China XD Plastics Co Ltd - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

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)

No. 9 Dalian North Road, Haping Road Centralized Industrial Park,

Harbin Development Zone, Heilongjiang Province, PRC 150060

(Address of principal executive offices) (Zip Code)

 

86-451-84346600

(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 3, 2018, the registrant had 50,448,841 shares of common stock, par value US$0.0001 per share, outstanding.

TABLE OF CONTENTS

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2018				2017
		US$				US$
ASSETS
Current assets:
Cash and cash equivalents			51,539,593				190,392,211
Restricted cash			335,915,478				129,699,454
Time deposits			7,268,287				288,023,017
Accounts receivable, net of allowance for doubtful accounts			173,278,607				298,868,984
Inventories			566,810,166				421,736,682
Prepaid expenses and other current assets			167,109,645				144,326,151
Total current assets			1,301,921,776				1,473,046,499
Property, plant and equipment, net			787,330,204				835,561,739
Land use rights, net			29,881,029				31,943,652
Long-term prepayments to equipment and construction suppliers			529,973,047				190,627,514
Other non-current assets			777,392				12,924,279
Total assets			2,649,883,448				2,544,103,683
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term loans, including current portion of long-term bank loans			692,120,072				775,396,929
Bills payable			626,322,828				252,768,510
Accounts payable			26,535,220				227,993,140
Amounts due to related parties			14,256,429				-
Income taxes payable			11,495,721				17,710,217
Accrued expenses and other current liabilities			116,926,581				138,605,509
Total current liabilities			1,487,656,851				1,412,474,305
Long-term bank loans, excluding current portion			127,253,750				114,208,319
Deferred income			100,571,327				99,168,276
Other non-current liabilities			103,629,677				107,898,318
Total liabilities			1,819,111,605				1,733,749,218
Redeemable Series D convertible preferred stock (redemption amount of US$270,936,200 and    US$244,044,200 as of September 30, 2018 and December 31, 2017, 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, 50,469,841 shares and 49,748,731 shares issued, 50,448,841 shares and 49,727,731 shares outstanding as of  September 30, 2018 and December 31, 2017, respectively			5,047				4,975
Treasury stock, 21,000 shares at cost			(92,694	)			(92,694	)
Additional paid-in capital			86,429,980				83,159,893
Retained earnings			704,079,389				648,790,469
Accumulated other comprehensive loss			(57,226,444	)			(19,084,743	)
Total stockholders’ equity			733,195,378				712,778,000
Commitments and contingencies			-				-
Total liabilities, redeemable convertible preferred stock and equity			2,649,883,448				2,544,103,683

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

		Three-Month Period Ended September 30,								Nine-Month Period Ended September 30,
		2018				2017				2018				2017
		US$				US$				US$				US$
Revenues			297,224,740				311,418,943				925,007,293				862,814,803
Cost of revenues			(249,997,804	)			(264,099,790	)			(767,759,035	)			(717,614,278	)
Gross profit			47,226,936				47,319,153				157,248,258				145,200,525
Selling expenses			(2,741,156	)			(858,739	)			(7,354,876	)			(2,082,889	)
General and administrative expenses			(8,117,769	)			(10,403,187	)			(28,341,545	)			(26,301,440	)
Research and development expenses			(23,342,321	)			(9,857,475	)			(33,680,855	)			(25,255,497	)
Total operating expenses			(34,201,246	)			(21,119,401	)			(69,377,276	)			(53,639,826	)
Operating income			13,025,690				26,199,752				87,870,982				91,560,699
Interest income			264,838				1,894,747				3,607,136				4,028,299
Interest expense			(13,393,886	)			(10,892,112	)			(37,562,666	)			(32,865,939	)
Foreign currency exchange gains (losses)			4,387,166				(2,372,361	)			6,064,328				(4,719,423	)
Losses on foreign currency option contracts			-				(584,724	)			(520,981	)			(584,724	)
Government grant			1,145,703				2,955,045				4,001,746				5,418,498
Total non-operating expense, net			(7,596,179	)			(8,999,405	)			(24,410,437	)			(28,723,289	)
Income before income taxes			5,429,511				17,200,347				63,460,545				62,837,410
Income tax benefit (expense)			3,535,430				(3,063,889	)			(8,171,625	)			(10,735,971	)
Net income			8,964,941				14,136,458				55,288,920				52,101,439
Earnings per common share:
Basic and diluted			0.13				0.21				0.83				0.79
Net Income			8,964,941				14,136,458				55,288,920				52,101,439
Other comprehensive income (losses)
Foreign currency translation adjustment, net of nil income taxes			(28,497,101	)			15,887,423				(38,141,701	)			33,557,087
Total Comprehensive income (losses)			(19,532,160	)			30,023,881				17,147,219				85,658,526

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine-Month Period Ended September 30,
		2018				2017
		US$				US$
Cash flows from operating activities:
Net cash provided by operating activities			115,513,922				144,871,143
Cash flows from investing activities:
Proceeds from maturity of time deposits			517,686,072				249,029,754
Purchase of time deposits			(236,428,396	)			(396,036,693	)
Purchase of land use rights			-				(3,203,611	)
Purchase of and deposits for property, plant and equipment			(430,839,423	)			(338,711,968	)
Refund of deposit from equipment suppliers			121,464,390				122,322,463
Deposits for acquisition of equity			(3,640,688	)			-
Refund of deposits for acquisition of equity			15,577,880				-
Government grant related to the construction of Sichuan plant			10,324,859				7,207,612
Net cash used in investing activities			(5,855,306	)			(359,392,443	)
Cash flows from financing activities:
Proceeds from bank borrowings			719,994,473				571,141,361
Repayments of bank borrowings			(757,018,030	)			(450,252,497	)
Investment received in advance from a related party			75,567,512				-
Refund of investment received in advance from a related party			(75,567,512	)			-
Proceeds from interest-free advances from related parties			14,256,429				-
Net cash (used in) provided by financing activities			(22,767,128	)			120,888,864
Effect of foreign currency exchange rate changes on cash, cash equivalents and restricted cash			(19,528,082	)			9,377,096
Net increase (decrease) in cash, cash equivalents and restricted cash			67,363,406				(84,255,340	)
Cash, cash equivalents and restricted cash at beginning of period			320,091,665				271,575,847
Cash, cash equivalents and restricted cash at end of period			387,455,071				187,320,507
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest			35,067,228				28,035,022
Income taxes paid			16,866,842				9,098,388
Non-cash investing activities:
Accrual for purchase of equipment and construction included in accrued expenses and other current liabilities			5,825,800				6,851,777

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.

 

See accompanying notes to unaudited condensed consolidated financial statements.

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Basis of presentation, significant concentrations and risks

(a) Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by rules and regulations of the United States Securities and Exchange Commission ("SEC"). The condensed consolidated balance sheet as of December 31, 2017 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, 2017, and the related consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, included in the Company's Annual Report on Form 10-K filed with the SEC on March 15, 2018.

In the opinion of the management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of September 30, 2018, the results of operations and cash flows for the nine-month periods ended September 30, 2018 and 2017, have been made.

The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the recoverability of the carrying amounts of property, plant and equipment, the realizability of inventories, the useful lives of property, plant and equipment, the collectability of accounts receivable, the fair values of stock-based compensation awards, and the accruals for tax uncertainties and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.

(b) Accounting Pronouncement Adopted in 2018

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which supersedes virtually all existing revenue recognition guidance. The new standard requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. We adopted ASU 2014-09 in the first quarter 2018, using the modified retrospective transition approach, which did not have any material impact on how we recognize revenue or to our financial statements or disclosures. See below for additional information related to our recognition of revenue generated from customer contracts.

Revenue recognition

Effective January 1, 2018, we adopted the new guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Topic 606 requires us to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires us to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, we satisfy a performance obligation. The adoption of this new guidance did not result in any changes to our revenue recognition practice.

The Company recognizes revenue upon transfer of control of its products to the customers, which typically occurs upon delivery. The Company’s main performance obligation to its customers is the delivery of products in accordance with purchase orders. Each purchase order defines the transaction price for the products purchased under the arrangement. The Company sells its products primarily to the distributors and to a lesser extent to the direct customers. For sales in the People’s Republic of China (“PRC”), acceptance of delivery of the products by the distributors is evidenced by goods receipt notes signed by the distributors’ customers (or end users). The distributors accept the products at the time they are delivered to the distributors’ customers (or end customers). Delivery acceptance is evidenced by signed goods receipt notes. The Company has no remaining obligations after the distributors’ acceptance of the products. Under the terms of the contracts or purchase orders between the Company and the distributors, the control of the products is transferred to the distributor upon the signing of the goods receipt notes and the distributor has no rights to return the products (other than for defective products). For sales to the overseas customers, delivery of the products occurs at the point in time the product is delivered to the named port of shipment, which is when the control of the products is transferred to the customer.

 

 

 

The selling price, which is specified in the purchase orders, is fixed. Under the terms of the purchase orders, upon the sale of the products to the distributors and the signing of the good receipts notes, the Company has the legal enforceable right to receive full payment of the sales price. The distributors’ obligation to pay the Company is not dependent on the distributors selling the products or collecting cash from their customers (or end customers). The customer is required to pay under normal sales terms. The Company’s normal payment terms in most cases are 90 days and its sales arrangements do not have any material financing components. In addition, the Company’s customer arrangements do not produce contract assets or liabilities that are material to its consolidated financial statements.

Incremental costs to fulfill the Company’s customer arrangements are expensed as incurred, as the amortization period is less than one year.

The Company’s sales are net of value added tax (“VAT”) and business tax and surcharges collected on behalf of tax authorities in respect of product sales. VAT and business tax and surcharges collected from customers, net of VAT paid for purchases, is recorded as a liability in the consolidated balance sheets until it is paid to the tax authorities.

Outbound freight and Handling costs:

The company accounts for product outbound freight and handling costs as fulfillment activities and present the associated costs in costs of goods sold in the period in which it sells the product.

Disaggregation of Revenues:

The company manufactures and sells modified plastics primarily for automotive applications in China and to a lesser extent, in Dubai, United Arab Emirates (“UAE”). The Company disaggregates revenue based on its major customer grouping as this category represents the most appropriate depiction of how the nature, amount, and timing of revenues and cash flows are affected by economic factors. Sales by major customer group are as follows:

Distributors – represents sales to the distributors, who re-sell our products to end customers. Geographically, this category only includes sales in China.

Direct customers – represents sales sold directly to customers in automotive applications and electrical appliances industry. Geographically, this category mainly includes sales to Republic of Korea (“ROK”) and to a lesser extent, in PRC.

Others – mainly represents agent fee of raw material trading.

The following tables provide sales by major customer group for the three and nine months ended September 30, 2018 and 2017:

ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash requires that the Statement of Cash Flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The Company retrospectively adopted this guidance as of January 1, 2018, to each period presented.

(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"). To a lesser extent, the Company also sells its products to an overseas customer in the Republic of Korea (the "ROK"). The Company's sales are highly concentrated.  Sales to distributors and end customer individually exceeded 10% of the Company's revenues for the three-month and nine-month periods ended September 30, 2018 and 2017, are as follows:

 

 

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

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 43.2% (four distributors) and 44.5% (four distributors) for the three-month periods ended September 30, 2018 and 2017, respectively, and 20.4% (two distributors) and 47.0% (four distributors) of the Company's total raw materials purchases for the nine-month periods ended September 30, 2018 and 2017, respectively of the Company's total raw material purchases, 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 cash equivalents, short-term restricted cash, time deposits and long-term restricted cash included in other non-current assets mentioned below maintained at banks consist of the following:

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 $1,668,278 and $1,505,747 are insured as of September 30, 2018 and December 31, 2017, 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.

Time deposits represent certificates of deposit with initial terms of six or twelve months when purchased.  As of September 30, 2018 and December 31, 2017, the Company's time deposits bear a weighted average interest rate of 1.1% and 1.3% per annum, respectively.

 

 

 

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$213,830,824 and US$65,766,735 as of September 30, 2018 and December 31, 2017, respectively. Upon maturity and repayment of the bills payable, which is generally within 6 months, the cash becomes available for use by the Company. The cash will be available for use by the Company 90 days from the issuance of the letter of credit. The cash flows from the pledged bank deposits, which relate to purchases of raw materials, are reported within cash flows from operating activities in the consolidated statements of cash flows.

Note 2 - Accounts receivable

Accounts receivable consists of the following:

As of September 30, 2018 and December 31, 2017, the accounts receivable balances also include notes receivable in the amount of US$233,762 and US$1,181,029, respectively. As of September 30, 2018 and December 31, 2017, US$94,320,321 and US$99,526,978, 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 and nine-month periods ended September 30, 2018 and 2017.

The following table provides an analysis of the aging of accounts receivable as of September 30, 2018 and December 31, 2017:

 

 

 

 

Note 3 – Inventories

Inventories consist of the following:

There were no write down of inventories for the three-month and nine-month periods ended September 30, 2018 and 2017.

Note 4 – Prepaid expenses and other current assets

 

Prepaid expenses and other current assets consist of the following:

(i) In March 2017, Sichuan Xinda signed a series of contracts with Harbin Hailezi Science and Technology Co., Ltd. (“Hailezi”) to purchase production equipment, and prepaid RMB1,728.9 million (equivalent to US$251.3 million ) to Hailezi, which was recognized in investing activities in the statements of cash flows. In June 2017, the two parties agreed to partially terminate the contracts and Hailezi agreed to refund the prepayment amounting to RMB1,704.9 million (equivalent to US$247.8 million) by the end of March 2018. As of March 31, 2018, Hailezi has refunded the above-mentioned prepayment to Sichuan Xinda. For details, please refer to Note 6.

(ii) 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 condensed consolidated statements of cash flows.

(iii) Advances to suppliers are the advances to purchase raw materials as of September 30, 2018.

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

(v) Others mainly include prepaid miscellaneous service fee, staff advance and prepaid rental fee.

 

 

 

 

Note 5 – Property, plant and equipment, net

Property, plant and equipment consist of the following:

 

For the three-month and nine-month periods ended September 30, 2018 and 2017, the Company capitalized US$568,444 and US$704,165, and US$1,829,388 and US$2,073,132 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:

 

 

 

 

Note 6 – Prepayments to equipment and construction suppliers

 

(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$118.2 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 has prepaid RMB621.6 million (equivalent to US$90.4 million) as of December 31, 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$41.2 million). Hailezi refunded RMB369.1 million (equivalent to US$53.7 million) to HLJ Xinda Group on June 22, 2017. As of September 30, 2018, HLJ Xinda Group has prepaid RMB252.5 million (equivalent to US$36.7 million).  The prepayment and refund were recognized in investing activities in the statements of cash flows.

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$136.6million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB920.9 million (equivalent to US$133.9 million) as of September 30, 2018.

 

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$357.0 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 has prepaid RMB1,728.9 million (equivalent to  US$251.3 million) as of September 30, 2018. 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$247.8 million) by the end of March 2018. 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$1.9  million) to Hailezi for the compensation of Hailezi due to the termination of the purchase contracts. As of September 30, 2018, Hailezi has refunded the above-mentioned prepayment.

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$276.2 million). Pursuant to the contracts with Hailezi, Sichuan Xinda has prepaid RMB1,710 million (equivalent to US$248.6 million) as of September 30, 2018.

 

 

 

 

(ii) In connection with the HLJ project, on June 25, 2018, HLJ Xinda Group entered into an equipment purchase contract with Ningbo Junzuo Trading Co., Ltd. ("Ningbo Junzuo") and Ningbo Junhu Trading Co., Ltd. ("Ningbo Junhu") to purchase production equipment, which will be used for 300,000 metric tons of biological based composite material, located in Harbin, for a total consideration of RMB1,156.4 million (equivalent to US$174.8 million). Pursuant to the contract with Ningbo Junzuo and Ningbo Junhu, HLJ Xinda Group has prepaid RMB400.0 million (equivalent to US$60.4 million) as of June 30, 2018. On July 10, 2018, the Company signed supplemental contracts with Ningbo Junzuo and Ningbo Junhu to cancel the equipment purchase at the full price due to the equipment not meeting the requirements of the Company. On July 31, 2018, the Company received the full refund of RMB400.0 million (equivalent to US$60.4 million).

(iii) In December 2017, HLJ Xinda Group entered into a building purchase contract with Shanghai Caohejing Kangqiao Science & Green River Construction & Development Co., Ltd. ("Green River") for a total consideration of RMB216.6 million (equivalent to US$31.5 million), with a total area of 13,972.64 square meters. The Company is planning to use this building as the offices of the newly set up research and development center in Shanghai, which was established on December 27, 2017. As of September 30, 2018, the Company has prepaid RMB108.3 million (equivalent to US$15.7 million).

Note 9 – Borrowings

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

(a)  Current

As of September 30, 2018 and December 31, 2017, the Company's short-term bank loans (including the current portion of long-term bank loans) bear a weighted average interest rate of 4.6% and 4.1% per annum, respectively. All short-term bank loans mature at various times within one year and contain no renewal terms.

As of September 30, 2018, the Company obtained eighteen loans in the total amount of RMB450.0 million (equivalent to US$65.4 million) secured by accounts receivables of RMB648.8 million (equivalent to US$94.3 million) at an annual interest rate of 4.35% from Harbin Longjiang Bank.

In February 2017, the Company obtained a one-year secured loan of US$17.0 million from Bank of China (Abu Dhabi Branch) at an annual interest rate of 2.3%. The loan was secured by restricted cash of RMB136.0 million (equivalent to US$21.6 million) in Bank of China in Harbin, China. The Company repaid the loan in February 2018.

 

 

 

 

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$5.5 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 will be due on July 20, 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$6.1 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 will be due on July 20, 2019.

 

In October and November 2015, the Company obtained three long term unsecured loans of RMB260 million (equivalent to US$37.8 million) from Bank of China at an annual interest rate of 4.75%. In January 2016, the Company obtained a long term unsecured loan of RMB80 million (equivalent to US$11.6 million) from Bank of China at an annual interest rate of 4.75%. On December 9, 2016, the Company obtained a long term unsecured loan of RMB30 million (equivalent to US$4.4 million) from Bank of China at an annual interest rate of 4.75%. On March 23, 2017, the Company obtained a long term unsecured loan of RMB25 million (equivalent to US$3.6 million) from Bank of China at an annual interest rate of 4.75%. The Company repaid RMB10 million (equivalent to US$1.5 million) on April 28, 2017, RMB40 million (equivalent to US$5.8 million) on October 28, 2017 and RMB25 million (equivalent to US$3.6 million) on April 28, 2018. RMB100 million (equivalent to US$14.5 million), RMB25 million (equivalent to US$3.7 million), RMB100 million (equivalent to US$14.5 million), RMB20 million (equivalent to US$2.9 million), and RMB75 million (equivalent to US$10.9 million) will be repaid on October 28, 2018, April 28, 2019, October 28, 2019, April 28, 2020 and October 28, 2020, respectively.

On May 13, 2016, the Company obtained two two-year secured loans of US$14.3 million from China Construction Bank (Dubai) at an interest of three-month LIBOR (2.3118% as of March 31, 2018) plus 1.6%.  On May 17, 2016, the Company obtained two two-year secured loans of US$12.3 million from China Construction Bank (Dubai) at an interest of three-month LIBOR (2.3118% as of March 31, 2018) plus 1.6%. On May 22, 2016, the Company obtained a two-year secured loan of US$3.8 million from China Construction Bank (Dubai) at an interest of three-month LIBOR (2.3118% as of March 31, 2018) plus 1.6%. The interest rate is reset every three months. These loans are secured by restricted cash of RMB68.8 million (equivalent to US$10.9 million). All of these loans were repaid in April 2018.

 

On August 22, 2016, Xinda Holding (HK) Company Limited ("Xinda Holding (HK)") a wholly owned subsidiary of the Company, entered into a facility agreement for a loan facility in an aggregate amount of US$180 million with a consortium of banks and financial institutions led by Standard Chartered Bank (Hong Kong) Limited. The Company paid arrangement fees and legal fees in the amount of US$6.77 million of which the unamortized balance is nil as of September 30, 2018 for the related loan. Debt issuance costs are presented on the consolidated balance sheets as a direct deduction from the carrying amount of the loan and amortized to interest expense using the effective interest rate of 6.205% as of September 30, 2018. 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 September 30, 2018, the Company totally pledged RMB343.3 million (equivalent to US$49,899,131) as repayment to settle above loan.  In accordance with the renewal agreement in October 2018, the repayment term of the above loan was extended and the loan will be due on November 30, 2018.

On December 1, 2017, the Company obtained a seven-year unsecured loan of RMB526.3 million (equivalent to US$76.5 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$24.6 million) in January 2018 at an annual interest rate of 4.9%.  RMB15 million (equivalent to US$2.2 million), RMB20 million (equivalent to US$2.9 million), RMB35 million (equivalent to US$5.1 million), RMB35 million (equivalent to US$5.1 million), RMB70 million (equivalent to US$10.2 million), RMB70 million (equivalent to US$10.2 million) and RMB450.4 million (equivalent to US$65.4 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.

 

As of September 30, 2018, the Company had total lines of credit of RMB8,146.4 million (US$1,184.2 million) including unused lines of credit of RMB2,410.1 million (US$350.3 million) with remaining terms less than 12 months and RMB99.6 million (US$14.5 million) with remaining terms beyond 12 months.

Certain lines of credit contain financial covenants such as total stockholders' equity, debt asset ratio, contingent liability ratio and net profit. As of September 30, 2018, the Company has met these financial covenants.

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

 Note 10 – Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:

 

		September 30, 2018				December 31, 2017
		US$				US$
Payables for purchase of property, plant and equipment			54,687,191				98,791,115
Accrued freight expenses			18,651,011				10,491,635
Accrued interest expenses			7,093,713				3,997,036
Contract liabilities (i)			14,027,020				8,843,649
Non-income tax payables			3,906,806				4,002,092
Others (ii)			18,560,840				12,479,982
Total accrued expenses and other current liabilities			116,926,581				138,605,509

Note 11 – Related party transactions

 

Note 12 – Income tax

Pursuant to an approval from the local tax authority in July 2013, Sichuan Xinda, a subsidiary of China XD, became a qualified enterprise located in the western region of the PRC, which entitled it to a preferential income tax rate of 15% from January 1, 2013 to December 31, 2020. Under the current laws of Dubai, Dubai Xinda, a subsidiary of China XD, is exempted from income taxes.

The effective income tax rates for the nine-month periods ended September 30, 2018 and 2017 were 12.9% and 17.1%, respectively.  The effective income tax rate decreased from 17.1% for the nine-month period ended September 30, 2017 to 12.9% for the nine-month period ended September 30, 2018, primarily due to (i) the increase of additional deduction of R&D expenses resulted from the new policy issued by China’s tax authority in September 2018 to increase the R&D expenses additional deduction rate from 50% to 75% for PRC entities, effective from January 1, 2018 to December 31, 2020 (ii) the increase of Sichuan Xinda’s profit before tax (“PBT”) percentage within the consolidating entities, partially offset by (iii) the increase of continuous operating losses occurred in overseas subsidiaries such as Dubai Xinda and Xinda Holding (HK).  The effective income tax rate for the nine-month period ended September 30, 2018 differs from the PRC statutory income tax rate of 25% primarily due to Sichuan Xinda's preferential income tax rate, the reversal of the unrecognized tax benefits accrued in year 2012 and 75% additional deduction of R&D expenses of the major PRC operating entities.

US$2,787,667 previously unrecognized tax benefits accrued in year 2012 and the related accrued interest amounting to US$2,520,051 were reversed due to the expiration of five-year tax assessment period on May 31, 2018. As of September 30, 2018, the unrecognized tax benefits were US$32,345,661 and the interest relating to unrecognized tax benefits was US$10,868,454, of which the unrecognized tax benefits in year 2013 amounting to US$3,673,233 and related accrued interest amounting to US$2,777,477 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 13 – 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$50.8 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$48.3 million) from Shunqing Government and RMB6.4 million (equivalent to US$0.9 million) from Ministry of Finance of the People's Republic of China to support the construction and RMB2.2 million (equivalent to US$0.3 million) special funds of ministerial key research projects from Ministry of Science and Technology of PRC as of September 30, 2018.

The Company has also received RMB45 million (equivalent to US$6.5 million) from Harbin Bureau of Finance for Biomedical composites project as of September 30, 2018.

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 condensed consolidated balance sheets, and to be recognized as other income in the condensed consolidated statements of comprehensive income over the periods and in the proportions in which depreciation expense on the long-term assets is recognized.

Note 14 – Other non-current liabilities

(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 estimated 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$11,354,425 of which will be paid in 2018 and was classified as current liabilities.

Note 15 – Stockholders' equity

The changes of each caption of stockholders' equity for the nine-month period ended September 30, 2018 are as follows:

		Series B Preferred Stock								Common Stock												Additional								Accumulated Other
		Number of Shares				Amount				Number of Shares				Amount				Treasury Stock				Paid-in Capital				Retained Earnings				Comprehensive Loss				Total Equity
						US$								US$
Balance as of January 1, 2018			1,000,000				100				49,727,731				4,975				(92,694	)			83,159,893				648,790,469				(19,084,743	)			712,778,000
Net income			-				-				-				-				-				-				55,288,920				-				55,288,920
Other comprehensive losses			-				-				-				-				-				-				-				(38,141,701	)			(38,141,701	)
Stock based compensation			-				-				-				-				-				3,270,159				-				-				3,270,159
Vesting of non-vested shares			-				-				721,110				72				-				(72	)			-				-				-
Balance as of September 30, 2018			1,000,000				100				50,448,841				5,047				(92,694	)			86,429,980				704,079,389				(57,226,444	)			733,195,378

 

 

 

 

 

 

Note 16 – Stock based compensation

Non-vested shares

A summary of the non-vested shares activity for the nine-month ended September 30, 2018 is as follows:

 

		Number of Nonvested Shares				Weighted Average Grant date Fair Value
						US$
Outstanding as of December 31, 2017			161,110				7.49
Granted			560,000				4.40
Vested			(721,110	)			4.76
Outstanding as of September 30, 2018			-				-

 

The Company recognized US$45,339 and US$121,890 of share-based compensation expense in general and administrative expenses relating to nonvested shares for the three-month periods ended September 30, 2018 and 2017, respectively, and US$2,675,115 and US$468,936 for the nine-month periods ended September 30, 2018 and 2017. As of September 30, 2018, there was nil unrecognized compensation cost relating to nonvested shares. 

 

 

 

 

 

Note 17 - Earnings per share

Basic and diluted earnings per share are calculated as follows:

 

		Three-Month Period Ended September 30,								Nine-Month Period Ended September 30,
		2018				2017				2018				2017
		US$				US$				US$				US$
Net income			8,964,941				14,136,458				55,288,920				52,101,439
Less:
Earnings allocated to participating Series D convertible preferred stock			(2,140,971	)			(3,432,680	)			(13,257,752	)			(12,651,945	)
Earnings allocated to participating nonvested shares			(8,904	)			(53,723	)			(106,113	)			(263,972	)
Net income for basic and diluted earnings per share			6,815,066				10,650,055				41,925,055				39,185,522
Denominator
Denominator for basic earnings per share			50,930,653				49,640,785				50,596,880				49,555,096
Dilutive effect of outstanding share options			32,944				-				32,944				-
Denominator for diluted earnings per share			50,963,597				49,640,785				50,629,824				49,555,096
Earnings per share:
Basic and diluted			0.13				0.21				0.83				0.79

 

The following table summarizes potentially dilutive securities excluded from the calculation of diluted earnings per share for the three-month periods and nine-month periods ended September 30, 2018 and 2017 because their effects are anti-dilutive:

Note 18 - Commitments and contingencies

(1)    Lease commitments

Future minimum lease payments under non-cancellable operating leases agreements as of September 30, 2018 were as follows. 

 

Rental expenses incurred for operating leases of plant and office spaces were US$650,141 and US$640,731 for the three-month periods ended September 30, 2018 and 2017, respectively, and US$2,034,145 and US$1,909,315 for the nine-month periods ended September 30, 2018 and 2017, respectively. There are no step rent provisions, escalation clauses, capital improvement funding requirements, other lease concessions or contingent rent in the lease agreements. The Company has no legal or contractual asset retirement obligations at the end of leases. The Company's leases do not contain any contingent rent payments terms.

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(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$261.7 million) in property, plant and equipment and approximately RMB600 million (equivalent to US$87.2 million) in working capital, for the construction of Sichuan plant.  As of September 30, 2018, the Company has a remaining commitment of RMB54.8 million (equivalent to US$8.0 million) mainly for facility construction.

In September 2016, Sichuan Xinda entered into equipment purchase contracts with Hailezi for a consideration of RMB17.0 million (equivalent to US$2.5 million) to purchase storage facility and testing equipment. Afterward, Sichuan Xinda cancelled two contracts with Hailezi for a consideration of RMB1.6 million (equivalent to US$0.2 million). As of September 30, 2018, 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$13.0 million) to purchase certain production and testing equipment. As of September 30, 2018, the Company has a commitment of RMB55.9 million (equivalent to US$8.1 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$34.5 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 September 30, 2018, Sichuan Xinda prepaid RMB119.8 million (equivalent to US$17.4 million) of which RMB72.1 million (equivalent to US$10.5 million) was transferred to construction in progress and has a remaining commitment of RMB144.5 million (equivalent to US$21.0 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$326.0 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$323.1   million), and Hailezi agreed to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$250.4 million) by the end of March 2018, out of the total prepayment made by Sichuan Xinda of RMB1,722.9 million (equivalent to US$260.4 million). As of June 30, 2018, Hailezi has refunded the prepayment in the amount of RMB1,704.9 million (equivalent to US$247.8 million). As of September 30, 2018, Sichuan Xinda prepaid RMB18.0 million (equivalent to US$2.6 million) and has a remaining commitment of RMB1.9 million (equivalent to US$0.3 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$276.2 million). Pursuant to the contracts with Hailezi, Sichuan Xinda have prepaid RMB1,710 million (equivalent to US$248.6 million) at the end of September 2018, and has a remaining commitment of RMB190 million (equivalent to US$27.6 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$4.5 million) as of September 30, 2018.

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$583.6million), among which the investment in fixed assets shall be no less than RMB3,295.0 million (equivalent to US$479.0 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$2.7 million) as of September 30, 2018.

 

 

 

 

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 476 certifications from manufacturers in the automobile industry as of September 30, 2018. 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 209 professionals and 7 consultants, including one consultant who is a member of Chinese Academy of Engineering. As a result of the integration of our academic and technological expertise, we have a portfolio of 505 patents, 32 of which we have obtained the patent rights and the remaining 473 of which we have applications pending in China as of September 30, 2018.

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).

 

 

 

 

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 December 2018. 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 September 30, 2018 include:

● Revenues were $297.2 million, a decrease of 4.6% from $311.4 million in the third quarter of 2017

● Gross profit was $47.2 million, a decrease of 0.2% from $47.3 million in the third quarter of 2017

● Gross profit margin was 15.9%, compared to 15.2% in the third quarter of 2017

● Net income was $9.0 million, compared to $14.1 million in the third quarter of 2017

● Total volume shipped was 108,832 metric tons, a slightly down 2.7% from 111,852 metric tons in the third quarter of 2017

Results of Operations

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

 

		Three-Month Period Ended												Nine-Month Period Ended
		September 30,								Change				September 30,								Change
(in millions, except  percentage)		2018				2017				%				2018				2017				%
Revenues			297.2				311.4				(4.6	)%			925.0				862.8				7.2	%
Cost of revenues			(250.0	)			(264.1	)			(5.3	)%			(767.8	)			(717.6	)			7.0	%
Gross profit			47.2				47.3				(0.2	)%			157.2				145.2				8.3	%
Total operating expenses			(34.2	)			(21.1	)			62.1	%			(69.3	)			(53.6	)			29.3	%
Operating income			13.0				26.2				(50.4	)%			87.9				91.6				(4.0	)%
Income before income taxes			5.5				17.2				(68.0	)%			63.5				62.8				1.1	%
Income tax benefit (expense)			3.5				(3.1	)			(212.9	)%			(8.2	)			(10.7	)			(23.4	)%
Net income			9.0				14.1				(36.2	)%			55.3				52.1				6.1	%

Revenues

As for the RMB selling price, the increase was mainly due to more sales of higher-end products of modified PA66, PA6 in China.

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The following table summarizes the breakdown of revenues by categories in millions of US$: 

The following table summarizes the breakdown of metric tons (MT) by product mix:

The Company continued to shift production mix from traditional ABS to higher-end products such as PA66, PA6, and plastic alloy, 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

Gross profit was US$47.2 million in the third quarter ended September 30, 2018, compared to US$47.3 million in the same period of 2017. Our gross margin increased to 15.9% during the third quarter ended September 30, 2018 from 15.2% during the same quarter of 2017 primarily due to more sales of higher-end products of 77.4% as compared to 74.9% for the same period of the prior year.

General and Administrative Expenses

General and administrative (G&A) expenses were US$8.1 million for the quarter ended September 30, 2018 compared to US$10.4 million in the same period in 2017, representing a decrease of 22.1%, or US$2.3 million. The decrease was primarily due to our approach on optimizing management structure and enhancing efficiency, leading to the decrease of (i) US$2.1 million in salary and welfare; (ii) US$0.6 million in miscellaneous expense; (iii) US$0.1 million in rental expense and partially offset by the increase of (iv) US$0.5 million in stock based compensation.

 

Research and Development Expenses

 

Research and development (R&D) expenses were US$23.3 million during the quarter ended September 30,  2018 compared with US$9.8 million during the same period in 2017, an increase of US$13.5 million, or 137.8%. 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.