UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

 

For the quarterly period ended September 30, 2014

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 x 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 x No o

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.

 

 

 

 

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

As of November 10, 2014, the registrant had 49,601,788 shares of common stock, par value US$0.0001 per share, outstanding.

 

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TABLE OF CONTENTS

 

 

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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.

 

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CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

		Three-Month Period Ended September 30,								Nine-Month Period Ended September 30,
		2014				2013				2014				2013
		US$				US$				US$				US$
Revenues			315,746,209				293,139,049				803,535,879				666,256,978
Cost of revenues			(250,378,605	)			(227,473,486	)			(639,219,994	)			(534,250,688	)
Gross profit			65,367,604				65,665,563				164,315,885				132,006,290
Selling expenses			(177,287	)			(143,573	)			(435,240	)			(253,565	)
General and administrative expenses			(5,413,088	)			(4,436,021	)			(13,762,596	)			(10,775,595	)
Research and development expenses			(5,081,833	)			(5,139,610	)			(27,068,448	)			(15,926,298	)
Total operating expenses			(10,672,208	)			(9,719,204	)			(41,266,284	)			(26,955,458	)
Operating income			54,695,396				55,946,359				123,049,601				105,050,832
Interest income			2,058,843				1,702,488				8,548,857				4,242,205
Interest expense			(10,865,335	)			(4,499,497	)			(31,059,573	)			(10,810,221	)
Foreign currency exchange gains (losses)			(120,435	)			550,010				(193,146	)			1,916,626
Gains (losses) on foreign currency forward contracts			309,999				-				(624,766	)			-
Change in fair value of warrants liability			1,594,936				(112,229	)			526,191				308,102
Government grant			-				709,655				1,324,213				919,746
Total non-operating expense, net			(7,021,992	)			(1,649,573	)			(21,478,224	)			(3,423,542	)
Income before income taxes			47,673,404				54,296,786				101,571,377				101,627,290
Income tax expense			(4,515,418	)			(13,235,220	)			(16,580,680	)			(25,308,256	)
Net income			43,157,986				41,061,566				84,990,697				76,319,034
Earnings per common share:
Basic earnings per common share			0.66				0.64				1.30				1.19
Diluted earnings per common share			0.62				0.64				1.29				1.19
Net Income			43,157,986				41,061,566				84,990,697				76,319,034
Other comprehensive income (loss)
Foreign currency translation adjustment, net of nil income taxes			6,981,015				768,724				(5,861,188	)			5,408,011
Comprehensive income			50,139,001				41,830,290				79,129,509				81,727,045

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to unaudited condensed consolidated financial statements

 

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CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Basis of presentation, significant concentrations and risks

 

(a) Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The condensed consolidated balance sheet as of December 31, 2013, was derived from the audited consolidated financial statements of China XD Plastics Company Limited (“China XD”) and its 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, 2013 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 26, 2014.

In the opinion of the management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of September 30, 2014, the results of operations for the three-month and nine-month periods ended September 30, 2014 and 2013, and the cash flows for the nine-month periods ended September 30, 2014 and 2013, have been made.

The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the 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 collectibility of accounts receivable, the fair values of stock-based compensation awards, derivative liabilities and the accruals for tax uncertainties and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.

(b) Significant concentrations and risks

Sales concentration

The Company sells its products, substantially through approved distributors in the People’s Republic of China (the “PRC”).  The Company’s sales are highly concentrated.  Sales to major distributors, which individually exceeded 10% of the Company’s revenues, are as follows:

 

 

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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.

 

In addition, the Company sold US$59.3 million and US$79.3 million products to a Korean end customer, accounting for 18.8% and 9.9% of the total revenues for the three months and nine months periods ended September 30, 2014, respectively.

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, Acrylonitrile Butadiene Styrene (“ABS”) and nylon. The Company purchased substantially all of its raw materials from eight and three distributors, which individually exceeded 10% of the Company’s total raw material purchases, accounting for approximately 68.1% and 56.6% of the Company’s total raw materials purchases for the three-month periods ended September 30, 2014 and 2013, respectively, and 76.1% and 79.9% of the Company’s total raw materials purchases for the nine-month periods ended September 30, 2014 and 2013, respectively. Management believes that other suppliers could provide similar raw materials on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect the Company’s business, financial position and results of operations.

 

The Company purchased equipment from two major equipment distributors, which accounted for 88.7% and 93.1% of the Company’s total equipment purchases, including prepayments, for the three-month periods ended September 30, 2014 and 2013, respectively, and accounted for 99.8% and 78.5% of the Company’s total equipment purchases for the nine-month periods ended September 30, 2014 and 2013.  Management believes that other suppliers could provide similar equipment on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect the Company’s business, financial position and results of operations. One of the majority owners of the equipment distributor is also the majority owner of a major raw material supplier that supplied approximately nil and 12.8% of the Company’s total raw material purchases for the three-month periods ended September 30, 2014 and 2013, and 0.6% and 16.0% of the Company’s total raw material purchases for the nine-month periods ended September 30, 2014 and 2013, respectively.  In addition, the majority owner of the equipment distributor is also the majority owner of sales Distributor D presented above.

Cash concentration

 

Cash and cash equivalents, restricted cash and time deposits maintained at banks consist of the following:

 

 

The bank deposits with financial institutions in the PRC are not insured by any government authority.  The bank deposits with financial institutions in HK SAR are insured by the government authority up to HK$500,000. The bank deposits with financial institutions in Macau SAR are insured by the government authority up to MOP$500,000. To limit exposure to credit risk, the Company primarily places bank deposits with large financial institutions in the PRC, HK SAR and Macau SAR with acceptable credit rating.

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$11,371,935 and US$3,964,518 as of September 30, 2014 and December 31, 2013, 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 pledged as collateral for letter of credit relating to purchases of raw materials are reported as restricted cash and amounted to US$185,728 and US$237,871 as of September 30, 2014 and December 31, 2013, respectively. 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 condensed consolidated statements of cash flows.

 

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Short-term bank deposits that are pledged as collateral for short-term bank borrowings are reported as restricted cash and amounted to US$2,981,427 and US$9,506,582 as of September 30, 2014 and December 31, 2013, respectively. Long-term bank deposits that are pledged as collateral for issuance of letter of guarantee are reported as other non-current assets and amounted to US$17,921,147 and nil as of September 30, 2014 and December 31, 2013, respectively. The cash flows from such bank deposits are reported within cash flows from financing activities in the condensed consolidated statements of cash flows. 

 

Note 2 - Accounts receivable, net

Accounts receivable consists of the following:

 

As of September 30, 2014 and December 31, 2013, the accounts receivable balances also include notes receivable in the amount of US$447,430 and US$7,481,629, respectively. As of September 30, 2014 and December 31, 2013, US$87,811,014 and US$133,778,940 of accounts receivable are pledged for the short-term bank loans, respectively.

 

There was no accrual of additional provision or write-off of accounts receivable for the three-month and nine-month periods ended September 30, 2014 and 2013.

Note 3 - Inventories

Inventories consist of the following:

 

 

There was no write down of inventories for the three-month and nine-month periods ended September 30, 2014 and 2013.

 

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Note 4 – Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

 

 

The Company is required to pay deposits to suppliers for the principal raw materials ordered. The Company makes advanced orders of raw materials based upon (i) the demand and supply situation in the raw materials market and (ii) the forecasted demand of products. All advances to suppliers as of September 30, 2014 are related to the purchase of raw materials.

 

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

Others mainly include other prepaid expenses, staff advances and financial receivable under the foreign currency forward contract (see Note 8).

 

Note 5 – Property, plant and equipment, net

Property, plant and equipment consist of the following:

 

 

For the three-month and nine-month periods ended September 30, 2014 and 2013, no interest expense was capitalized as a component of the cost of construction in progress as the amount was inconsequential. Depreciation expense on property, plant and equipment was allocated to the following expense items:

 

 

 

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Note 6 - Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:

 

Others mainly represent accrued issuance cost for the note offering, non income tax payables, accrued payroll and employee benefits and other accrued miscellaneous operating expenses.

 

Note 7 – Fair value measurement

Short-term financial instruments, including cash and cash equivalents, restricted cash, time deposits, accounts receivable, amount due from a related party, prepayment to equipment suppliers, short-term bank loans, bills payable, accounts payable, amount due to a related party, accrued expenses and other current liabilities-carrying amounts approximate fair values because of the short maturity of these instruments.

Long-term bank loans-fair value is based on the amount of future cash flows associated with each loan discounted at the Company’s current borrowing rate for similar debt instruments of comparable terms. The carrying value of the long-term bank loans approximate their fair values as the long-term bank loans carry interest rates which approximate rates currently offered by the Company’s banks for similar debt instruments of comparable maturities.

Notes payable-fair values of the Company’s notes payable are estimated based on quoted market prices which are categorized as Level 1 measurement in the fair value hierarchy. As of September 30, 2014, the carrying amount and estimated fair value of the notes payable were US$148,553,073 and US$160,782,000, respectively.

 

Derivative liabilities on warrants liability fair values are determined using an option-pricing model which considers the following significant inputs: the Company’s stock price, risk-free interest rate and expected volatility of the Company’s stock price over the term of the derivative liabilities.

 

Derivative liabilities on foreign currency forward contracts-fair values are determined using a discount cash flow model, which discounts the difference between the forward contract exchange rate from the quoted curve and the contract rate multiplied by the notional amounts. It considers the following significant inputs: risk-free rate and foreign exchange rate.

Note 8 – Foreign currency forward contracts

On March 14, 2014, the Company entered into a foreign currency forward contract with HSBC Bank (China) Company Ltd. (the “HSBC”), pursuant to which the Company would pay US$80 million to HSBC in exchange for RMB492 million on June 18, 2014.  On June 18, 2014, the Company paid HSBC US$1.1 million to settle the contract because the foreign exchange rate of USD had appreciated against RMB during the period of the forward contract.  The Company entered into another foreign currency forward contract with HSBC on June 18, 2014, pursuant to which the Company would pay US$50 million in exchange for RMB315 million on June 23, 2015.  Changes in fair value of the foreign currency forward contract dated June 18, 2014 amounted to US$0.4 million from the date of its inception to September 30, 2014, and was recognized in earnings because it did not qualify or was designated for hedge accounting.

 

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During the nine-month period ended September 30, 2014, the Company recognized loss on foreign currency forward contracts in the amount of US$0.6 million.

(a)  Current

 

 

(i)

As of September 30, 2014 and December 31, 2013, the Company’s short-term bank loans (including the current portion of long-term bank loans) bear a weighted average interest rate of 5.7% and 5.9% per annum, respectively. All short-term bank loans mature at various times within one year and contain no renewal terms.

(ii)

The Company obtained an interest-free loan in the amount of RMB50.0 million from a company affiliated with the People’s Government of Shunqing District, Nanchong City, Sichuan Province (“Shunqing Government”). The loan was issued to support the Company’s construction of a production plant in Sichuan. The Company repaid the loan in July 2014.

 

(b) Non-current

On January 17, 2014, the Company obtained four two-year unsecured loans with an aggregated principal amount of RMB150 million (equivalent to US$24.4 million) at 110% of Renminbi benchmark interest rates per annum (6.7650% as of September 30, 2014) from China Construction Bank.

During the second quarter of 2014, the Company obtained seven two-year unsecured loans of RMB328 million (equivalent to US$53.4 million) at an interest rate of 6.15% per annum from Bank of China.

 

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On May 15, 2014, the Company obtained a two-year unsecured loan of RMB50 million (equivalent to US$8.1 million) at an interest rate of 6.77% per annum from Bank of Communication. On June 23, 2014, the Company obtained a two-year unsecured loan of RMB45 million (equivalent to US$7.3 million) at an interest rate of 6.77% per annum from Bank of Communication. The company paid off these two loans in advance on September 28, 2014.

On June 12, 2014, the Company obtained a three-year secured loan of US$70 million from Bank of China, at an interest rate of London Inter-Bank Offered Rate (“LIBOR”) plus 2.6% (2.8346% as of September 30, 2014).  The interest rate is reset every three months. The loan is secured by bank deposits of US$17.9 million.

On July 1, 2014, the Company obtained three two-year unsecured loans of RMB122 million (equivalent to US$19.9 million) at an interest rate of 6.15% per annum from Bank of China.

As of September 30, 2014, the Company had total lines of credit of RMB3,181.2 million (US$518.3 million) from PRC banks in Harbin, Heilongjiang province. As of September 30, 2014, the Company has unused lines of credit of RMB1,120.5 million (US$182.5 million) with remaining terms less than 12 months and RMB 192 million (US$31.3 million) with remaining terms beyond 12 months.

Certain lines of credit contain financial covenants such as total stockholders’ equity, debt asset ratio, current ratio, contingent liability ratio and net profit. As of September 30, 2014, the Company has met these financial covenants.

 

Note 10 – Notes Payable

On February 4, 2014, Favor Sea Limited, a wholly owned subsidiary of the Company, issued US$150,000,000 aggregate principal amount of 11.75% Guaranteed Senior Notes due 2019 (the “Notes”) with issuance price of 99.080%. The Notes bear interest at a rate of 11.75% per annum, payable on February 4 and August 4 of each year, commencing on August 4, 2014.  The Notes will mature on February 4, 2019.  Net proceeds after debt issuance costs and debt discount were approximately US$143.5 million.  Debt issuance costs in the amount of US$4.9 million are recorded as deferred charges and included in the other noncurrent assets on the consolidated balance sheet.  The debt discount and debt issuance costs are amortized into interest expense using the effective interest method over the terms of the Notes.

The Notes can be redeemed prior to their maturity, the details of which are as follows:

 

The Company may at its option redeem the Notes, in whole but not in part, at any time prior to February 4, 2017, at a redemption price equal to 100% of the principal amount of the Notes redeemed plus the Applicable Premium, as defined in the Indenture of the Notes, and accrued and unpaid interest, if any, to (but not including) the redemption date. In addition, at any time and from time to time prior to February 4, 2017, the Company may at its option redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds of one or more sales of common stock of China XD in an equity offering, at a redemption price of 111.75% of the principal amount of the Notes redeemed, plus accrued and unpaid interest, if any, to (but not including) the redemption date, provided that at least 65% of the aggregate principal amount of the Notes issued remains outstanding after each such redemption and any such redemption takes place within 60 days after the closing of the related equity offering.

On or after February 4, 2017, the Company, may on any or more occasions redeem all or any part of the Notes, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest, if any, on the Notes redeemed, to (but not including) the applicable date of redemption, if redeemed during the twelve-month period beginning on February 4 of the years indicated below:
 

Upon occurrence of a Change of Control Triggering Event, as defined in the Indenture of the Notes, the Company must make an offer to purchase all the Notes outstanding at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to (but not including) the purchase date.

The Notes are guaranteed on a senior basis by China XD and Xinda Holding (HK) Company Limited (“Xinda Holding (HK)”), one of its direct subsidiaries. The Notes are secured by a lien on the share capital of Favor Sea Limited and Xinda Holding (HK).

For the three-month and nine-month periods ended September 30, 2014, the Company recognized interest expenses of the Notes in the amount of US$4,639,047 and US$12,187,207, respectively.

 

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Note 11 – Related party transactions

The Company entered into related party transactions with Harbin Xinda High-Tech Co., Ltd. (“Xinda High-Tech”), an entity controlled by the wife of Mr. Han, the chief executive officer and controlling stockholder of the Company and Mr. Han’s son.  The significant related party transactions are summarized as follows:

 

 

The balance due from a related party is summarized as follows:

 

The Company rents the following plant and office buildings in Harbin, Heilongjiang province from Xinda High-Tech:

 

 

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Premise Leased		Area (M2)				Annual Rental Fee (US$)			Period of Lease
Facility			3,134				16,219		Between January 1, 2014 and December 31, 2014
Facility			200				6,488		Between August 17, 2014 and August 16, 2015

 

Note 12 – Income tax

Pursuant to an approval from the local tax authority in July 2013, Sichuan Xinda Enterprise Group Co., Ltd. (“Sichuan Xinda Group”), 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, Al Composites Materials FZE (“Al Composites”), a subsidiary of China XD, is exempted from income taxes.

 

The effective income tax rates for the nine-month periods ended September 30, 2014 and 2013 were 16.3% and 24.9%, respectively. The effective income tax rate for the nine-month period ended September 30, 2014 differs from the PRC statutory income tax rate of 25% primarily due to the above mentioned Sichuan Xinda Group’s and Al Composites’s preferential income tax rate, partially offsetting effect of tax rate differential on loss-making entities not subject to PRC income tax, effect of non-deductible expenses and increase of valuation allowances against deferred income tax assets of certain subsidiaries, which were at cumulative loss position.

 

As of September 30, 2014, the unrecognized tax benefits were US$9,974,981 and the interest relating to unrecognized tax benefits was US$995,694.  No penalties expense related to unrecognized tax benefits were recorded. The Company is currently unable to provide an estimate of a range of the total amount of unrecognized tax benefits that is reasonably possible to change significantly within the next twelve months.

 

Note 13 – Warrants

The following is a summary of outstanding warrants as of September 30, 2014:

 

The fair values of the warrants as of September 30, 2014 were calculated using Black-Scholes option pricing model with the following assumptions:

 

During the nine-month period ended September 30, 2014, 918,736 shares of Series A investor warrants were exercised. On April 3, 2014, 130,435 Series A investor warrants were exercised for 130,435 shares of the common stocks of the Company. The Company received proceeds of US$596,740 in cash on April 3, 2014. In addition, 788,301 shares of Series A investor warrants were exercised using cashless method for 451,645 shares of the common stocks of the Company during the nine-month period ended September 30, 2014.

 

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Note 14 – Stockholders’ equity

The changes of each caption of stockholders’ equity for the nine-month period ended September 30, 2014 are as follows:

 

  

Note 15 – Stock based compensation

 

The Company recognized nil and US$34,590 of share-based compensation expense in general and administration expenses relating to stock options for the three-month period ended September 30, 2014 and 2013, respectively, and nil and US$127,215 of share-based compensation expense in general and administration expenses relating to stock options for the nine-month period ended September 30, 2014 and 2013, respectively.  All outstanding options expired on August 7, 2013.

 

A summary of the nonvested shares activity for the nine-month ended September 30, 2014 is as follows:

 

On August 7, 2014, the Company’s Board of Directors approved the grant of (i) 282,460 nonvested shares to certain executive officers and employees which will vest on August 7, 2017; (ii) 9,488 nonvested shares to two independent directors which will vest on February 7, 2015.

 

Note 16 – 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 and nine-month periods ended September 30, 2014 and 2013 because their effects are anti-dilutive:

	Three-Month Period Ended September 30,								Nine-month Period Ended September 30,
	2014				2013				2014				2013
Shares issuable upon conversion of Series D convertible preferred stock			16,000,000				16,000,000				16,000,000				16,000,000
Shares issuable upon exercise of Series A investor warrant			-				1,320,696				-				1,320,696
Shares issuable upon exercise of Series A placement agent warrant			-				117,261				-				117,261

 

Note 17 – Commitments and contingencies

(1)	Lease commitments

 

Future minimum lease payments under non-cancellable operating leases agreements as of September 30, 2014 were as follows. 

 

 

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Rental expenses incurred for operating leases of plant and equipment and office spaces were US$479,269 and US$336,584 for the three-month periods ended September 30, 2014 and 2013, respectively, and US$1,099,977 and US$734,854 for the nine-month periods ended September 30, 2014 and 2013, 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 the leases. The Company’s leases do not contain any contingent rent payments terms.

 

(2)	Sichuan plant construction and equipment

 

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$290 million) in property, plant and equipment and approximately RMB0.6 billion (equivalent to US$97 million) in working capital, for the construction of Sichuan plant.  As of September 30, 2014, the Company has a commitment of RMB832.6 million (equivalent to US$135.6 million) mainly for acquisition of equipment.

 

(3)	Equipment acquisition

As of September 30, 2014, the Company has a commitment of US$11,852,798, mainly for the acquisition of equipment for Al Composites.

 

 

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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 Plastics Company Limited (“China XD”, “we”, and the “Company”, and “us” or “our” shall be interpreted accordingly) is one of the leading specialty chemical companies engaged in the research, development, manufacture and sale of polymer composite materials primarily for automotive applications in China. Through our wholly-owned operating subsidiaries in China, we develop polymer composite materials using our proprietary technology and manufacture and sell our products primarily for use in the fabrication of automobile parts and components. We have 311 certifications from manufacturers in the automobile industry as of September 30, 2014. We are the only company certified as a National Enterprise Technology Center in modified plastics industry in Heilongjiang province. Our Research and Development (“R&D”) team consists of 237 professionals and 2 consultants. As a result of the integration of our academic and technological expertise, we have a portfolio of 143 patents, 2 of which we have obtained patent rights and the remaining 141 of which we have applications pending in PRC as of September 30, 2014.

Our products include eleven categories: Modified Polypropylene (PP), Modified Acrylonitrile Butadiene Styrene (ABS), Modified Polyamide 66 (PA66), Modified Polyamide 6 (PA6), Modified Polyoxymethylenes (POM), Modified Polyphenylene Oxide (PPO), Plastic Alloy, Modified Polyphenylene Sulfide (PPS), Modified Polyimide (PI), Modified Polylactic acid (PLA) and Polyether Ether Ketone (PEEK). As we have successfully developed more new products to grow our business, we have re-categorized our product types as presented above in order to present more updated breakdown of polymer composite materials we produce since the beginning of 2014. We believe the current categorization better reflects the nature and characteristics of our products and the way that our management currently views and analyzes our products. In conformity with this new categorization, we have adjusted comparable product information in applicable prior periods. Since not all the categories have achieved sales in the third quarter of 2014, we only presented the categories which achieved sales.

 

Our products are primarily used in the production of exterior and interior trim and functional components of 24 automobile brands and more than 80 automobile models manufactured in China, including Audi, Mercedes Benz, Buick, Chevrolet, VW Passat, Golf and Jetta, BMW, Mazda and Toyota. We have started offering certain high-end products, such as PA66 and long-chain PA12 manufactured from our Heilongjiang plants, to the Korean market since the second quarter of 2014.  In addition, during the three months ended June 30, 2014, we started the construction of A1 Composites plant in UAE with additional 4,000  metric tons targeting on high-end products for the overseas markets, which will be completed by the end of first quarter of 2015.  We plan to serve customers in oversea market from our A1 Composites plant, including the existing ones in Korea. 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 bases in Harbin, Heilongjiang in the PRC, with the construction of our plant in Sichuan underway. As of September 30, 2014, we had approximately 390,000 metric tons of production capacity across 83 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 base in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, expecting to bring total installed production capacity to 690,000 metric tons with additional 70 new production lines at the completion of the construction of our fourth production base. 

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Highlights for the three months ended September 30, 2014 include:

 

Results of Operations

 

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

(in millions, except  percentage)		Three-Month Period Ended												Nine-Month Period Ended
		September 30,								Change				September 30,								Change
		2014				2013				%				2014				2013				%
Revenues			315.7				293.1				7.7	%			803.5				666.3				20.6	%
Cost of revenues			(250.3	)			(227.4	)			10.1	%			(639.2	)			(534.3	)			19.6	%
Gross profit			65.4				65.7				(0.5	)%			164.3				132.0				24.5	%
Total operating expenses			(10.7	)			(9.7	)			10.3	%			(41.3	)			(26.9	)			53.5	%
Operating income			54.7				55.9				(2.1	)%			123.0				105.1				17.0	%
Income before income taxes			47.7				54.3				(12.2	)%			101.5				101.6				(0.1	)%
Income tax expense			(4.5	)			(13.2	)			(65.9	)%			(16.6	)			(25.3	)			(34.4	)%
Net income			43.2				41.1				5.1	%			84.9				76.3				11.3	%

Three months ended September 30, 2014 compared to three months ended September 30, 2013

Revenues

Revenues were US$315.7 million in the third quarter ended September 30, 2014, an increase of US$22.6 million, or 7.7%, compared to US$293.1 million in the same period of last year, due to approximately 4.1% increase in sales volume and 3.9% increase in the average RMB selling price of our products.

The increase of sales volume was driven by the strong demand of polymer composite materials in the PRC and Asian markets, the higher penetration of our business in our existing markets supported, as well as the marketing efforts to develop new customers. Such increase in demand was driven by increasing demand for middle and high-end automobiles by Chinese consumers, continuing substitution of imported polymer composite materials by domestic suppliers, as well as the increase of plastic content on the per-vehicle-basis in China with even higher adoption rate in higher-end automobile models than lower-end ones. The increase of average RMB selling price was mainly due to the shift of product mix towards higher-end products.

During the third quarter ended September 30, 2014, the Company sold US$59.3 million products to the Korean market, mainly PA66 and plastic alloy, accounting for 18.8% of the total revenues for third quarter of 2014.

 

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

 

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

The Company has shifted product mix from traditional Modified Polypropylene (PP) to higher-end products such as Modified Polyamide (mainly PA66) and plastic alloy, primarily due to (i) the increasing demand of advanced modified plastics in luxury automobile models in China and Korea, (ii) the stronger demand as a result of promotion by the Chinese government for clean energy vehicles and (iii) increased sales of higher-end cars made by automotive manufacturers from Chinese and German joint ventures, and U.S. and Japanese joint ventures, which manufacturers tend to use more and higher-end modified plastics in quantity per vehicle in China.

 

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Gross Profit and Gross Profit Margin

General and Administrative Expenses

 

	Three-Month Period Ended September 30,								Change
(in millions, except percentage)	2014				2013				Amount				%
General and Administrative Expenses		$	5.4			$	4.4			$	1.0				22.7	%
as a percentage of revenues			1.9	%			1.5	%							0.4	%

 

Research and Development Expenses

 

	Three-Month Period Ended September 30,								Change
(in millions, except percentage)	2014				2013				Amount				%
Research and Development Expenses		$	5.1			$	5.1			$	-				-
as a percentage of revenues			1.6	%			1.7	%							(0.1)	%

 

We expect to complete and commence to realize economic benefits on approximately 25% of the projects in the near term. The remaining projects are expected to be carried out for a longer period. 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 and medical devices.

 

Operating Income

Total operating income was US$54.7 million in the third quarter ended September 30, 2014 compared to US$55.9 million in the same period of 2013, representing a decrease of 2.1% or US$1.2 million. This decrease is primarily due to higher general & administrative expenses.

 

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Interest Income (Expenses)