Renminbi ("RMB"), the currency of the People's Republic of China. There is no assurance that exchange rates between the RMB and the U.S. Dollar will remain stable.  Inflation has not had a material impact on the Company's business.
 
COMMITMENTS AND CONTINGENCIES

Contractual Obligations

Our contractual obligations as of March 31, 2019 are as follows:
Contractual obligations
 
Total
 
 
Payment due
less than 1 year
 
 
1 – 3 years
 
 
3-5 years
 
 
More than 5
years
 
Purchase of plant equipment and construction in progress (2) (3) (4) (5)
 
 
278,992,435
 
 
 
278,639,578
 
 
 
352,857
 
 
 
-
 
 
 
-
 
Long-term bank loans (1)
 
 
386,231,157
 
 
 
184,237,501
 
 
 
129,270,133
 
 
 
46,783,170
 
 
 
25,940,353
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
665,223,592
 
 
 
462,877,079
 
 
 
129,622,990
 
 
 
46,783,170
 
 
 
25,940,353
 
 
(1)  Includes interest of US$20.0 million accrued at the interest rate under the loan agreements. For borrowings with a floating rate, the most recent rate as of March 31, 2019 was applied.

(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 RMB1,800 million (equivalent to US$267.3 million) in property, plant and equipment and approximately RMB600 million (equivalent to US$89.1 million) in working capital, for the construction of Sichuan plant.  As of March 31, 2019, the Company has a remaining commitment of RMB54.8 million (equivalent to US$8.1 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 March 31, 2019, 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).
 
 
36

On October 20, 2016, Sichuan Xinda entered into an equipment purchase contract with Peaceful Treasure Limited ("Peaceful") for a total consideration of RMB89.8 million (equivalent to US$13.3 million) to purchase certain production and testing equipment. As of March 31, 2019, the Company has a commitment of RMB55.9 million (equivalent to US$8.3 million).
 
On November 15, 2016, Sichuan Xinda entered into decoration contract with Beijin Construction  to perform indoor and outdoor decoration work for a consideration of RMB237.6 million (equivalent to US$35.4 million).  On February 20, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform outdoor decoration work for a consideration of RMB2.9 million (equivalent to US$0.4 million). On June 10, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform ground decoration work for a consideration of RMB23.8 million (equivalent to US$3.5 million). As of March 31, 2019, Sichuan Xinda prepaid RMB120.9 million (equivalent to US$18.0 million) of which RMB74.0 million (equivalent to US$11.0 million) was transferred to construction in progress and has a remaining commitment of RMB143.4 million (equivalent to US$21.3 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$333.1 million) to purchase production equipment and testing equipment in March 2017.  By the end of June 2017, Sichuan Xinda expected to launch an integrated ERP system, which resulted in the equipment to be purchased under the original contracts with Hailezi not meeting the production requirements. Thus the original contracts have been terminated with the amount of RMB2,222.9 million (equivalent to US$330.1 million), and Hailezi agreed to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$253.2 million) by the end of March 2018, out of the total prepayment made by Sichuan Xinda of RMB1,722.9 million (equivalent to US$255.9 million). As of June 30, 2018, Hailezi has refunded the prepayment in the amount of RMB1,704.9 million (equivalent to US$253.2 million). As of March 31, 2019, 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).

In connection with the Nanchong Project, on June 21, 2018, Sichuan Xinda entered into another equipment purchase contracts with Hailezi to purchase production equipment and testing equipment for a consideration of RMB1,900 million (equivalent to US$282.3 million). Pursuant to the contracts with Hailezi, Sichuan Xinda have prepaid RMB1,710 million (equivalent to US$254.0 million) at the end of March 2019, and has a remaining commitment of RMB190 million (equivalent to US$28.3 million).

(3)  Heilongjiang plant construction and equipment purchase

In connection with the equipment purchase contracts with Hailezi signed on September 26, 2016 and February 28, 2017 mentioned in Note 6 (i), HLJ Xinda Group has a remaining commitment of RMB31.2 million (equivalent to US$4.6 million) as of March 31, 2019.

In connection with the "HLJ Project" mentioned in Note 6 (i), pursuant to the three investment agreements, the project total capital expenditure will be RMB4,015.0 million (equivalent to be US$596.3million), among which the investment in fixed assets shall be no less than RMB3,295.0 million (equivalent to US$489.3 million) in total. Pursuant to the contracts with Hailezi signed in November 2017 mentioned in Note 6 (i), HLJ Xinda Group has a remaining commitment of RMB18.8 million (equivalent to US$2.8 million) as of March 31, 2019.
 
 
37


In connection with the HLJ project, on June 25, 2018, HLJ Xinda Group entered into another equipment purchase contract with Hailezi to purchase production equipment, which will be used for 300,000 metric tons of biological based composite material, located in Harbin, for a consideration of RMB749.8 million (equivalent to US$111.4 million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB300.7 million (equivalent to US$44.6 million) as of March 31, 2019, and has a remaining commitment of RMB449.1 million (equivalent to US$66.8 million).

In connection with the HLJ Project, on July 12, 2018, Heilongjiang Xinda Enterprise Group Company Limited (“HLJ Xinda Group”) entered into an equipment purchase contract with Hailezi to purchase production equipment, which will be used for 300,000 metric tons of biological based composite material, located in Harbin, for a consideration of RMB1,157.0 million (equivalent to US$171.8 million). Pursuant to the contract with Hailezi, HLJ Xinda has prepaid RMB240.8 million (equivalent to US$35.8 million) as of March 31, 2019, and has a remaining commitment of RMB916.2 million (equivalent to US$136.0 million).
 
(4)  Dubai plant construction and equipment
 
On April 28, 2015, Dubai Xinda entered into a warehouse construction contract with Falcon Red Eye Contracting Co. L.L.C. for a total consideration of AED6.7 million (equivalent to US$1.8 million). As of March 31, 2019, the Company has a remaining commitment of AED1.6 million (equivalent to US$0.4 million).

(5)   Xinda CI (Beijing) 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 March 31, 2019, the decoration work in the amount of RMB2.0 million (equivalent to US$0.3 million) was recorded in construction in progress. As of March 31, 2019, the Company has a remaining commitment of RMB3.8 million (equivalent to US$0.6 million).

On June 9, 2017, Xinda CI (Beijing) 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 March 31, 2019, the decoration work in the amount of RMB0.6 million (equivalent to US$0.1 million) was recorded in construction in progress. As of March 31, 2019, the Company has a remaining commitment of RMB0.6 million (equivalent to US$0.1 million).

Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet transactions.
 
 
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Item 3. Quantitative and Qualitative Disclosures about Market Risks

Interest Rate Risk

We are exposed to interest rate risk primarily with respect to our short-term loans, long-term bank loans, cash and cash equivalents, and restricted cash. Although the interest rates, which are based on the banks' prime rates are fixed for the terms of the loans and deposits, increase in interest rates will increase our interest expense.

A hypothetical 1.0% increase in the annual interest rate for all of our credit facilities under which we had outstanding borrowings as of March 31, 2019 would decrease income before income taxes by approximately US$2.3 million for the quarter ended March 31, 2019. Management monitors the banks' prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.

Foreign Currency Exchange Rates

The majority of our revenues are collected in and our expenses are paid in RMB. We face foreign currency rate translation risks when our results are translated to U.S. dollars.

The RMB was relatively stable against the U.S. dollar at approximately 8.28 RMB to the US$1.00 until July 21, 2005 when the Chinese currency regime was altered resulting in a 2.1% revaluation versus the U.S. dollar. From July 21, 2005 to June 30, 2010, the RMB exchange rate was no longer linked to the U.S. dollar but rather to a basket of currencies with a 0.3% margin of fluctuation resulting in further appreciation of the RMB against the U.S. dollar. Since June 30, 2009, the exchange rate had remained stable at 6.8307 RMB to 1.00 U.S. dollar until June 30, 2010 when the People's Bank of China allowed a further appreciation of the RMB by 0.43% to 6.798 RMB to 1.00 U.S. dollar. The People's Bank of China allowed the RMB and U.S. dollar exchange rate to fluctuate within 1% on April 16, 2012 and 2% on March 17, 2014, respectively. On March 31, 2019, the RMB traded at 6.7335 RMB to 1.00 U.S. dollar.

There remains international pressure on the Chinese government to adopt an even more flexible currency policy and the exchange rate of RMB is subject to changes in China's government policies which are, to a large extent, dependent on the economic and political development both internationally and locally and the demand and supply of RMB in the domestic market. There can be no assurance that such exchange rate will continue to remain stable in the future amongst the volatility of currencies, globalization and the unstable economies in recent years. Since (i) our revenues and net income of our PRC operating entities are denominated in RMB, and (ii) the payment of dividends, if any, will be in U.S. dollars, any decrease in the value of RMB against U.S. dollars would adversely affect the value of the shares and dividends payable to shareholders, in U.S. dollars.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company's management has evaluated, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operations of the Company's disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)), as of the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective because of material weakness in our internal control over financial reporting as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Notwithstanding management's assessment that our internal control over financial reporting was ineffective as of March 31, 2019. We believe that our unaudited condensed consolidated financial statements included in this Quarterly Report present fairly our financial position, results of operations and cash flows for the three months ended March 31, 2019 in all material respects.
 
 
39


 
(b) Changes in internal controls.

During the three months ended March 31, 2019, our efforts to improve our internal controls over financial reporting (1) adopting procedures to evaluate and assess performance of directors, officers and employees of the Company, (2) internal meetings, discussions, trainings and seminars periodically to review and improve our internal control procedures; We plan to improve on the above-referenced weakness by the end of the fiscal year ending December 31, 2019.

Other than the foregoing, there has been no other changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our first fiscal quarter ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

"Part I. Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 includes a detailed discussion of risks and uncertainties which could adversely affect our future results.  We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially affect our operations. The risks, uncertainties and other factors set forth in our Annual Report on Form 10-K may cause our actual results, performances and achievements to be materially different from those expressed or implied by our forward-looking statements. If any of these risks or events occurs, our business, financial condition or results of operations may be adversely affected. During the three-months ended March 31, 2019, there have been no material changes to the Risk Factors disclosed in “Part I Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5.  Other Information

None.

Item 6.  Exhibits

Exhibit
No.
 
Document Description
 3.1
 
3.2
 
3.3
 
3.4
 
3.5
 
31.1
 
31.2
 
32.1