China XD Plastics Co Ltd - Quarter Report: 2018 March (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, 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 May 4, 2018, the registrant had 49,727,731 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

		March 31,				December 31,
		2018				2017
		US$				US$
ASSETS
Current assets:
Cash and cash equivalents			50,814,789				190,392,211
Restricted cash			170,455,598				129,699,454
Time deposits			343,505,988				288,023,017
Accounts receivable, net of allowance for doubtful accounts			190,293,398				298,868,984
Inventories			556,919,906				421,736,682
Prepaid expenses and other current assets			111,816,277				144,326,151
Total current assets			1,423,805,956				1,473,046,499
Property, plant and equipment, net			844,425,358				835,561,739
Land use rights, net			33,025,874				31,943,652
Long-term prepayments to equipment and construction suppliers			224,826,888				190,627,514
Other non-current assets			13,148,575				12,924,279
Total assets			2,539,232,651				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			674,006,093				775,396,929
Bills payable			431,472,146				252,768,510
Accounts payable			47,678,749				227,993,140
Income taxes payable			15,879,046				17,710,217
Accrued expenses and other current liabilities			144,619,028				138,605,509
Total current liabilities			1,313,655,062				1,412,474,305
Long-term bank loans, excluding current portion			145,577,201				114,208,319
Deferred income			108,962,772				99,168,276
Other non-current liabilities			111,839,048				107,898,318
Total liabilities			1,680,034,083				1,733,749,218
Redeemable Series D convertible preferred stock (redemption amount of US$252,601,000     and US$244,044,200 as of March 31, 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, 49,748,731 shares and     49,748,731 shares issued, 49,727,731 shares and 49,727,731 shares outstanding as of      March 31, 2018 and December 31, 2017, respectively			4,975				4,975
Treasury stock, 21,000 shares at cost			(92,694	)			(92,694	)
Additional paid-in capital			83,242,685				83,159,893
Retained earnings			667,890,370				648,790,469
Accumulated other comprehensive income (loss)			10,576,667				(19,084,743	)
Total stockholders' equity			761,622,103				712,778,000
Commitments and contingencies			-				-
Total liabilities, redeemable convertible preferred stock and stockholders' equity			2,539,232,651				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 March 31,
		2018				2017
		US$				US$
Revenues			310,453,033				237,840,197
Cost of revenues			(256,585,577	)			(203,068,027	)
Gross profit			53,867,456				34,772,170
Selling expenses			(1,051,009	)			(518,813	)
General and administrative expenses			(8,875,009	)			(7,053,671	)
Research and development expenses			(5,049,898	)			(5,851,100	)
Total operating expenses			(14,975,916	)			(13,423,584	)
Operating income			38,891,540				21,348,586
Interest income			2,312,623				1,163,259
Interest expense			(12,894,205	)			(10,021,976	)
Foreign currency exchange losses			(3,955,808	)			(476,085	)
Losses on foreign currency option contracts			(520,981	)			-
Government grant			1,477,559				1,439,531
Total non-operating expense, net			(13,580,812	)			(7,895,271	)
Income before income taxes			25,310,728				13,453,315
Income tax expense			(6,210,827	)			(3,552,326	)
Net income			19,099,901				9,900,989
Earnings per common share:
Basic and diluted			0.29				0.15
Net Income			19,099,901				9,900,989
Other comprehensive income
Foreign currency translation adjustment, net of nil income taxes			29,661,410				3,918,303
Comprehensive income			48,761,311				13,819,292

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three-Month Period Ended March 31,
		2018				2017
		US$				US$
Cash flows from operating activities:
Net cash provided by (used in) operating activities			28,429,789				(47,564,499	)
Cash flows from investing activities:
Purchase of time deposits			(163,426,937	)			(59,853,272	)
Proceeds from maturity of time deposits			119,741,660				168,083,097
Purchase of and deposits for property, plant and equipment			(64,469,960	)			(328,428,788	)
Refund of deposit from an equipment supplier			60,054,417				75,052,508
Purchase of land use rights			-				(3,036,333	)
Government grant related to the industrial project for 300,000 metric tons biological composite materials			6,953,816				-
Net cash used in investing activities			(41,147,004	)			(148,182,788	)
Cash flows from financing activities:
Proceeds from bank borrowings			251,134,403				316,586,547
Repayment of bank borrowings			(347,339,779	)			(188,024,421	)
Net cash (used in) provided by financing activities			(96,205,376	)			128,562,126
Effect of foreign currency exchange rate changes on cash, cash equivalents, and restricted cash			10,101,313				1,608,314
Net decrease in cash, cash equivalents, and restricted cash			(98,821,278	)			(65,576,847	)
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			221,270,387				205,999,000
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest			11,062,464				8,482,216
Income taxes paid			7,064,571				5,057,042
Non-cash investing and financing activities:
Accrual for purchase of property, plant and equipment			196,911				4,147,349

 

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.

		Three-Month Period Ended March 31,
		2018				2017
		US$				US$
Cash and cash equivalents			50,814,789				57,695,720
Restricted cash			170,455,598				148,303,280
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows			221,270,387				205,999,000

 

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, accounting pronouncement adopted in 2018 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, 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 March 31, 2018, the results of operations and cash flows for the three-month periods ended March 31, 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 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.

 

 

 

(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, 2018 and 2017, are as follows:

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 30.3% (three distributors) and 40.4% (three distributors) , of the Company's total raw material purchases for the three-month periods ended March 31, 2018 and 2017, 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 cash equivalents, short-term restricted cash and time deposits mentioned below maintained at banks consist of the following:

 

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 and included from cash and cash equivalents in the consolidated statements of cash flows.

Short-term bank deposits that are pledged as collateral for bills payable relating to purchases of raw materials are reported as restricted cash and amounted to US$128,255,435 and US$65,766,735 as of March 31, 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.

 

Short-term bank deposits that are pledged as collateral for short-term and long-term bank borrowings are reported as restricted cash and amounted to US$40,600,499 and US$59,884,913 as of March 31, 2018 and December 31, 2017, respectively.  The cash flows from such bank deposits are reported within cash flows from financing activities in the consolidated statements of cash flows.

Short-term bank deposits that are related to government grant are reported as restricted cash and amounted to US$1,599,664 and US$1,537,935 as of March 31, 2018 and December 31, 2017, respectively. On February 11, 2017, the Company entered into a fund support agreement with the People's Government of Shunqing District, Nanchong City, Sichuan Province, pursuant to which the Company was granted RMB10 million (equivalent to US$1.5 million) to support the construction of the Sichuan plant. Such amount has been received in full in the Company's bank account with reimbursement be subject to the Government's pre-approval and will be released by the Government when the construction progress of the plant is 60%. Such balance is reported as restricted cash.

Short-term bank deposits that are pledged as collateral for foreign currency option contract are reported as restricted cash and amounted to nil and US$2,509,871 as of March 31, 2018 and December 31, 2017, respectively. The cash flows from such bank deposits are reported within operating activities in the consolidated statements of cash flows.

Note 2 – Accounts receivable

Accounts receivable consists of the following:

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(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$264.6 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$260.9 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.

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For the three-month periods ended March 31, 2018 and 2017, the Company capitalized US$643,788 and US$638,302 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:

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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$274.9 million) as of March 31, 2018. By the end of June 2017, in order to ensure the traceability of the product and management of supply chain, Sichuan Xinda expected to launch an integrated ERP system, which resulted in the equipment to be purchased under the original contracts with Hailezi not meeting the production requirements. Hailezi agreed to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$271.1 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$2  million) to Hailezi for the compensation of Hailezi due to the termination of the purchase contracts. As of March 31, 2018, Hailezi has refunded the above-mentioned prepayment.

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On December 1, 2017, the Company obtained a seven-year unsecured loan of RMB526.3 million (equivalent to US$83.7 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$26.8 million) in January 2018 at an annual interest rate of 4.9%.  RMB15 million (equivalent to US$2.4 million), RMB20 million (equivalent to US$3.1 million), RMB35 million (equivalent to US$5.6 million), RMB35 million (equivalent to US$5.6 million), RMB70 million (equivalent to US$11.1 million), RMB70 million (equivalent to US$11.1 million) and RMB450.4 million (equivalent to US$71.6 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 March 31, 2018, the Company had total lines of credit of RMB7,719.2 million (US$1,227.6 million) including unused lines of credit of RMB2,506.0 million (US$398.6 million) with remaining terms less than 12 months and RMB59.6 million (US$9.4 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 March 31, 2018, the Company has met these financial covenants.

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, 2018 and 2017 were 24.5% and 26.4%, respectively.  The effective income tax rate reduced from 26.4% for the three-month period ended March 31, 2017 to 24.5% for the three-month period ended March 31, 2018, primarily due to the decrease of continuous operating loss occurred in oversea subsidiaries such as Xinda Holding (HK) and Dubai Xinda, and partially offset by the decrease of Sichuan Xinda’s profit before tax (“PBT”) ratio. The effective income tax rate for the three-month period ended March 31, 2018 differs from the PRC statutory income tax rate of 25% primarily due to Sichuan Xinda's preferential income tax rate and R&D 50% additional deduction of the major PRC operating entities.

As of March 31, 2018, the unrecognized tax benefits were US$36,918,222 and the interest relating to unrecognized tax benefits was US$11,970,649, of which the unrecognized tax benefits in 2012 amounting to US$3,049,716 and related accrued interest amounting to US$ 2,665,451 was classified as current liabilities as the five-year tax assessment period will expire on May 31, 2018.  No penalties expense related to unrecognized tax benefits were recorded. The Company is currently unable to provide an estimate of a range of the total amount of unrecognized tax benefits that is reasonably possible to change significantly within the next twelve months.

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The Sichuan factory has been operational since July 2016. A cumulative RMB46.5 million (equivalent to US$7.4 million) government grants have been amortized as other income proportionate to the depreciation of the related assets, of which RMB7.1 million (equivalent to US$1.1 million) was amortized in the three-month period ended March 31, 2018.

 

The Company also received RMB36.0 million (equivalent to US$5.7 million) from Shunqing Government with respect to interest subsidy for bank loans. A cumulative RMB16.4 million (equivalent to US$2.6 million) government grants have been amortized as other income in line with the amount of related loan interest paid of which no amortization in the three-month period ended March 31, 2018.

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Note 16 - Earnings per share

Basic and diluted earnings per share are calculated as follows:

		Three-Month Period Ended March 31,
		2018				2017
		US$				US$
Numerator:
Net income			19,099,901				9,900,989
Less:
Earnings allocated to participating Series D convertible preferred stock			(4,638,091	)			(2,404,280	)
Earnings allocated to participating nonvested shares			(46,703	)			(56,733	)
Net income for basic and dilutive earnings per share			14,415,107				7,439,976
Denominator:
Denominator for basic and diluted earnings per share			49,727,731				49,511,541
Earnings per share:
Basic and diluted			0.29				0.15

The following table summarizes potentially dilutive securities excluded from the calculation of diluted earnings per share for the three-month periods ended March 31, 2018 and 2017 because their effects are anti-dilutive:

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Note 17 - Commitments and contingencies

(1)    Lease commitments

Future minimum lease payments under non-cancellable operating leases agreements as of March 31, 2018 were as follows. 

Rental expenses incurred for operating leases of plant and equipment and office spaces were US$581,354 and US$660,351 for the three-month periods ended March 31, 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.

(2)   Sichuan plant construction and equipment purchase

On March 8, 2013, Xinda Holding (HK) entered into an investment agreement with Shunqing Government, pursuant to which Xinda Holding (HK) will invest RMB1.8 billion (equivalent to US$0.3 billion) in property, plant and equipment and approximately RMB0.6 billion (equivalent to US$0.1 billion) in working capital, for the construction of Sichuan plant.  As of March 31, 2018, the Company has a remaining commitment of RMB54.8 million (equivalent to US$8.6 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$2.7 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$0.3 million). As of March 31, 2018, Sichuan Xinda prepaid RMB6.0 million (equivalent to US$1.0 million) and has a remaining commitment of RMB9.4 million (equivalent to US$1.4 million).

On October 20, 2016, Sichuan Xinda entered into an equipment purchase agreement purchase contract with Peaceful for a total consideration of RMB89.8 million (equivalent to US$14.3 million) to purchase certain production and testing equipment. As of March 31, 2018, the Company has a commitment of RMB55.9 million (equivalent to US$8.9 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$37.8 million).  On February 20, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform outdoor decoration work for a consideration of RMB2.9 million (equivalent to US$0.5 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$3.8 million). As of March 31, 2018, Sichuan Xinda prepaid RMB119.8 million (equivalent to US$19.0 million) of which RMB54.4 million (equivalent to US$8.6 million) was transferred to construction in progress and has a remaining commitment of RMB144.5 million (equivalent to US$23.1 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$356.7 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$353.5 million), and Hailezi agreed to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$271.1 million) by the end of March 2018, out of the total prepayment made by Sichuan Xinda of RMB1,722.9 million (equivalent to US$273.9 million). As of March 31, 2018, Hailezi has refunded the prepayment in the amount of RMB1,704.9 million (equivalent to US$271.1 million). As of March 31, 2018, Sichuan Xinda prepaid RMB18.0 million (equivalent to US$2.9 million) and has a remaining commitment of RMB2.0 million (equivalent to US$0.4 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 RMB31.1 million (equivalent to US$5.0 million) as of March 31, 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$638.5 million), among which the investment in fixed assets shall be no less than RMB3,295.0 million (equivalent to US$524.0 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$2.9 million) as of March 31, 2018.

(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, 2018, the Company has a remaining commitment of AED3.3 million (equivalent to US$0.6 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, 2018, 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, 2018, 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, 2018, 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, 2018, the Company has a remaining commitment of RMB0.6 million (equivalent to US$0.1 million).

(6)    Xinda Shanghai Research & Development office building

In connection with the building purchase contract mentioned in Note 6 (ii), HLJ Xinda Group has a remaining commitment of RMB108.3 million (equivalent to US$17.2 million) as of March 31, 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 454 certifications from manufacturers in the automobile industry as of March 31, 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 522 professionals and 11 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 443 patents, 32 of which we have obtained the patent rights and the remaining 411 of which we have applications pending in China as of March 31, 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 June 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 March 31, 2018 include:

		Three-Month Period Ended March 31,
(in thousands, except percentages)		2018								2017
		Amount				%				Amount				%
Revenues		$	310,453				100	%		$	237,840				100	%
Cost of revenues		$	256,586				83	%		$	203,068				85	%
Gross profit		$	53,867				17	%		$	34,772				15	%
Total operating expenses		$	14,976				5	%		$	13,424				6	%
Operating income		$	38,891				12	%		$	21,348				9	%
Income before income taxes		$	25,311				8	%		$	13,453				6	%
Income tax expenses		$	6,211				2	%		$	3,552				2	%
Net income		$	19,100				6	%		$	9,901				4	%

 

 

 

 

(in millions, except percentage)		Revenues For the Three-Month Period Ended March 31,
		2018								2017								Change in				Change in
		Amount				%				Amount				%				Amount				%
Modified Polyamide 66 (PA66)			81.8				26.3	%			64.7				27.2	%			17.1				26.4	%
Plastic Alloy			78.6				25.3	%			62.7				26.4	%			15.9				25.4	%
Modified Polyamide 6 (PA6)			64.0				20.6	%			57.6				24.2	%			6.4				11.1	%
Modified Polypropylene (PP)			50.2				16.2	%			38.0				16.0	%			12.2				32.1	%
Modified Acrylonitrile butadiene styrene (ABS)			8.6				2.8	%			6.4				2.7	%			2.2				34.4	%
Polyoxymethylenes (POM)			2.1				0.7	%			2.5				1.1	%			(0.4	)			(16.0	)%
Polyphenylene Oxide (PPO)			4.3				1.4	%			5.8				2.4	%			(1.5	)			(25.9	)%
PLA			20.9				6.7	%			0.1				0.0	%			20.8				208.0	%
Raw Materials			0				0.0	%			0				0.0	%			0.0				N/A	%
Total Revenues			310.5				100	%			237.8				100	%			72.7				30.6	%

 

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,
		2018								2017								Change in				Change in
		MT				%				MT				%				MT				%
Modified Polyamide 66 (PA66)			19,591				18.4	%			14,608				17.1	%			4,983				34.1	%
Plastic Alloy			26,787				25.2	%			24,520				28.6	%			2,267				9.2	%
Modified Polyamide 6 (PA6)			20,896				19.7	%			18,004				21.1	%			2,892				16.1	%
Modified Polypropylene (PP)			31,613				29.8	%			23,428				27.4	%			8,185				34.9	%
Modified Acrylonitrile butadiene styrene (ABS)			3,923				3.7	%			2,862				3.4	%			1,061				37.1	%
Polyoxymethylenes (POM)			610				0.6	%			862				1.0	%			(252	)			(29.2	)%
Polyphenylene Oxide (PPO)			690				0.6	%			905				1.1	%			(215	)			(23.8	)%
PLA			2,126				2.0	%			11				0.0	%			2,115				192.27	%
Raw Materials			-				0.0	%			216				0.3	%			(216	)			(100	)%
Total Sales Volume			106,236				100	%			85,416				100	%			20,820				24.4	%

 

Gross Profit and Gross Profit Margin

Gross profit was US$53.9 million in the quarter ended March 31, 2018, compared to US$34.8 million in the same period of 2017, representing an increase of 54.9% or US$19.1 million. Our gross margin increased to 17.4% during the quarter ended March 31, 2018 from 14.6% during the same quarter of 2017 primarily due to  higher gross margin of higher-end products in domestic market for the first quarter ended March 31, 2018 as compared to that of the prior year.

General and administrative (G&A) expenses were US$8.9 million in the quarter ended March 31, 2018 compared to US$7.1 million in the same period in 2017, representing an increase of 25.4%, or US$1.8 million. This increase is primarily due to the increase of US$0.9 million salary and welfare which was due to an increase in the number of management and general staff from supporting departments and the increase of US$0.9 million in professional fee.

Research and Development Expenses

R&D expenses were US$5.0 million during the quarter ended March 31, 2018 compared with US$5.9 million during the same period in 2017, a decrease of US$0.9 million, or 15.3%. The decrease was primarily due to the decrease of raw materials used by HLJ Xinda Group.

As of March 31, 2018, the number of ongoing research and development projects was 326. 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$38.9 million in the first quarter ended March 31, 2018 compared to $21.3 million in the same period of 2017, representing an increase of 82.6% or US$17.6 million. This increase is primarily due to increased gross profit, lower research and development expenses, partially offset by a higher G&A expenses and selling expenses.

Interest Income (Expenses)

 

		Three-Month Period Ended March 31,								Change
(in millions, except percentage)		2018				2017				Amount				%
Interest Income		$	2.3			$	1.2			$	1.1				91.7	%
Interest Expenses			(12.9	)			(10.0	)			(2.9	)			29.0	%
Net Interest Expenses		$	(10.6	)		$	(8.8	)		$	(1.8	)			20.5	%
as a percentage of revenues			(3.3	)%			(3.7	)%							0.4	%

 

 

Income Taxes

 

	Three-Month Period Ended March 31,								Change
(in millions, except percentage)	2018				2017				Amount					%
Income before Income Taxes		$	25.3			$	13.5			$	11.8				87.4	%
Income Tax Expense			(6.2	)			(3.6	)			(2.6	)			72.2	%
Effective income tax rate			24.5	%			26.4	%							(1.9	)%

Net Income

As a result of the above factors, we had a net income of US$19.1 million in the first quarter of 2018 compared to a net income of US$9.9 million in the same quarter of 2017.

Selected Balance Sheet Data as of March 31, 2018 and December 31, 2017:

		March 31, 2018				December 31, 2017				Change
(in millions, except percentage)										Amount				%
Cash and cash equivalents			50.8				190.4				(139.6	)			(73.3	)%
Restricted cash			170.5				129.7				40.8				31.5	%
Time deposits			343.5				288.0				55.5				19.3	%
Accounts receivable, net of allowance for doubtful accounts			190.3				298.9				(108.6	)			(36.3	)%
Inventories			556.9				421.7				135.2				32.1	%
Prepaid expenses and other current assets			111.8				144.3				(32.5	)			(22.5	)%
Property, plant and equipment, net			844.4				835.6				8.8				1.1	%
Land use rights, net			33.0				31.9				1.1				3.4	%
Prepayments to equipment and construction suppliers			224.8				190.6				34.2				17.9	%
Other non-current assets			13.1				12.9				0.2				1.6	%
Total assets			2,539.2				2,544.1				(4.9	)			(0.2	)%
Short-term  bank loans, including current portion of long-term bank loans			674.0				775.4				(101.4	)			(13.1	)%
Bills payable			431.5				252.8				178.7				70.7	%
Accounts payable			47.7				228.0				(180.3	)			(79.1	)%
Income taxes payable, including noncurrent portion			109.4				108.4				1.0				0.9	%
Accrued expenses and other current liabilities			144.6				138.6				6.0				4.3	%
Long-term bank loans, excluding current portion			145.6				114.2				31.4				27.5	%
Deferred income			109.0				99.2				9.8				9.9	%
Redeemable Series D convertible preferred stock			97.6				97.6				-				-
Stockholders' equity			761.6				712.8				48.8				6.8	%

LIQUIDITY AND CAPITAL RESOURCES

A summary of lines of credit for the three-month period ended March 31, 2018 and the remaining line of credit as of March 31, 2018 is as below: 

 

We have historically been able to make repayments when due. As of March 31, 2018, we have contractual obligations to pay (i) lease commitments in the amount of US$11.5 million, including US$1.4 million due in one year; (ii) equipment acquisition and facility construction in the amount of US$68.8 million; and (iii) long-term bank loan in the amount of US$424.4 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.

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

		Three-Month Period Ended March 31,
(in millions US$)		2018				2017
Net cash provided by (used in) operating activities			28.4				(47.6	)
Net cash used in investing activities			(41.1	)			(148.2	)
Net cash (used in) provided by financing activities			(96.2	)			128.6
Effect of foreign currency exchange rate changes on cash, cash equivalents and restricted cash			10.1				1.6
Net decrease in cash, cash equivalents, and restricted cash			(98.8	)			(65.6	)
Cash, cash equivalents, and restricted cash at the beginning of period			320.1				271.6
Cash, cash equivalents, and restricted cash at the end of period			221.3				206.0

Inventory turnover days have increased from 120 days for the year ended December 31, 2017 to 172 days for the quarter ended March 31, 2018. Turnover days of payables have decreased from 94 days for the year ended December 31, 2017 to 48 days for the quarter ended March 31, 2018.

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.

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COMMITMENTS AND CONTINGENCIES

Contractual Obligations

Our contractual obligations as of March 31, 2018 are as follows: