Quarterly Report (10-q)

Date : 08/14/2019 @ 8:35PM
Source : Edgar (US Regulatory)
Stock : China XD Plastics Company Ltd (CXDC)
Quote : 1.89  0.02 (1.07%) @ 3:31PM

Quarterly Report (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 June 30, 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)

 

Nevada 04-3836208

(State or other jurisdiction of incorporation or

organization)

(I.R.S. Employer Identification No.)

 

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). 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.

 

Large accelerated filer Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company
Emerging growth company   

 

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

 

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

 

As of August 7, 2019, the registrant had 50,948,841 shares of common stock, par value US$0.0001 per share, outstanding.

 

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

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, no par value   CXDC   NASDAQ Global Market

 

 

 
 

 

 

TABLE OF CONTENTS

 

  PAGE
PART I. FINANCIAL INFORMATION 3
     
Item 1. Financial Statements 3
     
  Unaudited Condensed Consolidated Balance Sheets 3
     
  Unaudited Condensed Consolidated Statements of Comprehensive Income 4
     
  Unaudited Condensed Consolidated Statements of Cash Flows 5
     
  Notes to the Unaudited Condensed Consolidated Financial Statements 6
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 26
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 40
   
Item 4. Controls and Procedures 41
     
PART II. OTHER INFORMATION 42
     
Item 1. Legal Proceedings 42
     
Item 1A. Risk Factors 42
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
     
Item 3. Defaults Upon Senior Securities 42
   
Item 4. Mine Safety Disclosures 42
     
Item 5.  Other Information 42
   
Item 6.  Exhibits 42
     
Signatures 43

 

 

2  
 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

     
    June 30,   December 31,
    2019   2018
    US$   US$
ASSETS                
Current assets:                
Cash and cash equivalents     194,763,132       41,301,817  
Restricted cash     312,109,750       325,690,023  
Accounts receivable, net of allowance for doubtful accounts     113,277,495       294,688,288  
Amounts due from a related party     278,370       —    
Inventories     734,184,823       620,033,195  
Prepaid expenses and other current assets     158,318,331       132,218,528  
    Total current assets     1,512,931,901       1,413,931,851  
Property, plant and equipment, net     824,360,375       775,941,280  
Land use rights, net     29,439,676       29,796,795  
Long-term prepayments to equipment and construction suppliers     448,633,091       530,636,319  
Operating lease right-of-use assets, net     15,760,841       —    
Other non-current assets     3,153,997       3,212,986  
    Total assets     2,834,279,881       2,753,519,231  
                 
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY                
Current liabilities:                
Short-term bank loans, including current portion of long-term bank loans     678,586,573       729,666,920  
Bills payable     576,257,873       618,166,453  
Accounts payable     115,275,006       84,958,469  
Amounts due to related parties     20,072,759       18,365,738  
Income taxes payable     18,314,186       15,975,367  
Operating lease liabilities, current     1,888,376       —    
Accrued expenses and other current liabilities     67,303,357       126,926,898  
    Total current liabilities     1,477,698,130       1,594,059,845  
Long-term bank loans, excluding current portion     252,503,403       111,808,244  
Deferred income     97,121,826       99,583,477  
Operating lease liabilities, non-current     14,588,111       —    
Other non-current liabilities     96,824,770       101,573,772  
    Total liabilities     1,938,736,240       1,907,025,338  
                 
Redeemable Series D convertible preferred stock (redemption amount of US$300,791,600 and US$280,650,800 as of June 30, 2019 and  December 31, 2018, respectively)     97,576,465       97,576,465  
Stockholders' equity:                
Series B preferred stock     100       100  
Common stock, US$0.0001 par value, 500,000,000 shares authorized, 50,969,841 shares issued, 50,948,841 shares outstanding as of  June 30, 2019 and December 31, 2018, respectively     5,097       5,097  
Treasury stock, 21,000 shares at cost     (92,694 )     (92,694 )
Additional paid-in capital     86,633,582       86,633,582  
Retained earnings     768,195,922       717,103,890  
Accumulated other comprehensive loss     (56,774,831 )     (54,732,547 )
    Total stockholders' equity     797,967,176       748,917,428  
Commitments and contingencies     —         —    
    Total liabilities, redeemable convertible preferred stock and stockholders' equity     2,834,279,881       2,753,519,231  

 

 

 

 

 

  

See accompanying notes to unaudited condensed consolidated financial statements.

 

3  
 

 

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   

Three-Month Period Ended

June 30,

 

Six-Month Period Ended

June 30,

    2019   2018   2019   2018
    US$   US$   US$   US$
                 
Revenues     463,073,880       317,329,520       764,539,887       627,782,553  
Cost of revenues     (397,813,194 )     (261,175,654 )     (648,949,533 )     (517,761,231 )
    Gross profit     65,260,686       56,153,866       115,590,354       110,021,322  
                                 
Selling expenses     (247,410 )     (3,562,711 )     (525,230 )     (4,613,720 )
General and administrative expenses     (5,764,593 )     (11,348,767 )     (14,539,978 )     (20,223,776 )
Research and development expenses     (9,551,721 )     (5,288,636 )     (19,613,907 )     (10,338,534 )
    Total operating expenses     (15,563,724 )     (20,200,114 )     (34,679,115 )     (35,176,030 )
                                 
    Operating income     49,696,962       35,953,752       80,911,239       74,845,292  
                                 
Interest income     454,357       1,029,675       890,136       3,342,298  
Interest expense     (12,059,242 )     (11,274,575 )     (29,559,519 )     (24,168,780 )
Foreign currency exchange gains     3,050,612       5,632,970       909,747       1,677,162  
Losses on foreign currency option contracts     —         —         —         (520,981 )
Gains on disposal of a subsidiary     —         —         518,491       —    
Government grant     1,611,216       1,378,484       3,706,153       2,856,043  
    Total non-operating expense, net     (6,943,057 )     (3,233,446 )     (23,534,992 )     (16,814,258 )
                                 
    Income before income taxes     42,753,905       32,720,306       57,376,247       58,031,034  
                                 
Income tax expense     (2,642,588 )     (5,496,228 )     (6,284,215 )     (11,707,055 )
                                 
    Net income     40,111,317       27,224,078       51,092,032       46,323,979  
                                 
Earnings per common share:                                
Basic and diluted     0.60       0.41       0.76       0.70  
                                 
Net Income     40,111,317       27,224,078       51,092,032       46,323,979  
                                 
Other comprehensive loss                                
Foreign currency translation adjustment, net of nil income taxes     (16,713,085 )     (39,306,010 )     (2,042,284 )     (9,644,600 )
                                 
    Comprehensive income (loss)     23,398,232       (12,081,932 )     49,049,748       36,679,379  

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4  
 

 

 

 

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Six-Month Period Ended June 30,
    2019   2018
    US$   US$
Cash flows from operating activities:                
Net cash provided by operating activities     92,864,032       152,600,917  
                 
Cash flows from investing activities:                
Proceeds from maturity of time deposits     —         388,105,630  
Purchase of time deposits     —         (210,380,884 )
Purchase of and deposits for property, plant and equipment     (52,396,204 )     (334,739,673 )
Refund of deposit from an equipment supplier     —         60,054,417  
Deposits for acquisition of equity     —         (3,640,688 )
Government grants related to the construction projects     —         10,558,608  
Proceeds from sales of a subsidiary     7,376,807       —    
Cash disposed for sales of a subsidiary     (3,202 )     —    
Net cash used in investing activities     (45,022,599 )     (90,042,590 )
                 
Cash flows from financing activities:                
Proceeds from bank borrowings     1,400,043,299       470,494,396  
Repayments of bank borrowings     (1,307,643,944 )     (587,236,484 )
Investment received in advance from a related party     —         75,567,512  
Proceeds from interest-free advances from related parties     67,389,859       —    
Repayments of interest-free advances from related parties     (65,152,460 )     —    
Net cash provided by (used in) financing activities     94,636,754       (41,174,576 )
                 
Effect of foreign currency exchange rate changes on cash, cash equivalents and restricted cash     (2,597,145 )     (5,499,604 )
Net increase in cash, cash equivalents and restricted cash     139,881,042       15,884,147  
                 
Cash, cash equivalents and restricted cash at beginning of period     366,991,840       320,091,665  
Cash, cash equivalents and restricted cash at end of period     506,872,882       335,975,812  
                 
Supplemental disclosure of cash flow information:                
Interest paid, net of capitalized interest     29,586,602       23,267,235  
Income taxes paid     6,067,051       12,906,780  
Non-cash investing and financing activities:                
Accrual for purchase of equipment and construction included in accrued expenses and other current liabilities     1,721,729       6,057,014  

 

 

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.

 

         
    June 30,
    2019   2018
    US$   US$
Cash and cash equivalents     194,763,132       72,721,460  
Restricted cash     312,109,750       263,254,352  
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows     506,872,882       335,975,812  

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5  
 

 

 

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, 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 June 30, 2019, the results of operations and cash flows for the six-month periods ended June 30, 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 fair values of stock-based compensation awards, 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.

 

 

6  
 

 

 

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 and six-month periods ended June 30, 2019 and 2018, are as follows:

 

    Three-Month Period Ended June 30,
    2019   2018
    US$   %   US$   %
Distributor A, located in PRC     58,501,659       12.6 %     44,765,278       14.1 %
Distributor B, located in PRC     36,906,778       8.0 %     41,215,145       13.0 %
Distributor C, located in PRC     33,077,889       7.1 %     38,366,592       12.1 %
Total     128,486,326       27.7 %     124,347,015       39.2 %

 

 

    Six-Month Period Ended June 30,
    2019   2018
    US$   %   US$   %
Distributor A, located in PRC     115,001,391       15.0 %     92,497,187       14.7 %
Distributor B, located in PRC     74,605,665       9.8 %     76,782,431       12.2 %
Distributor C, located in PRC     55,046,388       7.2 %     70,719,605       11.3 %
Total     244,653,444       32.0 %     239,999,223       38.2 %

 

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 31.7% (three distributors) and 20.5% (two distributors) for the three-month periods ended June 30, 2019 and 2018, respectively, and 33.2% (three distributor) and 10.0% (one distributor) of the Company's total raw materials purchases for the six-month periods ended June 30, 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.

 

7  
 

 

 

Cash concentration

 

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

 

   

June 30,

2019

 

December 31,

2018

      US$       US$  
Renminbi (“RMB”) denominated bank deposits with:                
Financial Institutions in the PRC     505,195,427       366,773,172  
Financial Institutions in Hong Kong Special Administrative Region ("Hong Kong SAR")     8,134       8,134  
United States (“U.S.”) dollar denominated bank deposits with:                
Financial Institution in the U.S.     80,869       40,390  
Financial Institutions in the PRC     16,981       17,050  
Financial Institution in Hong Kong SAR     1,417,991       131,892  
Financial Institution in Macau Special Administrative Region ("Macau SAR")     910       6,144  
Financial Institution in Dubai, UAE     3,518       14,464  
Hong Kong dollar denominated bank deposits with:                
Financial institution in Hong Kong SAR     156       156  
Dirham denominated bank deposits with:                
Financial institution in Dubai, UAE     148,896       438  

 

The bank deposits with financial institutions in the PRC are insured by the government authority for up to RMB500,000. The bank deposits with financial institutions in the Hong Kong SAR are insured by the government authority for up to HK$500,000. The bank deposits with financial institutions in the Macau SAR are insured by the government authority for up to MOP$500,000. The bank deposits with financial institutions in the Dubai, UAE are not insured by the government authority. Total bank deposits amounting to $1,695,579 and $1,442,481 are insured as of June 30, 2019 and December 31, 2018, respectively. The Company has not experienced any losses in uninsured bank deposits and does not believe that it is exposed to any significant risks on cash held in bank accounts. To limit exposure to credit risk, the Company primarily places bank deposits with large financial institutions in the PRC, Hong Kong SAR, Macau SAR and Dubai, UAE with acceptable credit rating.

 

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$205,519,886 and US$202,568,664 as of June 30, 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$1,470,334 and US$1,469,935 as of June 30, 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$52,894,002 and US$70,885,301 as of June 30, 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$50,770,919 and US$50,766,123 as of June 30, 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$1,454,609 and nil as of June 30, 2019 and December 31, 2018, respectively.

 

 

8  
 

 

 

Note 2 – Accounts receivable

 

Accounts receivable consists of the following:

 

   

June 30,

2019

 

December 31,

2018

      US$       US$  
                 
Accounts receivable     113,315,947       294,726,804  
Allowance for doubtful accounts     (38,452 )     (38,516 )
Accounts receivable, net     113,277,495       294,688,288  

 

As of June 30, 2019 and December 31, 2018, the accounts receivable balances also include notes receivable in the amount of US$377,566 and US$27,392, respectively. As of June 30, 2019 and December 31, 2018, US$38,510,882 and US$94,581,170 , respectively, of accounts receivable are pledged for the short-term bank loans. 

 

There was no accrual of additional provision or write-off of accounts receivable for the three-month and six-month periods ended June 30, 2019 and 2018.

 

The following table provides an analysis of the aging of accounts receivable as of June 30, 2019 and December 31, 2018:

 

   

June 30,

2019

 

December 31,

2018

      US$       US$  
Aging:                
– current     91,154,357       218,458,862  
– 1-3 months past due     6,190,511       31,386,341  
– 4-6 months past due     15,229,655       109,412  
– 7-12 months past due     659,678       42,532,170  
– greater than one year past due     81,746       2,240,019  
Total accounts receivable     113,315,947       294,726,804  

 

Note 3 – Inventories

 

Inventories consist of the following:

 

   

June 30,

2019

   

December 31,

2018

 
  US$   US$  
         
Raw materials and work in progress     706,804,803       612,701,274  
Finished goods     27,380,020       7,331,921  
Total inventories     734,184,823       620,033,195  

 

There were no write down of inventories for the three-month and six-month periods ended June 30, 2019 and 2018.

 

 

9  
 

 

 

Note 4 – Prepaid expenses and other current assets

 

Prepaid expenses and other current assets consist of the following:

 

   

June 30,

2019

   

December 31,

2018

 
    US$     US$  
             
Value added taxes receivables (i)     1,871,331       4,700,702  
Advances to suppliers (ii)     80,565,747       104,469,023  
Interest receivable (iii)     901,181       826,729  
Consideration for sales of Shanghai Sales (iv)     -       7,285,231  
Receivables from Shanghai Sales for the prepayment to a supplier (v)     15,751,663       -  
Receivables from Hong Kong Grand Royal Trading Co., Ltd.(vi)     48,236,949       -  
Others (vii)     10,991,460       14,936,843  
Total prepaid expenses and other current assets     158,318,331       132,218,528  

 

(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.

 

(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 Shanghai Sales 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 US$7.4 million was received on April 11, 2019. The cash received was included in the cash flows from investing activities for the six-month period ended June 30, 2019.

 

(v) In December 2017, HLJ Xinda Group entered into a building purchase contract with Shanghai Caohejing Kangqiao Science & Green River Construction & Development Co., Ltd. ("Green River") for a total consideration of RMB216.6 million (equivalent to US$31.5 million), with a total area of 13,972.64 square meters with a prepaid RMB108.3 million (equivalent to US$15.8 million).

 

During the six-month period ended June 30, 2019, HLJ Xinda Group entered into an agreement with Green River and Shanghai Sales, to transfer the rights and obligations of HLJ Xinda Group under the original purchase agreement to Shanghai Sales. Pursuant to the agreement, Shanghai Sales will pay the RMB108.3 million (equivalent to US$15.8 million) to HLJ Xinda Group. As a result, the prepayment was reclassified as prepaid expenses and other current assets. HLJ Xinda Group received the RMB108.3 million on August 6, 2019.  

 

(vi) Hong Kong Grand Royal Trading Co., Ltd. (“Hong Kong Grand Royal”) is a raw material supplier of Dubai Xinda. Dubai Xinda has prepaid USD48.2 million to Hong Kong Grand Royal in 2017 for purchase of raw materials. Due to the price fluctuation of raw materials, Hong Kong Grand Royal could not purchase and deliver the raw materials to Dubai Xinda. In July 2019, both parties entered into a supplemental agreement to cancel the original purchase agreements and Hong Kong Grand Royal shall refund USD14.0 million by September 30, 2019 and USD34.2 million by October 30, 2019. In July 2019, Hong Kong Grand Royal has refunded USD4.6 million.

 

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

 

10  
 

 

 

Note 5 – Property, plant and equipment, net

 

Property, plant and equipment consist of the following:

 

   

June 30,

2019

   

December 31,

2018

 
    US$     US$  
             
Machinery, equipment and furniture     580,251,030       580,735,482  
Motor vehicles     2,807,772       2,658,487  
Workshops and buildings     157,993,038       157,976,839  
Construction in progress     295,562,881       217,194,285  
    Total property, plant and equipment     1,036,614,721       958,565,093  
Less accumulated depreciation     (212,254,346 )     (182,623,813 )
    Property, plant and equipment, net     824,360,375       775,941,280  

 

For the three-month and six-month periods ended June 30, 2019 and 2018, the Company capitalized US$357,175 and US$617,156, and US$744,499 and US$1,260,944 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:

 

         
   

Three-Month Period Ended

June 30,

    2019   2018
    US$   US$
Cost of revenues     13,522,087       9,310,321  
General and administrative expenses     519,248       806,745  
Research and development expenses     946,164       1,064,688  
Selling expenses     454       1,400  
    Total depreciation expense     14,987,953       11,183,154  

 

 

   

Six-Month Period Ended

June 30,

    2019   2018
    US$   US$
Cost of revenues     26,981,070       18,878,939  
General and administrative expenses     1,205,771       1,601,370  
Research and development expenses     1,968,287       1,976,328  
Selling expenses     2,277       2,830  
    Total depreciation expense     30,157,405       22,459,467  

 

Note 6 - Prepayments to equipment and construction suppliers

 

   

June 30,

2019

   

December 31,

2018

 
    US$     US$  
             
Hailezi (i)     424,294,943       502,087,116  
Green River (ii)     -       15,778,057  
Beijin Construction (iii)     6,863,055       6,867,269  
Peaceful Treasure Limited(iv)     16,998,714       4,936,983  
Others       476,379       966,894  
    Total Prepayments to equipment and construction suppliers     448,633,091       530,636,319  

 

 

 

 

11  
 

 

 

(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$113.8 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$90.4 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$41.3 million). Hailezi refunded RMB369.1 million (equivalent to US$53.6 million) to HLJ Xinda Group on June 22, 2017. In May 2019, HLJ Xinda Group has prepaid another RMB1.0 million (equivalent to US$0.1 million). As of June 30, 2019, HLJ Xinda Group has prepaid RMB253.5 million (equivalent to US$36.9 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$136.7million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB920.9 million (equivalent to US$134.0 million) in total as of June 30, 2019. RMB530.8 million (equivalent to US$77.2 million) of the equipment was delivered in June 2019 and the prepayment was transferred to construction in progress. As of June 30, 2019, the amount of the remaining prepayment was RMB390.1 million (equivalent to US$56.8 million).

 

In connection with the HLJ project, in June and July 2018, HLJ Xinda Group entered into two equipment purchase contracts 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 RMB1906.8 million (equivalent to US$277.4 million). Pursuant to the contracts with Hailezi, HLJ Xinda Group has prepaid RMB541.5 million (equivalent to US$78.8 million) as of June 30, 2019.

 

On March 17, 2017, Sichuan Xinda entered into a definitive agreement with the People's Government of Shunqing District, Nanchong City of Sichuan Province for the production of 300,000 metric tons of bio-composite materials and additive manufacturing and 20,000 metric tons of functional masterbatch, a high-end color additive process in plastics manufacturing (the "Nanchong Project"). The Nanchong Project will be located in a land area of 250 mu (equivalent to 41.2 acres), with 215 mu designated for bio-composite materials and additive manufacturing production and 35 mu to be designated for functional masterbatch production. The projected total capital expenditures for the project is approximately RMB2.5 billion (equivalent to US$363.7 million).

 

In connection with the Nanchong Project, Sichuan Xinda entered into equipment purchase contracts with Hailezi to purchase production equipment and testing equipment. Pursuant to the contracts with Hailezi, Sichuan Xinda prepaid RMB1,728.9 million (equivalent to  US$251.5 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$248.0 million) by the end of March 2018, the remaining uncancelled amount is RMB24.0 (equivalent to US$3.5 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. In January, 2018, Hailezi 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 June 30, 2019 was RMB20.8 million (equivalent to US$3.0 million).

 

In connection with  the Nanchong Project, on June 21, 2018, Sichuan Xinda entered into another equipment purchase contract with Hailezi to purchase production equipment and testing equipment for a consideration of RMB1,900 million (equivalent to US$276.4 million). Pursuant to the contracts with Hailezi, Sichuan Xinda has prepaid RMB1,710 million (equivalent to US$248.8 million) as of June 30, 2019.

 

12  
 

 

 

 

The table below summarized the balance of prepayments to Hailezi for each of the projects as of June 30, 2019 and December 31, 2018, and the movements of the prepayments:

 

(in millions US$)
Year   Projects  

Balance as of

December 31, 2018

 

 

 

 

Prepaid in 2019

  Transfer to CIP in 2019   Effect of foreign currency exchange rate changes  

Balance as of

June 30, 2019

  2017     Storage system     36.8       0.1       —         —         36.9  
  2017     HLJ project     134.2       —         (77.2 )     (0.2 )     56.8  
  2018     HLJ project     78.9       —         —         (0.1 )     78.8  
  2017     Nanchong project     3.0       —         —         —         3.0  
  2018     Nanchong project     249.2       —         —         (0.4 )     248.8  
  Total           502.1       0.1       (77.2 )     (0.7 )     424.3  

 

(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$31.5 million), with a total area of 13,972.64 square meters with a prepaid RMB108.3 million (equivalent to US$15.8 million).

 

During the six-month period ended June 30, 2019, HLJ Xinda Group entered into an agreement with Green River and Shanghai Sales, to transfer the rights and obligations of HLJ Xinda Group under the original purchase agreement to Shanghai Sales. Pursuant to the agreement, Shanghai Sales will pay the RMB108.3 million (equivalent to US$15.8 million) to HLJ Xinda Group. As a result, the prepayment was reclassified as prepaid expenses and other current assets. HLJ Xinda Group received the RMB108.3 million on August 6, 2019.

 

(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 RMB264.3 million (equivalent to US$38.5 million). Pursuant to the contracts with Beijin Construction, Sichuan Xinda has prepaid RMB120.9 million (equivalent to US$17.6 million) as of June 30, 2019, of which RMB74.0 million (equivalent to US$10.8 million) was transferred to construction in progress.

 

(iv) On October 20, 2016, Sichuan Xinda entered into an equipment purchase contract with Peaceful Treasure Limited ("Peaceful") for a total consideration of RMB89.8 million (equivalent to US$13.1 million) to purchase certain production and testing equipment. The Company prepaid RMB33.9 million (equivalent to US$4.9 million) as of June 30, 2019.

 

On May 31, 2019, Dubai Xinda entered into an equipment purchase contract with Peaceful for a total consideration of US$18.8 million to purchase storage and testing equipment. The Company prepaid US$12.1 million as of June 30, 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 six-month period ended June 30, 2018.

 

13  
 

 

 

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

 

    June 30,   December 31,
    2019   2018
      US$       US$  
Unsecured loans     364,234,076       418,198,508  
Loans secured by accounts receivable     65,457,402       65,567,082  
Loans secured by restricted cash     59,546,089       69,500,000  
Current portion of long-term bank loans (note b)     189,349,006       176,401,330  
    Total short-term loans, including current portion of long-term bank loans     678,586,573       729,666,920  

 

As of June 30, 2019 and December 31, 2018, the Company's short-term bank loans (including the current portion of long-term bank loans) bear a weighted average interest rate of 4.9% and 4.7% per annum, respectively. All short-term bank loans mature at various times within one year and contain no renewal terms.

 

During the six-month period ended June 30, 2019, the Company repaid thirteen loans in a total amount of RMB450.0 million (equivalent to US$65.5 million), and obtained thirteen loans in a total amount of RMB450.0 million (equivalent to US$65.5 million) at an annual interest rate of 4.350% secured by accounts receivables of RMB264.8 million (equivalent to US$38.5 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$15.6 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 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$5.5 million) in Bank of China in Harbin, China. In accordance with the renewal agreement on July 19, 2018, the repayment term of the loan was extended and the loan was 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$6.1 million) in Bank of China in Harbin, China. In accordance with the renewal agreement on July 19, 2018, the repayment term of the loan was extended and the loan was 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$43.6 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.

 

In January 2019, the Company obtained a nine-month secured short-term loan of RMB100.0 million (equivalent to US$14.5 million) from Postal Savings Bank of China at an annual interest rate of 4.35%. The loan was secured by restricted cash of RMB10.0 million (equivalent to US$1.5 million) in Postal Savings Bank of China.

 

14  
 

 

 

(b) Non-current

 

   

June 30,

2019

   

December 31,

2018

 
    US$     US$  
Secured loans     74,690,642       2,177,985  
Unsecured loans     277,161,767       196,031,589  
Syndicate loan facility     90,000,000       90,000,000  
Less: current portion     (189,349,006 )     (176,401,330 )
Total long-term bank loans, excluding current portion     252,503,403       111,808,244  

 

In October and November 2015, the Company obtained three long term unsecured loans of RMB260.0 million (equivalent to US$37.8 million) from Bank of China at an annual interest rate of 4.75%. In January 2016, the Company obtained a long term unsecured loan of RMB80.0 million (equivalent to US$11.6 million) from Bank of China at an annual interest rate of 4.75%. On December 9, 2016, the Company obtained a long term unsecured loan of RMB30.0 million (equivalent to US$4.4 million) from Bank of China at an annual interest rate of 4.75%. On March 23, 2017, the Company obtained a long term unsecured loan of RMB25.0 million (equivalent to US$3.6 million) from Bank of China at an annual interest rate of 4.75%. The Company repaid RMB10.0 million (equivalent to US$1.5 million) on April 28, 2017, RMB40.0 million (equivalent to US$5.8 million) on October 28, 2017, RMB25.0 million (equivalent to US$3.6 million) on April 28, 2018, RMB100.0 million (equivalent to US$14.5 million) on October 28, 2018 and RMB25.0 million (equivalent to US$3.6 million) on April 28, 2019, RMB100.0 million (equivalent to US$14.5 million), RMB20.0 million (equivalent to US$2.9 million), and RMB75.0 million (equivalent to US$10.9 million) will be repaid on October 28, 2019, April 28, 2020 and October 28, 2020, respectively. As of June 30, 2019, the Company was providing external guarantees without the bank’s consent, which was in violation of a provision of the loan contract. According to the loan contract, Bank of China has the right to declare the above loans be immediately due and payable. As a result, the loan amounting to RMB75.0 million (equivalent to US$10.9 million) due on October 28, 2020 was callable and classified as short-term loans. For details of the guarantee, please refer to note 17.

 

On August 22, 2016, Xinda Holding (HK) Company Limited ("Xinda Holding (HK)") a wholly owned subsidiary of the Company, entered into a facility agreement for a loan facility in an aggregate amount of US$180.0 million with a consortium of banks and financial institutions led by Standard Chartered Bank (Hong Kong) Limited. The Company paid arrangement fees and legal fees in the amount of US$6.77 million for the related loan, which were all amortized as of June 30, 2019. Debt issuance costs are presented on the consolidated balance sheets as a direct deduction from the carrying amount of the loan and amortized to interest expense using the effective interest rate of 6.205% as of June 30, 2019. The Company repaid US$22.5 million, US$22.5 million and US$45.0 million on November 22, 2017, February 22, 2018 and May 22, 2018, respectively. US$90.0 million of the principal amount should be repaid on August 22, 2018. The loans were not repaid on time due to the stricter foreign exchange control in the PRC. As of June 30, 2019, the balance of the loan was US$90.0 million, and the Company totally pledged RMB349.0 million (equivalent to US$50.8 million) restricted cash to secure the repayment of the above loan. In accordance with the renewal agreement in July 2019, the repayment term of the above loan was extended to August 30, 2019.

 

During 2017, the Company obtained four long-term unsecured loans of RMB430.0 million (equivalent to US$62.5 million) from Nanchong Shuntou Development Group Co., Ltd. at an annual interest rate of 4.35%. In accordance with the renewal agreements on April 2, 2019, the repayment terms of the four loans were extended and the loans will be due on September 30, 2019.

 

On December 1, 2017, the Company obtained a seven-year unsecured loan of RMB526.3 million (equivalent to US$76.6 million) from Longjiang Bank, Harbin Branch at an annual interest rate of 4.9%. The Company borrowed another long-term loan in amount of RMB169.1 million (equivalent to US$24.6 million) in January 2018 at an annual interest rate of 4.9%. The Company repaid RMB15.0 million (equivalent to US$2.2 million) on June 30 , 2019, RMB20.0 million (equivalent to US$2.9 million), RMB35.0 million (equivalent to US$5.1 million), RMB35.0 million (equivalent to US$5.1 million), RMB70.0 million (equivalent to US$10.2 million), RMB70.0 million (equivalent to US$10.2 million) and RMB450.4 million (equivalent to US$65.5 million) will be repaid on December 30, 2019, June 30, 2020, December 30, 2020, June 30, 2021, December 30, 2021, and after 2021, respectively.

 

On December 26, 2018, the Company obtained a five-year secured loan of AED8.0 million (equivalent to US$2.2 million) from National Bank of Umm Al Qaiwain at an interest rate of three-month EBOR (2.58% as of June 30, 2019) plus 3.75%. The long-term loan was secured by an undated cheque of AED8.8 million (US$2.4 million) favouring the bank provided by Dubai Xinda. The cheque would not be cashed by the bank unless Dubai Xinda defaults. Principal will be repaid in ten half-yearly installments of AED0.8 million (equivalent to US$0.2 million) each. The Company repaid AED0.8 million (equivalent to US$0.2 million) on June 30 , 2019 .

 

15  
 

 

 

In January 2019, the Company obtained a two-year secured loan of RMB500.0 million (equivalent to US$72.7 million) from China Construction Bank. The long-term loan was secured by the right of equity income of Sichuan Xinda, which was previously held by HLJ Xinda Group. The registration of pledge was completed in January 2019.

 

On June 17, 2019, the Company obtained a long-term loan of RMB600.0 million (equivalent to US$87.3 million) from Longjiang Bank, Harbin Branch at an annual interest rate of 5.635%. RMB50 million (equivalent to US$7.3 million), RMB50 million (equivalent to US$7.3 million), RMB50 million (equivalent to US$7.3 million), RMB50 million (equivalent to US$7.3 million), RMB100 million (equivalent to US$14.5 million), RMB100 million (equivalent to US$14.5 million), RMB100 million (equivalent to US$14.5 million) and RMB100 million (equivalent to US$14.5 million) will be repaid on June 20, 2021, December 20, 2021, June 20, 2022, December 20, 2022, June 20, 2023, December 20, 2023, June 20, 2024, December 20, 2024, respectively.

 

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

 

    June 30, 2019
          US$  
  2019       170,221,299  
  2020       24,436,644  
  2021       108,076,658  
  2022       41,164,647  
  After 2022       97,953,161  
  Total       441,852,409  

 

 

Note 9 – Accrued expenses and other current liabilities

 

Accrued expenses and other current liabilities consist of the following:

 

   

June 30,

2019

 

December 31,

2018

      US$       US$  
Payables for purchase of property, plant and equipment     14,453,599       53,059,897  
Accrued freight expenses     9,900,646       25,908,990  
Accrued interest expenses     11,295,515       8,873,532  
Contract liabilities (i)     1,425,590       16,105,245  
Non income tax payables     7,934,608       6,425,236  
Others (ii)     22,293,399       16,553,998  
Total accrued expenses and other current liabilities     67,303,357       126,926,898  

 

(i) Contract liabilities mainly represent the advance received from customers in the PRC for the finished goods and raw materials purchases as of June 30, 2019. The change in contract liabilities primarily represents the cash received, less amounts recognized as revenues during the period.

 

(ii) Others mainly represent accrued payroll and employee benefits, accrued audit and consulting fees, electricity fee and other accrued miscellaneous operating expenses.

 

16  
 

 

 

Note 10 – Related Party Transactions

 

The related party transactions are summarized as follows:

 

    Three-Month Period Ended June 30,   Six-Month Period Ended June 30,
    2019   2018   2019   2018
    US$   US$   US$   US$
Transactions with related parties:                                
                                 
Revenues resulting from transactions with a related party:                                
Sales to Macromolecule Composite Materials (iv)     308,800       —         308,800       —    
                                 
Financing transactions with related parties:                                
Investment received in advance from Changmu (i)     —         75,567,512       —         75,567,512  
Interest-free advances from Mr. Jie Han (ii)     2,950,723       —         2,950,723       —    
Interest-free advances from a senior management employee in HLJ Xinda Group (iii)     —         —         284,008       —    
Repayment of interest-free advances from management employees in HLJ Xinda Group and Sichuan Xinda (iii)     (4,439,451 )     —         (4,439,451 )     —    
Interest-free advances from Macromolecule Composite Materials (iv)     64,155,128       —         64,155,128       —    
Repayment of interest-free advances from Macromolecule Composite Materials (iv)     (60,713,009 )     —         (60,713,009 )     —    
Total financing transactions with related parties     1,953,391       75,567,512       2,237,399       75,567,512  

 

The related party balances are summarized as follows:

 

   

June 30,

2019

 

December 31,

2018

    US$   US$
Amounts due from a related party:                
Macromolecule Composite Materials (iv)     278,370       —    
                 
Amounts due to related parties:                
Mr. Jie Han (ii)     12,800,559       9,907,915  
Mr. Jie Han’s wife (ii)     3,176,480       3,180,965  
Mr. Jie Han’s son (ii)     727,304       728,523  
Senior management employees in HLJ Xinda Group and Sichuan Xinda (iii)     443,734       4,548,335  
Macromolecule Composite Materials (iv)     2,924,682       —    
Total amounts due to related parties     20,072,759       18,365,738  
                 

 

(i) On July 14, 2018, Xinda Holding (HK) entered into a subscription intent agreement with Changmu Investment (Beijing) Company Limited (“Changmu”), a company wholly controlled by Mr. Tiexin Han, the son of Mr. Jie Han, the Chief Executive Officer and Chairman of the Company. Pursuant to the terms of the agreement, HLJ Xinda Group received RMB500.0 million (equivalent to US$75.6 million) from Changmu on June 29, 2018 as deposits in order to subscribe newly authorized registered capital of HLJ Xinda Group subject to further negotiations. Due to the inability to reach agreement on the terms, both parties agreed not to proceed with any definitive agreement. Therefore, HLJ Xinda Group refunded the investment received in advance from Changmu in September 2018.

 

(ii) During the year ended December 31, 2018, the Company received RMB68.0 million (equivalent to US$9.9 million) from Mr. Jie Han, the Chairman of the Company, RMB21.8 million (equivalent to US$3.2 million) from Ms. Limei Sun, the wife of Mr. Jie Han, RMB5.0 million (equivalent to US$0.7 million) from Mr. Tiexin Han, the son of Mr. Jie Han. 

 

During the six-month period ended June 30, 2019, the Company received another RMB20.0 million (equivalent to US$2.9 million) from Mr. Jie Han as interest-free advances.

 

(iii) In August 2018, the Company received RMB10.0 million (equivalent to US$1.5 million) each from three senior management employees (Messers Junjie Ma, Yuchong Jia, Guangjun Jiao) of Sichuan Xinda as interest-free advances to Sichuan Xinda. During the year ended December 31, 2018, the Company also received RMB1.2 million (equivalent to US$0.2 million) from a senior management employee (Mr. Rujun Dai) of HLJ Xinda Group as interest-free advances to HLJ Xinda Group.

 

In April 2019, the Company repaid the RMB30.0 million (equivalent to US$4.4 million) to the senior management employees in Sichuan Xinda. During the six-month period ended June 30, 2019, the Company received another RMB1.9 million (equivalent to US$0.3 million) from Mr. Rujun Dai and repaid RMB0.09 million (equivalent to US$0.01 million) to Mr. Rujun Dai. As of June 30, 2019, the amounts due to Mr. Rujun Dai was RMB3.1 million (equivalent to US$0.4 million).

 

(iv) On December 26, 2018, Shanghai Sales set up Heilongjiang Xinda Macromolecule Composite Materials Company Limited (“Macromolecule Composite Materials”). On April 22, 2019, Shanghai Sales transferred 97.5% equity interest in Macromolecule Composite Materials to Harbin Shengtong Engineering Plastics Co. Ltd. ("Harbin Shengtong"). Mr. Xigang Chen, the general manager of Sichuan Xinda, is the general manager and also the principal shareholder of Harbin Shengtong.

 

17  
 

 

 

During the period from April 22, 2019 through June 30, 2019, the Company sold products to Macromolecule Composite Materials in US$0.3 million. As of June 30, 2019, the accounts receivable due from Macromolecule Composite Materials amounted to US$0.3 million.

During the period from April 22, 2019 through June 30, 2019, the Company received RMB434.4 million (equivalent to US$64.2 million) of interest-free advances from Macromolecule Composite Materials and repaid RMB411.5 million (equivalent to US$60.7 million). As of June 30, 2019, the amounts due to Macromolecule Composite Materials was RMB20.1 million (equivalent to US$2.9 million), which was subsequently settled in August 2019.

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 six-month periods ended June 30, 2019 and 2018 were 11.0% and 20.2%, respectively. The effective income tax rate decreased from 20.2% for the six-month period ended June 30, 2018 to 11.0% for the six-month period ended June 30, 2019, primarily due to (i) the increase of additional deduction of R&D expenses resulted from the increase of R&D expenses incurred and the new policy issued by China’s tax authority in September 2018 to increase the R&D expenses additional deduction rate from 50% to 75% for PRC entities, effective from January 1, 2018 to December 31, 2020, (ii) the decrease of continuous operating losses occurred in overseas subsidiaries such as Dubai Xinda and Xinda Holding (HK). The effective income tax rate for the six-month period ended June 30, 2019 differs from the PRC statutory income tax rate of 25% primarily due to Sichuan Xinda's preferential income tax rate, the reversal of the unrecognized tax benefits accrued in year 2013 and 75% additional deduction of R&D expenses of the major PRC operating entities.

 

US$3,675,637 previously unrecognized tax benefits accrued in year 2013 and the related accrued interest amounting to US$3,206,058 were reversed due to the expiration of five-year tax assessment period on May 31, 2019. As of June 30, 2019, the unrecognized tax benefits were US$33,325,830 and the interest relating to unrecognized tax benefits was US$11,488,342, of which t he unrecognized tax benefits in year 2014 amounting to US$5,739,217 and related accrued interest amounting to US$4,218,325 were classified as current liabilities as the five-year tax assessment period will expire on May 31, 2020.  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$50.9 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 RMB333.2 million (equivalent to US$48.5 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 June 30, 2019.

 

The Company has also received RMB45.0 million (equivalent to US$6.5 million) from Harbin Bureau of Finance for Biomedical composites project as of June 30, 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 RMB88.7 million (equivalent to US$13.0 million) government grants have been amortized as other income proportionate to the depreciation of the related assets, of which RMB17.2 million (equivalent to US$2.5 million) was amortized in the three-month period ended June 30, 2019.

 

The Company also received RMB36.0 million (equivalent to US$5.2 million) from Shunqing Government with respect to interest subsidy for bank loans. A cumulative RMB16.4 million (equivalent to US$2.3 million) government grants have been amortized as other income in line with the amount of related loan interest accrued.

 

18  
 

 

 

Note 13 – Other non-current liabilities

             
    June 30,     December 31 ,  
    2019     2018  
    US$     US$  
Income tax payable-noncurrent (i)     88,722,693       92,461,068  
Deferred income tax liabilities     5,706,294       6,716,921  
Others     2,395,783       2,395,783  
Total other non-current liabilities     96,824,770       101,573,772  

 

(i) Income tax payable-noncurrent represents the repatriation tax, the accumulative balance of unrecognized tax benefits since 2015 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 six-month period ended June 30, 2019 are as follows:

 

    Series B Preferred Stock     Common Stock                     Accumulated      
   

Number of

Shares

    Amount    

Number of

Shares

    Amount    

Treasury

Stock

   

Additional

Paid-in

Capital

   

Retained

Earnings

   

Other

Comprehensive

Income (Loss)

   

Total

Stockholders'

Equity

 
          US$           US$     US$     US$     US$     US$     US$  
Balance at January 1, 2019     1,000,000       100       50,948,841       5,097       (92,694 )     86,633,582       717,103,890       (54,732,547 )     748,917,428  
Net income     -       -       -       -       -       -       51,092,032       -       51,092,032  
Other comprehensive income - Foreign currency translation adjustment, net of nil income taxes     -       -       -       -       -       -       -       (2,042,284     (2,042,284
Balance as of June 30, 2019     1,000,000       100       50,948,841       5,097       (92,694 )     86,633,582       768,195,922       (56,774,831 )     797,967,176  

 

 

Note 15– Stock based compensation

 

Non-vested shares

 

The Company recognized nil and US$2,547,273 of compensation expense in general and administrative expenses relating to non-vested shares for the three-month periods ended June 30, 2019 and 2018, respectively, and nil and US$2,630,065 for the six-month periods ended June 30, 2019 and 2018, respectively. As of June 30, 2019, there was no unrecognized compensation cost relating to non-vested shares.

 

 

19  
 

 

Note 16 - Earnings per share

 

Basic and diluted earnings per share are calculated as follows:

 

    Three-Month Period Ended June 30,    

Six-Month Period Ended June 30,

 
    2019     2018     2019     2018  
    US$     US$     US$     US$  
Net income     40,111,317       27,224,078       51,092,032       46,323,979  
Less:                                
Earnings allocated to participating Series D convertible preferred stocks     (9,586,142 )     (6,555,197 )     (12,210,406 )     (11,177,620 )
Earnings allocated to participating nonvested shares     -       (66,007 )     -       (112,552 )
Net income for basic and diluted earnings per share     30,525,175       20,602,874       38,881,626       35,033,807  
                                 
Denominator                                
Denominator for basic and diluted earnings per share     50,948,841       50,287,731       50,948,841       50,148,504  
                                 
Earnings per share:                                
Basic and diluted     0.60       0.41       0.76       0.70  

 

The following table summarizes potentially dilutive securities excluded from the calculation of diluted earnings per share for the three-month periods and six-month periods ended June 30, 2019 and 2018 because their effects are anti-dilutive:

 

  Three-Month Period Ended June 30,   Six-Month Period Ended June 30,  
  2019   2018   2019   2018  
                 
Shares issuable upon conversion of Series D convertible preferred stocks     16,000,000       16,000,000       16,000,000       16,000,000  
                                 

 

Note 17 - 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$261.8 million) in property, plant and equipment and approximately RMB600 million (equivalent to US$87.3 million) in working capital, for the construction of Sichuan plant.  As of June 30, 2019, the Company has a remaining commitment of RMB54.8 million (equivalent to US$8.0 million) mainly for facility construction.

 

In September 2016, Sichuan Xinda entered into equipment purchase contracts with Hailezi for a consideration of RMB17.0 million (equivalent to US$2.5 million) to purchase storage facility and testing equipment. Afterward, Sichuan Xinda cancelled two contracts with Hailezi for a consideration of RMB1.6 million (equivalent to US$0.2 million). As of June 30, 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 Treasure Limited ("Peaceful") for a total consideration of RMB89.8 million (equivalent to US$13.1 million) to purchase certain production and testing equipment. As of June 30, 2019, the Company has a commitment of RMB55.9 million (equivalent to US$8.1 million).

 

20  
 

 

 

On November 15, 2016, Sichuan Xinda entered into decoration contract with Beijin Construction  to perform indoor and outdoor decoration work for a consideration of RMB237.6 million (equivalent to US$34.6 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 June 30, 2019, Sichuan Xinda prepaid RMB120.9 million (equivalent to US$17.6 million) of which RMB74.0 million (equivalent to US$10.8 million) was transferred to construction in progress and has a remaining commitment of RMB143.4 million (equivalent to US$21.1 million).

 

In connection with the Nanchong Project mentioned in Note 6 (i), Sichuan Xinda entered into equipment purchase contracts with Hailezi for a consideration of RMB2,242.8 million (equivalent to US$326.2 million) to purchase production equipment and testing equipment in March 2017.  By the end of June 2017, Sichuan Xinda expected to launch an integrated ERP system, which resulted in the equipment to be purchased under the original contracts with Hailezi not meeting the production requirements. Thus the original contracts have been terminated with the amount of RMB2,222.9 million (equivalent to US$323.3 million), and Hailezi agreed to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$248.0 million) by the end of March 2018, out of the total prepayment made by Sichuan Xinda of RMB1,722.9 million (equivalent to US$250.6 million). As of June 30, 2018, Hailezi has refunded the prepayment in the amount of RMB1,704.9 million (equivalent to US$248.0 million). As of June 30, 2019, Sichuan Xinda prepaid RMB18.0 million (equivalent to US$2.6 million) and has a remaining commitment of RMB1.9 million (equivalent to US$0.3 million).

 

In connection with the Nanchong Project, on June 21, 2018, Sichuan Xinda entered into another equipment purchase contracts with Hailezi to purchase production equipment and testing equipment for a consideration of RMB1,900 million (equivalent to US$276.4 million). Pursuant to the contracts with Hailezi, Sichuan Xinda have prepaid RMB1,710 million (equivalent to US$248.8 million) at the end of June 30, 2019, and has a remaining commitment of RMB190.0 million (equivalent to US$27.6 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 RMB30.2 million (equivalent to US$4.4 million) as of June 30, 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$596.3 million), 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$2.7 million) as of June 30, 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$109.1 million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB300.7 million (equivalent to US$43.8 million) as of June 30, 2019, and has a remaining commitment of RMB449.1 million (equivalent to US65.3 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$168.3 million). Pursuant to the contract with Hailezi, HLJ Xinda has prepaid RMB240.8 million (equivalent to US$35.0 million) as of June 30, 2019, and has a remaining commitment of RMB916.2 million (equivalent to US$133.3 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 June 30, 2019, the Company has a remaining commitment of AED1.6 million (equivalent to US$0.4 million).

 

On May 31, 2019, Dubai Xinda entered into a warehouse construction contract with Peaceful for a total consideration of USD18.8 million. As of June 30, 2019, the Company has a remaining commitment of USD6.7 million.

 

 

21  
 

 

 

(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$0.8 million) to decorate office building. As of December 31, 2018, the decoration work in the amount of RMB2.0 million (equivalent to US$0.3 million) was recorded in construction in progress. As of June 30, 2019, the Company has a remaining commitment of RMB3.8 million (equivalent to US$0.5 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 December 31, 2018, the decoration work in the amount of RMB0.6 million (equivalent to US$0.1 million) was recorded in construction in progress. As of June 30, 2019, the Company has a remaining commitment of RMB0.6 million (equivalent to US$0.1 million).

 

(5) Guarantees

 

On December 25, 2018, HLJ Xinda Group, Sichuan Xinda and Mr. Jie Han provided guarantee to Shanghai Sales obtaining a one-year loan of RMB500.0 million (equivalent to US$72.7) from Longjiang Bank, Harbin Branch with an annual interest rate of 6.09% from December 25, 2018 to December 24, 2019. If Shanghai Sales does not repay the above loan when due, HLJ Xinda Group, Sichuan Xinda and Mr. Jie Han shall be obliged to repay the RMB500.0 million loan.

 

On April 15, 2019, Sichuan Xinda provided guarantee to Shanghai Sales obtaining a one-year loan of RMB800.0 million (equivalent to US$116.4 million) from Longjiang Bank, Harbin Branch with an annual interest rate of 6.09% from April 15, 2019 to April 14, 2020. If Shanghai Sales does not repay the above loan when due, Sichuan Xinda shall be obliged to repay the RMB800.0 million loan.

 

In the event of Shanghai Sales defaults on the loans, the Company’s material loss contingency would be RMB1.379 billion (equivalent to US$190.2 million), including estimated interest expenses of RMB7.9 million (equivalent to US$1.1 million) as of June 30, 2019. As the Company estimated that the potential material loss contingency was not probable, no accrual for a loss contingency was recognized for the six-month period ended June 30, 2019.

 

Note 18 - Revenues

 

Revenues consist of the following:

 

 

   

Three-Month Period Ended

June 30,

 

Six-Month Period Ended

June 30,

    2019   2018   2019   2018
    US$   US$   US$   US$
Modified Polyamide 66 (PA66)     92,259,170       88,073,232       176,137,415       169,858,624  
Modified Polyamide 6 (PA6)     105,421,049       62,257,420       171,589,143       126,298,421  
Plastic Alloy     71,411,826       79,409,277       134,548,451       157,975,693  
Modified Polypropylene (PP)     40,795,250       47,141,439       77,852,304       97,356,990  
Modified Acrylonitrile Butadiene Styrene (ABS)     14,777,635       8,231,853       28,225,264       16,828,835  
Polyoxymethylenes (POM)     2,302,901       2,748,355       4,899,362       4,871,740  
Polyphenylene Oxide (PPO)     9,133,246       6,620,677       25,992,396       10,790,238  
Polylactide (PLA)     12,751,971       22,847,267       29,263,327       43,729,113  
Polyethylene (PE)     1,831,333       —         3,604,077       —    
Work in progress     112,300,015       —         112,300,015       —    
Raw materials     89,484       —         128,133       72,899  
Total Revenue     463,073,880       317,329,520       764,539,887       627,782,553  

 

The following table provides sales by major customer group for the three-month and six-month periods ended June 30, 2019 and 2018 :

 

   

Three-Month Period Ended

June 30,

 

Six-Month Period Ended

June 30,

    2019   2018   2019   2018
    US$   US$   US$   US$
Distributors     322,799,104       314,604,613       605,615,795       618,143,455  
Direct customers     140,185,292       2,724,907       158,729,179       9,566,199  
Others     89,484       —         128,133       72,899  
Total Revenue     463,073,880       317,329,520       764,539,887       627,782,553  

 

 

 

 

 

 

22  
 

 

 

Note 19 - 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 six-month period ended June 30, 2019.

 

Note 20 - 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 June 30, 2019 were classified as operating leases. As of June 30, 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 17.8 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.

 

23  
 

 

 

Lease cost for the six-month period ended June 30, 2019 is as follows:

 

    Six-Month Period Ended June 30,
    2019
      US$  
Operating lease cost     847,228  
Short-term lease cost     333,214  
Total lease cost     1,180,442  

 

As of June 30, 2019, the maturities of the operating lease liabilities are as follows:

 

    Remaining Lease Payments
US$
2019     691,792  
2020     1,385,467  
2021     1,407,931  
2022     1,408,292  
2023     1,424,120  
Thereafter     22,012,465  
Total remaining lease payments     28,330,067  
Less:  imputed interest     (11,853,580 )
Total operating lease liabilities     16,476,487  
Less: current portion     (1,888,376 )
Non-current operating lease  liabilities     14,588,111  
Weighted-average remaining lease term     17.8 years  
Weighted-average discount rate     6.7 %

 

 

24  
 

 

 

Supplemental cash flow information related to leases is as follows:

 

    Six-Month Period Ended June 30,  
Supplemental disclosure of cash flow information:   2019  
Cash paid for amounts included in the measurement of lease liabilities:   US$  
Operating cash flows from operating leases     1,679,029  
Right-of-use assets obtained in exchange for new lease liabilities:        
Operating lease     16,075,213  

 

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:

 

    US$  
Years ended December 31,      
2019     2,174,439  
2020     1,486,007  
2021     1,486,007  
2022     1,446,251  
2023     1,482,593  
Thereafter     21,176,139  

 

Rental expenses incurred for operating leases of plant and equipment and office spaces were US$2,455,509 in 2018.

 

 

25  
 

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

We make forward-looking statements in this report, in other materials we file with the Securities and Exchange Commission (the "SEC") or otherwise release to the public, and on our website. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media and others. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings) and demand for our products and services, and other statements of our plans, beliefs, or expectations, including the statements contained in this Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operation," regarding our future plans, strategies and expectations are forward-looking statements. In some cases these statements are identifiable through the use of words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "will," "would" and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and in Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). You are cautioned not to place undue reliance on these forward-looking statements because these forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Thus, our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: economic conditions generally and the automotive modified plastics market specifically, legislative or regulatory changes that affect our business, including changes in regulation, the availability of working capital, the introduction of competing products, and other risk factors described herein. These risks and uncertainties, together with the other risks described from time-to-time in reports and documents that we filed with the SEC should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

Overview

 

China XD is one of the leading specialty chemical companies engaged in the research, development, manufacture and sale of modified plastics primarily for automotive applications in China, and to a lesser extent, in Dubai, UAE. Through our wholly-owned operating subsidiaries in China and UAE, we develop modified plastics using our proprietary technology, manufacture and sell our products primarily for use in the fabrication of automobile parts and components. We have 497 certifications from manufacturers in the automobile industry as of June 30, 2019. We are the only company certified as a National Enterprise Technology Center in modified plastics industry in Heilongjiang province.  Our Research and Development (the "R&D") team consists of 65 professionals and  7  consultants. As a result of the integration of our academic and technological expertise, we have a portfolio of 465 patents, 32 of which we have obtained the patent rights and the remaining 433 of which we have applications pending in China as of June 30, 2019.

 

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 June 30, 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 June 30, 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 fourth 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.

 

In July 2017, the HLJ Xinda Group launched new industrial development project with the Management Committee of Harbin Economic-Technological Development Zone. It includes an industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics, which we expect will be completed by the end of the fourth quarter of 2019. Also included is an industrial project for 300,000 metric tons of biological composite materials, an industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory, all of which we expect to be started by the end of fourth quarter 2019.  

 

Highlights for the three-month period ended June 30, 2019 include:

 

● Revenues were $463.1 million, an increase of 46.0% from $317.3 million in the second quarter of 2018

● Gross profit was $65.3 million, an increase of 16.2% from $56.2 million in the second quarter of 2018

● Gross profit margin was 14.1%, compared to 17.7% in the second quarter of 2018

● Net income was $40.1 million, compared to $27.2 million in the second quarter of 2018

● Total volume shipped was 106,609 metric tons, an increase of 2.8% from 103,678 metric tons in the second quarter of 2018

 

26  
 

 

 

Results of Operations

 

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

 

 

(in millions, except  percentage)   Three-Month Period Ended       Six-Month Period Ended    
    June 30,   Change   June 30,   Change
    2019   2018   %   2019   2018   %
Revenues     463.1       317.3       46.0 %     764.5       627.8       21.8 %
Cost of revenues     (397.8 )     (261.1 )     52.4 %     (648.9 )     (517.8 )     25.3 %
Gross profit     65.3       56.2       16.2 %     115.6       110.0       5.1 %
Total operating expenses     (15.6 )     (20.2 )     (22.8 )%     (34.7 )     (35.2 )     (1.4 )%
Operating income     49.7       36.0       38.1 %     80.9       74.8       8.2 %
Income before income taxes     42.7       32.7       30.6 %     57.4       58.0       (1.0 )%
Income tax expense     (2.6 )     (5.5 )     (52.7 )%     (6.3 )     (11.7 )     (46.2 )%
Net income     40.1       27.2       47.4 %     51.1       46.3       10.4 %

 

Three-month period ended June 30, 2019 compared to three-month period ended June 30, 2018

 

Revenues

 

Revenues were US$463.1 million in the second quarter ended June 30, 2019, an increase of US$145.8 million, or 46.0%, compared to US$317.3 million in the same period of last year. This was due to approximately 51.4% increase in the average RMB selling price, and 2.8% increase in sales volume, as compared with those of the same period of last year, and partially offset by 9.5% negative impact from exchange rate due to depreciation of RMB against US dollars.

 

(i) Domestic market

 

For the three-month period ended June 30, 2019, revenue from domestic market increased by US$128.3 million due to: i) an increase of 48.3% in the average RMB selling price of our products; ii) an increase of 1.1% in sales volume as compared with those of last year ; and partially offset by iii) a depreciation of RMB against US dollars by 9.5%.

 

According to the China Association of Automobile Manufacturers, automobile production and sales in China decreased by 13.7% and 12.4%, respectively, for the first half year of 2019 as compared to the same period of 2018. The weakening in macroeconomic conditions since summer of 2018 continued to exacerbate auto business environment, but thanks to our positive efforts to expand our customer bases and to meet their new requirements, the Company has increased overall growth in all parts of China. We had sales growth of 118.9% in Northeast China, 16.3% in Central China, 12.1% in Southern China, 11.9% in North China, 8.7% in Southwest China and 4.3% in East China.

 

As for the RMB selling price, the increase of 48.3% was mainly due to: i) increased sales of new categories of higher-end products of PA66 and PA6 produced with high-priced raw materials with higher selling price in domestic market; and ii) sales of high-priced work in progress in domestic market during the three-month period ended June 30, 2019.

 

(ii) Overseas market

 

For the three-month period ended June 30, 2019, revenues from overseas market was US$17.5 million as compared to US$53,353 of the same period of 2018.

 

After a successful trial production at our production base in Dubai in November 2018, the Company has established business relationships with new customers in UAE and India, and shipped products to the end users in Europe. We are optimistic about the prospect of our business expansion overseas.

 

27  
 

 

 

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

 

(in millions, except percentage)  

Revenues

For the Three-Month Period

Ended June 30,

       
    2019   2018   Change in   Change in
    Amount   %   Amount   %   Amount   %
Modified Polyamide 66 (PA66)     92.3       19.9 %     88.1       27.8 %     4.2       4.8 %
                                                 
Plastic Alloy     71.4       15.4 %     79.4       25.0 %     (8.0 )     (10.1 )%
                                                 
Modified Polyamide 6 (PA6)     105.4       22.8 %     62.3       19.6 %     43.1       69.2 %
                                                 
Modified Polypropylene (PP)     40.8       8.8 %     47.2       14.9 %     (6.4 )     (13.6 )%
                                                 
Modified Acrylonitrile Butadiene Styrene (ABS)     14.8       3.2 %     8.2       2.6 %     6.6       80.5 %
                                                 
Polyoxymethylenes (POM)     2.3       0.5 %     2.8       0.9 %     (0.5 )     (17.9 )%
                                                 
Polyphenylene Oxide (PPO)     9.1       2.0 %     6.5       2.0 %     2.6       40.0 %
                                                 
Modified Polylactic acid (PLA)     12.8       2.8 %     22.8       7.2 %     (10.0 )     (43.9 )%
                                                 
Polyethylene (PE)     1.8       0.4 %           0.0 %     1.8       N/A  
                                                 
Work in progress     112.3       24.2 %           0.0 %     112.3       N/A  
                                                 
Raw Materials     0.1       0.0 %     0.0       0.0 %     0.1       N/A  
Total Revenues     463.1       100 %     317.3       100 %     145.8       46.0 %

 

 

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

 

(in MTs, except percentage)  

Sales Volume

For the Three-Month Period

Ended June 30,

       
    2019   2018   Change in   Change in
    MT   %   MT   %   MT   %
Modified Polyamide 66 (PA66)     15,824       14.8 %     21,166       20.4 %     (5,342 )     (25.2 )%
                                                 
Plastic Alloy     19,203       18.0 %     25,908       25.0 %     (6,705 )     (25.9 )%
                                                 
Modified Polyamide 6 (PA6)     20,486       19.2 %     19,250       18.6 %     1,236       6.4 %
                                                 
Modified Polypropylene (PP)     26,641       25.0 %     29,447       28.4 %     (2,806 )     (9.5 )%
                                                 
Modified Acrylonitrile Butadiene Styrene (ABS)     7,014       6.6 %     3,784       3.6 %     3,230       85.4 %
                                                 
Polyoxymethylenes (POM)     677       0.6 %     755       0.7 %     (78 )     (10.3 )%
                                                 
Polyphenylene Oxide (PPO)     1,809       1.7 %     1,035       1.0 %     774       74.8 %
                                                 
Modified Polylactic acid (PLA)     1,238       1.2 %     2,333       2.3 %     (1,095 )     (46.9 )%
                                                 
Polyethylene (PE)     1,385       1.3 %     —         0.0 %     1,385       N/A  
                                                 
Work in progress     12,332       11.6 %     —         0.0 %     12,332       N/A  
                                                 
Total Sales Volume     106,609       100 %     103,678       100 %     2,931       2.8 %

 

 

 

 

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The Company continued to shift production mix from traditional lower-end products such as PP to higher-end products such as PA6 and PPO, primarily due to (i) greater growth potential of advanced modified plastics in luxury automobile models in China, (ii) the stronger demand as a result of promotion by the Chinese government for clean energy vehicles and (iii) better quality demand from and consumer recognition of higher-end cars made by automotive manufacturers from Chinese and Germany joint ventures, Sino-U.S. and Sino-Japanese joint ventures, which manufacturers tend to use more and higher-end modified plastics in quantity per vehicle in China.

 

The Company also sold high-priced work in progress with discounted price in domestic markets during the three-month period ended June 30, 2019 in order to accelerate inventory turnover and replenish operating funds.

 

Gross Profit and Gross Profit Margin

 

    Three-Month Period Ended June 30,   Change
(in millions, except percentage)   2019   2018   Amount   %
Gross Profit   $ 65.3     $ 56.2     $ 9.1       16.2 %
Gross Profit Margin     14.1 %     17.7 %             (3.6 )%

 

Gross profit was US$65.3 million in the second quarter ended June 30, 2019, compared to US$56.2 million in the same period of 2018. Our gross margin decreased to 14.1% during the second quarter ended June 30, 2019 from 17.7% during the same quarter of 2018 primarily due to the adopted discounted-priced strategy on sales of work in progress in domestic market in order to return capital for the quarter ended June 30, 2019 as compared to that of the prior year.

 

General and Administrative Expenses

 

    Three-Month Period Ended June 30,   Change
(in millions, except percentage)   2019   2018   Amount   %
General and Administrative Expenses   $ 5.8     $ 11.3     $ (5.5 )     (48.7 )%
as a percentage of revenues     1.2 %     3.6 %             (2.4 )%

 

General and administrative (G&A) expenses were US$5.8 million for the quarter ended June 30, 2019 compared to US$11.3 million in the same period in 2018, representing a decrease of 48.7%, or US$5.5million. The decrease was primarily due to our approach on optimizing management structure and enhancing efficiency, leading to the decrease of (i) US$2.5 million in share based compensation incurred for external consultancy, (ii) US$2.0 million in salary and welfare, and (iii) US$1.0 million in travelling, transportation and miscellaneous expense.

 

Research and Development Expenses

 

    Three–Month Period Ended June 30,   Change
(in millions, except percentage)   2019   2018   Amount   %
Research and Development Expenses   $ 9.6     $ 5.3     $ 4.3       81.1 %
as a percentage of revenues     2.2 %     1.7 %             0.5 %

 

R&D expenses were US$9.6 million during the quarter ended June 30, 2019 compared with US$5.3 million during the same period in 2018, representing an increase of US$4.3 million, or 81.1%. 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 June 30, 2019, the number of ongoing research and development projects was 371. 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.

 

29  
 

 

 

Operating Income

 

Total operating income was US$49.7 million in the second quarter ended June 30, 2019 compared to $36.0 million in the same period of 2018, representing an increase of 38.1% or US$13.7 million. This increase is primarily due to higher gross profit, lower selling expenses and G&A expenses, partially offset by higher R&D expenses.

 

Interest Income (Expenses)

 

    Three-Month Period Ended June 30,   Change
(in millions, except percentage)   2019   2018   Amount   %
Interest Income   $ 0.5     $ 1.0     $ (0.5 )     (50.0 )%
Interest Expenses     (12.1 )     (11.3 )     (0.8 )     7.1 %
Net Interest Expenses   $ (11.6 )   $ (10.3 )   $ (1.3 )     12.6 %
as a percentage of revenues     (2.5 )%     (3.3 )%             0.8 %

 

Net interest expenses were US$11.6 million for the three-month period ended June 30, 2019, compared to $10.3 million in the same period of 2018, representing an increase of 12.6% or US$1.3 million, primarily due to (i) the increase of interest expense resulting from the average loan interest rate increased to 5.2% for the three-month period ended June 30, 2019 compared to 4.6% of the same period in 2018; (ii) the decrease of average deposit balance in amount of US$221.1 million for the three-month period ended June 30, 2019 compared to US$506.7 million for the same period in prior year; (iii) the decrease of interest income resulting from the average deposit interest rate decreased to 0.8% for the three-month period ended June 30, 2019 compared to 1.1% of the same period in 2018; and partially offset by (iv) the decrease of average short-term and long-term loan balance in amount of US$882.5 million for the three-month period ended June 30, 2019 compared to US$925.0 million for the same period in 2018.

 

Income Taxes

 

    Three-Month Period Ended June 30,   Change
(in millions, except percentage)   2019   2018   Amount   %
Income before Income Taxes   $ 42.7     $ 32.7     $ 10.0       30.6 %
Income Tax Expense     (2.6 )     (5.5 )     2.9       (52.7 )%
Effective income tax rate     6.2 %     16.8 %             11.4 %

 

The effective income tax rates for the three-month periods ended June 30, 2019 and 2018 were 6.2% and 16.8%, respectively. The decrease of effective income tax rate was primarily due to (i) the increase of additional deduction of R&D expenses resulted from the increase of R&D expenses incurred and the new policy issued by China’s tax authority in September 2018 to increase the R&D expenses additional deduction rate from 50% to 75% for PRC entities, effective from January 1, 2018 to December 31, 2020, (ii) the decrease of continuous operating losses occurred in overseas subsidiaries such as Dubai Xinda and Xinda Holding (HK). The effective income tax rate for the three-month period ended June 30, 2019 differs from the PRC statutory income tax rate of 25% primarily due to Sichuan Xinda's preferential income tax rate, the reversal of the unrecognized tax benefits accrued in year 2013 and 75% additional deduction of R&D expenses of the major PRC operating entities.

 

Our PRC and Dubai subsidiaries have US$505.4 million of cash and cash equivalents and restricted cash as of June 30, 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. The undistributed earnings as of December 31, 2017 were subject to the one-time repatriation tax under the Tax Act as a deemed repatriation of accumulated undistributed earnings from the foreign subsidiaries. However, the Company continues to plan to indefinitely reinvest its earnings in PRC and Dubai subsequent to the Tax Act.

 

Net Income

 

As a result of the above factors, we had a net income of US$40.1 million in the second quarter of 2019 compared to a net income of US$27.2 million in the same quarter of 2018.

 

30  
 

 

 

Six-month period ended June 30, 2019 compared to six-month period ended June 30, 2018

 

Revenues

 

Revenues were US$764.5 million in the six-month period ended June 30, 2019, an increase of US$136.7 million, or 21.8%, compared with US$627.8 million in the same period of last year, as a combined result of: i) 35.3% increase in the average RMB selling price, as compared with those of the same period of last year, and partially offset by ii) 8.2% negative impact from exchange rate due to depreciation of RMB against US dollars; iii) approximately 4.2% decrease in sales volume.

 

(i) Domestic market

 

For the six-month period ended June 30, 2019, revenue from domestic market increased by US$113.5 million compared, as a combined result of: i) an increase of 32.9% in the average RMB selling price of our products; and partially offset by ii) a depreciation of RMB against US dollars by 8.2%; iii) a decrease of 5.4% in sales volume as compared with those of last year .

 

According to the China Association of Automobile Manufacturers, automobile production and sales in China decreased by 13.7% and 12.4%, respectively, for the first half year of 2019 as compared to the same period of 2018. As weakening in macroeconomic conditions since summer of 2018 continued to exacerbate auto business environment, our Company has seen 8.7% decrease in Southwest China and 8.5% decrease in East China. 

 

Thanks to our positive efforts to expand our customer bases and to meet their new requirements, the Company has increased significant growth of 62.6% in Northeast China, 12.8% in North China, 12.1% in South China, 10.1% in Central China.

 

As for the RMB selling price, the increase of 32.9% was mainly due to: i) increased sales of new categories of higher-end products of PA66 and PA6 produced with high-priced raw materials with higher selling price in domestic markets; and ii) sales of high-priced work in progress in domestic market during the six-month period ended June 30, 2019.

 

(ii) Overseas market

 

For the six-month period ended June 30, 2019, revenues from overseas market was US$23.3 million as compared to US$108,207 of that in 2018.

 

After a successful trial production at our production base in Dubai in November 2018, the Company has established business relationships with new customers in UAE and India, and shipped products to the end users in Europe. We are optimistic about the prospect of our business expansion overseas.

 

31  
 

 

 

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

 

 

(in millions, except percentage)  

Revenues

For the Six-Month Period Ended June 30,

       
    2019   2018   Change in   Change in
    Amount   %   Amount   %   Amount   %
Modified Polyamide 66 (PA66)     176.1       23.0 %     169.9       27.1 %     6.2       3.6 %
                                                 
Plastic Alloy     134.5       17.6 %     158.0       25.1 %     (23.5 )     (14.9 )%
                                                 
Modified Polyamide 6 (PA6)     171.6       22.5 %     126.3       20.1 %     45.3       35.9 %
                                                 
Modified Polypropylene (PP)     77.9       10.2 %     97.4       15.5 %     (19.5 )     (20.0 )%
                                                 
Modified Acrylonitrile Butadiene Styrene (ABS)     28.2       3.7 %     16.8       2.7 %     11.4       67.9 %
                                                 
Polyoxymethylenes (POM)     4.9       0.6 %     4.9       0.8 %     0.0       0.0 %
                                                 
Polyphenylene Oxide (PPO)     26.0       3.4 %     10.8       1.7 %     15.2       140.7 %
                                                 
Modified Polylactic acid (PLA)     29.3       3.8 %     43.7       7.0 %     (14.4 )     (33.0 )%
                                                 
Polyethylene (PE)     3.6       0.5 %           0.0 %     3.6     N/A  
                                                 
Work in progress     112.3       14.7 %           0.0 %     112.3       N/A  
                                                 
Raw Materials     0.1       0.0 %     0.0       0.0 %     0.1       N/A  
                                                 
Total Revenues     764.5       100 %     627.8       100 %     136.7       21.8 %

 

 

32  
 

 

 

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

 

(in MTs, except percentage)  

Sales Volume

For the Six-Month Period Ended June 30,

       
    2019   2018   Change in   Change in
    MT   %   MT   %   MT   %
Modified Polyamide 66 (PA66)     32,810       16.3 %     40,757       19.4 %     (7,947 )     (19.5 )%
                                                 
Plastic Alloy     40,861       20.5 %     52,695       25.1 %     (11,834 )     (22.5 )%
                                                 
Modified Polyamide 6 (PA6)     37,830       18.8 %     40,146       19.1 %     (2,316 )     (5.8 )%
                                                 
Modified Polypropylene (PP)     51,549       25.6 %     61,060       29.1 %     (9,511 )     (15.6 )%
                                                 
Modified Acrylonitrile Butadiene Styrene (ABS)     13,646       6.8 %     7,707       3.7 %     5,939       77.1 %
                                                 
Polyoxymethylenes (POM)     1,462       0.7 %     1,365       0.7 %     97       7.1 %
                                                 
Polyphenylene Oxide (PPO)     5,026       2.5 %     1,725       0.8 %     3,301       191.4 %
                                                 
Modified Polylactic acid (PLA)     2,832       1.4 %     4,459       2.1 %     (1,627 )     (36.5 )%
                                                 
Polyethylene (PE)     2,705       1.3 %     —         0.0 %     2,705       N/A  
                                                 
Work in progress     12,332       6.1 %     —         0.0 %     12,332       N/A  
                                                 
Total Sales Volume     201,053       100 %     209,914       100 %     (8,861 )     (4.2 )%

 

The Company continued to shift production mix from traditional lower-end products such as PP to higher-end products such as PPO and PLA, primarily due to (i) greater growth potential of advanced modified plastics in luxury automobile models in China, (ii) the stronger demand as a result of promotion by the Chinese government for clean energy vehicles and (iii) better quality demand from and consumer recognition of higher-end cars made by automotive manufacturers from Chinese and Germany joint ventures, Sino-U.S. and Sino-Japanese joint ventures, which manufacturers tend to use more and higher-end modified plastics in quantity per vehicle in China.

 

The Company also sold high-priced work in progress with discounted price in domestic markets during the six-month period ended June 30, 2019 in order to accelerate inventory turnover and replenish operating funds.

 

Gross Profit and Gross Profit Margin

 

    Six-Month Period Ended June 30,   Change
(in millions, except percentage)   2019   2018   Amount   %
Gross Profit   $ 115.6     $ 110.0     $ 5.6       5.1 %
Gross Profit Margin     15.1 %     17.5 %             (2.4 )%

 

Gross profit was US$115.6 million during the six-month period ended June 30, 2019, as compared to US$110.0 million in the same period of 2018. Our gross margin decreased to 15.1% during the six-month period ended June 30, 2019 from 17.5% during the same quarter of 2018 primarily due to the adopted discounted-priced strategy on sales of work in progress in domestic market in order to return capital for the six-month period ended June 30, 2019 as compared to that of the prior year.

 

33  
 

 

 

General and Administrative Expenses

 

    Six-Month Period Ended June 30,   Change
(in millions, except percentage)   2019   2018   Amount   %
General and Administrative Expenses   $ 14.5     $ 20.2     $ (5.7 )     (28.2 )%
as a percentage of revenues     1.9 %     3.2 %             (1.3 )%

 

General and administrative (G&A) expenses were US$14.5 million in the six-month period ended June 30, 2019 compared to US$20.2 million in the same period in 2018, representing a decrease of 28.2%, or US$5.7 million. The decrease was primarily due to our approach on optimizing management structure and enhancing efficiency, leading to the decrease of (i) US$2.9 million in salary and welfare, (ii) US$2.6 million in stock based compensation incurred for external consultancy, and (iii) US$0.2 million in office expense.

 

Research and Development Expenses

 

    Six-Month Period Ended June 30,   Change
(in millions, except percentage)   2019   2018   Amount   %
Research and Development Expenses   $ 19.6     $ 10.3     $ 9.3       90.3 %
as a percentage of revenues     2.6 %     1.6 %             1.0 %

 

Research and development (R&D) expenses were US$19.6 million during for the six-month period ended June 30, 2019 compared with US$10.3 million during the same period in 2018, representing an increase of US$9.3 million, or 90.3%. 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 June 30, 2019, the number of ongoing research and development projects was  371 . 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$80.9 million for the six-month period ended June 30, 2019 compared to US$74.8 million in the same period of 2018, representing an increase of 8.2% or US$6.1 million. This increase is primarily due to increased gross profit, lower selling expenses and G&A expenses and partially offset by higher research and development expenses.

 

Interest Income (Expenses)

 

   

Six-Month Period Ended

June 30,

  Change
(in millions, except percentage)   2019   2018   Amount   %
Interest Income   $ 0.9     $ 3.3     $ (2.4 )     (72.7 )%
Interest Expenses     (29.6 )     (24.2 )     (5.4 )     22.3 %
Net Interest Expenses   $ (28.7 )   $ (20.9 )   $ (7.8 )     37.3 %
as a percentage of revenues     (3.8 )%     (3.3 )%             (0.5 )%

 

Net interest expenses were US$28.7 million for the six-month period ended June 30, 2019, compared to $20.9 million in the same period of 2018, representing an increase of 37.3% or US$7.8 million, primarily due to (i) the increase of interest expense resulting from the average loan interest rate increased to 5.4% for the six-month period ended June 30, 2019 compared to 4.5% of the same period in 2018; (ii) the decrease of average deposit balance in amount of US$253.7 million for the six-month period ended June 30, 2019 compared to US$1,131.7 million for the same period in prior year; (iii) the decrease of interest income resulting from the average deposit interest rate decreased to 0.7% for the six-month period ended June 30, 2019 compared to 1.2% of the same period in 2018; and partially offset by (iv) the decrease of  average short-term and long-term loan balance in the amount of US$886.8 million for the six-month period ended June 30, 2019 compared to US$$917.0 million of the same period in 2018.

 

34  
 

 

 

Income Taxes

 

    Six-Month Period Ended June 30,   Change
(in millions, except percentage)   2019   2018   Amount   %
Income before Income Taxes   $ 57.4     $ 58.0     $ (0.6 )     (1.0 )%
Income Tax Expense     (6.3 )     (11.7 )     (5.4 )     46.2 %
Effective income tax rate     11.0 %     20.2 %             (9.2 )%

 

The effective income tax rates for the six-month periods ended June 30, 2019 and 2018 were 11.0% and 20.2%, respectively. The effective income tax rate decreased from 20.2% for the six-month period ended June 30, 2018 to 11.0% for the six-month period ended June 30, 2019, primarily due to (i) the increase of additional deduction of R&D expenses resulted from the increase of R&D expenses incurred and the new policy issued by China’s tax authority in September 2018 to increase the R&D expenses additional deduction rate from 50% to 75% for PRC entities, effective from January 1, 2018 to December 31, 2020, (ii) the decrease of continuous operating losses occurred in overseas subsidiaries such as Dubai Xinda and Xinda Holding (HK). The effective income tax rate for the six-month period ended June 30, 2019 differs from the PRC statutory income tax rate of 25% primarily due to Sichuan Xinda's preferential income tax rate, the reversal of the unrecognized tax benefits in year 2013 and 75% additional deduction of R&D expenses of the major PRC operating entities.

 

Net Income

 

As a result of the above factors, we had a net income of US$51.1 million for the six-month period ended June 30, 2019 compared to net income of US$46.3 million in the same period of 2018.

 

Selected Balance Sheet Data as of June 30, 2019 and December 31, 2018:

 

     
   

June 30,

2019

  December 31, 2018   Change
( in millions, except percentage)           Amount   %
Cash and cash equivalents     194.8       41.3       153.5       371.7 %
Restricted cash     312.1       325.7       (13.6 )     (4.2 )%
Accounts receivable, net of allowance for doubtful accounts     113.3       294.7       (181.4 )     (61.6 )%
Amounts due from a related party     0.3       —         0.3       N/A  
Inventories     734.2       620.0       114.2       18.4 %
Prepaid expenses and other current assets     158.2       132.2       26.0       19.7 %
Property, plant and equipment, net     824.4       775.9       48.5       6.2 %
Land use rights, net     29.4       29.8       (0.4 )     (1.3 )%
Long-term prepayments to equipment and construction suppliers     448.6       530.6       (82.0 )     (15.5 )%
Operating right of use assets, net     15.8       —         15.8       N/A  
Other non-current assets     3.2       3.2       —         0.0 %
     Total assets     2,834.3       2,753.5       80.8       2.9 %
Short-term bank loans, including current portion of long-term bank loans     678.6       729.7       (51.1 )     (7.0 )%
Bills payable     576.3       618.2       (41.9 )     (6.8 )%
Accounts payable     115.3       85.0       30.3       35.6 %
Amounts due to related parties     20.1       18.4       1.7       9.2 %
Income taxes payable, including noncurrent portion     99.8       99.2       0.6       0.6 %
Accrued expenses and other current liabilities     67.3       126.9       (59.6 )     (47.0 )%
Long-term bank loans, excluding current portion     252.5       111.8       140.7       125.8 %
Deferred income     97.1       99.6       (2.5 )     (2.5 )%
Operating lease liabilities, non-current     14.6       —         14.6       N/A  
Redeemable Series D convertible preferred stock     97.6       97.6       —         —    
Stockholders' equity     798.0       748.9       49.1       6.6 %

 

 

 

 

 

35  
 

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our financial condition continued to improve as measured by an increase of 6.6% in stockholders' equity as of June 30, 2019 as compared to that of December 31, 2018. Cash, cash equivalents and restricted cash increased by 38.1% or US$139.9 million due to the increase of net cash provided by financing activities and operating activities. Inventories increased by 18.4% as a result of more purchases of the raw materials and the Company's strategy to stock up the finished goods for the upcoming orders. Prepaid expenses and other current assets increased by 19.7% or US$26.0 million because (i) HLJ Xinda Group has reclassified US$15.8 million of long-term prepayments to Green River to receivables due from Shanghai sales; (ii) advances to suppliers for purchasing raw materials and receivables from Hong Kong Grand Royal Trading Co., Ltd. increased by US$24.3 million and partially offset by (iii) consideration for sales of Shanghai Sales decreased by US$7.3 million; (iv) other prepaid expenses mainly including prepaid miscellaneous service fee and staff advance, and value added taxes receivables decreased by US$6.8 million. The aggregate short-term and long-term bank loans increased by 10.6% due to using the line of credits to support operating and investing activities in HLJ Xinda Group and Sichuan Xinda. We define the manageable debt level as the sum of aggregate short-term and long-term loans over total assets.

 

A summary of lines of credit for the six-month period ended June 30, 2019 and the remaining line of credit as of June 30, 2019 is as below: 

 

 

(in millions)   June 30, 2019
    Lines of Credit, Obtained  

Remaining

Available

Name of Financial Institution   Date of Approval   RMB   USD   USD
Bank of Communication   August 6, 2018     120.0       17.5       —    
China Everbright Bank   September 17, 2018     100.0       14.5       10.2  
Bank of China   July 28, 2017     295.0       42.9       —    
Bank of Longjiang, Heilongjiang   September 12, 2017     945.0       137.5       —    
Industrial & Commercial Bank of China (ICBC)   September 5, 2018     1,300.0       189.1       88.2  
Agricultural Bank of China   September 3, 2018     200.0       29.1       —    
Export-Import Bank of China   August 22, 2018     200.0       29.1       11.6  
Postal Savings Bank of China   April 19, 2018     400.0       58.2       43.6  
Sichuan Tianfu Bank   March 18, 2019     50.0       7.3       —    
Nanchong Shuntou Development Group Ltc.   January 30,2018     430.0       62.5       —    
Standard Chartered Bank   August 22, 2016     932.2       135.6       0.6  
Nanchong Rural Commercial Bank   January 30, 2018     250.0       36.4       —    
Bank of Inner Mongolia   August 16, 2018     40.0       5.8       —    
Harbin Rural Commercial Bank   July 31, 2018     350.0       50.9       —    
Jianxin Financial Asset Investment Co., Ltd.   March 29, 2019     110.0       16.0       —    
National Bank of Umm Al Qaiwain   September 26, 2018     3.0       0.4       —    
Subtotal (credit term<=1 year)         5,725.2       832.8       154.2  
Bank of China   July 28, 2016     275.0       40.0       40.0  
Bank of Longjiang, Heilongjiang   November 28, 2017     1,245.0       181.2       2.9  
National Bank of Umm Al Qaiwain   September 26, 2018     10.5       1.5       —    
China Construction Bank   March 31, 2019     500.0       72.7       —    
Subtotal (credit term>1 year)         2,030.5       295.4       42.9  
Total         7,755.7       1,128.2       197.1  

 

 

As of June 30, 2019, we have contractual obligations to (i) lease commitments in the amount of US$28.3 million, including US$1.4 million due in one year; (ii) equipment acquisition and facility construction in the amount of US$279.9 million; and (iii) long-term bank loan in the amount of US$496.4 million (including principals and interests).

 

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

 

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

 

36  
 

 

 

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

 

    Six-Month Period Ended June 30,
(in millions US$)   2019   2018
Net cash provided by operating activities     92.9       152.6  
Net cash used in investing activities     (45.0 )     (90.0 )
Net cash provided by (used in) financing activities     94.6       (41.2 )
Effect of foreign currency exchange rate changes on cash, cash equivalents and restricted cash     (2.6 )     (5.5 )
Net increase in cash, cash equivalents, and restricted cash     139.9       15.9  
Cash, cash equivalents, and restricted cash at the beginning of period     367.0       320.1  
Cash, cash equivalents, and restricted cash at the end of period     506.9       336.0  

 

Operating Activities

 

Net cash provided by operating activities was US$92.9 million for the six-month period ended June 30, 2019, as compared to US$152.6 million provided in operating activities for the six-month period ended June 30, 2018, due to (i) the increase of approximately US$348.5 million in cash operating payments, including raw material purchases, rental and personnel costs, (ii) the increase of US$6.3 million interest payments, (iii) the decrease of US$2.8 million interest income and partially offset by (iv) the increase of approximately US$296.9 million in cash collected from our customers for the six-month period ended June 30, 2019 and (v) the increase of US$1.0 million received from government grant.

 

Investing Activities

 

Net cash used in the investing activities was US$45.0 million for the six-month period ended June 30, 2019 as compared to US$90.0 million for the same period of last year, due to (i) the decrease of US$282.3 million purchase of property, plant and equipment, (ii) the decrease of US$210.4 million purchase of time deposits, (iii) the increase of US$7.4 million proceeds from sales of a subsidiary, (iv) the decrease of US$3.6 million deposits for acquisition of equity, and partially offset by (v) the decrease of US$388.1 million proceeds from maturity of time deposits, (vi) the decrease of US$60.1 million refund of deposit from an equipment supplier and (vii) the decrease of US$10.5 million government grants related to the construction projects.

 

Financing Activities

 

Net cash provided by the financing activities was US$94.6 million for the six-month period ended June 30, 2019, as compared to US$41.2 million used in financing activities for the same period of last year, primarily as a result of (i) the increase of the proceeds of US$929.6 million from bank borrowings for the six-month period ended June 30, 2019, (ii) the increase of US$67.4 million proceeds of interest-free advances from related parties, partially offset by (iii) the increase of US$720.4 million repayments of bank borrowings and (iv) the decrease of US$75.6 million in investment received in advance from a related party and (v) the increase of US$65.2 million repayments of interest-free advances to related parties.

 

As of June 30, 2019, our cash, cash equivalents and restricted cash balance was US$506.9 million, as compared to US$367.0 million at December 31, 2018.

 

Days Sales Outstanding ("DSO") has decreased from 84 days for the year ended December 31, 2018 to 48 days for the six-month period ended June 30, 2019 as a result of faster accounts receivable collection from the domestic customers.

 

It takes shorter to collect from our customers. We believe that our DSO is well below industry average Industry Standard Customer and Supplier Payment Terms (days) as below:

 

    Six-month period ended June 30, 2019   Year ended December 31, 2018
Customer Payment Term   Payment in advance/up to 90 days    Payment in advance/up to 90 days
Supplier Payment Term  Payment in advance/up to 90 days  Payment in advance/up to 90 days

 

Inventory turnover days have increased from 178 days for the year ended December 31, 2018 to 188 days for the six-month period ended June 30, 2019. Turnover days of payables have decreased from 53 days for the year ended December 31, 2018 to 28 days for the six-month period ended June 30, 2019.

 

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.

 

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.

 

37  
 

 

 

COMMITMENTS AND CONTINGENCIES

 

Contractual Obligations

 

Our contractual obligations as of June 30, 2019 are as follows:

 

Contractual obligations   Total  

Payment due

less than 1 year

  1 – 3 years   3-5 years  

More than 5

years

Purchase of plant, equipment and construction in progress (2)(3)(4)(5)     279,850,284       279,504,675       345,609       —         —    
Long-term bank loans (1)     479,848,104       189,116,691       162,215,822       88,453,490       40,062,101  
Total     759,698,388       468,621,366       162,561,431       88,453,490       40,062,101  

 

(1)  Includes interest of US$38.0 million accrued at the interest rate under the loan agreements. For borrowings with a floating rate, the most recent rate as of June 30, 2019 was applied.

 

(2)  Sichuan plant construction and equipment purchase.

 

On March 8, 2013, Xinda Holding (HK) entered into an investment agreement with Shunqing Government, pursuant to which Xinda Holding (HK) will invest RMB1,800 million (equivalent to US$261.8 million) in property, plant and equipment and approximately RMB600 million (equivalent to US$87.3 million) in working capital, for the construction of Sichuan plant.  As of June 30, 2019, the Company has a remaining commitment of RMB54.8 million (equivalent to US$8.0 million) mainly for facility construction.

 

In September 2016, Sichuan Xinda entered into equipment purchase contracts with Hailezi for a consideration of RMB17.0 million (equivalent to US$2.5 million) to purchase storage facility and testing equipment. Afterward, Sichuan Xinda cancelled two contracts with Hailezi for a consideration of RMB1.6 million (equivalent to US$0.2 million). As of June 30, 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 Treasure Limited ("Peaceful") for a total consideration of RMB89.8 million (equivalent to US$13.1 million) to purchase certain production and testing equipment. As of June 30, 2019, the Company has a commitment of RMB55.9 million (equivalent to US$8.1 million).

 

On November 15, 2016, Sichuan Xinda entered into decoration contract with Beijin Construction  to perform indoor and outdoor decoration work for a consideration of RMB237.6 million (equivalent to US$34.6 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 June 30, 2019, Sichuan Xinda prepaid RMB120.9 million (equivalent to US$17.6 million) of which RMB74.0 million (equivalent to US$10.8 million) was transferred to construction in progress and has a remaining commitment of RMB143.4 million (equivalent to US$21.1 million).

 

38  
 

 

 

In connection with the Nanchong Project mentioned in Note 6 (i), Sichuan Xinda entered into equipment purchase contracts with Hailezi for a consideration of RMB2,242.8 million (equivalent to US$326.2 million) to purchase production equipment and testing equipment in March 2017.  By the end of June 2017, Sichuan Xinda expected to launch an integrated ERP system, which resulted in the equipment to be purchased under the original contracts with Hailezi not meeting the production requirements. Thus the original contracts have been terminated with the amount of RMB2,222.9 million (equivalent to US$323.3 million), and Hailezi agreed to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$248.0 million) by the end of March 2018, out of the total prepayment made by Sichuan Xinda of RMB1,722.9 million (equivalent to US$250.6 million). As of June 30, 2018, Hailezi has refunded the prepayment in the amount of RMB1,704.9 million (equivalent to US$248.0 million). As of June 30, 2019, Sichuan Xinda prepaid RMB18.0 million (equivalent to US$2.6 million) and has a remaining commitment of RMB1.9 million (equivalent to US$0.3 million).

 

In connection with the Nanchong Project, on June 21, 2018, Sichuan Xinda entered into another equipment purchase contracts with Hailezi to purchase production equipment and testing equipment for a consideration of RMB1,900 million (equivalent to US$276.4 million). Pursuant to the contracts with Hailezi, Sichuan Xinda have prepaid RMB1,710 million (equivalent to US$248.8 million) at the end of June 30, 2019, and has a remaining commitment of RMB190.0 million (equivalent to US$27.6 million).

 

(3)  Heilongjiang plant construction and equipment purchase

 

In connection with the equipment purchase contracts with Hailezi signed on September 26, 2016 and February 28, 2017 mentioned in Note 6 (i), HLJ Xinda Group has a remaining commitment of RMB30.2 million (equivalent to US$4.4 million) as of June 30, 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$596.3 million), 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$2.7 million) as of June 30, 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$109.1 million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB300.7 million (equivalent to US$43.8 million) as of June 30, 2019, and has a remaining commitment of RMB449.1 million (equivalent to US65.3 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$168.3 million). Pursuant to the contract with Hailezi, HLJ Xinda has prepaid RMB240.8 million (equivalent to US$35.0 million) as of June 30, 2019, and has a remaining commitment of RMB916.2 million (equivalent to US$133.3 million).

 

(4)  Dubai plant construction and equipment

 

On April 28, 2015, Dubai Xinda entered into a warehouse construction contract with Falcon Red Eye Contracting Co. L.L.C. for a total consideration of AED6.7 million (equivalent to US$1.8 million). As of June 30, 2019, the Company has a remaining commitment of AED1.6 million (equivalent to US$0.4 million).

 

On May 31, 2019, Dubai Xinda entered into a warehouse construction contract with Peaceful for a total consideration of USD18.8 million. As of June 30, 2019, the Company has a remaining commitment of USD6.7 million.

 

(5)   Xinda CI (Beijing) office building decoration

 

On March 30, 2017, Xinda CI (Beijing) Investment Holding Co., Ltd. ("Xinda Beijing Investment") entered into a decoration contract with Beijing Fangyuan Decoration Engineering Co.,Ltd for a total consideration of RMB5.8million (equivalent to US$0.8million) to decorate office building. As of December 31, 2018, the decoration work in the amount of RMB2.0 million (equivalent to US$0.3 million) was recorded in construction in progress. As of June 30, 2019, the Company has a remaining commitment of RMB3.8 million (equivalent to US$0.5 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 December 31, 2018, the decoration work in the amount of RMB0.6 million (equivalent to US$0.1 million) was recorded in construction in progress. As of June 30, 2019, the Company has a remaining commitment of RMB0.6 million (equivalent to US$0.1 million).

 

 

39  
 

 


Off-Balance Sheet Arrangements

 

The Company and Mr. Jie Han have entered into two off–balance sheet commitments that provide guarantees for two one-year loans in the amounts of RMB500 million (equivalent to US$72.7 million) and RMB800 million (equivalent to US$116.4 million) obtained by Heilongjiang Xinda Enterprise Group Shanghai New Materials Sales Company Limited ("Shanghai Sales"), an unrelated party and a raw material provider, on December 25, 2018 and April 15, 2019, respectively, from Longjiang Bank Co., Ltd. Harbin Pingfang branch (“Longjiang Bank”). The Company’s pledged obligations primarily consist of repayments of loan principle and interests if Shanghai Sales defaults on the loans when due.

 

Our management estimates that, in the event that Shanghai Sales defaults on the loans, the Company’s material loss contingency would be RMB1.379 billion (equivalent to US$190.2 million), including estimated interest expenses of RMB7.9 million (equivalent to US$1.1 million) as of June 30, 2019.

 

As of today, our management believes that the potential material loss contingency is not probable immediate or in the near future.

 

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 June 30, 2019 would decrease income before income taxes by approximately US$4.7 million for the six-month period ended June 30, 2019. 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

 

The majority of our revenues are collected in and 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. The People's Bank of China allowed the RMB and U.S. dollar exchange rate to fluctuate within 1% on April 16, 2012 and 2% on March 17, 2014, respectively. On June 30, 2019, the RMB traded at 6.8747 RMB to 1.00 U.S. dollar. Affected by the current trade conflicts between China and US, on August 5, 2019, the RMB exchange rate against the U.S. dollar depreciated to break through 7.00 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.

 

40  
 

 

 

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, 2018.

 

Notwithstanding management's assessment that our internal control over financial reporting was ineffective as of June 30, 2019. 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-month period ended June 30, 2019 in all material respects.

 

(b) Changes in internal controls.

 

During the six-month period ended June 30, 2019, our efforts to improve our internal controls over financial reporting (1) hiring additional qualified financial staff; (2) adopting procedures to evaluate and assess performance of directors, officers and employees of the Company, (3) internal meetings, discussions, trainings 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, 2019.

 

Other than the foregoing, there has been no other changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our six-month period ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

41  
 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

"Part I. Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 includes a detailed discussion of risks and uncertainties which could adversely affect our future results.  We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially affect our operations. The risks, uncertainties and other factors set forth in our Annual Report on Form 10-K may cause our actual results, performances and achievements to be materially different from those expressed or implied by our forward-looking statements. If any of these risks or events occurs, our business, financial condition or results of operations may be adversely affected. During the six-month period ended June 30, 2019, there have been no material changes to the Risk Factors disclosed in “Part I Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

 

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.  Other Information

 

None.

 

Item 6.  Exhibits

 

Exhibit

No.

  Document Description
     
10.1   Maximum Guarantee Contract dated December 25, 2018 between Longjiang Bank Co., Ltd. Harbin Pingfang branch and Heilongjiang Xinda Enterprise Group Co., Ltd.
10.2   Maximum Guarantee Contract dated December 25, 2018 between Longjiang Bank Co., Ltd. Harbin Pingfang branch and Sichuan Xinda Enterprise Group Co., Ltd.
10.3   Maximum Guarantee Contract dated April 15, 2019 between Longjiang Bank Co., Ltd. Harbin Pingfang branch and Sichuan Xinda Enterprise Group Co., Ltd.
31.1   Certification of the Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of the Chief Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
32.2   Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
101   Interactive Data Files Pursuant to Rule 405 of Regulation S-T.

 

 

 

42  
 

 

 

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.

 

  China XD Plastics Company Limited
     
Date: August 14, 2019 By:    /s/ Jie Han
  Name: Jie Han
 

Title: Chief Executive Officer

(Principal Executive Officer)

 

     
Date: August 14, 2019 By:    /s/ Taylor Zhang
  Name: Taylor Zhang
 

Title: Chief Financial Officer

 

 

 

 

 

 

43  
 

 

Exhibit Index

 

Exhibit

No.

  Document Description
     
10.1   Maximum Guarantee Contract dated December 25, 2018 between Longjiang Bank Co., Ltd. Harbin Pingfang branch and Heilongjiang Xinda Enterprise Group Co., Ltd.
10.2   Maximum Guarantee Contract dated December 25, 2018 between Longjiang Bank Co., Ltd. Harbin Pingfang branch and Sichuan Xinda Enterprise Group Co., Ltd.
10.3   Maximum Guarantee Contract dated April 15, 2019 between Longjiang Bank Co., Ltd. Harbin Pingfang branch and Sichuan Xinda Enterprise Group Co., Ltd.
31.1   Certification of the Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of the Chief Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
32.2   Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
101   Interactive Data Files Pursuant to Rule 405 of Regulation S-T.

 

 

 

 

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