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, 2015

or

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

For the transition period from ____ to _____

 

Commission File Number: 000-53131

CHINA XD PLASTICS COMPANY LIMITED

(Exact name of registrant as specified in its charter)

 

 

 

 

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

Harbin Development Zone, Heilongjiang Province, PRC 150060

(Address of principal executive offices) (Zip Code)

86-451-84346600

(Registrant’s telephone number, including area code)

 

 

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

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

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

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

 

 

 

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

As of May 5, 2015, the registrant had 49,151,796 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 March 31,
		2015				2014
		US$				US$
Revenues			221,926,395				223,580,675
Cost of revenues			(173,284,119	)			(176,932,337	)
Gross profit			48,642,276				46,648,338
Selling expenses			(296,820	)			(122,328	)
General and administrative expenses			(4,964,758	)			(3,796,364	)
Research and development expenses			(5,813,863	)			(8,630,734	)
Total operating expenses			(11,075,441	)			(12,549,426	)
Operating income			37,566,835				34,098,912
Interest income			2,428,071				3,035,365
Interest expense			(10,629,353	)			(8,579,977	)
Foreign currency exchange losses			(90,415	)			(479,190	)
Gains on foreign currency forward contracts			354,519				-
Government grant			-				1,311,239
Change in fair value of warrant liability			-				(162,739	)
Total non-operating expense, net			(7,937,178	)			(4,875,302	)
Income before income taxes			29,629,657				29,223,610
Income tax expense			(4,225,631	)			(7,227,559	)
Net income			25,404,026				21,996,051
Earnings per common share:
Basic and diluted			0.39				0.34
Net Income			25,404,026				21,996,051
Other comprehensive loss
Foreign currency translation adjustment, net of nil income taxes			(164,760	)			(14,188,735	)
Comprehensive income			25,239,266				7,807,316

 

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

		Three-Month Period Ended March 31,
		2015				2014
		US$				US$
Cash flows from operating activities:
Net cash provided by operating activities			37,529,772				26,174,417
Cash flows from investing activities:
Purchase of time deposits			(110,597,161	)			(162,265,820	)
Proceeds from maturity of time deposits			80,026,889				111,155,365
Purchase of and deposits for property, plant and equipment			(86,042,231	)			-
Purchases of land use rights			(5,522,219	)			(1,020,326	)
Net cash used in investing activities			(122,134,722	)			(52,130,781	)
Cash flows from financing activities:
Proceeds from bank borrowings			203,658,524				176,935,307
Repayment of bank borrowings			(111,397,430	)			(215,370,999	)
Proceeds from issuance of the Notes			-				148,396,175
Payment of issuance costs of the Notes			-				(3,481,955	)
Placement of restricted cash as collateral for bank borrowings			(22,298,692	)			(2,786,383	)
Net cash provided by financing activities			69,962,402				103,692,145
Effect of foreign currency exchange rate changes on cash and cash equivalents			384,182				(2,866,506	)
Net increase (decrease) in cash and cash equivalents			(14,258,366	)			74,869,275
Cash and cash equivalents at beginning of period			45,456,612				95,545,904
Cash and cash equivalents at end of period			31,198,246				170,415,179
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest			14,508,630				5,242,256
Income taxes paid			2,215,158				18,749,381
Non-cash investing and financing activities:
Accrual for issuance costs of the Notes			-				1,439,209
Accrual for purchase of equipment			14,224				155,285

 

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 (“SEC”). The condensed consolidated balance sheet as of December 31, 2014 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, 2014, 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 16, 2015.

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, 2015, the results of operations and cash flows for the three-month periods ended March 31, 2015 and 2014, have been made.

The preparation of 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 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, 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 primarily through approved distributors in the People’s Republic of China (the “PRC”). To a lesser extent, the Company also sells its products to an overseas customer in the Republic of Korea (the “ROK”). The Company’s sales are highly concentrated.  Sales to distributors and end customer, which individually exceeded 10% of the Company’s revenues for the three month periods ended March 31, 2015 and 2014, are as follows:

 

The Company expects revenues from these distributors and the customer to continue to represent a substantial portion of its revenue in the future. Any factor adversely affecting the automobile industry in the PRC and the Republic of Korea (the "ROK") 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. During the three-month periods ended March 31, 2015 and 2014, the Company purchased its raw materials through six and seven distributors, which individually exceeded 10% of the Company’s total raw material purchases, accounted for approximately 73.8% and 79.2%, 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.

 

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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 the HK SAR are insured by the government authority up to HK$500,000. The bank deposits with financial institutions in the 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.

Cash deposits in bank that are restricted as to withdrawal or usage for up to 12 months are reported as restricted cash in the condensed consolidated balance sheets and excluded from cash in the condensed consolidated statements of cash flows. Cash deposits that are restricted for period beyond 12 months from the balance sheet date are included in other non-current assets in the condensed consolidated balance sheets.

 

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Note 2 - Accounts receivable

Accounts receivable consists of the following:

 

As of March 31, 2015 and December 31, 2014, the accounts receivable balances also include notes receivable in the amount of US$539,810 and US$921,907, respectively. As of March 31, 2015 and December 31, 2014, US$32,916,916 and US$50,473,063 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 periods ended March 31, 2015 and 2014.

Note 3 - Inventories

Inventories consist of the following:

 

 

There were no write down of inventories for the three-month periods ended March 31, 2015 and 2014.

 

Note 4 – Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

 

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Note 5 – Property, plant and equipment, net

Property, plant and equipment consist of the following:

 

 

For the three-month periods ended March 31, 2015 and 2014, the Company capitalized US$168,306, and nil 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 suppliers

Note 7 – Fair value measurement

Short-term financial instruments, including cash and cash equivalents, restricted cash, time deposits, accounts receivable, amounts due from a related party, short-term bank loans, bills payable, accounts payable and 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 March 31, 2015, the carrying amount and estimated fair value of the notes payable were US$ 148,682,290 and US$ 142,782,000, respectively.

Derivative assets on foreign currency forward contract- fair value is 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.

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Note 8 – Borrowings

(a)

Current

 

 

 

(i)

As of March 31, 2015 and December 31, 2014, the Company’s short-term bank loans bear a weighted average interest rate of 5.0% and 5.7% per annum, respectively. All short-term bank loans mature at various times within one year and contain no renewal terms.

 

(ii)

On February 11, 2015, the Company obtained RMB140 million (US$22.6 million) bank loan at an annual interest rate of 5.32%, from Bank of Communications, and RMB100 million (US$16.1 million) bank loan at an annual interest rate of 5.32%, from Bank of Construction banks in Nanchong City, Sichuan. These two loans were guaranteed by an investment company affiliated with the People’s Government of Shunqing District, Nanchong City, Sichuan Province (“Shunqing Government”) and were issued to support the Company’s construction of a production plant in Nanchong City, Sichuan and will be paid off in five installments. The last installment will become due and payable on November 30, 2015.

 

(iii)

On January 15, 2015, the Company obtained a 350-day secured loan of US$12.0 million from HSBC Bank Middle East Limited in Dubai, UAE at an annual interest rate of London Inter-Bank Offered Rate (“LIBOR”) (0.2708% as of March 31, 2015) plus 1.8%. On February 2, 2015, the Company obtained another 351-day secured loan of US$16.6 million from HSBC Bank Middle East Limited in Dubai, UAE at an interest rate of LIBOR (0.2708% as of March 31, 2015) plus 1.8%. These loans were secured by restricted cash of RMB39.3 million (equivalent to US$6.3 million) by the HSBC bank in Harbin, China.

(b)	Non-current

 

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Note 9 - Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:

		March 31, 2015				December 31, 2014
		US$				US$
Payables for purchase of property, plant and equipment			7,131,095				7,234,607
Accrued freight expenses			2,589,545				1,688,431
Accrued interest expenses			5,154,385				9,031,741
Others			7,406,174				6,529,804
Total accrued expenses and other current liabilities			22,281,199				24,484,583

 

Others mainly represent accrued payroll and employee benefits, non income tax payables and other accrued miscellaneous operating expenses.

Note 10 – 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:

 

 

The Company rents the following facilities in Harbin, Heilongjiang province from Mr. Han's son:

Note 11– 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 three-month periods ended March 31, 2015 and 2014 were 14.3% and 24.7%, respectively. The effective income tax rate for the three-month period ended March 31, 2015 differs from the PRC statutory income tax rate of 25% primarily due to the above mentioned Dubai exempt from income taxes, Sichuan Xinda Group’s preferential income tax rate, partially offsetting by effect of tax rate differential on 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 March 31, 2015, the unrecognized tax benefits were US$15,251,469 and the interest relating to unrecognized tax benefits was US$1,628,687.  No penalties expense related to unrecognized tax benefits were recorded. The Company is currently unable to provide an estimate of a range of the total amount of unrecognized tax benefits that is reasonably possible to change significantly within the next twelve months.

 

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Note 12 – Deferred Income

Following the investment agreement on the Company's Sichuan plant (Note 6), on January 26, 2015, the Company entered into a memorandum agreement and a fund support agreement with the People’s Government of Shunqing District, Nanchong City, Sichuan Province (“Shunqing Government”) on facilitating the Company's production base in Sichuan.  Pursuant to above two agreements, Shunqing Government, through its investment vehicle,  extended to the Company a RMB110 million (equivalent to US$17.7 million) interest free fund support on the construction of the Sichuan plant.  As the fund support is deemed specifically for the plant construction and payable if any failure by the Company to follow the construction schedule, it is recognized as deferred income of government grant.

Note 13 – Stockholders’ equity

The changes of each caption of stockholders’ equity for the three-month period ended March 31, 2015 are as follows:

 

 

Note 14 – Stock based compensation

A summary of the nonvested shares activity for the three-month ended March 31, 2015 is as follows:

 

The Company recognized US$255,726 and US$410,848 of compensation expense in general and administrative expenses relating to nonvested shares for the three-month periods ended March 31, 2015 and 2014, respectively. As of March 31, 2015, there was US$1,545,184 of total unrecognized compensation cost relating to nonvested shares, which is to be recognized over a weighted average period of 1.42 years.

 

Note 15 - Earnings per share

Basic and diluted earnings per share are calculated as follows:

 

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The following table summarizes potentially dilutive securities excluded from the calculation of diluted earnings per share for the three-month periods ended March 31, 2015 and 2014 because their effects are anti-dilutive:

 

 

Note 16 - Commitments and contingencies

(1)    Lease commitments

 

Future minimum lease payments under non-cancellable operating leases agreements as of March 31, 2015 were as follows. 

 

Rental expenses incurred for operating leases of plant and equipment and office spaces were US$229,149 and US$318,228 for the three-month periods ended March 31, 2015 and 2014, respectively. There are no step rent provisions, escalation clauses, capital improvement funding requirements, other lease concessions or contingent rent in the lease agreements. The Company has no legal or contractual asset retirement obligations at the end of leases. The company’s leases do not contain any contingent rent payments terms.

 

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 March 31, 2015, the Company has a commitment of RMB225.5 million (equivalent to US$36.3 million) mainly for facility construction, and RMB343.8 million (equivalent to US$55.4 million) for the acquisition of equipments.

On January 5, 2015, AL Composites entered into an equipment purchase contract with Peaceful for a total consideration of US$271.2 million to purchase certain production and testing equipment.  As of March 31, 2015, the Company has a commitment of US$227.8 million for the remaining equipment acquisition. On January 25, 2015, AL Composites entered into a facility purchase contract with Zettachem International Limited for a total consideration of AED 12,500,000 (equivalent to US$3.4 million). As of March 31, 2015, the Company has a commitment of US$0.7 million.

 

The Company and certain of its officers were named as defendants in two putative securities class action lawsuits filed on July 15, 2014 and July 16, 2014 in the United States District Court for the Southern District of New York. The Company, after consultation with its legal counsel, believes that the lawsuits are without merit and intends to vigorously defend against them.  Nevertheless, there is a possibility that a loss may have been incurred. In accordance with ASC Topic 450, no loss contingency was accrued as of March 31, 2015 since the possible loss or range of loss cannot be reasonably estimated.

 

 

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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

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Highlights for the three months ended March 31, 2015 include:

 

● Revenues were $221.9 million, a decrease of 0.8% from $223.6 million in the first quarter of 2014

● Gross profit was $48.6 million, an increase of 4.3% from $46.6 million in the first quarter of 2014

● Gross profit margin was 21.9%, compared to 20.9% in the first quarter of 2014

● Net income was $25.4 million, compared to $22.0 million in the first quarter of 2014

● Total volume shipped was 69,355 metric tons, up 0.6% from 68,945 metric tons in the first quarter of 2014

 

Results of Operations

 

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

		Three-Month Period Ended March 31,
(in thousands, except percentages)		2015								2014
		Amount				%				Amount				%
Revenues		$	221,926				100	%		$	223,581				100	%
Cost of revenues		$	173,284				78	%		$	176,933				79	%
Gross profit		$	48,642				22	%		$	46,648				21	%
Total operating expenses		$	11,075				5	%		$	12,549				6	%
Operating income		$	37,567				17	%		$	34,099				15	%
Income before income taxes		$	29,630				13	%		$	29,224				13	%
Income tax expenses		$	4,226				2	%		$	7,228				3	%
Net income		$	25,404				11	%		$	21,996				10	%

Three months ended March 31, 2015 compared to three months ended March 31, 2014

Revenues

 

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

 

 

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

 

The Company continued to shift production mix from traditional Modified Polypropylene (PP) to higher-end products such as Modified Polyamide PA6 and plastic alloy, primarily due to (i) the increasing demand of advanced modified plastics in luxury automobile models in China, (ii) the stronger demand as a result of promotion by the Chinese government for clean energy vehicles and (iii) increased sales of higher-end cars made by automotive manufacturers from Chinese and Germany 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. In addition, the Company sold primarily higher-end PA66 and plastic alloy to the newly developed customer in the Republic of Korea. 

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Gross Profit and Gross Profit Margin

Gross profit was US$48.6 million in the quarter ended March 31, 2015 compared to US$46.6 million in the same period of 2014, representing an increase of 4.3%. Our gross margin increased to 21.9% during the quarter ended March 31, 2015 from 20.9% during the same quarter of 2014 primarily due to (i) higher-end product sales accounting for 78.4% of our total revenues for the first quarter ended March 31, 2015 as compared to 73.7% of that of the prior year; and (ii) the lower raw material costs as we benefited from the decrease of raw materials cost procured earlier at lower price due to the decreased crude oil price following the end of 2014.

General and Administrative Expenses

 

		Three-Month Period Ended March 31,								Change
(in millions, except percentage)		2015				2014				Amount				%
General and Administrative Expenses			$	5.0			$	3.8			$	1.2				31.6	%
as a percentage of revenues				2.3	%			1.7	%							0.6	%

 

Research and Development Expenses

R&D expenses were US$5.8 million during the quarter ended March 31, 2015 compared with US8.6 million during the same period in 2014, a decrease of US$2.8 million, or 32.6%, reflecting the Company's efforts to adjust research and development activities on new products primarily for industrialized applications from automotive to other advanced fields such as ships, airplanes, high-speed rail, 3D printing materials, biodegradable plastics, and medical devices, etc..   

 

As of March 31, 2015, the number of ongoing research and development projects was 126. 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.

Operating Income

Total operating income was US$37.6 million in the first quarter ended March 31, 2015 compared to $34.1 million in the same period of 2014, representing an increase of 10.3% or US$3.5 million. This increase is primarily due to higher gross profit, lower research and developed expenses, partially offset by higher selling expenses, and general and administrative expenses.

 

Interest Income (Expenses)

		Three-Month Period Ended March 31,								Change
(in millions, except percentage)		2015				2014				Amount				%
Interest Income		$	2.4			$	3.0			$	(0.6	)			20.0	%
Interest Expenses			(10.6	)			(8.6	)			(2.0	)			23.3	%
Net Interest Expenses		$	(8.2	)		$	(5.6	)		$	(2.6	)			46.4	%
as a percentage of revenues			(3.7	)%			(2.4	)%							(1.3	)%

 

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Income Taxes

 

Net Income

As a result of the above factors, we had a net income of US$25.4 million in the first quarter of 2015 compared to a net income of US$22.0 million in the same quarter of 2014.

 

Selected Balance Sheet Data as of March 31, 2015 and December 31, 2014:

		March 31, 2015				December 31, 2014				Change
(in millions, except percentage)										Amount				%
Cash and cash equivalents			31.2				45.5				(14.3	)			(31.4	)%
Restricted cash			28.8				12.5				16.3				130.4	%
Time deposits			269.2				238.5				30.7				12.9	%
Accounts receivable, net of allowance for doubtful accounts			199.2				204.0				(4.8	)			(2.4	)%
Inventories			298.9				249.8				49.1				19.7	%
Property, plant and equipment, net			316.0				318.3				(2.3	)			(0.7	)%
Land use rights, net			18.9				11.9				7.0				58.8	%
Prepayments to equipment and construction suppliers			266.7				182.2				84.5				46.4	%
Other non-current assets			41.3				25.5				15.8				62.0	%
Total assets			1,485.9				1,299.7				186.2				14.3	%
Short-term  bank loans, including current portion of long-term bank loans			161.0				99.7				61.3				61.5	%
Bills payable			27.2				43.4				(16.2	)			(37.3	)%
Accounts payable			218.7				152.1				66.6				43.8	%
Income taxes payable, including noncurrent portion			19.8				17.3				2.5				14.5	%
Accrued expenses and other current liabilities			22.3				24.5				(2.2	)			(9.0	)%
Long-term bank loans, excluding current portion			205.5				174.3				31.2				17.9	%
Notes payable			148.7				148.6				0.1				0.1	%
Deferred income			17.7				-				17.7				N/	A
Redeemable Series D convertible preferred stock			97.6				97.6				-				-
Stockholders' equity			550.9				525.3				25.6				4.9	%

 

 

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LIQUIDITY AND CAPITAL RESOURCES

Historically, our primary uses of cash have been to finance working capital needs and capital expenditures for new production lines. We have financed these requirements primarily from cash generated from operations, bank borrowings and the issuance of our convertible preferred stocks and debt financings. As of March 31, 2015 and December 31, 2014, we had US$31.2 million and US$45.5 million, respectively, in cash and cash equivalents, which were primarily deposited with banks in China (including Hong Kong and Macau). As of March 31, 2015, we had US$161.0 million short-term bank loans (including the current portion of long-term bank loans), including US$63.3 million unsecured loan, US$26.3 million loans secured by accounts receivable, US$38.7 million loans secured by a third party affiliated with Shunqing government, US$28.6 million loans secured by restricted cash, and US$4.1 million long-term bank loans that due in one year. We also had US$205.5 million long-term bank loans (excluding the current portion), including US$70 million loans secured by long-term deposits and US$135.5 million unsecured loan. Short-term and long-term bank loans in total bear a weighted average interest rate of 4.1% per annum and do not contain any renewal terms. We have historically been able to make repayments when due.  In addition, the Company has US$148.7 million of 11.75% guaranteed senior notes due in 2019.

A summary of lines of credit for the three-month period ended March 31, 2015 and the remaining line of credit as of March 31, 2015 is as below: 

 

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

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

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

 

		Three-Month Period Ended March 31,
(in millions US$)		2015				2014
Net cash provided by operating activities			37.5				26.2
Net cash used in investing activities			(122.1	)			(52.1	)
Net cash provided by financing activities			69.9				103.7
Effect of foreign currency exchange rate changes on cash and cash equivalents			0.4				(2.9	)
Net increase (decrease) in cash and cash equivalents			(14.3	)			74.9
Cash and cash equivalents at the beginning of period			45.5				95.5
Cash and cash equivalents at the end of period			31.2				170.4

Financing Activities

Net cash provided by the financing activities was US$69.9 million for the three-month period ended March 31, 2015, as compared to US$103.7 million for the same period of last year, primarily as a result of (i) US$148.4 million proceeds from Senior notes issued during the period ended March 31, 2014, (ii) increase of US$19.5 million of placement of restricted cash as collateral for bank borrowings for the three-month period ended March 31, 2015, partially offset by (iii) the decrease of US$104.0 million repayments of bank borrowings, (iv) the increase of US$26.7 million borrowings of bank loans and (v) US$3.5 million issuance costs paid for the issuance of Senior notes in 2014.

 

As of March 31, 2015, our cash and cash equivalents balance was US$31.2 million, compared to US$45.5 million at December 31, 2014.

 

Inventory turnover days has increased from 80 days for the year ended December 31, 2014 to 143 days for the quarter ended March 31, 2015 due to inventory of raw materials buildup in anticipation of increasing demand from our customers, especially those located in longer distance in the following quarters.

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

 

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

COMMITMENTS AND CONTINGENCIES

Contractual Obligations

Our contractual obligations as of March 31, 2015 are as follows:

(1)  Includes interest of US$11.3 million accrued at the interest rate under the loan agreements. For borrowings with a floating rate, the most recent rate as of March 31, 2015 was applied.

(2)  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 with issuance price of 99.080% (the "Notes"). The Notes bear interest at a rate of 11.75% per annum, payable on February 4 and August 4 of each year, commencing August 4, 2014. The Notes will mature on February 4, 2019.

(3)  (i) On March 8, 2013, Xinda Holding (HK) entered into an investment agreement with Nanchong Government, pursuant to which Xinda Holding (HK) will invest RMB1.8 billion (equivalent to US$290.1 million) in property, plant and equipment and approximately RMB0.6 billion (equivalent to US$96.7 million) in working capital, for the construction of the Sichuan plant.  As of March 31, 2015, the Company has a commitment of RMB225.5 million (equivalent to US$36.3 million) mainly for facility construction, and RMB343.8 million (equivalent to US$55.4 million) for the acquisition of equipments.

 

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Legal Proceedings

None.

 

Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet transactions.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risks

 

Interest Rate Risk

 

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

 

A hypothetical 1.0% increase in the annual interest rate for all of our credit facilities under which we had outstanding borrowings as of March 31, 2015 would decrease income before income taxes by approximately US$1.3 million for the quarter ended March 31, 2015. Management monitors the banks' prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.

 

Foreign Currency Exchange Rates

 

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

The RMB was relatively stable against the U.S. dollar at approximately 8.28 RMB to the US$1.00 until July 21, 2005 when the Chinese currency regime was altered resulting in a 2.1% revaluation versus the U.S. dollar. From July 21, 2005 to June 30, 2010, the RMB exchange rate was no longer linked to the U.S. dollar but rather to a basket of currencies with a 0.3% margin of fluctuation resulting in further appreciation of the RMB against the U.S. dollar. Since June 30, 2009, the exchange rate had remained stable at 6.8307 RMB to 1.00 U.S. dollar until June 30, 2010 when the People's Bank of China allowed a further appreciation of the RMB by 0.43% to 6.798 RMB to 1.00 U.S. dollar. On March 31, 2015, the RMB traded at 6.2069 RMB to 1.00 U.S. dollar.

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

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

 

The Company’s management has evaluated, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operations of the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)), as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective because of material weakness in our internal control over financial reporting as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

Notwithstanding management’s assessment that our internal control over financial reporting was ineffective as of December 31, 2014 due to one material weakness as identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, we believe that our unaudited condensed consolidated financial statements included in this Quarterly Report present fairly our financial position, results of operations and cash flows for the three months ended March 31, 2015 in all material respects.

 

(b) Changes in internal controls.

 

During the three-month ended March 31, 2015, our efforts to improve our internal controls over financial reporting include (1) external training of U.S. GAAP and SEC reporting by qualified entities to our accounting staff, (2) recruiting qualified accounting staff in AL Composites with requisite expertise and knowledge to help improve our internal control procedures, (3) adopting internal policies and approval and supervision procedures governing financial reporting, (4) adopting procedures to evaluate and assess performance of directors, officers and employees of the Company, (5) internal meetings, discussions and seminars periodically to review and improve our internal control procedures. We plan to improve on the above-referenced weakness by the end of the fiscal year ending December 31, 2015.

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

The Company and certain of its officers and directors have been named as defendants in two putative securities class action lawsuits filed in the United States District Court for the Southern District of New York.  These actions, which allege violations of Section 10(b) and Section 20(a) of the United States securities laws, were filed on July 15, 2014 and July 16, 2014 and are captioned Yang v. Han, et al., No. 14-cv-5308 (GBD) and Tompkins v. China XD Plastics Company Ltd., et al., No. 14-cv-5359 (GBD), respectively.  On November 21, 2014, the Court consolidated the actions and appointed lead plaintiffs.  On February 17, 2015, the lead plaintiffs filed a Consolidated Class Action Complaint on behalf of a class of all persons other than the defendants who purchased the common stock of China XD Plastics Company Limited between March 25, 2014 and July 10, 2014, inclusive.  Specifically, the lead plaintiffs allege that the Company and two of its officers made false or misleading statements and/or omitted material facts in the Company's Form 10-K for the year ended December 31, 2013 and the Company's Form 10-Q for the first quarter ended March 31, 2014. They also assert that the individual defendants are liable because they allegedly controlled the Company during the time the allegedly false and misleading statements and omissions were made.  The lead plaintiffs seek damages in unspecified amounts.

Based on our initial review of the complaints, the management believes the lawsuits are without merit and intend to vigorously defend against them.

Item 1A. Risk Factors

 

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5.  Exhibits

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

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Exhibit Index