Attached files
file | filename |
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EX-31.1 - China Auto Logistics Inc | v194024_ex31-1.htm |
EX-32.2 - China Auto Logistics Inc | v194024_ex32-2.htm |
EX-31.2 - China Auto Logistics Inc | v194024_ex31-2.htm |
EX-32.1 - China Auto Logistics Inc | v194024_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended June 30, 2010
¨
|
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: 000-52625
CHINA
AUTO LOGISTICS INC.
(Exact
Name of Registrant as Specified in Its Charter)
Nevada
|
20-2574314
|
(State or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S. Employer Identification No.)
|
|
|
No. 87 No. 8 Coastal Way, Floor 2
|
|
Construction Bank, FTZ
|
|
Tianjin Province
|
|
The People’s Republic of China 300461
|
300461
|
(Address of Principal Executive Offices)
|
(Zip Code)
|
(86)
22-2576-2771
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No x
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 ¨
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
|
|
Outstanding at August 16, 2010
|
Common Stock, $.001 par value per share
|
|
18,100,000 shares
|
TABLE
OF CONTENTS
Page
|
||
PART
I – FINANCIAL INFORMATION
|
||
Item
1.
|
Financial
Statements
|
3 |
Condensed
Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009
(Unaudited)
|
3 | |
Condensed
Consolidated Statements of Income for the Three Months and Six Months
Ended June 30, 2010 and 2009 (Unaudited)
|
4 | |
Condensed
Consolidated Statements of Comprehensive Income for the Three Months and
Six Months Ended June 30, 2010 and 2009 (Unaudited)
|
5 | |
Condensed
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
2010 and 2009 (Unaudited)
|
6 | |
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
8 | |
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
15 |
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
28 |
Item
4.
|
Controls
and Procedures
|
28 |
PART
II – OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
29 |
Item
1A.
|
Risk
Factors
|
29 |
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
29 |
Item
3.
|
Default
Upon Senior Securities
|
29 |
Item
4.
|
(Removed
and Reserved)
|
29 |
Item
5.
|
Other
Information
|
29 |
Item
6.
|
Exhibits
|
29 |
SIGNATURES | 31 |
2
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
CHINA
AUTO LOGISTICS INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 1,931,235 | $ | 2,255,058 | ||||
Restricted
cash
|
3,236,054 | 4,296,368 | ||||||
Accounts
receivable – trade
|
83,768 | - | ||||||
Receivables
related to financing services
|
25,485,629 | 9,499,219 | ||||||
Inventories
|
20,782,705 | 16,617,641 | ||||||
Advances
to suppliers
|
19,548,472 | 18,151,077 | ||||||
Prepaid
expenses
|
28,479 | 36,516 | ||||||
Value
added tax refundable
|
702,765 | 368,272 | ||||||
Total
current assets
|
71,799,107 | 51,224,151 | ||||||
Property
and equipment, net
|
583,327 | 487,933 | ||||||
Total
Assets
|
$ | 72,382,434 | $ | 51,712,084 | ||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
Current
liabilities
|
||||||||
Lines
of credit related to financing services
|
$ | 23,865,815 | $ | 7,766,981 | ||||
Bank
loans payable
|
1,914,327 | 3,221,933 | ||||||
Draft
notes payable
|
- | 2,929,030 | ||||||
Accrued
expenses
|
239,062 | 455,276 | ||||||
Customer
deposits
|
12,421,417 | 5,857,640 | ||||||
Deferred
revenue
|
144,062 | 82,185 | ||||||
Due
to shareholder
|
1,188,460 | 975,920 | ||||||
Due
to director
|
19,441 | 19,391 | ||||||
Income
tax payable
|
709,643 | 2,132,891 | ||||||
Total
current liabilities
|
40,502,227 | 23,441,247 | ||||||
Equity
|
||||||||
China
Auto Logistics Inc. shareholders’ equity
|
||||||||
Preferred
stock, $0.001 par value, 5,000,000 shares authorized, none issued and
outstanding
|
- | - | ||||||
Common
stock, $0.001 par value, 95,000,000 shares authorized, 18,100,000 shares
issued and outstanding
|
18,100 | 18,100 | ||||||
Additional
paid-in capital
|
13,273,530 | 13,273,530 | ||||||
Accumulated
other comprehensive income
|
2,445,029 | 2,278,788 | ||||||
Retained
earnings
|
15,789,718 | 12,400,067 | ||||||
Total
China Auto Logistics Inc. shareholders’ equity
|
31,526,377 | 27,970,485 | ||||||
Noncontrolling
interests
|
353,830 | 300,352 | ||||||
Total
equity
|
31,880,207 | 28,270,837 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 72,382,434 | $ | 51,712,084 |
The
accompanying notes form an integral part of these condensed consolidated
financial statements
3
CHINA
AUTO LOGISTICS INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
revenue
|
$ | 54,820,581 | $ | 45,113,772 | $ | 108,969,853 | $ | 90,237,786 | ||||||||
Cost
of revenue
|
51,786,674 | 42,751,514 | 103,199,954 | 85,496,654 | ||||||||||||
Gross
profit
|
3,033,907 | 2,362,258 | 5,769,899 | 4,741,132 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling
and marketing
|
187,127 | 143,318 | 385,527 | 304,147 | ||||||||||||
General
and administrative
|
292,362 | 216,621 | 684,672 | 587,603 | ||||||||||||
Total
operating expenses
|
479,489 | 359,939 | 1,070,199 | 891,750 | ||||||||||||
Income
from operations
|
2,554,418 | 2,002,319 | 4,699,700 | 3,849,382 | ||||||||||||
Other
income (expenses):
|
||||||||||||||||
Interest
income
|
5,582 | 2,398 | 38,167 | 3,761 | ||||||||||||
Interest
expenses
|
(28,191 | ) | (45,836 | ) | (67,742 | ) | (106,417 | ) | ||||||||
Other
income
|
5,928 | - | 5,928 | - | ||||||||||||
Total
other expenses
|
(16,681 | ) | (43,438 | ) | (23,647 | ) | (102,656 | ) | ||||||||
Income
before income taxes
|
2,537,737 | 1,958,881 | 4,676,053 | 3,746,726 | ||||||||||||
Income
taxes
|
650,734 | 503,202 | 1,235,250 | 998,304 | ||||||||||||
Net
income
|
1,887,003 | 1,455,679 | 3,440,803 | 2,748,422 | ||||||||||||
Less:
Net income attributable to
|
||||||||||||||||
noncontrolling interests
|
25,798 | 130,452 | 51,152 | 262,012 | ||||||||||||
Net
income attributable to shareholders of China Auto Logistics
Inc.
|
$ | 1,861,205 | $ | 1,325,227 | $ | 3,389,651 | $ | 2,486,410 | ||||||||
Earnings
per share attributable to shareholders of China Auto Logistics
Inc.
|
||||||||||||||||
–
basic and diluted
|
$ | 0.10 | $ | 0.07 | $ | 0.19 | $ | 0.14 | ||||||||
Weighted
average number of common share outstanding
|
||||||||||||||||
–
basic and diluted
|
18,100,000 | 18,100,000 | 18,100,000 | 18,100,000 |
The
accompanying notes form an integral part of these condensed consolidated
financial statements
4
CHINA
AUTO LOGISTICS INC.
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
income
|
$ | 1,887,003 | $ | 1,455,679 | $ | 3,440,803 | $ | 2,748,422 | ||||||||
Other
comprehensive income
|
||||||||||||||||
Foreign
currency translation adjustments
|
160,479 | 13,792 | 168,567 | 9,720 | ||||||||||||
Comprehensive
income
|
2,047,482 | 1,469,471 | 3,609,370 | 2,758,142 | ||||||||||||
Less:
Comprehensive income attributable to
|
||||||||||||||||
noncontrolling
interests
|
27,992 | 131,495 | 53,478 | 292,629 | ||||||||||||
Comprehensive
income attributable to shareholders of China Auto Logistics
Inc.
|
$ | 2,019,490 | $ | 1,337,976 | $ | 3,555,892 | $ | 2,465,513 |
The
accompanying notes form an integral part of these condensed consolidated
financial statements
5
CHINA
AUTO LOGISTICS INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
income
|
$ | 3,440,803 | $ | 2,748,422 | ||||
Adjustments
to reconcile net income to net cash provided by (used for) operating
activities:
|
||||||||
Depreciation
and amortization
|
100,050 | 108,494 | ||||||
Change
of inventory reserve
|
- | (146,257 | ) | |||||
Loss
on disposal of property and equipment
|
2,495 | - | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Restricted
cash
|
1,079,348 | (3,090,431 | ) | |||||
Accounts
receivable – trade
|
(83,322 | ) | (125,957 | ) | ||||
Receivables
related to financing services
|
117,943 | 1,798,546 | ||||||
Inventories
|
(4,044,400 | ) | 243,886 | |||||
Advances
to suppliers
|
(1,311,971 | ) | (3,271,805 | ) | ||||
Prepaid
expenses, other current assets and other assets
|
8,203 | 8,088 | ||||||
Value
added tax refundable
|
(328,895 | ) | 447,755 | |||||
Deferred
tax assets
|
- | 36,564 | ||||||
Accounts
payable
|
- | 922,752 | ||||||
Draft
notes payable
|
(2,929,437 | ) | - | |||||
Accrued
expenses
|
(11,471 | ) | 66,664 | |||||
Customer
deposits
|
6,505,928 | 267,919 | ||||||
Deferred
revenue
|
61,155 | 2,567 | ||||||
Income
tax payable
|
(1,432,829 | ) | (631,404 | ) | ||||
Net
cash provided by (used for) operating activities
|
1,173,600 | (614,197 | ) | |||||
Cash
flows from investing activities
|
||||||||
Proceeds
from disposal of property and equipment
|
18,987 | - | ||||||
Purchase
of property and equipment
|
(213,702 | ) | (4,875 | ) | ||||
Net
cash used for investing activities
|
(194,715 | ) | (4,875 | ) | ||||
Cash
flows from financing activities
|
||||||||
Proceeds
from short-term bank loans
|
- | 1,316,315 | ||||||
Repayments
of short-term bank loans
|
(1,318,247 | ) | (1,316,315 | ) | ||||
Repayments
of lines of credit related to automobile purchases
|
- | (662,194 | ) | |||||
Net
cash flows used for financing activities
|
(1,318,247 | ) | (662,194 | ) | ||||
Effect
of exchange rate change on cash
|
15,539 | 86 | ||||||
Net
decrease in cash and cash equivalents
|
(323,823 | ) | (1,281,180 | ) | ||||
Cash
and cash equivalents at the beginning of period
|
2,255,058 | 1,598,781 | ||||||
Cash
and cash equivalents at the end of period
|
$ | 1,931,235 | $ | 317,601 |
6
CHINA
AUTO LOGISTICS INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)
Six Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Supplemental
disclosure of cash flow information:
|
||||||||
Interest
paid
|
$ | 28,191 | $ | 108,027 | ||||
Income
taxes paid
|
$ | 2,670,329 | $ | 1,585,494 | ||||
Non-cash
activities:
|
||||||||
Increase
of borrowings on lines of credit for loans extended to the Company’s
customers
|
$ | 16,010,892 | $ | 2,355,496 | ||||
Increase
in balance due to shareholders for accrued expenses paid by
shareholder
|
$ | 206,406 | $ | 190,750 | ||||
Increase
of draft notes receivable for customer deposits
|
$ | - | 2,925,870 | |||||
Increase
of draft notes payable for advances to suppliers
|
$ | - | 2,925,146 |
The
accompanying notes form an integral part of these condensed consolidated
financial statements
7
CHINA
AUTO LOGISTICS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Summary
of Significant Accounting Policies
Organization,
Nature of Business and Basis of Presentation
China
Auto Logistics Inc. (the "Company" or "China Auto") operates through its
wholly-owned subsidiary Ever Auspicious International Limited, a Hong Kong
corporation ("HKCo"), and its wholly-owned subsidiary Tianjin Seashore New
District Shisheng Business Trading Group Co. Ltd. ("Shisheng"), a company
established under the laws of the People's Republic of China ("PRC"). The
Company's principal business includes (i) sales of both domestically
manufactured and imported automobiles, (ii) financing services related to
imported automobiles, (iii) automobile information websites and advertising
services, (iv) management services to auto malls and (v) logistics services
related to the automobile importing process and other automobile import value
added services, such as assistance with customs clearance, storage and
nationwide delivery services ("Automobile Import Value Added
Services").
The
accompanying condensed consolidated balance sheet as of December 31, 2009, which
has been derived from the audited consolidated financial statements and the
accompanying unaudited condensed consolidated financial statements, has been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("US GAAP") have been condensed or
omitted pursuant to those rules and regulations and the Company believes that
the disclosures made are adequate to make the information not
misleading.
In the
opinion of management, these condensed consolidated financial statements reflect
all adjustments which are of a normal recurring nature and which are necessary
to present fairly the financial position of China Auto as of June 30, 2010 and
the results of operations for the three-month and six-month periods ended June
30, 2010 and 2009, and the cash flows for the six-month periods ended June 30,
2010 and June 30, 2009. These condensed consolidated financial statements and
related notes should be read in conjunction with the Company's annual report on
Form 10-K for the fiscal year ended December 31, 2009. The results of operations
for the three months and six months ended June 30, 2010 are not necessarily
indicative of the results which may be expected for the entire fiscal
year.
The
preparation of condensed consolidated financial statements in conformity with US
GAAP requires the Company to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Basis
of Consolidation
The
consolidated financial statements include the financial statements of China Auto
and its wholly-owned and majority-owned subsidiaries. All
inter-company transactions and balances have been eliminated in preparation of
the consolidated financial statements.
Currency
Reporting
The
Company's operations in the PRC use the local currency, Renminbi ("RMB"), as
their functional currency, whereas amounts reported in the accompanying
condensed consolidated financial statements and disclosures are stated in U.S.
dollars, the reporting currency of the Company, unless stated otherwise. As
such, the condensed consolidated balance sheets of the Company have been
translated into U.S. dollars at the current rates as of June 30, 2010 and
December 31, 2009 and the condensed consolidated statements of income have been
translated into U.S. dollars at the weighted average rates during the periods
the transactions were recognized.
The
resulting translation gain adjustments are recorded as other comprehensive
income in the condensed consolidated statements of comprehensive income and as a
separate component of equity in the condensed consolidated balance
sheets.
8
Revenue
Recognition
The
Company’s main source of income was generated through (1) sales of automobiles,
(2) service fees for assisting customers in obtaining bank financing for
purchases of automobiles, (3) web-based advertising service fees, including fees
from (a) displaying graphic advertisements on the Company’s websites and (b)
web-based listing services that allow customers to place automobile related
information on the Company’s websites, (4) automobile import value added
services, and (5) auto mall management services. The financing services are
provided to customers for automobiles not sold by the Company. The Company
recognizes revenue when there is persuasive evidence of an arrangement, delivery
has occurred upon shipment or services have been rendered, the seller’s price to
the buyer is fixed or determinable, and collectibility is reasonably
assured.
The
Company recognizes the sales of automobiles upon delivery and acceptance by
customers and where collectibility is reasonably assured.
Service
revenue related to financing services is recognized ratably over the financing
period.
Service
fees for graphic advertisements on the Company’s websites are charged on a fixed
fee basis. The Company recognizes the advertising revenue when the service is
performed over the service term.
The
Company charges a monthly fee for listing services and recognizes the revenue
when services are performed.
The
Company recognizes revenue from automobile import value added services when such
services are performed.
Revenue
from auto mall management services is recognized ratably over the service
period.
Value
Added Taxes represent amounts collected on behalf of specific regulatory
agencies that require remittance by a specified date. These amounts are
collected at the time of sales and are detailed on invoices provided to
customers. The Company accounts for Value Added Taxes on a net basis. The
Company records and pays business taxes based on a percentage of the net service
revenues and reports the service revenue net of the business taxes and other
sales related taxes.
Receivables
Related to Financing Services
The
Company records receivables related to financing services when cash is loaned to
customers to finance their purchases of automobiles. Upon repayment by
customers, the Company records the amounts as reductions of receivables related
to financing services. Receivables related to financing services represent the
aggregate outstanding balance of loans from customers related to their purchases
of automobiles and are considered receivables held for investment. The Company
charges a fee for providing loan services and such fees are prepaid by
customers. The Company amortizes these fees over the receivable term, which is
typically 90 days, using the straight-line method. The Company records such
amortized amounts as financing fee income and the unamortized amount is
classified as deferred revenue on the Company’s consolidated balance
sheets.
The
Company evaluates the collectibility of outstanding receivables at the end of
each of the reporting periods and makes estimates for potential credit losses.
The Company has not experienced any losses on its accounts receivable
historically and accordingly did not record any allowance of credit losses as of
June 30, 2010 and December 31, 2009.
Basic
and Diluted Earnings Per Share
Basic
earnings per common share is computed by dividing net earnings available to
common stockholders by the weighted average number of common shares
outstanding. Diluted earnings per common share is computed similarly
to basic earnings per common share, except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. As of June 30, 2010 and 2009, the Company did
not have any common stock equivalents, therefore, the basic earnings per share
is the same as the diluted earnings per share.
Reclassifications
Certain
prior period amounts included in selling and marketing expenses and general and
administrative expenses in condensed consolidated statements of income have been
reclassified to cost of revenue, and certain prior period amounts of investing
activities and financing activities in condensed consolidated statements of cash
flow have been reclassified to operating activities to conform to the current
period presentation.
9
New
Accounting Pronouncements Not Yet Adopted
In
September 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13
“Revenue Recognition (Topic 605): Multiple Deliverable Revenue Element
Arrangements – a consensus of the FASB Emerging Issues Task Force” (“ASU
2009-13”). The new guidance states that if vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined,
companies will be required to develop a best estimate of the selling price to
separate deliverables and allocate arrangement consideration using the relative
selling price method. ASU 2009-13 will be applied prospectively and will become
effective during the first quarter of 2011. Early adoption is allowed. The
Company does not expect the adoption of this guidance to have a significant
effect on its consolidated financial position or results of
operations.
(2) Property
and Equipment
A summary
of property and equipment is as follows:
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Computer
|
$ | 211,604 | $ | 210,448 | ||||
Office
equipment, furniture and fixtures
|
169,638 | 125,676 | ||||||
Automobiles
|
1,131,975 | 1,029,631 | ||||||
1,513,217 | 1,365,755 | |||||||
Less:
Accumulated depreciation
|
929,890 | 877,822 | ||||||
$ | 583,327 | $ | 487,933 |
Depreciation
and amortization expense for property and equipment amounted to approximately
$52,126 and $53,195 for the three months ended June 30, 2010 and 2009,
respectively, and $100,050 and $108,494 for the six months ended June 30, 2010
and 2009, respectively.
(3) Lines
of Credit Related to Financing Services
The
Company provides financing services to its customers using the Company’s bank
facility lines of credit. The Company earns a service fee for drawing its
facility lines related to its customers’ purchases of automobiles and payment of
import taxes. Customers bear all the interest and fees charged by the banks and
prepay those fees upon the execution of their service contracts with the
Company. Customers are also required to make a deposit in the range of 15% to
30% of the purchase price of the automobiles. The banks take custody of the
automobiles until the borrowings are fully repaid.
China
Merchants Bank
In June
2010, the Company entered into a facility line of credit agreement with China
Merchants Bank. Under the terms of the agreement, the Company could borrow a
maximum amount of $11,044,191 (RMB75,000,000) as of June 30, 2010. As of June
30, 2010, the Company had outstanding balances of $3,914,848. The facility line
of credit matures in June 2011 and is guaranteed by a director and a non-related
entity.
In May
2009, the Company entered into a facility line of credit agreement with China
Merchants Bank. Under the terms of the agreement, the Company could borrow a
maximum amount of $13,180,633 (RMB 90,000,000) as of December 31, 2009. As of
December 31, 2009, the Company had outstanding balances of $3,739,100. This
facility line of credit matured in May 2010 and was guaranteed by a director and
a non-related entity.
Agricultural
Bank of China
In
January 2010, the Company entered into a new facility line of credit agreement
with Agricultural Bank of China to facilitate its financing services. Under the
terms of the agreement, the Company could borrow a maximum amount of $16,934,427
(RMB 115,000,000) as of June 30, 2010. The Company had an outstanding balance of
$14,290,368 as of June 30, 2010. This facility line of credit is guaranteed by
three non-related entities.
10
In
January and February 2009, the Company entered into two facility lines of credit
with Agricultural Bank of China to facilitate its financing service business.
The Company had an outstanding balance of $99,635 as of December 31, 2009. These
facility lines of credit expired in December 2009 and were guaranteed by
non-related entities.
PuDong
Development Bank
In June
2010, the Company entered into a facility line of credit agreement with PuDong
Development Bank. Under the terms of the agreement, the Company could borrow a
maximum amount of $14,725,589 (RMB100,000,000) as of June 30, 2010. As of June
30, 2010, the Company had outstanding balances of $1,049,803. The facility line
of credit matures in June 2011 and is guaranteed by a director and a non-related
entity.
In June
2009, the Company entered into a facility line of credit agreement with PuDong
Development Bank related to its financing services. Under the terms of the
agreement, the Company could borrow a maximum amount of $8,787,089 (RMB
60,000,000) as of December 31, 2009. As of December 31, 2009, the Company had
outstanding balances of $3,928,246. This facility line of credit expired in May
2010 and was guaranteed by a non-related entity.
ZheJiang
Commercial Bank
In April
2010, the Company entered into a facility line of credit agreement with ZheJiang
Commercial Bank. Under the terms of the agreement, the Company could borrow a
maximum amount of $7,362,794 (RMB50,000,000) as of June 30, 2010. As of June 30,
2010, the Company had outstanding balances of $4,610,796. The facility line of
credit matures in June 2012
and is guaranteed by two directors and two non-related entities.
(4) Short-term
Bank Loans
Short-term
bank loans as of June 30, 2010 and December 31, 2009 consist of the
following:
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Loan
from Agricultural Bank of China, with interest rate of 5.841% guaranteed
by non-related entities, and matures in November 2010
|
$ | 1,325,303 | $ | 1,318,063 | ||||
Loan
from Agricultural Bank of China, with interest rate of 5.841% guaranteed
by non-related entities, and matures in November 2010
|
589,024 | 585,807 | ||||||
Loan
from Agricultural Bank of China, with interest rate of 5.346% guaranteed
by non-related entities, and matured in March 2010
|
- | 1,318,063 | ||||||
$ | 1,914,327 | $ | 3,221,933 |
Weighted
average interest rates for these bank loans were 5.841% and 5.663% at June 30,
2010 and December 31, 2009, respectively.
(5) Draft
Notes Payable
The
Company issued certain notes payable to suppliers, which notes are guaranteed by
the Company’s banks. These notes payable were issued as replacements of the
accounts payable. The terms of these draft notes payable vary depending on
negotiations with specific suppliers. Typical terms are in the range of three to
six months. On the maturity dates, the note holders present these notes to the
banks to draw cash based on the note amounts. The Company is subject to a bank
fee of 0.05% on notes payable amounts.
As of
December 31, 2009, the Company had a draft note payable in the amount of
$2,929,030 (RMB 20,000,000). This note was guaranteed by ZheJiang Commercial
Bank and matured in March 2010. The Company was required to maintain $2,929,030
as guaranteed funds, which was classified as restricted cash as of December 31,
2009. As of June 30, 2010, the Company had no outstanding draft notes
payable.
11
The
purpose of this type of arrangement is to provide additional time to the Company
to remit payments while allowing vendors to avoid any credit risk since the
vendors are guaranteed payment by the bank.
(6) Major
Customers and Suppliers
Sales to
the Company’s largest customer accounted for 24% and 33% of the Company’s sales
during the three months ended June 30, 2010
and 2009, respectively, and 28% and 23% of the Company’s sales during the six
months ended June 30, 2010 and 2009, respectively.
No other customers had more than 10% of the Company sales for these
periods.
Purchases
from the Company’s largest supplier during the three months ended June 30, 2010
and purchases from its three largest suppliers during the three months ended
June 30, 2009 accounted for 10% and 57%, respectively, of the Company’s total
purchases. And, during the six months ended June 30, 2010 and 2009, purchases
from the Company's three largest suppliers accounted for 42% and 60%,
respectively, of the Company’s purchases.
(7) Related
Party Balances and Transactions
Cheng
Weihong (the Secretary, Senior Vice President and Chairwoman of Shisheng and
wife of China Auto’s President and Chief Executive Officer, Mr. Tong Shiping)
made non-interest bearing loans to the Company from time to time to meet working
capital needs of the Company. As of June 30, 2010 and December 31, 2009, the
outstanding balances due to Cheng Weihong were $19,441 and $19,391,
respectively.
The
Company’s shareholder, Sino Peace Limited, paid on behalf of the Company accrued
expenses of $120,939 and $134,158 during the three months ended June 30, 2010
and 2009, respectively, and $206,406 and $190,750 during the six months ended
June 30, 2010 and 2009, respectively. As of June 30, 2010 and
December 31, 2009, outstanding balances due to Sino Peace Limited were
$1,188,460 and
$975,920, respectively.
(8) Segment
Information
The
Company has five principal operating segments: (1) sales of automobiles, (2)
financing services, (3) web-based advertising services, (4) automobile import
value added services, and (5) auto mall management services. These operating
segments were determined based on the nature of services offered. Operating
segments are defined as components of an enterprise about which separate
financial information is available and that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Company's Chief Executive Officer and Chief Operating Officer
have been identified as the chief operating decision makers. The Company's chief
operating decision makers direct the allocation of resources to operating
segments based on the profitability and cash flows of each respective
segment.
The
Company evaluates performance based on several factors, including net revenue,
cost of revenue, operating expenses, and income from operations. The following
tables show the operations of the Company's operating segments:
12
Three Months Ended
June 30, 2010
|
Sales of
Automobiles
|
Financing
Services
|
Web-based
Advertising
Services
|
Automobile
Import
Value
Added
Services
|
Auto Mall
Management
Services
|
Corporate
|
Total
|
|||||||||||||||||||||
Net
revenue
|
$ | 52,782,164 | $ | 460,468 | $ | 1,167,519 | $ | 159,644 | $ | 250,786 | $ | - | $ | 54,820,581 | ||||||||||||||
Cost
of revenue
|
51,723,982 | 5,144 | 28,489 | 7,560 | 21,499 | - | 51,786,674 | |||||||||||||||||||||
Operating
expenses
|
||||||||||||||||||||||||||||
Selling
and marketing
|
60,426 | 39,228 | 60,178 | 7,541 | 19,754 | - | 187,127 | |||||||||||||||||||||
General
and administrative
|
54,214 | 45,214 | 16,403 | 7,582 | 22,768 | 146,181 | 292,362 | |||||||||||||||||||||
Total
operating expenses
|
114,640 | 84,442 | 76,581 | 15,123 | 42,522 | 146,181 | 479,489 | |||||||||||||||||||||
Income
(loss) from operations
|
$ | 943,542 | $ | 370,882 | $ | 1,062,449 | $ | 136,961 | $ | 186,765 | $ | (146,181 | ) | $ | 2,554,418 |
Three Months Ended
June 30, 2009
|
Sales of
Automobiles
|
Financing
Services
|
Web-based
Advertising
Services
|
Automobile
Import
Value
Added
Services
|
Auto Mall
Management
Services
|
Corporate
|
Total
|
|||||||||||||||||||||
Net
revenue
|
$ | 43,868,870 | $ | 361,786 | $ | 712,168 | $ | 170,948 | $ | - | $ | - | $ | 45,113,772 | ||||||||||||||
Cost
of revenue
|
42,720,915 | - | 28,222 | 2,377 | - | - | 42,751,514 | |||||||||||||||||||||
Operating
expenses
|
||||||||||||||||||||||||||||
Selling
and marketing
|
71,046 | 28,629 | 33,004 | 10,639 | - | - | 143,318 | |||||||||||||||||||||
General
and administrative
|
45,768 | 17,518 | 13,466 | 6,977 | - | 132,892 | 216,621 | |||||||||||||||||||||
Total
operating expenses
|
116,814 | 46,147 | 46,470 | 17,616 | - | 132,892 | 359,939 | |||||||||||||||||||||
Income
(loss) from operations
|
$ | 1,031,141 | $ | 315,639 | $ | 637,476 | $ | 150,955 | $ | - | $ | (132,892 | ) | $ | 2,002,319 |
Six Months Ended
June 30, 2010
|
Sales of
Automobiles
|
Financing
Services
|
Web-based
Advertising
Services
|
Automobile
Import
Value
Added
Services
|
Auto Mall
Management
Services
|
Corporate
|
Total
|
|||||||||||||||||||||
Net
revenue
|
$ | 105,166,506 | $ | 780,051 | $ | 2,244,850 | $ | 444,338 | $ | 334,108 | $ | - | $ | 108,969,853 | ||||||||||||||
Cost
of revenue
|
103,081,761 | 11,528 | 64,788 | 15,695 | 26,182 | - | 103,199,954 | |||||||||||||||||||||
Operating
expenses
|
||||||||||||||||||||||||||||
Selling
and marketing
|
122,491 | 75,356 | 123,434 | 35,421 | 28,825 | - | 385,527 | |||||||||||||||||||||
General
and administrative
|
143,126 | 105,030 | 29,406 | 26,987 | 37,787 | 342,336 | 684,672 | |||||||||||||||||||||
Total
operating expenses
|
265,617 | 180,386 | 152,840 | 62,408 | 66,612 | 342,336 | 1,070,199 | |||||||||||||||||||||
Income
(loss) from operations
|
$ | 1,819,128 | $ | 588,137 | $ | 2,027,222 | $ | 366,235 | $ | 241,314 | $ | (342,336 | ) | $ | 4,699,700 |
13
Six Months Ended
June 30, 2009
|
Sales of
Automobiles
|
Financing
Services
|
Web-based
Advertising
Services
|
Automobile
Import
Value
Added
Services
|
Auto Mall
Management
Services
|
Corporate
|
Total
|
|||||||||||||||||||||
Net
revenue
|
$ | 87,950,320 | $ | 617,767 | $ | 1,345,418 | $ | 324,281 | $ | - | $ | - | $ | 90,237,786 | ||||||||||||||
Cost
of revenue
|
85,419,727 | 5,226 | 61,709 | 9,992 | - | - | 85,496,654 | |||||||||||||||||||||
Operating
expenses
|
||||||||||||||||||||||||||||
Selling
and marketing
|
159,365 | 50,123 | 78,755 | 15,904 | - | - | 304,147 | |||||||||||||||||||||
General
and administrative
|
123,311 | 34,587 | 29,371 | 11,461 | - | 388,873 | 587,603 | |||||||||||||||||||||
Total
operating expenses
|
282,676 | 84,710 | 108,126 | 27,365 | - | 388,873 | 891,750 | |||||||||||||||||||||
Income
(loss) from operations
|
$ | 2,247,917 | $ | 527,831 | $ | 1,175,583 | $ | 286,924 | $ | - | $ | (388,873 | ) | $ | 3,849,382 |
Following
are total assets by segment:
Total Assets
|
Sales of
Automobiles
|
Financing
Services
|
Web-based
Advertising
Services
|
Automobile
Import
Value
Added
Services
|
Auto Mall
Management
Services
|
Corporate
|
Total
|
|||||||||||||||||||||
As
of June 30, 2010
|
$ | 42,051,159 | $ | 29,103,139 | $ | 635,760 | $ | 381,456 | $ | 83,768 | $ | 127,152 | $ | 72,382,434 | ||||||||||||||
As
of December 31, 2009
|
$ | 36,248,793 | $ | 14,212,513 | $ | 694,877 | $ | 416,926 | $ | - | $ | 138,975 | $ | 51,712,084 |
14
Item
2. Management Discussion and Analysis of Financial Condition and
Results of Operations
Except as
otherwise indicated by the context, references in this Quarterly Report to “we”,
“us”, “our” or the “Company” are to the consolidated businesses of China Auto
Logistics Inc. and its wholly-owned direct and indirect subsidiaries, Ever
Auspicious International Limited and Tianjin Seashore New District Shisheng
Business Trading Group Co. Ltd., except that references to “our common stock” or
“our capital stock” or similar terms refer to the common stock, par value $0.001
per share, of China Auto Logistics Inc., a Nevada corporation (the
“Registrant”). “China” or “PRC” refers to the People’s Republic of
China. References to “RMB” refer to the Chinese Renminbi, the
currency of the primary economic environment in which the Company
operates.
Management's
Discussion and Analysis of Financial Condition and Results of Operations
(“MD&A”) is designed to provide information that is supplemental to, and
should be read together with, the Company’s condensed consolidated financial
statements and the accompanying notes contained in this Quarterly Report.
Information in this Item 2 is intended to assist the reader in obtaining an
understanding of the condensed consolidated financial statements, the changes in
certain key items in those financial statements from quarter to quarter, the
primary factors that accounted for those changes, and any known trends or
uncertainties that the Company is aware of that may have a material effect on
the Company’s future performance, as well as how certain accounting principles
affect the consolidated financial statements. This includes discussion of (i)
Liquidity, (ii) Capital Resources, (iii) Results of Operations, and (iv)
Off-Balance Sheet Arrangements, and any other information that would be
necessary to an understanding of the company’s financial condition, changes in
financial condition and results of operations.
Forward
Looking Statements
This
periodic report contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 with respect to the
financial condition, results of operations, business strategies, operating
efficiencies or synergies, competitive positions, growth opportunities for
existing products, plans and objectives of management. Statements in this
periodic report that are not historical facts are hereby identified as
"forward-looking statements" for the purpose of the safe harbor provided by
Section 21E of the Exchange Act and Section 27A of the Securities Act.
Generally, the words “believes,” “anticipates,” “may,” “will,” “should,”
“expect,” “intend,” “estimate,” “continue” and similar expressions or the
negative thereof or comparable terminology are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties, including the matters set forth in this report or other reports
or documents we file with the SEC from time to time, which could cause actual
results or outcomes to differ materially from those projected.
Prospective
shareholders should understand that several factors govern whether any
forward-looking statements contained herein will be or can be achieved. Any one
of those factors could cause actual results to differ materially from those
projected herein. These forward-looking statements include plans and objectives
of management for future operations, including plans and objectives relating to
the products and the future economic performance of the Company. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions, future business decisions,
and the time and money required to successfully complete development projects,
all of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although we believe that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of those assumptions could prove inaccurate and, therefore, there can be no
assurance that the results contemplated in any of the forward-looking statements
contained herein will be realized. Based on actual experience and business
development, the Company may alter its marketing, capital expenditure plans or
other budgets, which may in turn affect the Company’s results of operations. In
light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of any such statement should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved. Undue reliance should not
be placed on these forward-looking statements, which speak only as of the date
hereof. We undertake no obligation to update these forward-looking
statements.
The
following discussion of our financial condition and results of operations is
based upon and should be read in conjunction with our condensed
consolidated financial statements and their related notes included in this
Quarterly Report and our Annual Report on Form 10-K as filed with the SEC for
the year ended December 31, 2009.
15
BUSINESS
OVERVIEW
Prior
Operations of China Auto Logistics Inc.
China
Auto Logistics Inc., formerly Fresh Ideas Media, Inc., was incorporated in the
State of Nevada on February 22, 2005. Fresh Ideas Media, Inc. was engaged in the
advertising and consulting business. In February 2005, Fresh Ideas Media, Inc.
formed a wholly-owned subsidiary, Community Alliance, Inc. (“Community
Alliance”), an entity which markets sub-licenses for take-home school folders.
Fresh Ideas Media, Inc. had only commenced limited operations and had not yet
generated significant revenues, and was therefore considered a development stage
company.
The
Exchange and the Spin-Off
On
November 10, 2008, Fresh Ideas Media, Inc. entered into an Exchange Agreement
(the “Exchange”) with Ever Auspicious International Limited, a Hong Kong
corporation (“HKCo”), whereby Fresh Ideas Media, Inc. acquired all of the issued
and outstanding securities of HKCo in exchange for the issuance by Fresh Ideas
Media, Inc. of 11,700,000 newly-issued shares of our common stock. The closing
of the Exchange (the “Closing”) occurred on the same day, immediately following
the cancellation of an aggregate of 1,135,000 shares of Fresh Ideas Media,
Inc.’s common stock held by Phillip E. Ray and Ruth Daily, Fresh Ideas Media,
Inc.’s principal stockholders immediately prior to the Closing. Prior
to the Exchange, Phillip E. Ray and Ruth Daily owned approximately 23.89% and
16.58%, respectively, of the issued and outstanding common stock of Fresh Ideas
Media, Inc. As of the Closing, HKCo beneficially owned
approximately 64.64% of the voting capital stock of Fresh Ideas Media,
Inc. As a result of the Exchange, HKCo became a wholly owned
subsidiary of Fresh Ideas Media, Inc. and Fresh Ideas Media, Inc.’s primary
business operations are those of HKCo. Shortly after the Closing,
Fresh Ideas Media, Inc. changed its name to China Auto Logistics
Inc.
In
connection with the consummation of the Exchange, Fresh Ideas Media, Inc. agreed
to complete the spin-off of Community Alliance through a dividend of all of the
issued and outstanding capital stock of Community Alliance to holders of Fresh
Ideas Media, Inc.’s common stock as of September 9, 2008. The spin-off was
approved by the Board of Directors of Fresh Ideas Media, Inc. on September 9,
2008. As a result of the spin-off, the business and operations of HKCo are the
sole business and operations of Fresh Ideas Media, Inc.
HKCo was
incorporated in Hong Kong on October 17, 2007. Prior to December 25,
2007, HKCo had minimal assets and no operations. On December 25, 2007, Tianjin
Seashore New District Shisheng Business Trading Group Co. Ltd. (“Shisheng”), a
company established under the laws of the People’s Republic of China, became a
wholly-owned foreign enterprise of HKCo. This arrangement was
approved by the relevant ministries of the PRC government.
Upon the
completion of the above-mentioned transactions on December 25, 2007 and November
10, 2008, the Company owned 100% of HKCo which owned 100% of Shisheng, the
operating entity of HKCo. For financial reporting purposes, these
transactions were classified as a recapitalization of Shisheng and the
historical financial statements of Shisheng were reported as the Company’s
historical financial statements.
Shisheng’s
businesses include sales of both domestically manufactured automobiles and
imported automobiles, providing financing services related to imported
automobiles, and providing logistic services relating to the automobile
importing process and other automobile import value added services such as
assistance with customs clearance, storage and nationwide delivery services.
Shisheng holds 98% equity ownership in Hengjia Port Logistics Corp. (“Hengjia”),
Ganghui Information Technology Corp. (“Ganghui”) and Zhengji International
Trading Corp. (“Zhengji”). Hengjia’s business is to provide web-based
advertising services and automobile import value added services to wholesalers
and distributors in the imported vehicle trading industry. Ganghui’s business is
to provide web-based, real-time information on imported automobiles. Zhengji’s
is engaged in sales of both domestically manufactured automobiles and imported
automobiles.
Listing on
NASDAQ
Effective
January 8, 2010, the Registrant commenced trading of its shares of common
stock on the NASDAQ Global Market under the trading symbol CALI.
16
Current
Business of the Company
The
Company, through its website www.at188.com,
engages in automobile sales, customs clearance services, storage services and
national transportation services. The Company is the only one-stop
automobile service provider in Tianjin which also provides dealer financing to
its customers. Additionally, the Company’s website www.at160.com, which
covered 15 cities in the beginning of 2010 and currently covers 20 cities,
targets domestically manufactured automobile dealers and traders with an
effective and efficient quoting platform and a user-friendly interface for the
customers to identity the best quotes and packages.
On April
23, 2010, the Company launched its new website www.cali.com.cn to
integrate and meet on a single site the needs of the full spectrum of the PRC’s
dynamic automotive public, including dealers, suppliers, auto purchasers and
drivers of both foreign and domestically manufactured automobiles. On April 21,
2010, the Company entered into a memorandum of understanding with Chongqing
Qizhong Technology Development Corporation to acquire www.goodcar.cn and
the related business. Goodcar is in the business of providing consumers with
information and discounted services relating to automobiles, including
discounted gas, parking, car washes, body-shop repair and car maintenance. A
definitive acquisition agreement has not yet been finalized for this
transaction.
The
Company believes the integration of these wide ranging sites and services in a
single portal serving a broad spectrum of China's auto living public, as well as
the addition of new web-based auto-related services, for businesses and
consumers, will drive future growth.
Critical
Accounting Policies, Estimates and Assumptions
Our discussion and analysis of our
financial condition and results of operations are based upon our condensed
consolidated financial statements. These financial statements are
prepared in accordance with generally accepted accounting principles in the
United States (“US GAAP”), which requires us to make estimates and assumptions
that affect the reported amounts of our assets and liabilities and revenues and
expenses, to disclose contingent assets and liabilities on the date of the
financial statements, and to disclose the reported amounts of revenues and
expenses incurred during the financial reporting periods. The most significant
estimates and assumptions include revenues recognition, valuation of inventories
and provisions for income taxes. We continue to evaluate these estimates and
assumptions that we believe to be reasonable under the circumstances. We rely on
these evaluations as the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Since
the use of estimates is an integral component of the financial reporting
process, actual results could differ from those estimates. Some of our
accounting policies require higher degrees of judgment than others in their
application. We believe critical accounting policies as disclosed in this Form
10-Q reflect the more significant judgments and estimates used in preparation of
our financial statements. We believe there have been no material changes to our
critical accounting policies and estimates.
The
following critical accounting policies rely upon assumptions and estimates and
were used in the preparation of our condensed consolidated financial
statements:
Revenue
Recognition
The
Company’s main source of income was generated through (1) sales of automobiles,
(2) service fees for assisting customers in obtaining bank financing on
purchases of automobiles, (3) web-based advertising service fees, including fees
from (a) displaying graphic advertisements on the Company’s websites and (b)
web-based listing services that allow customers to place automobile related
information on the Company’s websites, (4) automobile import value added
services, and (5) auto mall management services. The financing services are
provided to customers on automobiles not sold by the Company. The Company
recognizes revenue when there is persuasive evidence of an arrangement, delivery
has occurred upon shipment or services have been rendered, the seller’s
price to the buyer is fixed or determinable, and collectibility is reasonably
assured.
The
Company recognizes the sales of automobiles upon delivery and acceptance by the
customers and where collectibility is reasonably assured.
Service
revenue related to financing services is recognized ratably over the financing
period.
Service
fees for graphic advertisements on the Company’s websites are charged on a fixed
fee basis. The Company recognizes the advertising revenue when the service is
performed over the service term.
The
Company charges a monthly fee for listing services and recognizes the revenue
when services are performed.
The
Company recognizes revenue from automobile import value added services when such
services are performed.
17
Revenue
from auto mall management services is recognized ratably over the service
period.
Value
Added Taxes represent amounts collected on behalf of specific regulatory
agencies that require remittance by a specified date. These amounts are
collected at the time of sales and are detailed on invoices provided to
customers. The Company accounts for Value Added Taxes on a net basis. The
Company records and pays business taxes based on a percentage of the net service
revenues and reports the service revenue net of the business taxes and other
sales related taxes.
Receivables Related to
Financing Services
The
Company records receivables related to Financing Services when cash is loaned to
customers to finance their purchases of automobiles. Upon repayment by
customers, the Company records the amounts as reductions of receivables related
to Financing Services. Receivables related to Financing Services represent the
aggregate outstanding balance of loans from customers related to their purchases
of automobiles and are considered receivables held for investment. The Company
charges a fee for providing loan services and such fees are prepaid by
customers. The Company amortizes these fees over the receivable term, which is
typically 90 days, using the straight-line method. The Company records such
amortized amounts as financing fee income and the unamortized amount is
classified as deferred revenue on the Company’s consolidated balance
sheets.
The
Company evaluates the collectibility of outstanding receivables at the end of
each of the reporting periods and makes estimates for potential credit losses.
The Company has not experienced any losses on its accounts receivable
historically and accordingly did not record any allowance of credit losses as
for the three months ended June 30, 2010 and 2009 and as of balance sheet
dates.
Inventories
Inventory
is stated at the lower of cost (using the first-in-first-out method) or market.
We continually evaluate the composition of our inventory, assessing slow-moving
and ongoing products. Our inventory is comprised of the purchase cost of
automobiles, which declines in value over time. We continuously evaluate our
inventory to determine the reserve amount for slow-moving
inventory.
Currency
Reporting
Amounts
reported are stated in U.S. Dollars, unless stated otherwise. Our functional
currency is Renminbi (“RMB”). Foreign currency transactions (outside the PRC)
are translated into RMB according to the prevailing exchange rate at the
transaction dates. Assets and liabilities denominated in foreign currencies at
the balance sheet dates are translated into RMB at period-end exchange rates.
For the purpose of preparing the consolidated financial statements, the
consolidated balance sheets of our Company have been translated into U.S.
dollars at the current rates as of the end of the respective periods and the
consolidated statements of income have been translated into U.S. dollars at the
weighted average rates during the periods the transactions were recognized. The
resulting translation gain adjustments are recorded as other comprehensive
income in the condensed consolidated statements of comprehensive income and as a
separate component of equity in the condensed consolidated balance
sheets.
Income
taxes
Deferred
income taxes are recognized for temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements,
net operating loss carry forwards and credits by applying enacted statutory tax
rates applicable to future years. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
Current income taxes are provided for in accordance with the laws of the
relevant taxing authorities.
The FASB
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The Company did not incur any interest or penalties
related to potential underpaid income tax expenses.
18
New Accounting
Pronouncements Not Yet Adopted
In
September 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13
“Revenue Recognition (Topic 605): Multiple Deliverable Revenue Element
Arrangements – a consensus of the FASB Emerging Issues Task Force” (“ASU
2009-13”). The new guidance states that if vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined,
companies will be required to develop a best estimate of the selling price to
separate deliverables and allocate arrangement consideration using the relative
selling price method. ASU 2009-13 will be applied prospectively and will become
effective during the first quarter of 2011. Early adoption is allowed. The
Company does not expect the adoption of this guidance to have a significant
effect on its consolidated financial position or results of
operations.
The following is management’s
discussion and analysis of certain significant factors which have affected our
financial position and operating results during the periods included in the
accompanying condensed consolidated financial statements, as well as information
relating to the plans of our current management and should be read in
conjunction with the accompanying condensed financial statements and their
related notes included in this Quarterly Report on Form 10-Q.
RESULTS
OF OPERATIONS
Results
of Operations for the Three Months Ended June 30, 2010 Compared to the Three
Months Ended June 30, 2009
The
following table sets forth certain information relating to our results of
operations, and our condensed consolidated statements of operations as a
percentage of net revenue, for the periods indicated:
Three
Months
Ended June
30, 2010
|
% of net
revenue
|
Three
Months
Ended June
30, 2009
|
% of net
revenue
|
Change in % |
||||||||||||||||
Net
revenue
|
$ | 54,820,581 | 100.00 | % | $ | 45,113,772 | 100.00 | % | 21.52 | % | ||||||||||
Cost
of revenue
|
51,786,674 | 94.47 | % | 42,751,514 | 94.76 | % | 21.13 | % | ||||||||||||
Gross
profit
|
3,033,907 | 5.53 | % | 2,362,258 | 5.24 | % | 28.43 | % | ||||||||||||
Operating
expenses
|
479,489 | 0.87 | % | 359,939 | 0.80 | % | 33.21 | % | ||||||||||||
Income
from operations
|
2,554,418 | 4.66 | % | 2,002,319 | 4.44 | % | 27.57 | % | ||||||||||||
Other
expenses
|
16,681 | 0.03 | % | 43,438 | 0.10 | % | (61.60 | )% | ||||||||||||
Income
before income taxes and noncontrolling interests
|
2,537,737 | 4.63 | % | 1,958,881 | 4.34 | % | 29.55 | % | ||||||||||||
Net
income
|
1,887,003 | 3.44 | % | 1,455,679 | 3.23 | % | 29.63 | % | ||||||||||||
Net
income attributable to shareholders of China Auto Logistics
Inc.
|
$ | 1,861,205 | 3.40 | % | $ | 1,325,227 | 2.94 | % | 40.44 | % |
For the
three months ended June 30, 2010, our net revenue increased 21.52% to
$54,820,581, from $45,113,772 for the same period in 2009, and our cost of
revenue increased 21.13% to $51,786,674 from $42,751,514 for the
same period in 2009. Gross profit margin increased 29 basis points from 5.24%
for the three months ended June 30, 2009 to 5.53% for the same period in 2010.
As compared to the same period in 2009, our gross profit, income from operations
and net income for the three months ended June 30, 2010 increased 28.43% to
$3,033,907, 27.57% to $2,554,418 and 29.63% to
$1,887,003, respectively, primarily due to an increase in our web-based
advertising service revenue and auto mall management service revenue.
Net
income attributable to shareholders of China Auto Logistics Inc. increased
40.44% from $1,325,227 for the three months
ended June 30, 2009 to $1,861,205 for the three months
ended June 30, 2010. The increase was primarily due to an increase in web-based
advertising service revenue and auto mall management service revenue, as
discussed above, and the Company’s increased share of its subsidiaries’ profits
following the increase in Shisheng’s equity ownership of each of Hengjia,
Ganghui and Zhengji to 98% on July 23, 2009. Previously, Shisheng held equity
interests in those companies of 80%, 80% and 86.4%,
respectively.
19
Net
Revenue
The
following table sets forth a summary of our net revenue by category for the
periods indicated, in dollars and as a percentage of total net
revenue:
Three
Months
Ended June
30, 2010
|
% of net
revenue
|
Three
Months
Ended June
30, 2009
|
% of net
revenue
|
Change in
%
|
||||||||||||||||
Net
revenue
|
$ | 54,820,581 | 100.00 | % | $ | 45,113,772 | 100.00 | % | 21.52 | % | ||||||||||
-
Sales of Automobiles
|
52,782,164 | 96.28 | % | 43,868,870 | 97.24 | % | 20.32 | % | ||||||||||||
-
Financing Services
|
460,468 | 0.84 | % | 361,786 | 0.80 | % | 27.28 | % | ||||||||||||
-
Web-based Advertising Services
|
1,167,519 | 2.13 | % | 712,168 | 1.58 | % | 63.94 | % | ||||||||||||
-
Automobile Import Value Added Services
|
159,644 | 0.29 | % | 170,948 | 0.38 | % | (6.61 | )% | ||||||||||||
-
Auto Mall Management Services
|
250,786 | 0.46 | % | - | 0.00 | % | 100.00 | % |
Sales of
Automobiles
Net
revenue from sales of automobiles increased 20.32% to $52,782,164 for the three
months ended June 30, 2010 from $43,868,870 for the same period in 2009. During
the three months ended June 30, 2010 and 2009, the Company sold 681 automobiles
and 522 automobiles, respectively, representing an increase of 30.46% in volume.
The average unit selling price per automobile for the three months ended June
30, 2010 decreased 7.77% to $77,507 from $84,040 for the same period in 2009 due
to the change in sales mix in the quarter. During the three months
ended June 30, 2010, the number of automobiles sold with unit selling price
below $50,000 increased to 26% of total sales of automobiles, representing a 7%
period-on-period increase as compared to that for the three months ended June
30, 2009. However, the Company will continue its focus on the marketing of
higher-end luxury automobiles.
Sales to
the Company’s top three customers, each of which are car dealers, accounted for
32% and 40% of the Company’s sales during the three months ended June 30, 2010
and 2009, respectively. The Company will continue to maintain close working
relationships with its top customers while attempting to reduce the
concentration of revenues among these top customers.
Financing
Services
The Company provides financing services
(“Financing Services”) to its customers using the Company’s bank facility lines
of credit. The Company earns a service fee for drawing its facility lines
related to its customers’ purchases of automobiles and payment of import taxes.
Customers bear all the interest and fees charged by the banks and prepay those
fees upon the execution of their service contracts with the
Company.
Net
revenue from Financing Services for the three months ended June 30, 2010
increased 27.28% to $460,468 from $361,786 for the same period in 2009. The
Company has expanded its aggregate credit lines by approximately $14 million to
$50 million as of June 30, 2010, from approximately $36 million as of December
31, 2009. As a result of the increase in credit lines during the period, revenue
from financing services increased.
Our
revenue growth from financing services is heavily dependent on overall industry
growth and economic market conditions in the PRC. A factor that affects our
revenue from financing services is our relationship with major commercial banks,
with whom we have established good credit. Any decrease of credit
limits or expiration of credit lines or other bank facilities may temporarily
reduce our capacity to provide financing services or affect our purchasing
power. However, we have not experienced any difficulties in accessing
credit lines and loan facilities with banks in the past. Therefore, we do not
foresee any difficulty at this time in obtaining credit lines and loan
facilities from our banks.
We
provide Financing Services to our customers with our lines of credit with major
commercial banks in the PRC, including the Agriculture Bank of China, China
Merchants Bank, PuDong Development Bank and ZheJiang Commercial Bank. We
continue to strengthen our relationship with these banks and aim to negotiate
with additional banks for higher lines of credit at more favorable terms. Based
on the Company’s business relationships with certain financial institutions, we
are able to obtain financing on an “as-needed” basis and we are in negotiations
for a number of new credit lines. As of June 30, 2010, the Company had aggregate
credit lines of $50,067,001 (RMB340,000,000). Although all of our lines of
credit have maturities of less than two years and may not be renewed on the same
terms, if at all, we do not expect that the expiration of our lines of credit
with any one of our existing banks will have a material adverse effect on our
ability to provide Financing Services. However, if the automobile market in the
PRC, and in particular the market for imported automobiles, slows down in the
future, our revenue from Financing Services would be materially and adversely
affected by a decreased number of transactions.
20
We view
the business of Financing Services and Automobile Import Value Added Services,
discussed below, as closely related, and both are heavily dependent upon market
conditions. In particular, a tightening of the credit market in the PRC, to the
extent it impacts our ability to obtain lines of credit from our banks or other
additional financing, will also limit our ability to provide Financing Services
to our customers.
Web-based Advertising
Services
Revenue
generated from advertisements on our websites (“Web-based Advertising Services”)
has experienced continuous growth in recent periods as a result of the expanded
coverage and increased popularity of our websites. Our revenue from Web-based
Advertising Services increased 63.94%, from $712,168 for the three months ended
June 30, 2009 to $1,167,519 for the three months ended June 30,
2010.
Currently,
our websites have over 190 paid subscribers and over 1,200 advertisers, and
cover 20 cities in the PRC. Our www.at188.com and www.at160.com are two
of the most popular websites in China dealing with imported and
domestic cars. Currently, our revenue from our websites is mainly generated from
advertisements. We aim to generate 50% of revenues from our websites
subscription fees and advertisements, and 50% from Automobile Import Value Added
Services sold over the Internet. We are rapidly developing our
websites and expect continuous growth in revenue from our websites as a result
of expanding our reach from 15 cities at the beginning of 2010 to currently 20
cities throughout the PRC, representing increased coverage in additional 8
cities as compared to its presence in 12 cities for the three months ended June
30, 2009. The Company aims to reach 70% of the auto buying public in the PRC in
future years.
Automobile Import Value
Added Services
Revenue
generated through our customs clearance, storage and nationwide delivery
services (“Automobile Import Value Added Services”) decreased 6.61%, from
$170,948 for the three months ended June 30, 2009 to $159,644 for the three
months ended June 30, 2010 due to fewer transactions in the three months ended
June 30, 2010.
Auto Mall Management
Services
Pursuant
to a services agreement entered into by and between the Company and Tianjin
Prominent Hero International Logistics Co., Ltd., dated as of March 1, 2010, the
Company agreed to provide services to manage Tianjin FTZ International
Automobile Exhibition and Sales Center (“Auto Mall Management Services”) for a
one-year period for an aggregate consideration of $1,000,000. The Company
started to provide such services in March 1, 2010 and the related services fee
is recognized ratably over the service period. The related revenue
earned in the period is included under our Auto Mall Management Services
segment.
Our Auto
Mall Management Services revenue for the three months ended June 30, 2010 was
$250,786 and there was no such revenue in the same period of 2009.
Cost of
Revenue
Three
Months
Ended
June 30,
2010
|
% of net
revenue
|
Three
Months
Ended
June 30,
2009
|
% of net
revenue
|
Change in
%
|
||||||||||||||||
Net
revenue
|
$ | 54,820,581 | 100.00 | % | $ | 45,113,772 | 100.00 | % | 21.52 | % | ||||||||||
Cost
of revenue
|
51,786,674 | 94.47 | % | 42,751,514 | 94.76 | % | 21.13 | % |
Our cost
of revenue primarily consisted of the cost of automobiles imported from foreign
automobile manufacturers and certain direct labor and overhead costs related to
our Financing Services, Web-based Advertising Services, Automobile Import Value
Added Services and Auto Mall Management Services. Our cost of revenue increased
21.13%, from $42,751,514 for the three months ended June 30, 2009 to $51,786,674
for the three months ended June 30, 2010. The increase was primarily due to an
increase in the purchase price of imported automobiles and the number of
automobiles sold in the period, which is consistent with our net revenue growth
rate.
21
As our
cost of revenue consists primarily of the purchase price of imported
automobiles, we have limited control over such costs. The prices of imported
automobiles are determined solely by suppliers and are dependent upon market
conditions. We will continue to work on obtaining more favorable terms and
discounts by strengthening our relationship with suppliers and placing more
batch orders.
Operating
Expenses
Three
Months
Ended June
30, 2010
|
% of total
|
Three
Months
Ended June
30, 2009
|
% of total
|
Change in
%
|
||||||||||||||||
Operating
Expenses
|
||||||||||||||||||||
-
Selling and Marketing
|
$ | 187,127 | 39.03 | % | $ | 143,318 | 39.82 | % | 30.57 | % | ||||||||||
-
General and Administrative
|
292,362 | 60.97 | % | 216,621 | 60.18 | % | 34.96 | % | ||||||||||||
Total
|
$ | 479,489 | 100.00 | % | $ | 359,939 | 100.00 | % | 33.21 | % |
During
the three months ended June 30, 2010, our total operating expenses increased
33.21% to $479,487 from $359,939 for the same period in 2009. This increase was
a combination of a 30.57% increase in selling and marketing expenses to $187,127
for the three months ended June 30, 2010 from $143,318 for the same period in
2009, and a 34.96% increase in general and administrative expenses (“G&A”)
to $292,362 for the three months ended June 30, 2010 from $216,621 for the same
period in 2009.
The
following table sets forth a breakdown of the primary selling and marketing
expenses of the Company:
Three Months Ended June 30,
|
Change in
%
|
|||||||||||
2010
|
2009
|
|
||||||||||
Primary
selling and marketing expenses
|
||||||||||||
-
Payroll
|
$ | 43,184 | $ | 26,406 | 63.54 | % | ||||||
-
Office supplies
|
22,971 | 13,572 | 69.25 | % | ||||||||
-
Entertainment
|
8,462 | 6,070 | 39.41 | % | ||||||||
-
Rent
|
44,723 | 42,017 | 6.44 | % |
Payroll expenses increased 63.54% to
$43,184 for the three months ended June 30, 2010 from $26,406 for the same
period in 2009 due to the cost of additional staff for the new segment of Auto
Mall Management Services and the rising costs of remuneration packages related
to recruiting and maintaining skilled employees. Office supplies were higher in
the three months ended June 30, 2010 as a result of the Company’s acquisition of
certain low value office equipment.
The
following table sets forth a breakdown of the primary G&A expenses of the
Company:
Three Months Ended June 30,
|
Change in
%
|
|||||||||||
2010
|
2009
|
|
||||||||||
Primary
general and administrative expenses
|
||||||||||||
-
Payroll
|
$ | 84,879 | $ | 42,409 | 100.14 | % | ||||||
-
Entertainment
|
18,469 | 16,581 | 11.39 | % | ||||||||
-
Depreciation
|
50,997 | 44,603 | 14.34 | % | ||||||||
-
Legal and professional fees
|
73,435 | 49,202 | 49.25 | % |
Payroll
expenses increased 100.14% to $84,879 for the three months ended June 30, 2010
from $42,409 for the same period in 2009 primarily due to the rising costs of
offering competitive remuneration packages to maintain qualified management
staff. Entertainment expenses increased by 11.39% from the same period in 2009,
primarily due to increase of company events in the three months ended June 30,
2010. Legal and professional fees increased 49.25% for the three months ended
June 30, 2010 to $73,435 from $49,202 in the same period of 2009, related to the
increased costs of handling U.S. reporting matters.
22
Depreciation and
Amortization
In order
to meet the needs of the expansion of its operations, the Company steadily
purchased office equipment and updated computer and server hardware and
software. As a result of certain office equipment and automobiles being fully
depreciated, depreciation and amortization decreased 2.01% for the three months
ended June 30, 2010 to $52,126 from $53,195 in the same period of 2009. As of
June 30, 2010, the Company does not own any real property.
We
depreciate our property and equipment under the straight-line method over the
economic useful lives of the assets.
Income from
Operations
Income
from operations increased 27.57% for the three months ended June 30, 2010 to
$2,554,418 from $2,002,319 in the same period of 2009, which is primarily
attributable to growth in revenue and gross profit, as discussed
above.
Gross
profits increased 28.43% for the three months ended June 30, 2010 to $3,033,907
from $2,362,258 in the same period of 2009, due to an increase in net revenues
of 21.52% from $45,113,772 to $54,820,581.
In the
future, in our automobiles sales business, we aim to improve profitability. We
expect to strengthen relationships with our major suppliers to obtain more
favorable terms such as freight exemptions and discounts. We also expect
increased profit from continued growth in our website services and auto-related
services business.
Other Income and
Expenses
Other
income and expenses consist primarily of interest income and interest expenses.
The Company’s interest income is generated by interest earned through bank
deposits while interest expenses are amounts paid by the Company with respect to
its borrowings from banks.
Results
of Operations for the Six Months Ended June 30, 2010 Compared to the Six Months
Ended June 30, 2009
The
following table sets forth certain information relating to our results of
operations, and our condensed consolidated statements of operations as a
percentage of net revenue, for the periods indicated:
Six Months
Ended
June 30,
2010
|
% of net
revenue
|
Six Months
Ended
June 30,
2009
|
% of net
revenue
|
Change in
%
|
||||||||||||||||
Net
revenue
|
$ | 108,969,853 | 100.00 | % | $ | 90,237,786 | 100.00 | % | 20.76 | % | ||||||||||
Cost
of revenue
|
103,199,954 | 94.71 | % | 85,496,654 | 94.75 | % | 20.71 | % | ||||||||||||
Gross
profit
|
5,769,899 | 5.29 | % | 4,741,132 | 5.25 | % | 21.70 | % | ||||||||||||
Operating
expenses
|
1,070,199 | 0.98 | % | 891,750 | 0.99 | % | 20.01 | % | ||||||||||||
Income
from operations
|
4,699,700 | 4.31 | % | 3,849,382 | 4.26 | % | 22.09 | % | ||||||||||||
Other
expenses
|
23,647 | 0.02 | % | 102,656 | 0.11 | % | (76.96 | )% | ||||||||||||
Income
before income taxes and noncontrolling interests
|
4,676,053 | 4.29 | % | 3,746,726 | 4.15 | % | 24.80 | % | ||||||||||||
Net
income
|
3,440,803 | 3.16 | % | 2,748,422 | 3.05 | % | 25.19 | % | ||||||||||||
Net
income attributable to shareholders of China Auto Logistics
Inc.
|
$ | 3,389,651 | 3.11 | % | $ | 2,486,410 | 2.76 | % | 36.33 | % |
For the
six months ended June 30, 2010, our net revenue increased 20.76% to
$108,969,853, from $90,237,786 for the same period in 2009, and our cost of
revenue increased 20.71% to $103,199,954 from $85,496,654 for the same period in
2009. Gross profit margin increased 4 basis points from 5.25% for the six months
ended June 30, 2009 to 5.29% for the same period in 2010. As compared to the
same period in 2009, our gross profit, income from operations and net income for
the six months ended June 30, 2010 increased 21.70% to $5,769,899, 22.09% to
$4,699,700 and 25.19% to $3,440,803, respectively primarily due to an increase
in our web-based advertising service revenue and auto mall management service
revenue.
23
Net
income attributable to shareholders of China Auto Logistics Inc. increased
36.33% from $2,486,410 for the six months ended June 30, 2009 to $3,389,651 for
the six months ended June 30, 2010. The increase was primarily due to an
increase in web-based advertising service revenue and auto mall management
services revenue, as discussed above, and the Company’s increased share of
its subsidiaries’ profit following its further acquisitions of equity holdings
in each of three subsidiaries to 98% on July 23, 2009.
Net
Revenue
The
following table sets forth a summary of our net revenue by category for the
periods indicated, in dollars and as a percentage of total net
revenue:
Six Months
Ended June
30, 2010
|
% of net
revenue
|
Six Months
Ended
June 30,
2009
|
% of net
revenue
|
Change in
%
|
||||||||||||||||
Net
revenue
|
$ | 108,969,853 | 100.00 | % | $ | 90,237,786 | 100.00 | % | 20.76 | % | ||||||||||
-
Sales of Automobiles
|
105,166,506 | 96.51 | % | 87,950,320 | 97.47 | % | 19.57 | % | ||||||||||||
-
Financing Services
|
780,051 | 0.72 | % | 617,767 | 0.68 | % | 26.27 | % | ||||||||||||
-
Web-based Advertising Services
|
2,244,850 | 2.06 | % | 1,345,418 | 1.49 | % | 66.85 | % | ||||||||||||
-
Automobile Import Value Added Services
|
444,338 | 0.41 | % | 324,281 | 0.36 | % | 37.02 | % | ||||||||||||
-
Auto Mall Management Services
|
334,108 | 0.30 | % | - | 0.00 | % | 100.00 | % |
Sales of
Automobiles
Net
revenue from sales of automobiles increased 19.57% to $105,166,506 for the six
months ended June 30, 2010 from $87,950,320 for the same period in 2009. During
the six months ended June 30, 2010 and 2009, the Company sold 1,307 automobiles
and 1,081 automobiles, respectively, representing an increase of 20.91% in
volume. The average unit selling price per automobile for the six months ended
June 30, 2010 decreased 1.10% to $80,464 from $81,360 for the same period in
2009 due to the change in sales mix in the second quarter of 2010. During the
second quarter of 2010, the number of automobiles sold with unit selling price
below $50,000 increased to 26% of total sales of automobiles, representing a 7%
period-on-period increase as compared to that for the same period in 2009.
However, the Company will continue its focus on the marketing of luxury high-end
automobiles.
Sales to the Company’s top three
customers, each of which are car dealers, accounted for 37% and 33% of the
Company’s sales during the six months ended June 30, 2010 and 2009,
respectively. The Company will continue to maintain close working relationships
with its top customers while attempting to reduce the concentration of revenues
among these top customers.
Financing
Services
Net
revenue from Financing Services for the six months ended June 30, 2010 increased
26.27% to $780,051 from $617,767 for the same period in 2009. Our revenue growth
from financing services is heavily dependent on overall industry growth and
economic market conditions in the PRC. The Company has expanded its aggregate
credit lines by approximately $14 million to $50 million as of June 30, 2010,
from approximately $36 million as of December 31, 2009. Revenue from Financing
Services increased as a result of the increase in credit lines during the
period.
Web-based Advertising
Services
Our
revenue from Web-based Advertising Services increased 66.85%, from $1,345,418
for the six months ended June 30, 2009 to $2,244,850 for the six months ended
June 30, 2010. This increase is primarily due to the increased advertisement
services rendered following the expended coverage and increased popularity of
our websites as a result of expanding our reach from 15 cities at the beginning
of 2010 to currently 20 cities throughout the PRC, representing increased
coverage in additional 8 cities as compared to its presence in 12 cities for the
three months ended June 30, 2009.
Automobile Import Value
Added Services
Our
Automobile Import Value Added Services revenue increased 37.02%, from $324,281
for the six months ended June 30, 2009 to $444,338 for the six months ended June
30, 2010. The increase is primarily in line with the increase in sales of
automobiles.
24
Auto Mall Management
Services
Our Auto
Mall Management Services revenue for the six months ended June 30, 2010 was
$334,108, which represented revenue from a service agreement entered into with
Tianjin Prominent Hero International Logistics Co., Ltd. dated March 1, 2010.
There was no such revenue in the same period of 2009.
Cost of
Revenue
Six Months
Ended
June 30,
2010
|
% of net
revenue
|
Six Months
Ended
June 30,
2009
|
% of net
revenue
|
Change in
%
|
||||||||||||||||
Net
revenue
|
$ | 108,969,853 | 100.00 | % | $ | 90,237,786 | 100.00 | % | 20.76 | % | ||||||||||
Cost
of revenue
|
103,199,954 | 94.71 | % | 85,496,654 | 94.75 | % | 20.71 | % |
Our cost
of revenue primarily consisted of the cost of automobiles imported from foreign
automobile manufacturers and certain direct labor and overhead costs related to
our Financing Services, Web-based Advertising Services, Automobile Import Value
Added Services and Auto Mall Management Services. Our cost of revenue increased
20.71%, from $85,496,654 for the six months ended June 30, 2009 to $103,199,954
for the six months ended June 30, 2010. The increase was primarily due to an
increase in the purchase price of imported automobiles and the number of
automobiles sold in the period, which is consistent with our net revenue growth
rate.
Operating
Expenses
Six Months
Ended June
30, 2010
|
% of total
|
Six Months
Ended June
30, 2009
|
% of total
|
Change in
%
|
||||||||||||||||
Operating
Expenses
|
||||||||||||||||||||
-
Selling and Marketing
|
$ | 385,527 | 36.02 | % | $ | 304,147 | 34.11 | % | 26.76 | % | ||||||||||
-
General and Administrative
|
684,672 | 63.98 | % | 587,603 | 65.89 | % | 16.52 | % | ||||||||||||
Total
|
$ | 1,070,199 | 100.00 | % | $ | 891,750 | 100.00 | % | 20.01 | % |
During
the six months ended June 30, 2010, our total operating expenses increased
20.01% to $1,070,199 from $891,750 for the same period in 2009. This increase
was a combination of a 26.76% increase in selling and marketing expenses to
$385,527 for the six months ended June 30, 2010 from $304,147 for the same
period in 2009, and a 16.52% increase in general and administrative expenses
(“G&A”) to $684,672 for the six months ended June 30, 2010 from $587,603 for
the same period in 2009.
The
following table sets forth a breakdown of the primary selling and marketing
expenses of the Company:
Six
Months Ended June 30,
|
Change
in
%
|
|||||||||||
2010
|
2009
|
|
||||||||||
Primary
selling and marketing expenses
|
||||||||||||
-
Payroll
|
$ | 76,715 | $ | 48,069 | 59.59 | % | ||||||
-
Office supplies
|
54,531 | 27,026 | 101.77 | % | ||||||||
-
Entertainment
|
14,665 | 26,087 | (43.78 | )% | ||||||||
-
Rent
|
86,760 | 83,993 | 3.29 | % |
Payroll expenses increased 59.59% to
$76,715 for the six months ended June 30, 2010 from $48,069 for the same period in
2009 due to the cost of additional staff for the new segment of Auto Mall
Management Services and the rising costs of remuneration packages related to
recruiting and maintaining skilled employees. Office supplies and low value
consumables are higher in the six months ended June 30, 2010 as a result of the
Company’s acquisition of certain low value office
equipment.
25
The
following table sets forth a breakdown of the primary G&A expenses of the
Company:
Six Months Ended June 30,
|
Change in
%
|
|||||||||||
2010
|
2009
|
|
||||||||||
Primary
general and administrative expenses
|
||||||||||||
-
Payroll
|
$ | 168,784 | $ | 84,463 | 99.83 | % | ||||||
-
Entertainment
|
42,250 | 48,904 | (13.61 | )% | ||||||||
-
Depreciation
|
96,547 | 94,492 | 2.17 | % | ||||||||
-
Legal and professional fees
|
259,313 | 190,202 | 36.34 | % |
Payroll
expenses increased 99.83% to $168,784 for the six months ended June 30, 2010
from $84,463 for the same period in 2009 primarily due to the rising costs of
offering competitive remuneration packages to maintain qualified management
staff. Entertainment decreased by 13.61% compared to that in the same period in
2009, which was primarily due to corporate activities relating to the Company’s
listing on NASDAQ in the six months ended June 30, 2009. Legal and professional
fees increased 36.34% for the six months ended June 30, 2010 to $259,313 from
$190,202 in the same period of 2009, due to the increased costs of handling U.S.
reporting matters.
Depreciation and
Amortization
In order
to meet the needs of its expanding operations, the Company steadily purchased
office equipment and updated computer and server hardware and software. As a
result of certain office equipment and automobiles being fully depreciated,
depreciation and amortization decreased 7.78% for the six months ended June
30, 2010 to $100,050 from $108,494 in the same period of 2009.
Income from
Operations
Income
from operations increased 22.09% for the six months ended June 30, 2010 to
$4,699,700 from $3,849,382 in the same period of 2009, which is primarily
attributable to growth in revenue and gross profit. Gross profit increased
21.70% for the six months ended June 30, 2010 to $5,769,899 from $4,741,132 in
the same period of 2009, due to an increase in net revenues of 20.76% from
$90,237,786 to $108,969,853.
Inflation
We
believe that inflation has had a negligible effect on operations for the three
and six month periods ended June 30, 2010 and 2009. However, overall commodity
inflation is an ongoing concern for our business and has been a considerable
operational and financial focus for the Company. We continue to monitor
commodity costs and work with our suppliers and customers to manage changes in
commodity costs.
LIQUIDITY
AND CAPITAL RESOURCES
We
generally finance our operations through a combination of operating profit,
short-term borrowing from banks and shareholder loans. During the reporting
periods, we arranged a number of bank loans to satisfy our financing needs. As
of the date of this Form 10-Q, we have not experienced any difficulty in raising
funds through bank loans, and we have not experienced any liquidity problems in
settling our payables in the ordinary course of business and repaying our bank
loans when they come due.
We
believe that the level of financial resources is a significant factor for our
future development and accordingly we may determine from time to time to raise
capital through private debt or equity financings to strengthen the Company’s
financial position, to expand our facilities and to provide the Company with
additional flexibility to take advantage of business
opportunities. No assurances can be given that we will be successful
in raising such additional capital on terms acceptable to the
Company.
26
The
following table sets forth a summary of our cash flows for the six months ended
June 30, 2010 and 2009.
Six Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Net
cash provided by (used for) operating activities
|
$ | 1,173,600 | $ | (614,197 | ) | |||
Net
cash used for investing activities
|
(194,715 | ) | (4,875 | ) | ||||
Net
cash used for financing activities
|
(1,318,247 | ) | (662,194 | ) | ||||
Effect
on exchange rate change on cash
|
15,539 | 86 | ||||||
Cash
and cash equivalents at beginning of period
|
2,255,058 | 1,598,781 | ||||||
Cash
and cash equivalents at end of period
|
1,931,235 | 317,601 |
Operating
Activities
During
the six months ended June 30, 2010, we generated net cash from operating
activities of $1,173,600, as compared to net cash used for operating activities
of $614,197 in the same period of 2009. The increase in net cash from operating
activities is primarily a result of our increased net income during the
period and a decrease in net cash flows used for working capital as compared to
the same period in 2009. This decrease in net cash flows used for working
capital is primarily comprised of a $1,079,348 decrease in restricted cash and a
$6,505,928 increase in customer deposits, which was partly offset by an increase
in advances to suppliers of $1,311,971, an increase in inventories of $4,044,400
and a decrease in draft notes payable of $2,929,437 as compared to the same
period in 2009.
During
the six months ended June 30, 2009, net cash used for operating activities was
primarily comprised of an increase in restricted cash of $3,090,431 and an
increase in advances to suppliers of $3,271,805, which was partially offset by a
decrease in receivables relating to Financing Services of $1,798,546 and a
decrease in accounts payable of $922,752.
Investing
Activities
During
the six months ended June 30, 2010, net cash used for investing activities was
$194,715. This was primarily attributable to cash used for purchases of property
and equipment of $213,702.
Financing
Activities
During
the six months ended June 30, 2010, net cash used for financing activities was
$1,318,247, as compared to $662,194 of net cash used for financing activities in
the same period of 2009. The net cash used for financing activities mainly
represents the repayments of short-term bank loans and lines of credit related
to automobile purchases.
Our total
cash and cash equivalents increased to $1,931,235 as of June 30, 2010, as
compared to $317,601 as of June 30, 2009.
Working
Capital
As of
June 30, 2010, the Company had working capital of $31,296,880 compared to
working capital of $27,782,904 as of December 31, 2009.
The
Company’s general cash needs have been to finance the accumulation of inventory
and the build-up in accounts receivable and advances to suppliers. As of June
30, 2010, the Company’s inventories increased by $4,165,064 or 25.06%, compared
to inventory balances as of December 31, 2009; its receivables related to
Financing Services increased by $15,986,410 or 168%; and its advances to
suppliers decreased by $1,397,395 or 7.70%, as compared with those as of
December 31, 2009. The Company had outstanding borrowings of
$23,865,815, representing 3.07 times of its borrowings as of December 31,
2009.
We aim to
continue to improve the level of working capital through increased revenue and
efficiently controlling costs.
27
OFF-BALANCE
SHEET ARRANGEMENTS
The
Company does not have any outstanding derivative financial instruments,
off-balance sheet guarantees or interest rate swap transactions of foreign
currency forward contracts. The Company does not have any retained or
contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such
entity. The Company does not have any variable interest in any
unconsolidated entity that provides financing, liquidity, market risk or credit
support to the Company or that engages in leasing, hedging or research and
development services with the Company.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Not
applicable.
Item
4. Controls and Procedures
A. Evaluation
of Disclosure Controls and Procedures
The
Company maintains disclosure controls and procedures and internal controls
designed to ensure that information required to be disclosed in the Company's
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. The Company's management, with the
participation of its principal executive and financial officers, has evaluated
the effectiveness of the Company's disclosure controls and procedures as of the
end of the period covered by this Quarterly Report on Form 10-Q. The Company's
principal executive and financial officers have concluded, based on such
evaluation, that such disclosure controls and procedures were effective for the
purpose for which they were designed as of the end of such period.
B. Changes
in Internal Control over Financial Reporting
There was
no change in the Company's internal control over financial reporting that was
identified in connection with such evaluation that occurred during the period
covered by this Quarterly Report on Form 10-Q that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
28
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings.
There
have been no material developments in any legal proceedings since the
disclosures contained in the Registrant’s Form 10-K for the year ended December
31, 2009.
Item
1A. Risk Factors.
Not
required.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None.
Item
3. Defaults Upon Senior Securities.
None.
Item
4. (Removed and Reserved).
Item
5. Other Information.
(a) There
is no information required to be disclosed on Form 8-K during the period covered
by this Form 10-Q that was not so reported.
(b) There
were no material changes to the procedures by which security holders may
recommend nominees to the registrant’s board of directors during the quarter
ended June 30, 2010.
Item
6. Exhibits.
The
following exhibits, which are numbered in accordance with Item 601 of
Regulation S-K, are filed herewith or, as noted, incorporated by reference
herein:
Index to
Exhibits
Exhibit
Number
|
|
Exhibit Description
|
2.1
(1)
|
Share
Exchange Agreement, dated as of November 10, 2008, between USCo, the
Company and Stockholder.
|
|
2.2
(1)
|
Share
Exchange Agreement dated, as of November 1, 2007, among Ever Auspicious
International Limited, Cheng Weihong, Xia Qiming, and Qian
Yuxi.
|
|
2.3
(1)
|
Supplementary
Agreement to Share Exchange Agreement, dated as of November 1, 2007, among
Ever Auspicious International Limited, Cheng Weihong, Xia Qiming, and Qian
Yuxi.
|
|
3.1
(2)
|
Amended
Articles of Incorporation of the Company
|
|
3.2
(2)
|
Amended
and Restated Bylaws of the Company
|
|
10.1
(1)
|
Lease
Agreement, effective as of June 30, 2003, between China Construction Bank
Tianjin Tariff-free Zone Branch and Tianjin Shisheng Investment Group
Ltd.
|
|
10.2
(1)
|
Lease
Agreement, effective as of January 1, 2007, between Tianjin Port
International Car Exhibit Centre and Tianjin Shisheng Investment Group
Ltd.
|
29
10.3
(1)
|
Supplementary
Agreement, dated as of December 8, 2007, between Tianjin Port
International Car Exhibit Centre and Tianjin Shisheng Investment Group
Ltd.
|
|
10.4
(1)
|
Form
of Employment Contract
|
|
10.5
(3)
|
Audit
Committee Charter
|
|
10.6
(3)
|
Compensation
Committee Charter
|
|
10.7
(3)
|
Corporate
Governance and Nominating Committee Charter
|
|
14.1
(3)
|
Code
of Business Conduct and Ethics
|
|
21.1
(1)
|
Subsidiaries
|
|
31.1*
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
31.2*
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
32.1*
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2*
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
* Filed
herewith
(1)
Incorporated by reference to the Company’s Form 8-K, filed with the Securities
and Exchange Commission on November 10, 2008.
(2)
Incorporated by reference to the Company’s Definitive Schedule 14C Information
Statement, filed with the Securities and Exchange Commission on December 5,
2008.
(3)
Incorporated by reference to the Company’s Form 8-K, filed with the Securities
and Exchange Commission on December 24, 2008.
30
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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
AUTO LOGISTICS INC.
|
||
By:
|
/s/ Tong Shiping
|
|
Tong
Shiping
|
||
Chief
Executive Officer
|
Date: August
16, 2010
31
Index
to Exhibits
Exhibit
Number
|
|
Exhibit Description
|
2.1
(1)
|
Share
Exchange Agreement, dated as of November 10, 2008, between USCo, the
Company and Stockholder.
|
|
2.2
(1)
|
Share
Exchange Agreement, dated as of November 1, 2007, among Ever Auspicious
International Limited, Cheng Weihong, Xia Qiming, and Qian
Yuxi.
|
|
2.3
(1)
|
Supplementary
Agreement to Share Exchange Agreement, dated as of November 1, 2007, among
Ever Auspicious International Limited, Cheng Weihong, Xia Qiming, and Qian
Yuxi.
|
|
3.1
(2)
|
Amended
Articles of Incorporation of the Company
|
|
3.2
(2)
|
Amended
and Restated Bylaws of the Company
|
|
10.1
(1)
|
Lease
Agreement, effective as of June 30, 2003, between China Construction Bank
Tianjin Tariff-free Zone Branch and Tianjin Shisheng Investment Group
Ltd.
|
|
10.2
(1)
|
Lease
Agreement, effective as of January 1, 2007, between Tianjin Port
International Car Exhibit Centre and Tianjin Shisheng Investment Group
Ltd.
|
|
10.3
(1)
|
Supplementary
Agreement, dated as of December 8, 2007, between Tianjin Port
International Car Exhibit Centre and Tianjin Shisheng Investment Group
Ltd.
|
|
10.4
(1)
|
Form
of Employment Contract
|
|
10.5
(3)
|
Audit
Committee Charter
|
|
10.6
(3)
|
Compensation
Committee Charter
|
|
10.7
(3)
|
Corporate
Governance and Nominating Committee Charter
|
|
14.1
(3)
|
Code
of Business Conduct and Ethics
|
|
21.1
(1)
|
Subsidiaries
|
|
31.1*
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
31.2*
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
32.1*
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2*
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
* Filed
herewith
(1)
Incorporated by reference to the Company’s Form 8-K, filed with the Securities
and Exchange Commission on November 10, 2008.
(2)
Incorporated by reference to the Company’s Definitive Schedule 14C Information
Statement, filed with the Securities and Exchange Commission on December 5,
2008.
(3)
Incorporated by reference to the Company’s Form 8-K, filed with the Securities
and Exchange Commission on December 24, 2008.
32