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, 2018

or

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

For the transition period from ____ to _____

Commission File Number: 000-53131

CHINA XD PLASTICS COMPANY LIMITED

(Exact name of registrant as specified in its charter)

 

 

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

Harbin Development Zone, Heilongjiang Province, PRC 150060

(Address of principal executive offices) (Zip Code)

86-451-84346600

(Registrant's telephone number, including area code)

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

 

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

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

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

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

 

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

As of August 3, 2018, the registrant had 50,287,731 shares of common stock, par value US$0.0001 per share, outstanding.

 

 

TABLE OF CONTENTS

 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

		June 30,				December 31,
		2018				2017
		US$				US$
ASSETS
Current assets:
Cash and cash equivalents			72,721,460				190,392,211
Restricted cash			263,254,352				129,699,454
Time deposits			113,351,268				288,023,017
Accounts receivable, net of allowance for doubtful accounts			308,622,962				298,868,984
Inventories			549,782,095				421,736,682
Prepaid expenses and other current assets			85,211,205				144,326,151
Total current assets			1,392,943,342				1,473,046,499
Property, plant and equipment, net			813,775,162				835,561,739
Land use rights, net			31,226,580				31,943,652
Long-term prepayments to equipment and construction suppliers			507,306,748				190,627,514
Other non-current assets			16,102,868				12,924,279
Total assets			2,761,354,700				2,544,103,683
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term loans, including current portion of long-term bank loans			635,504,864				775,396,929
Bills payable			519,466,191				252,768,510
Accounts payable			166,693,789				227,993,140
Amounts due to a related party			75,567,512				-
Income taxes payable			16,612,181				17,710,217
Accrued expenses and other current liabilities			153,355,737				138,605,509
Total current liabilities			1,567,200,274				1,412,474,305
Long-term bank loans, excluding current portion			132,304,205				114,208,319
Deferred income			105,746,194				99,168,276
Other non-current liabilities			106,440,118				107,898,318
Total liabilities			1,911,690,791				1,733,749,218
Redeemable Series D convertible preferred stock (redemption amount of US$252,601,000 and US$244,044,200 as of June 30, 2018 and December 31, 2017, respectively)			97,576,465				97,576,465
Stockholders' equity:
Series B preferred stock			100				100
Common stock, US$0.0001 par value, 500,000,000 shares authorized, 50,308,731 shares and     49,748,731 shares issued, 50,287,731 shares and 49,727,731 shares outstanding as of      June 30, 2018 and December 31, 2017, respectively			5,031				4,975
Treasury stock, 21,000 shares at cost			(92,694	)			(92,694	)
Additional paid-in capital			85,789,902				83,159,893
Retained earnings			695,114,448				648,790,469
Accumulated other comprehensive loss			(28,729,343	)			(19,084,743	)
Total stockholders' equity			752,087,444				712,778,000
Commitments and contingencies			-				-
Total liabilities, redeemable convertible preferred stock and stockholders' equity			2,761,354,700				2,544,103,683

 

See accompanying notes to unaudited condensed consolidated financial statements.

  

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six-Month Period Ended June 30,
		2018				2017
		US$				US$
Cash flows from operating activities:
Net cash provided by operating activities			152,600,917				166,636,423
Cash flows from investing activities:
Proceeds from maturity of time deposits			388,105,630				244,825,478
Purchase of time deposits			(210,380,884	)			(215,714,244	)
Purchase of land use rights			-				(6,214,207	)
Purchase of and deposits for property, plant and equipment			(334,739,673	)			(281,550,529	)
Refund of deposit from an equipment supplier			60,054,417				75,197,802
Deposits for acquisition of equity			(3,640,688	)			-
Government grants related to the construction projects			10,558,608				7,136,482
Net cash used in investing activities			(90,042,590	)			(176,319,218	)
Cash flows from financing activities:
Proceeds from bank borrowings			470,494,396				441,425,024
Repayments of bank borrowings			(587,236,484	)			(311,342,509	)
Investment received in advance from a related party			75,567,512				-
Net cash (used in) provided by financing activities			(41,174,576	)			130,082,515
Effect of foreign currency exchange rate changes on cash, cash equivalents and restricted cash			(5,499,604	)			7,995,135
Net increase in cash, cash equivalents and restricted cash			15,884,147				128,394,855
Cash, cash equivalents and restricted cash at beginning of period			320,091,665				271,575,847
Cash, cash equivalents and restricted cash at end of period			335,975,812				399,970,702
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest			23,267,235				17,323,875
Income taxes paid			12,906,780				7,353,371
Non-cash investing and financing activities:
Accrual for purchase of equipment and construction included in accrued expenses and other current liabilities			6,057,014				5,379,730

		June 30,
		2018				2017
		US$				US$
Cash and cash equivalents			72,721,460				279,825,075
Restricted cash			263,254,352				120,145,627
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows			335,975,812				399,970,702

 

See accompanying notes to unaudited condensed consolidated financial statements.

CHINA XD PLASTICS COMPANY LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 - Basis of presentation, significant concentrations and risks

(a) Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by rules and regulations of the United States Securities and Exchange Commission ("SEC"). The condensed consolidated balance sheet as of December 31, 2017 was derived from the audited consolidated financial statements of  China XD Plastics Company Limited ("China XD") and subsidiaries (collectively, the "Company"). The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated balance sheet of the Company as of December 31, 2017, and the related consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, included in the Company's Annual Report on Form 10-K filed with the SEC on March 15, 2018.

In the opinion of the management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of June 30, 2018, the results of operations and cash flows for the six-month periods ended June 30, 2018 and 2017, have been made.

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

(b) Accounting Pronouncement Adopted in 2018

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which supersedes virtually all existing revenue recognition guidance. The new standard requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. We adopted ASU 2014-09 in the first quarter 2018, using the modified retrospective transition approach, which did not have any material impact on how we recognize revenue or to our financial statements or disclosures. See below for additional information related to our recognition of revenue generated from customer contracts.

Revenue recognition

Effective January 1, 2018, we adopted the new guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Topic 606 requires us to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires us to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, we satisfy a performance obligation. The adoption of this new guidance did not result in any changes to our revenue recognition practice.

ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash requires that the Statement of Cash Flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The Company retrospectively adopted this guidance as of January 1, 2018, to each period presented.

 

 

 

(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"). To a lesser extent, the Company also sells its products to an overseas customer in the Republic of Korea (the "ROK"). The Company's sales are highly concentrated.  Sales to distributors and end customer individually exceeded 10% of the Company's revenues for the three-month and six-month periods ended June 30, 2018 and 2017, are as follows:

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

Purchase concentration of raw materials and equipment

The principal raw materials used for the Company's production of modified plastics products are plastic resins, such as polypropylene, ABS and nylon. The Company purchases substantially all of its raw materials through a limited number of distributors.  Raw material purchases from these distributors, which individually exceeded 10% of the Company's total raw material purchases, accounted for approximately 20.5% (two distributors) and 71.1% (six distributors) for the three-month periods ended June 30, 2018 and 2017, respectively, and 10.0% (one distributor) and 60.0% (five distributors) of the Company's total raw materials purchases for the six-month periods ended June 30, 2018 and 2017, respectively of the Company's total raw material purchases, Management believes that other suppliers could provide similar raw materials on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect the Company's business, financial position and results of operations.

 

 

 

Cash concentration

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

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 amounted to $1,787,899 and $1,505,747 are insured as of June 30, 2018 and December 31, 2017, 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$188,205,423 and US$65,766,735 as of June 30, 2018 and December 31, 2017, respectively. Upon maturity and repayment of the bills payable, which is generally within 6 months, the cash becomes available for use by the Company. The cash will be available for use by the Company 90 days from the issuance of the letter of credit. The cash flows from the pledged bank deposits, which relate to purchases of raw materials.

Short-term bank deposits that are pledged as collateral for short-term and long-term bank borrowings are reported as restricted cash and amounted to US$73,527,189 and US$59,884,913 as of June 30, 2018 and December 31, 2017, respectively.

Short-term bank deposits that are related to government grant are reported as restricted cash and amounted to US$1,521,740 and US$1,537,935 as of June 30, 2018 and December 31, 2017, respectively. On February 11, 2017, the Company entered into a fund support agreement with the People's Government of Shunqing District, Nanchong City, Sichuan Province, pursuant to which the Company was granted RMB10 million (equivalent to US$1.5 million) to support the construction of the Sichuan plant. Such amount has been received in full in the Company's bank account with reimbursement be subject to the Government's pre-approval and will be released by the Government when the construction progress of the plant is 60%. Such balance is reported as restricted cash.

Short-term bank deposits that are pledged as collateral for foreign currency option contract are reported as restricted cash and amounted to nil and US$2,509,871 as of June 30, 2018 and December 31, 2017, respectively.

 

 

 

Note 2 – Accounts receivable

 

Accounts receivable consists of the following:

As of June 30, 2018 and December 31, 2017, the accounts receivable balances also include notes receivable in the amount of US$187,014 and US$1,181,029, respectively. As of June 30, 2018 and December 31, 2017, US$98,489,107and US$99,526,978, 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, 2018 and 2017.

 

The following table provides an analysis of the aging of accounts receivable as of June 30, 2018 and December 31, 2017:

 

Note 3 – Inventories

Inventories consist of the following:

There were no write down of inventories for the three-month and six-month periods ended June 30, 2018 and 2017.

 

 

 

Note 4 – Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

(i) In March 2017, Sichuan Xinda signed a series of contracts with Harbin Hailezi Science and Technology Co., Ltd. (“Hailezi”) to purchase production equipment, and prepaid RMB1,728.9 million (equivalent to US$261.3 million ) to Hailezi, which was recognized in investing activities in the statements of cash flows. In June 2017, the two parties agreed to partially terminate the contracts and Hailezi agreed to refund the prepayment amounting to RMB1,704.9 million (equivalent to US$257.7 million) by the end of March 2018. As of March 31, 2018, Hailezi has refunded the above-mentioned prepayment to Sichuan Xinda. For details, please refer to Note 6.

(ii) Value added taxes receivables mainly represent the input taxes on purchasing equipment by Xinda Group and Sichuan Xinda, which are to be net off with output taxes.  Value added taxes receivables were recognized in operating activities in condensed consolidated statements of cash flows.

(iii) Advances to suppliers are the advances to purchase raw materials as of June 30, 2018.

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

(v) Others mainly include prepaid miscellaneous service fee, staff advance and prepaid rental fee.

Note 5 – Property, plant and equipment, net

Property, plant and equipment consist of the following:

For the three-month and six-month periods ended June 30, 2018 and 2017, the Company capitalized US$617,156 and US$692,599, and US$1,260,944 and US$1,341,181 of interest costs as a component of the cost of construction in progress. Depreciation expense on property, plant and equipment was allocated to the following expense items:

 

 

 

 

 

 

Note 6 - Prepayments to equipment and construction suppliers

(i) On September 26, 2016 and February 28, 2017, HLJ Xinda Group entered into equipment purchase contracts with Hailezi for a total consideration of RMB782.2 million (equivalent to US$118.2 million) to purchase storage facility and other equipment, which will be used for upgrading the storage system of warehouse located in Harbin, China. Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB621.6 million (equivalent to US$94.0 million) as of December 31, 2017.  Due to a redesign of outdoor storage facility in June 2017, HLJ Xinda Group entered into a supplementary agreement with Hailezi, which decreased the original contract amount to RMB283.7 million (equivalent to US$42.9 million). Hailezi refunded RMB369.1 million (equivalent to US$55.8 million) to HLJ Xinda Group on June 22, 2017. As of June 30, 2018, HLJ Xinda Group has prepaid RMB252.5 million (equivalent to US$38.2 million).  The prepayment and refund were recognized in investing activities in the statements of cash flows.

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$142.0 million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB920.9 million (equivalent to US$139.1 million) as of June 30, 2018.

In connection with the HLJ project, on June 21, 2018, HLJ Xinda Group entered into another equipment purchase contract with Hailezi to purchase production equipment, which will be used for 300,000 metrics tons of biological based composite material, located in Harbin, for a consideration of RMB749.8 million (equivalent to US$113.3 million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB300.7 million (equivalent to US$45.5 million) as of June 30, 2018.

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$377.8 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 has prepaid RMB1,728.9 million (equivalent to  US$261.3 million) as of June 30, 2018. 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$257.7 million) by the end of March 2018. As of December 31, 2017, Sichuan Xinda signed a supplementary agreement with Hailezi, pursuant to the agreement, Sichuan Xinda agreed to pay RMB12.4 million (equivalent to US$1.9  million) to Hailezi for the compensation of Hailezi due to the termination of the purchase contracts. As of June 30, 2018, Hailezi has refunded the above-mentioned prepayment.

 

 

 

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$287.2 million). Pursuant to the contracts with Hailezi, Sichuan Xinda has prepaid RMB1,260 million (equivalent to US$190.4 million) as of June 30, 2018.

(ii) In connection with the HLJ project, on June 25, 2018, HLJ Xinda Group entered into an equipment purchase contract with Ningbo Junzuo Trading Co., Ltd. ("Ningbo Junzuo") and Ningbo Junhu Trading Co., Ltd. ("Ningbo Junhu") to purchase production equipment, which will be used for 300,000 metrics tons of biological based composite material, located in Harbin, for a total consideration of RMB1,156.4 million (equivalent to US$174.8 million). Pursuant to the contract with Ningbo Junzuo and Ningbo Junhu, HLJ Xinda Group has prepaid RMB400.0 million (equivalent to US$60.4 million) as of June 30, 2018. On July 10, 2018, the Company signed supplemental contracts with Ningbo Junzuo and Ningbo Junhu to cancel the equipment purchase at the full price due to the equipment not meeting the requirements of the Company. On July 31, 2018, the Company received the full refund of RMB400.0 million (equivalent to US$60.4 million).

(iii) 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$32.7 million), with a total area of 13,972.64 square meters. The Company is planning to use this building as the offices of the newly set up research and development center in Shanghai, which was established on December 27, 2017. As of June 30, 2018, the Company has prepaid RMB108.3 million (equivalent to US$16.4 million).

(iv) Since November 15, 2016, Sichuan Xinda entered into decoration contracts with Sichuan Beijin Construction Engineering Company Limited ("Beijin Construction") to perform indoor and outdoor decoration work for a consideration of RMB237.6 million (equivalent to US$35.9 million). Pursuant to the contract with Beijin Construction, Sichuan Xinda has prepaid RMB119.8 million (equivalent to US$18.1 million) as of June 30, 2018, in which RMB72.1 million (equivalent to US$10.9 million) was transferred to construction in progress. The prepayment was recognized in investing activities in the statements of cash flows.

(v) As of June 30, 2018, Sichuan Construction primarily consisted of payables due to Peaceful Treasure Limited ("Peaceful"). On October 20, 2016, Sichuan Xinda entered into an equipment purchase contract with Peaceful for a total consideration of RMB89.8 million (equivalent to US$13.6 million) to purchase certain production and testing equipment. The Company prepaid RMB33.9 million (equivalent to US$5.1 million) as of June 30, 2018. The equipment will be delivered when the construction of plants and buildings of the Nanchong project completed in September 2018.

Note 7 – Other non-current assets

On November 21, 2017, HLJ Xinda Group signed a purchase contract with Xinda High-Tech Co., Ltd. ("Xinda High-Tech") on 100% equity transfer of Xinda High-Tech for a total consideration of RMB105 million (US$15.9 million).  Pursuant to the contract, HLJ Xinda Group has prepaid deposits of RMB101.2 million (equivalent to US$15.3 million) as of June 30, 2018, with the remaining RMB3.8 million (equivalent to US$0.6 million) to be paid within thirty days after the completion of the legal transfer. The Company is in the process of obtaining the government approval as of June 30, 2018.

Note 8 – 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.

Note 9 – 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

As of June 30, 2018 and December 31, 2017, the Company's short-term bank loans (including the current portion of long-term bank loans) bear a weighted average interest rate of 4.3% and 4.1% per annum, respectively. All short-term bank loans mature at various times within one year and contain no renewal terms.

 

 

In November 2017, the Company obtained a three-month secured short-term loan of RMB200 million (equivalent to US$30.6 million) from Nanchong Shuntou Development Group Co., Ltd. at an annual interest rate of 4.35%. The loan was secured by one of the land use rights of RMB43.5 million (equivalent to US$6.9 million). The Company repaid the loan in January, 2018.

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$45.3 million) in Standard Chartered Bank in Harbin, China.

In October and November 2015, the Company obtained three long term unsecured loans of RMB260 million (equivalent to US$39.3 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 million (equivalent to US$12.1 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 million (equivalent to US$4.5 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 million (equivalent to US$3.8 million) from Bank of China at an annual interest rate of 4.75%. The Company repaid RMB10 million (equivalent to US$1.5 million) on April 28, 2017, RMB40 million (equivalent to US$6.0 million) on October 28, 2017 and RMB25 million (equivalent to US$3.8 million) on April 28, 2018. RMB100 million (equivalent to US$15.1 million), RMB25 million (equivalent to US$3.8 million), RMB100 million (equivalent to US$15.1 million), RMB20 million (equivalent to US$3.1 million), and RMB75 million (equivalent to US$11.3 million) will be repaid on October 28, 2018, April 28, 2019, October 28, 2019, April 28, 2020 and October 28, 2020, respectively.

On May 13, 2016, the Company obtained two two-year secured loans of US$14.3 million from China Construction Bank (Dubai) at an interest of three-month LIBOR (2.3118% as of March 31, 2018) plus 1.6%.  On May 17, 2016, the Company obtained two two-year secured loans of US$12.3 million from China Construction Bank (Dubai) at an interest of three-month LIBOR (2.3118% as of March 31, 2018) plus 1.6%. On May 22, 2016, the Company obtained a two-year secured loan of US$3.8 million from China Construction Bank (Dubai) at an interest of three-month LIBOR (2.3118% as of March 31, 2018) plus 1.6%. The interest rate is reset every three months. These loans are secured by restricted cash of RMB68.8 million (equivalent to US$10.9 million). All of these loans were repaid in April 2018.

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

Note 10 – Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:

(i) Advance from customers mainly represents the advance received from three customers in the PRC for the raw material purchases as of June 30, 2018.

Note 12 – 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, 2018 and 2017 were 20.2% and 16.8%, respectively.  The effective income tax rate increased from 16.8% for the six-month period ended June 30, 2017 to 20.2% for the six-month period ended June 30, 2018, primarily due to the increase of continuous operating losses occurred in overseas subsidiaries such as Dubai Xinda and Xinda Holding (HK), the decrease of 50% additional deduction of R&D expense and partially offset by the increase of Sichuan Xinda’s profit before tax (“PBT”) percentage within the consolidating entities. The effective income tax rate for the six-month period ended June 30, 2018 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 2012 and 50% additional deduction of R&D expenses of the major PRC operating entities.

US$2,898,304 previously unrecognized tax benefits accrued in year 2012 and the related accrued interest amounting to US$ 2,721,753 were reversed due to the expiration of five-year tax assessment period on May 31, 2018. As of June 30, 2018, the unrecognized tax benefits were US$35,306,965 and the interest relating to unrecognized tax benefits was US$9,973,520, of which the unrecognized tax benefits in year 2013 amounting to US$3,819,016 and related accrued interest amounting to US$2,721,430 were classified as current liabilities as the five-year tax assessment period will expire on May 31, 2019. No penalties expense related to unrecognized tax benefits were recorded. The Company is currently unable to provide an estimate of a range of the total amount of unrecognized tax benefits that is reasonably possible to change significantly within the next twelve months.

Note 13 – Deferred Income

On January 26, 2015, the Company entered into a memorandum and a fund support agreement (the "Agreement") with the People's Government of Shunqing District, Nanchong City, Sichuan Province ("Shunqing Government") pursuant to which Shunqing Government, through its investment vehicle, extended to the Company RMB350 million (equivalent to US$52.9 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 RMB332.2 million (equivalent to US$50.2 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, 2018.

The Company has also received RMB45 million (equivalent to US$6.8 million) from Harbin Bureau of Finance for Biomedical composites project as of June 30, 2018.

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 condensed consolidated balance sheets, and to be recognized as other income in the condensed 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 RMB54.9 million (equivalent to US$8.3 million) government grants have been amortized as other income proportionate to the depreciation of the related assets, of which RMB15.6 million (equivalent to US$2.5 million) was amortized in the six-month period ended June 30, 2018.

The Company also received RMB36.0 million (equivalent to US$5.4 million) from Shunqing Government with respect to interest subsidy for bank loans. A cumulative RMB16.4 million (equivalent to US$2.6 million) government grants have been amortized as other income in line with the amount of related loan interest paid of which no amortization in the six-month period ended June 30, 2018.

 Note 14 – Other non-current liabilities

(i) Income tax payable-noncurrent represents the repatriation tax, the accumulative balance of unrecognized tax benefits since 2013 and related accrued interest. According to the Tax Cuts and Jobs Act enacted on December 22, 2017, the management estimated 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$11,354,425 of which will be paid in 2018 and was classified as current liabilities.

 

 

Note 15 – Stockholders' equity

The changes of each caption of stockholders' equity for the six-month period ended June 30, 2018 are as follows:

 

		Series B Preferred Stock								Common Stock												Additional								Accumulated Other				Total
		Number of Shares				Amount				Number of Shares				Amount				Treasury Stock				Paid-in Capital				Retained Earnings				Comprehensive Loss				Stockholders' Equity
						US$								US$
Balance as of January 1, 2018			1,000,000				100				49,727,731				4,975				(92,694	)			83,159,893				648,790,469				(19,084,743	)			712,778,000
Net income			-				-				-				-				-				-				46,323,979				-				46,323,979
Other comprehensive income			-				-				-				-				-				-				-				(9,644,600	)			(9,644,600	)
Stock based compensation			-				-				-				-				-				2,630,065				-				-				2,630,065
Vesting of non-vested shares			-				-				560,000				56				-				(56	)			-				-				-
Balance as of June 30, 2018			1,000,000				100				50,287,731				5,031				(92,694	)			85,789,902				695,114,448				(28,729,343	)			752,087,444

 

Note 16 – Stock based compensation

Non-vested shares

A summary of the non-vested shares activity for the six-month ended June 30, 2018 is as follows:

		Number of Nonvested Shares				Weighted Average Grant date Fair Value
						US$
Outstanding as of December 31, 2017			161,110				7.49
Granted			560,000				4.40
Vested			(560,000	)			4.40
Outstanding as of June 30, 2018			161,110				7.49

 

 

Note 17 - 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,
		2018				2017				2018				2017
		US$				US$				US$				US$
Net income			27,224,078				28,063,992				46,323,979				37,964,981
Less:
Earnings allocated to participating Series D convertible preferred stocks			(6,555,197	)			(6,814,870	)			(11,177,620	)			(9,219,142	)
Earnings allocated to participating nonvested shares			(66,007	)			(160,703	)			(112,552	)			(217,469	)
Net income for basic and diluted earnings per share			20,602,874				21,088,419				35,033,807				28,528,370
Denominator
Denominator for basic and diluted earnings per share			50,287,731				49,511,541				50,148,504				49,511,541
Earnings per share:
Basic and diluted			0.41				0.43				0.70				0.58

 

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, 2018 and 2017 because their effects are anti-dilutive:

Note 18 - Commitments and contingencies

(1)    Lease commitments

Future minimum lease payments under non-cancellable operating leases agreements as of June 30, 2018 were as follows. 

Rental expenses incurred for operating leases of plant and equipment and office spaces were US$802,650 and US$894,643, and for the three-month periods ended June 30, 2018 and 2017, respectively, and US$1,384,004 and US$1,554,993 for the six-month periods ended June 30, 2018 and 2017, respectively.  There are no step rent provisions, escalation clauses, capital improvement funding requirements, other lease concessions or contingent rent in the lease agreements. The Company has no legal or contractual asset retirement obligations at the end of leases. The Company's leases do not contain any contingent rent payments terms.

(2)   Sichuan plant construction and equipment purchase

On March 8, 2013, Xinda Holding (HK) entered into an investment agreement with Shunqing Government, pursuant to which Xinda Holding (HK) will invest RMB1,800 million (equivalent to US$272.0 million) in property, plant and equipment and approximately RMB600 million (equivalent to US$90.7 million) in working capital, for the construction of Sichuan plant.  As of June 30, 2018, the Company has a remaining commitment of RMB54.8 million (equivalent to US$8.3 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$2.6 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, 2018, Sichuan Xinda prepaid RMB6.0 million (equivalent to US$0.9 million) and has a remaining commitment of RMB9.4 million (equivalent to US$1.5 million).

On October 20, 2016, Sichuan Xinda entered into an equipment purchase contract with Peaceful for a total consideration of RMB89.8 million (equivalent to US$13.6 million) to purchase certain production and testing equipment. As of June 30, 2018, the Company has a commitment of RMB55.9 million (equivalent to US$8.5 million).

On November 15, 2016, Sichuan Xinda entered into decoration contract with Beijin Construction  to perform indoor and outdoor decoration work for a consideration of RMB237.6 million (equivalent to US$35.9 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$3.6 million). As of June 30, 2018, Sichuan Xinda prepaid RMB119.8 million (equivalent to US$18.1 million) of which RMB72.1 million (equivalent to US$10.9 million) was transferred to construction in progress and has a remaining commitment of RMB144.5 million (equivalent to US$21.8 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$339.0 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$336.0 million), and Hailezi agreed to refund the prepayment in the amount of RMB1,704.9 million (equivalent to US$257.7 million) by the end of March 2018, out of the total prepayment made by Sichuan Xinda of RMB1,722.9 million (equivalent to US$260.4 million). As of June 30, 2018, Hailezi has refunded the prepayment in the amount of RMB1,704.9 million (equivalent to US$257.7 million). As of June 30, 2018, Sichuan Xinda prepaid RMB18.0 million (equivalent to US$2.7 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$287.2 million). Pursuant to the contracts with Hailezi, Sichuan Xinda have prepaid RMB1,260 million (equivalent to US$190.4 million) at the end of June 2018, and has a remaining commitment of RMB640 million (equivalent to US$96.8 million).

(3)    Heilongjiang plant construction and equipment purchase

In connection with the equipment purchase contracts with Hailezi signed on September 26, 2016 and February 28, 2017 mentioned in Note 6 (i), HLJ Xinda Group has a remaining commitment of RMB31.2 million (equivalent to US$4.7 million) as of June 30, 2018.

In connection with the "HLJ Project" mentioned in Note 6 (i), pursuant to the three investment agreements, the project total capital expenditure will be RMB4,015.0 million (equivalent to be US$606.8 million), among which the investment in fixed assets shall be no less than RMB3,295.0 million (equivalent to US$498.0 million) in total. Pursuant to the contracts with Hailezi signed in November 2017 mentioned in Note 6 (i), HLJ Xinda Group has a remaining commitment of RMB18.8 million (equivalent to US$2.9 million) as of June 30, 2018.

In connection with the HLJ project, on June 21, 2018, HLJ Xinda Group entered into another equipment purchase contract with Hailezi to purchase production equipment, which will be used for 300,000 metrics tons of biological based composite material, located in Harbin, for a consideration of RMB749.8 million (equivalent to US$113.3 million). Pursuant to the contract with Hailezi, HLJ Xinda Group has prepaid RMB300.7 million (equivalent to US$45.5 million) as of June 30, 2018, and has remaining commitment of RMB449.1 million (equivalent to US$67.8 million).

In connection with the HLJ project, on June 25, 2018, HLJ Xinda Group entered into equipment purchase contracts with Ningbo Junzuo and Ningbo Junhu to purchase production equipment, which will be used for 300,000 metrics tons of biological based composite material, located in Harbin, for a total consideration of RMB1,156.4 million (equivalent to USD174.8 million). Pursuant to the contract with Ningbo Junzuo and Ningbo Junhu, HLJ Xinda Group has prepaid RMB400.0 million (equivalent to USD60.4 million) as of June 30, 2018 and has a remaining commitment of RMB756.4 million (equivalent to US$114.4 million).  On July 10, 2018, the Company signed supplemental contracts with Ningbo Junzuo and Ningbo Junhu to cancel the equipment purchase at the full price due to the equipment not meeting the requirements of the Company. On July 31, 2018, the Company received the full refund of RMB400.0 million (equivalent to US$60.4 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, 2018, the Company has a remaining commitment of AED3.3 million (equivalent to US$0.6 million).

(5)    Xinda CI (Beijing) office building decoration

On March 30, 2017, Xinda CI (Beijing) Investment Holding Co., Ltd. ("Xinda Beijing Investment") entered into a decoration contract with Beijing Fangyuan Decoration Engineering Co., Ltd. for a total consideration of RMB5.8 million (equivalent to US$0.9 million) to decorate office building. As of June 30, 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, 2018, the Company has a remaining commitment of RMB3.8 million (equivalent to US$0.6 million).

On June 9, 2017, Xinda CI (Beijing) entered into a decoration contract with Beijing Zhonghongwufang Stone Co., Ltd for a total consideration of RMB1.2 million (equivalent to US$0.2 million) to decorate office building. As of June 30, 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, 2018, the Company has a remaining commitment of RMB0.6 million (equivalent to US$0.1 million).

(6)    Xinda Shanghai Research & Development office building

In connection with the building purchase contract mentioned in Note 6 (ii), HLJ Xinda Group has a remaining commitment of RMB108.3 million (equivalent to US$16.3 million) as of June 30, 2018.

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

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

Overview

Highlights for the three months ended June 30, 2018 include:

● Revenues were $317.3 million, an increase of 1.2% from $313.6 million in the second quarter of 2017

● Gross profit was $56.2 million, a decrease of 10.9% from $63.1 million in the second quarter of 2017

● Gross profit margin was 17.7%, compared to 20.1% in the second quarter of 2017

● Net income was $27.2 million, compared to $28.1million in the second quarter of 2017

● Total volume shipped was 103,678 metric tons, a decrease of 0.9% from 104,617 metric tons in the second quarter of 2017

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
		2018				2017				%				2018				2017				%
Revenues			317.3				313.6				1.2	%			627.8				551.4				13.9	%
Cost of revenues			(261.1	)			(250.5	)			4.2	%			(517.8	)			(453.5	)			14.2	%
Gross profit			56.2				63.1				(10.9	)%			110.0				97.9				12.4	%
Total operating expenses			(20.2	)			(19.1	)			5.8	%			(35.2	)			(32.5	)			8.3	%
Operating income			36.0				44.0				(18.2	)%			74.8				65.4				14.4	%
Income before income taxes			32.7				32.2				1.6	%			58.0				45.7				26.9	%
Income tax expense			(5.5	)			(4.1	)			34.1	%			(11.7	)			(7.7	)			51.9	%
Net income			27.2				28.1				(3.2	)%			46.3				38.0				21.8	%

Three months ended June 30, 2018 compared to three months ended June 30, 2017

Revenues

 

(ii) Overseas market

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,
		2018								2017								Change in				Change in
		MT				%				MT				%				MT				%
Modified Polyamide 66 (PA66)			21,166				20.4	%			17,982				17.3	%			3,184				17.7	%
Modified Polyamide 6 (PA6)			19,250				18.6	%			18,821				18.0	%			429				2.3	%
Plastic Alloy			25,908				25.0	%			30,483				29.1	%			(4,575	)			(15.0	)%
Modified Polypropylene (PP)			29,447				28.4	%			30,893				29.5	%			(1,446	)			(4.7	)%
Modified Acrylonitrile butadiene styrene (ABS)			3,784				3.6	%			3,738				3.6	%			46				1.2	%
Polyoxymethylenes (POM)			755				0.7	%			752				0.7	%			3				0.4	%
Polyphenylene Oxide (PPO)			1,035				1.0	%			765				0.7	%			270				35.3	%
Modified Polylactic Acid (PLA)			2,333				2.3	%			1,183				1.1	%			1,150				97.2	%
Raw Materials			0.0				0.0	%			0.0				0.0	%			-				N/A
Total Sales Volume			103,678				100	%			104,617				100	%			(939	)			(0.9	)%

 

 

 

 

Gross Profit and Gross Profit Margin

 

	Three-Month Period Ended June 30,								Change
(in millions, except percentage)	2018				2017				Amount				%
Gross Profit		$	56.2			$	63.1			$	(6.9	)			(10.9	)%
Gross Profit Margin			17.7	%			20.1	%							(2.4	)%

 

General and Administrative Expenses

 

	Three-Month Period Ended June 30,								Change
(in millions, except percentage)	2018				2017				Amount					%
General and Administrative Expenses		$	11.3			$	8.8			$	2.5				28.4	%
as a percentage of revenues			3.6	%			2.8	%							0.8	%

 

Research and Development Expenses

R&D expenses were US$5.3 million during the quarter ended June 30, 2018 compared with US$9.5 million during the same period in 2017, a decrease of US$4.2 million, or 44.2%. The decrease was primarily due to the decrease of raw materials used.

As of June 30, 2018, the number of ongoing research and development projects was 401. 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$36.0 million in the second quarter ended June 30, 2018 compared to $44.0 million in the same period of 2017, representing a decrease of 18.2% or US$8.0 million. This decrease is primarily due to lower gross profit, higher selling expenses and G&A expenses, partially offset by lower R&D expenses.

 

 

 

 

Interest Income (Expenses)

 

 

Net interest expenses were US$10.3 million for the three-month period ended June 30, 2018, compared to $11.0 million in the same period of 2017, representing a decrease of 6.4% or US$0.7 million, primarily due to (i) the decrease of interest expense resulting from the weighted average loan interest rate decreased to  4.6% for the three-month period ended June 30, 2018 as compared to 4.9% of the same period of 2017; and partially offset by (ii) the increase of average short-term and long-term loan balance in the amount of US$925.0 million for the three-month period ended June 30, 2018 compared to US$849.0 million for the same period in 2017.

 

Income Taxes

	Three-Month Period Ended June 30,								Change
(in millions, except percentage)	2018				2017				Amount					%
Income before Income Taxes		$	32.7			$	32.2			$	0.5				1.6	%
Income Tax Expense			(5.5	)			(4.1	)			(1.4	)			34.1	%
Effective income tax rate			16.8	%			12.8	%							4.0	%

Six months ended June 30, 2018 compared to six months ended June 30, 2017

 

Revenues

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,
		2018								2017								Change in				Change in
		Amount				%				Amount				%				Amount				%
Modified Polyamide 66 (PA66)			169.9				27.1	%			140.1				25.4	%			29.8				21.3	%
Modified Polyamide 6 (PA6)			126.3				20.1	%			117.0				21.2	%			9.3				7.9	%
Plastic Alloy			158.0				25.1	%			164.6				29.9	%			(6.6	)			(4.0	)%
Modified Polypropylene (PP)			97.4				15.5	%			87.8				15.9	%			9.6				10.9	%
Modified Acrylonitrile butadiene styrene (ABS)			16.8				2.7	%			14.5				2.6	%			2.3				15.9	%
Modified Polylactic Acid (PLA)			43.7				7.0	%			12.1				2.2	%			31.6				261.2	%
Polyphenylene Oxide (PPO)			10.8				1.7	%			10.6				1.9	%			0.2				1.9	%
Polyoxymethylenes (POM)			4.9				0.8	%			4.7				0.9	%			0.2				4.3	%
Raw Materials			0.0				0.0	%			0.0				0.0	%			0.0				N/A
Total Revenues			627.8				100	%			551.4				100	%			76.4				13.9	%