China XD Plastics Co Ltd - Quarter Report: 2019 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, 2019

or

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

For the transition period from ____ to _____

Commission File Number: 000-53131

CHINA XD PLASTICS COMPANY LIMITED

(Exact name of registrant as specified in its charter)

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

Harbin Development Zone, Heilongjiang Province, PRC 150060

(Address of principal executive offices) (Zip Code)

86-451-84346600

(Registrant's telephone number, including area code)

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

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

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit

such files). Yes ☒ No ☐

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

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

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

Securities registered pursuant to Section 12(b) of the Act:

 

As of May 10, 2019, the registrant had were 50,948,841 shares of common stock, par value US$0.0001 per share, outstanding.

 

 

TABLE OF CONTENTS

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

See accompanying notes to unaudited condensed consolidated financial statements.

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

See accompanying notes to unaudited condensed consolidated financial statements.

 

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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 and significant concentrations and risks

 

(a) Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by rules and regulations of the United States Securities and Exchange Commission ("SEC"). The condensed consolidated balance sheet as of December 31, 2018 was derived from the audited consolidated financial statements of China XD Plastics Company Limited ("China XD") and subsidiaries (collectively, the "Company"). The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, included in the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2019.

In the opinion of the management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of March 31, 2019, the results of operations and cash flows for the three-month periods ended March 31, 2019 and 2018, have been made.

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

(b) Accounting pronouncement adopted in 2019

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

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

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

 

 

 

(c) Significant concentrations and risks

Sales concentration

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

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

 

Purchase concentration of raw materials and equipment

The principal raw materials used for the Company's production of modified plastics products are plastic resins, such as polypropylene, ABS and nylon. The Company purchases substantially all of its raw materials through a limited number of distributors.  Raw material purchases from these distributors, which individually exceeded 10% of the Company's total raw material purchases, accounted for approximately 37.8% (three distributors) and 30.3% (three distributors), of the Company's total raw material purchases for the three-month periods ended March 31, 2019 and 2018, respectively. Management believes that other suppliers could provide similar raw materials on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect the Company's business, financial position and results of operations.

Cash concentration

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

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

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

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

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

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

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

 

Note 2 – Accounts receivable

 

Accounts receivable consists of the following:

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

 

 

The following table provides an analysis of the aging of accounts receivable as of March 31, 2019 and December 31, 2018:

 

 

Note 3 – Inventories

Inventories consist of the following:

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

Note 4 – Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

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

 

 

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

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

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

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

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

Note 5 – Property, plant and equipment, net

Property, plant and equipment consist of the following:

 

 

 

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

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$116.2 million) to purchase storage facility and other equipment, which will be used for upgrading the storage system of warehouse located in Harbin, China. Pursuant to the contract with Hailezi, HLJ Xinda Group prepaid RMB621.6 million (equivalent to US$92.3 million) during the first quarter of 2017.  Due to a redesign of outdoor storage facility in June 2017, HLJ Xinda Group entered into a supplementary agreement with Hailezi, which decreased the original contract amount to RMB283.7 million (equivalent to US$42.1 million). Hailezi refunded RMB369.1 million (equivalent to US$54.8 million) to HLJ Xinda Group on June 22, 2017. As of March 31, 2019, HLJ Xinda Group has prepaid RMB252.5 million (equivalent to US$37.5 million). 

On July 21, 2017, HLJ Xinda Group entered into three investment agreements with the Management Committee of Harbin Economic- Technological Development Zone with respect to the industrial project for 300,000 metric tons of biological composite materials, the industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics and the industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory (the "HLJ Project"). In order to fulfill the agreements, HLJ Xinda Group entered into an equipment purchase contract with Hailezi to purchase production equipment in November 2017, which will be used for 100,000 metric tons of engineering plastics located in Harbin, for a consideration of RMB939.7 million (equivalent to US$139.6million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB920.9 million (equivalent to US$136.8 million) as of March 31, 2019.

 

 

In connection with the Nanchong Project, Sichuan Xinda entered into equipment purchase contracts with Hailezi to purchase production equipment and testing equipment. Pursuant to the contracts with Hailezi, Sichuan Xinda prepaid RMB1,728.9 million (equivalent to  US$256.8 million) in the first quarter of year 2017. In 2017, in order to ensure the traceability of the product and management of supply chain, Sichuan Xinda expected to launch an integrated ERP system, which resulted in the equipment to be purchased under the original contracts with Hailezi not meeting the production requirements. Hailezi agreed to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$253.2 million) by the end of March 2018, the remaining uncancelled amount is RMB24.0 (equivalent to US$3.6 million). As of December 31, 2017, Sichuan Xinda signed a supplementary agreement with Hailezi, pursuant to the agreement, Sichuan Xinda agreed to pay RMB12.4 million (equivalent to US$1.8 million) to Hailezi for the compensation of Hailezi due to the termination of the purchase contracts. As of March 31, 2019, Hailezi has refunded the above-mentioned prepayment.  The Company received the testing equipment in the amount of RMB3.2 million (equivalent to US$0.5 million) in November 2018, the remaining balance of the uncancelled prepayment as of March 31, 2019 is RMB20.8 million (equivalent to US$3.1 million).

 

 

The table below summarized the balance of prepayments to Hailezi for each of the projects as of March 31, 2019 and December 31, 2018, and the movements of the prepayments:

 

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

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

(iii) Since November 15, 2016, Sichuan Xinda entered into decoration contracts with Sichuan Beijin Construction Engineering Company Limited ("Beijin Construction") to perform indoor and outdoor decoration work for a consideration of RMB237.6 million (equivalent to US$35.4 million). On February 20, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform outdoor decoration work for a consideration of RMB2.9 million (equivalent to US$0.4 million). On September 10, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform ground decoration work for a consideration of RMB23.8 million (equivalent to US$3.5 million). Pursuant to the contracts with Beijin Construction, Sichuan Xinda has prepaid RMB120.9 million (equivalent to US$18.0 million) as of March 31, 2019, of which RMB74.0 million (equivalent to US$11.0 million) was transferred to construction in progress. The prepayment was recognized in investing activities in the statements of cash flows.

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

Note 7 – Losses on foreign currency option contracts

 

On February 24, 2017, the Company entered into two foreign currency option contracts with Bank of China ("BOC"), Harbin Branch, pursuant to which the Company and BOC both have options to excise the foreign currency contracts depending on the future currency fluctuation, and the nominal values are US$5.0 million and US$10.0 million, respectively, with the defined exchange rates for settlement on March 15, 2018. The Company recognized losses on the above foreign currency option contracts amounting to US$0.5 million in the three-month period ended March 31, 2018.

 

 

 

Note 8 – Borrowings

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

(a)  Current

 

During year 2018, the Company obtained thirty-four loans in a total amount of RMB1,350.0 million (equivalent to US$200.5 million) secured by accounts receivables of RMB1,948.9 million (equivalent to US$289.4 million) at an annual interest rate of 4.350%. The Company repaid twenty-one loans in total RMB900.0 million (equivalent to US$133.7 million), and retrieved accounts receivables of RMB1,299.8 million (equivalent to US$193.0 million) in year 2018.  As of March 31, 2019, the remaining loans secured by accounts receivables were RMB450.0 million (equivalent to US$66.8 million).

In July 2017, the Company obtained a one-year secured loan of US$14.0 million from Bank of China (Paris Branch) at an annual interest rate of 2.5%. The loan was secured by restricted cash of RMB107.0 million (equivalent to US$15.9 million) in Bank of China in Harbin, China. In accordance with the renewal agreement on July 19, 2018, the repayment term of the loan was extended and the loan was subsequently repaid in April 2019.

 

In October 2017, the Company obtained a one-year secured loan of US$5.0 million from Bank of China (Paris Branch) at an annual interest rate of 2.5%. The loan was secured by restricted cash of RMB37.5 million (equivalent to US$5.6 million) in Bank of China in Harbin, China. In accordance with the renewal agreement on July 19, 2018, the repayment term of the loan was extended and the loan was subsequently repaid in April 2019.

 

In October 2017, the Company obtained a one-year secured loan of US$5.5 million from Bank of China (Paris Branch) at an annual interest rate of 2.5%. The loan was secured by restricted cash of RMB42.0 million (equivalent to US$6.2 million) in Bank of China in Harbin, China. In accordance with the renewal agreement on July 19, 2018, the repayment term of the loan was extended and the loan was subsequently repaid in April 2019.

 

In May 2018, the Company obtained a three-month secured short-term loan of US$45.0 million from Standard Chartered Bank with the interest rate at 1.5% per annum over LIBOR payable on the last day of its interest period. The loan was secured by restricted cash of RMB300.0 million (equivalent to US$44.6 million) in Standard Chartered Bank in Harbin, China.  The Company did not repay the loan on time which is due on August 17, 2018 due to the stricter foreign exchange control in the PRC. Management is in the discussion with the Standard Chartered Bank to resolve this matter.

(b) Non-current

 

 

 

 

 Note 9 – Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:

(i) Contract liabilities mainly represent the advance received from customers in the PRC for the finished goods and raw materials purchases as of March 31, 2019. The change in contract liabilities primarily represents the cash received, less amounts recognized as revenues during the period.

Note 10 – Related party transactions

 

Note 11 – Income tax

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

The effective income tax rates for the three-month periods ended March 31, 2019 and 2018 were 24.9% and 24.5%, respectively.  The effective income tax rate increased from 24.5% for the three-month period ended March 31, 2018 to 24.9% for the three-month period ended March 31, 2019, primarily due to the decrease of Sichuan Xinda's profit before tax ("PBT") ratio. The effective income tax rate for the three-month period ended March 31, 2019 differs from the PRC statutory income tax rate of 25% primarily due to Sichuan Xinda's preferential income tax rate and  75% additional deduction of R&D expenses of the major PRC operating entities.

 

As of March 31, 2019, the unrecognized tax benefits were US$34,626,289 and the interest relating to unrecognized tax benefits was US$13,710,137, of which the unrecognized tax benefits in year 2013 amounting to US$3,752,714 and related accrued interest amounting to US$3,164,360 were classified as current liabilities as the five-year tax assessment period will expire on May 31, 2019. No penalties expense related to unrecognized tax benefits were recorded. The Company is currently unable to provide an estimate of a range of the total amount of unrecognized tax benefits that is reasonably possible to change significantly within the next twelve months.

Note 12 – Deferred Income

On January 26, 2015, the Company entered into a memorandum and a fund support agreement (the "Agreement") with the People's Government of Shunqing District, Nanchong City, Sichuan Province ("Shunqing Government") pursuant to which Shunqing Government, through its investment vehicle, extended to the Company RMB350 million (equivalent to US$52.0 million) to support the construction of the Sichuan plant, which has been received in full in the form of government repayment of bank loans on behalf of the Company.

In addition, the Company has received RMB332.2 million (equivalent to US$49.3 million) from Shunqing Government and RMB6.4 million (equivalent to US$1.0 million) from Ministry of Finance of the People's Republic of China to support the construction and RMB2.2 million (equivalent to US$0.3 million) special funds of ministerial key research projects from Ministry of Science and Technology of PRC as of March 31, 2019.

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

 

 

Since the funding is related to the construction of long-term assets, the amounts were recognized as government grant, which is included in deferred income on the consolidated balance sheets, and to be recognized as other income in the consolidated statements of comprehensive income over the periods and in the proportions in which depreciation expense on the long-term assets is recognized.

The Sichuan factory has been operational since July 2016. A cumulative RMB80.2 million (equivalent to US$11.9 million) government grants have been amortized as other income proportionate to the depreciation of the related assets, of which RMB8.7 million (equivalent to US$1.3 million) was amortized in the three-month period ended March 31, 2019.

The Company also received RMB36.0 million (equivalent to US$5.3 million) from Shunqing Government with respect to interest subsidy for bank loans. A cumulative RMB16.4 million (equivalent to US$2.4 million) government grants have been amortized as other income in line with the amount of related loan interest accrued.

Note 13 – Other non-current liabilities

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

Note 14 – Stockholders' equity

The changes of each caption of stockholders' equity for the three-month period ended March 31, 2019 are as follows:

 

 

Note 15 - Earnings per share

Basic and diluted earnings per share are calculated as follows:

 

The following table summarizes potentially dilutive securities excluded from the calculation of diluted earnings per share for the three-month periods ended March 31, 2019 and 2018 because their effects are anti-dilutive:

 

 

Note 16 - Commitments and contingencies

 

(1)   Sichuan plant construction and equipment purchase

On March 8, 2013, Xinda Holding (HK) entered into an investment agreement with Shunqing Government, pursuant to which Xinda Holding (HK) will invest RMB1,800 million (equivalent to US$267.3 million) in property, plant and equipment and approximately RMB600 million (equivalent to US$89.1 million) in working capital, for the construction of Sichuan plant.  As of March 31, 2019, the Company has a remaining commitment of RMB54.8 million (equivalent to US$8.1 million) mainly for facility construction.

In September 2016, Sichuan Xinda entered into equipment purchase contracts with Hailezi for a consideration of RMB17.0 million (equivalent to US$2.5 million) to purchase storage facility and testing equipment. Afterward, Sichuan Xinda cancelled two contracts with Hailezi for a consideration of RMB1.6 million (equivalent to US$0.2 million). As of March 31, 2019, Sichuan Xinda prepaid RMB6.0 million (equivalent to US$0.9 million) and has a remaining commitment of RMB9.4 million (equivalent to US$1.4 million).

On October 20, 2016, Sichuan Xinda entered into an equipment purchase contract with Peaceful for a total consideration of RMB89.8 million (equivalent to US$13.3 million) to purchase certain production and testing equipment. As of March 31, 2019, the Company has a commitment of RMB55.9 million (equivalent to US$8.3 million).

On November 15, 2016, Sichuan Xinda entered into decoration contract with Beijin Construction  to perform indoor and outdoor decoration work for a consideration of RMB237.6 million (equivalent to US$35.4 million).  On February 20, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform outdoor decoration work for a consideration of RMB2.9 million (equivalent to US$0.4 million). On June 10, 2017, Sichuan Xinda entered into another decoration contract with Beijin Construction to perform ground decoration work for a consideration of RMB23.8 million (equivalent to US$3.5 million). As of March 31, 2019, Sichuan Xinda prepaid RMB120.9 million (equivalent to US$18.0 million) of which RMB74.0 million (equivalent to US$11.0 million) was transferred to construction in progress and has a remaining commitment of RMB143.4 million (equivalent to US$21.3 million).

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

  

 

 

 

(2)  Heilongjiang plant construction and equipment purchase

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

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

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

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

(3)  Dubai plant construction and equipment

On April 28, 2015, Dubai Xinda entered into a warehouse construction contract with Falcon Red Eye Contracting Co. L.L.C. for a total consideration of AED6.7 million (equivalent to US$1.8 million). As of March 31, 2019, the Company has a remaining commitment of AED1.6 million (equivalent to US$0.4 million).

(4)  Xinda CI (Beijing) office building decoration

On March 30, 2017, Xinda CI (Beijing) Investment Holding Co., Ltd. ("Xinda Beijing Investment") entered into a decoration contract with Beijing Fangyuan Decoration Engineering Co., Ltd. for a total consideration of RMB5.8 million (equivalent to US$0.9 million) to decorate office building. As of March 31, 2019, the decoration work in the amount of RMB2.0 million (equivalent to US$0.3 million) was recorded in construction in progress. As of March 31, 2019, the Company has a remaining commitment of RMB3.8 million (equivalent to US$0.6 million).

On June 9, 2017, Xinda CI (Beijing) entered into a decoration contract with Beijing Zhonghongwufang Stone Co., Ltd for a total consideration of RMB1.2 million (equivalent to US$0.2 million) to decorate office building. As of March 31, 2019, the decoration work in the amount of RMB0.6 million (equivalent to US$0.1 million) was recorded in construction in progress. As of March 31, 2019, the Company has a remaining commitment of RMB0.6 million (equivalent to US$0.1 million).

 

 

 

Note 17 - Revenues

Revenues consist of the following:

The following table provides sales by major customer group for the three-month periods ended March 31, 2019 and 2018:

Note 18 - Gains on disposal of a subsidiary

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

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

 

 

 

Note 19 - Leases

As discussed in Note 1, effective January 1, 2019, the Company adopted Topic 842. At the inception of a contract, the Company determines if the arrangement is, or contains, a lease. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Rent expense is recognized on a straight-line basis over the lease term.

The Company has made certain accounting policy elections whereby it does not recognize ROU assets or lease liabilities for short-term leases (those with original terms of 12-months or less). All of the Company’s existing leases as of March 31, 2019 were classified as operating leases. As of March 31, 2019, the Company had operating leases for land and office with remaining terms expiring from 2022 through 2037 and a weighted average remaining lease term of 18.01 years. Weighted average discount rate used in the calculation of the lease liabilities was 6.7%. The discount rate reflects the estimated incremental borrowing rate, which includes an assessment of the credit rating to determine the rate that the Company would have to pay to borrow, on a collateralized basis for a similar term, an amount equal to the lease payments in a similar economic environment.

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

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

 

Supplemental cash flow information related to leases is as follows:

 

 

 

 

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

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

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).

 

 

 

The Company's products are primarily used in the production of exterior and interior trim and functional components of 31 automobile brands and 103 automobile models manufactured in China, including Audi, Mercedes Benz, BMW, Toyota, Buick, Chevrolet, Mazda, Volvo, Ford, Citroen, Jinbei, VW Passat, Golf, Jetta, etc.  Our research center is dedicated to the research and development of modified plastics, and benefits from its cooperation with well-known scientists from prestigious universities in China. We operate three manufacturing plants in Harbin, Heilongjiang in the PRC. As of March 31, 2019, in Harbin, Heilongjiang Province, we had approximately 290,000 metric tons of production capacity across 64 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwanese conveyer systems. In December 2013, we broke ground on the construction of our fourth production plant in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, which we expect will bring total domestic installed production capacity to 590,000 metric tons with the addition of 70 new production lines upon the completion of the construction of our fourth production plant. Sichuan Xinda has been supplying to its customers since 2013. We installed 50 production lines in the second half of 2016 in our Sichuan plant with production capacity of 216,000 metric tons during the year of 2017 and an additional 10 production lines in July 2018, bringing the total capacity to 259,200 metric tons. As of March 31, 2019, there is still construction ongoing on the site of our Sichuan plant which is to be expected to be completed by the end of the third quarter of 2019. In order to develop potential overseas markets, Dubai Xinda obtained one leased property and two purchased properties, approximately 52,530 square meters in total, including one leased 10,000 square meters, and two purchased 20,206 and 22,324 square meters on January 25, 2015, June 28, 2016 and September 21, 2016, respectively, from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE, with constructed building comprising warehouses, offices and service blocks. In addition to the earlier 10 trial production lines in Dubai Xinda, the Company completed installing 45 production lines with 11,250 metric tons of annual production capacity by the end of November 2018, and  an additional 40 production lines with 13,000 metric tons of annual production capacity were still in construction ongoing, expected to be completed by the end of 2019, bringing total installed production capacity in Dubai Xinda to 24,250 metric tons, targeting high-end products for the overseas market.

  

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

●    Revenues were $301.5 million, a decrease of 2.9% from $310.5 million in the first quarter of 2018

●    Gross profit was $50.3 million compared to $53.9 million in the first quarter of 2018

●    Gross profit margin decreased to 16.7% from 17.4% in the first quarter of 2018

●    Net income was $11.0 million compared to $19.1 million in the first quarter of 2018

●    Total volume shipped was 94,444 metric tons, down 11.1% from 106,236 metric tons in the first quarter of 2018

 

 

 

Results of Operations

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

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

Revenues

 

 

 

(ii) Overseas market

For the three months ended March 31, 2019, revenues from overseas market was US$5.8 million as compared to US$54,854 of that in 2018.

 

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

 

 

Gross Profit and Gross Profit Margin

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

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

 

 

 

Research and Development Expenses

R&D expenses were US$10.1 million during the quarter ended March 31, 2019 compared with US$5.0 million during the same period in 2018, an increase of US$5.1 million, or 102.0%. This significant increase was primarily due to (i) elevated R&D activities to meet the new higher specification requirements from potential customers, especially overseas; and (ii) increased efforts directed towards applications in new electrical equipment and electronics, alternative energy applications, power devices, aviation equipment and ocean engineering, in addition to other new products primarily for advanced industrialized applications in the automobile sector and in new verticals such as ships, airplanes, high-speed rail, 3D printing materials, biodegradable plastics, and medical devices.

As of March 31, 2019, the number of ongoing research and development projects was 355. We expect to complete and commence to realize economic benefits from approximately 25% of the projects in the near term. The remaining projects are expected to be carried out for a longer period. The majority of the projects are in the field of modified plastics in automotive applications and the rest are in advanced fields such as ships, airplanes, high-speed rail, medical devices, etc.

Operating Income

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

Interest Income (Expenses)

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

 

 

Income Taxes

 

The effective income tax rates for the three-month periods ended March 31, 2019 and 2018 were 24.9% and 24.5%, respectively.  The effective income tax rate increased from 24.5% for the three-month period ended March 31, 2018 to 24.9% for the three-month period ended March 31, 2019, primarily due to the decrease of Sichuan Xinda's profit before tax ("PBT") ratio. The effective income tax rate for the three-month period ended March 31, 2019 differs from the PRC statutory income tax rate of 25% primarily due to Sichuan Xinda's preferential income tax rate and  75% additional deduction of R&D expenses of the major PRC operating entities.

Our PRC and Dubai subsidiaries have US$506.2 million of cash and restricted cash as of March 31, 2019, which are planned to be indefinitely reinvested in the PRC and Dubai. Due to our policy of indefinitely reinvesting our earnings in our PRC business, we have not provided for deferred income tax liabilities related to PRC withholding income tax on undistributed earnings of our PRC subsidiaries. In addition, due to our policy of indefinitely reinvesting our earnings in Dubai, UAE, we have not provided for deferred income tax liabilities related to Dubai Xinda in Dubai, UAE, on undistributed earnings.
 

Net Income

As a result of the above factors, we had a net income of US$11.0 million in the first quarter of 2019 compared to a net income of US$19.1 million in the same quarter of 2018.

 

 

 

Selected Balance Sheet Data as of March 31, 2019 and December 31, 2018: