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EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER - China Logistics Group Incexh31-1.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER - China Logistics Group Incexh31-2.htm
EX-32.2 - SECTION 1350 CERTIFICATION OF CHIEF FINANCIAL OFFICER - China Logistics Group Incexh32-2.htm
EX-32.1 - SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - China Logistics Group Incexh32-1.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
FOR THE QUARTERLY PERIOD ENDED: June 30, 2012
or
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
FOR THE TRANSITION PERIOD FROM: _____________ TO _____________
 
COMMISSION FILE NUMBER: 000-31497

CHINA LOGISTICS GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Florida
65-1001686
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

23F. Gutai Beach Building No. 969 Zhongshan Road (South), Shanghai, China
200011
(Address of principal executive offices)
(Zip Code)

86-21-63355100
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
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.
[X] Yes [  ]No 

Indicate by check mark whether the registrant has been submitted electronically and posted on its corporate Website, if any, every Interactive Date 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).
[ X ]Yes [] No 

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

Large accelerated filer
[  ]
   
Accelerated filer
[  ]
Non-accelerated filer
[  ]
   
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  [X] No 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 41,508,203 shares of common stock are issued and outstanding as of August 7, 2012.

 
 

 
 
 
 
CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS
 
   
Page No.
 
PART I. - FINANCIAL INFORMATION
     
Item 1.
Financial Statements.
1
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
11
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
15
     
Item 4.
Controls and Procedures.
15
     
PART II - OTHER INFORMATION
     
Item 1.
Legal Proceedings.
15
     
Item 1A.
Risk Factors.
15
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
15
     
Item 3.
Defaults Upon Senior Securities.
16
     
Item 4.
Mine Safety Disclosures.
16
     
Item 5.
Other Information.
16
     
Item 6.
Exhibits.
16
     
 
Signatures
17


 
i

 
 
 


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This report includes forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:

 
our history of losses and declining margins;
 
our history of providing advances to related parties and loans to unrelated parties which could adversely impact our liquidity,
 
our dependence on third party equipment and services to operate our business,
 
our dependence on third party cargo agents,
 
credit risks,
 
the slowdown of the Chinese economy or risks of inflation,
 
the impact of changes in the political and economic policies and reforms of the Chinese government; fluctuations in the exchange rate between the U.S. dollar and the Renminbi;
 
uncertainties associated with the Peoples Republic of China ("PRC")’s legal system,
 
currency exchange restrictions and fluctuations in the value of the RMB,
 
economic, legal restrictions and business conditions in China,
 
adverse impact of recent Chinese accounting scandals,
 
material weaknesses in our internal control over financial reporting,
 
the closely-held nature of our securities,
 
limited public market for our common stock, and
 
the potential dilutive impact of the exercise of warrants, including warrants with cashless exercise provisions, or the conversion of preferred stock.

You should read thoroughly this report and the documents that we refer to herein with the understanding that our actual future results may be materially different from and/or worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements including those made in  Item A. Risk Factors.  Other sections of this report include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

 
ii

 
 
 

OTHER PERTINENT INFORMATION

We maintain our web site at www.chinalogisticsinc.com. Information on this web site is not a part of this report.

INDEX OF CERTAIN DEFINED TERMS USED IN THIS REPORT
 
When used in this report the terms:
 
 
·
"China Logistics," "we," "us," "our," the "Company," and similar terms refer to China Logistics Group, Inc., a Florida corporation, and its subsidiary,
 
 
·
"Shandong Jiajia" refers to Shandong Jiajia International Freight & Forwarding Co., Ltd., a Chinese company and a majority owned subsidiary of China Logistics, and its branches in Shanghai, Qingdao, Tianjin, Xiamen, and Lianyungang,
 
 
·
"China" or the "PRC" refers to the People's Republic of China, and
 
 
·
"RMB" refers to the Renminbi, which is the currency of mainland PRC.

 
iii

 
 
 


PART 1 - FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
             
   
June 30, 2012
   
December 31, 2011
 
ASSETS
 
(unaudited)
       
Current assets:
           
Cash
 
$
2,024,290
   
$
1,396,896
 
Accounts receivable, net of allowance of $1,800,250 and $1,787,951
   
2,147,891
     
3,393,631
 
Other Receivables
   
702,467
     
598,750
 
Advance to vendors and other prepaid expenses
   
551,987
     
-
 
Due from related parties
   
685,888
     
630,465
 
    Total current assets
   
6,112,523
     
6,019,742
 
                 
Property and equipment, net
   
58,999
     
37,674
 
    Total assets
 
$
6,171,522
   
$
6,057,416
 
 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
               
Current liabilities:
               
Accounts payable - trade
 
$
2,749,555
   
$
3,574,287
 
Accrued expenses and other current liabilities
   
853,356
     
789,070
 
Advances from customers
   
697,769
     
485,102
 
Due to related parties
   
1,245,393
     
1,350,743
 
Foreign tax payable
   
5,860
     
10,267
 
    Total current liabilities
   
5,551,933
     
6,209,469
 
                 
Shareholders’ equity (deficit):
               
China Logistics Group, Inc. shareholders' equity:
               
Preferred stock - $0.001 par value, 450,000 shares authorized Series B convertible issued and outstanding at June 30, 2012 and December 31, 2011
   
450
     
 450
 
Common stock, $0.001 par value, 500,000,000 shares authorized; 41,508,203 shares issued and outstanding at June 30, 2012 and December 31, 2011
   
41,508
     
41,508
 
Additional paid-in capital
   
20,636,980
     
20,636,980
 
Accumulated deficit
   
(19,878,617
)
   
(20,218,197
)
Accumulated other comprehensive loss
   
(105,204
)
   
(144,033
)
        Total China Logistics Group, Inc. shareholders' equity
   
695,117
     
316,708
 
Non-controlling interest
   
(75,528
)
   
(468,761
)
    Total shareholders’ equity (deficit)
   
619,589
     
(152,053
)
    Total liabilities and shareholders’ equity (deficit)
 
$
6,171,522
   
$
6,057,416
 

See accompanying notes to unaudited consolidated financial statements.

 
- 1 -

 
 
 
 
CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2012     2011     2012     2011  
Sales    $  6,200,412      $  6,064,231      $  11,567,472      $  10,673,664  
Cost of sales
   
5,777,884
     
5,718,640
     
10,338,975
     
9,909,191
 
Gross profit
   
422,528
     
345,591
     
1,228,497
     
764,473
 
                                 
Operating expenses:
                               
Selling, general and administrative
   
284,553
     
185,750
     
527,911
     
539,608
 
Gain on disposal of property and equipment
   
-
     
-
     
(1,089
)
   
-
 
Total operating expenses
   
284,553
     
185,750
     
526,822
     
539,608
 
Income from operations
   
137,975
     
159,841
     
701,675
     
224,865
 
                                 
Other (expenses) income:
                               
Other expense
   
(1,191
)
   
(6,650
)
   
(2,889
)
   
(14,996
)
Interest (expense) income
   
(1,013
)
   
243
     
185
     
(1,553
)
Total other expenses, net
   
(2,204
)
   
(6,407
)
   
(2,704
)
   
(16,549
)
Income before income taxes
   
135,771
     
153,434
     
698,971
     
208,316
 
Foreign income taxes (benefit)
   
(471
)
   
4,070
     
3,464
     
5,618
 
Net Income
   
136,242
     
149,364
     
695,507
     
202,698
 
Less: Net income attributable to the noncontrolling interest
   
75,419
     
36,250
     
355,927
     
124,911
 
Net income attributable to China Logistics Group, Inc.
 
 $
60,823
   
$
113,114
   
 $
339,580
   
 $
77,787
 
Comprehensive income:
                               
Net income
   
136,242
     
149,364
     
695,507
     
202,698
 
Foreign currency translation adjustments
   
(20,558
)
   
(8,898
 )
   
38,829
     
3,492
 
Comprehensive income
 
$
115,684
   
$
140,466
   
$
734,336
   
$
206,190
 
 Less: net income attributable to noncontrolling interests
   
75,419
     
36,250 
     
355,927
     
124,911 
 
Comprehensive income attributable to China Logistics Group, Inc.
 
$
40,265
   
$
104,216
   
$
378,409
   
$
81,279
 
Earnings per common share:
                               
     Basic
 
$
0.00
   
$
0.00
   
$
0.01
   
$
0.00
 
     Diluted
 
$
0.00
   
$
0.00
   
$
0.01
   
$
0.00
 
                                 
Weighted average number of shares outstanding:
                               
   Basic
   
41,508,203
     
41,508,203
     
41,508,203
     
41,508,203
 
   Diluted
   
46,008,203
     
46,008,203
     
46,008,203
     
46,008,203
 

The accompanying notes are an integral part of these financial statements


 
- 2 -

 
 
 

CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
For the Six Months Ended June 30,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
 
$
695,507
   
$
202,698
 
Adjustments to reconcile net income to net cash provided by from operating activities:
               
Depreciation expense
   
2,576
     
11,907
 
Allowance for doubtful accounts
   
12,299
     
42,146
 
 Increase (decrease) in cash attributable to changes in operating assets and liabilities:
               
Accounts receivable
   
1,233,440
     
(1,281,389
)
Prepaid expenses and other current assets
           
-
 
Other receivables
   
(103,717
)
   
533,724
 
Repayment of advances to related parties
   
7,309
     
64,207
 
Advances to related parties
   
(62,732
)
   
(90,320
)
Accounts payable
   
(824,733
)
   
(155,193
)
Other accruals and current liabilities
   
64,287
     
317,777
 
Taxes payable
   
(4,407
)
   
(5,012
)
Advances to vendors
   
(551,987
)
   
(6,496
)
Advances from customers
   
212,667
     
833,721
 
                 
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
680,509
     
467,770
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from disposal of property plant and equipment
   
1,426
     
-
 
Purchase of property plant and equipment
   
(24,210
)
   
(4,274
)
                 
NET CASH USED IN INVESTING ACTIVITIES
   
(22,784
)
   
(4,274
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Payment of advances from related parties
   
(106,294
)
   
(674,074
)
Advances to related parties
   
945
     
-
 
                 
NET CASH USED IN FINANCING ACTIVITIES
   
(105,349
)
   
(674,074
)
                 
EFFECT OF EXCHANGE RATE ON CASH
   
75,018
     
6,845
 
NET INCREASE (DECREASE)  IN CASH
   
627,394
     
(203,733
)
CASH  - beginning of period
   
1,396,896
     
1,309,848
 
CASH  - end of period
 
$
2,024,290
   
$
1,106,115
 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid during the period for foreign taxes
 
$
23,843
   
$
5,101
 

The accompanying notes are an integral part of these financial statements.

 
- 3 -

 
 
CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

China Logistics Group, Inc. (“we”, “us”, “our” or the “Company”) is a Florida corporation and was incorporated on March 19, 1999 under the name of ValuSALES.com, Inc. We changed our name to Video Without Boundaries, Inc. on November 16, 2001. On August 31, 2006 we changed our name from Video Without Boundaries, Inc. to MediaReady, Inc. and on February 14, 2008, we changed our name from MediaReady, Inc. to China Logistics Group, Inc.

During 2002, we began to reposition our company within the home entertainment media-on-demand marketplace.  It was our intent to become a producer and distributor of interactive consumer electronics and provide streaming digital media and video on demand services. However, we were unable to successfully or profitably penetrate the market.

On December 31, 2007 we entered into an acquisition agreement with Shandong Jiajia International Freight and Forwarding Co., Ltd. (“Shandong Jiajia”) and its sole shareholders Messrs. Hui Liu and Wei Chen, through which we acquired a 51% interest in Shandong Jiajia. The transaction was accounted for as a capital transaction, implemented through a reverse recapitalization.  

Shandong Jiajia, formed in 1999 as a Chinese limited liability company, is an international freight forwarder and logistics management company. Shandong Jiajia acts as an agent for international freight and shipping companies. Shandong Jiajia sells cargo space and arranges land, maritime, and air international transportation for clients seeking to import or export merchandise from or into China.  Headquartered in Qingdao, Shandong Jiajia has branches in Shanghai, Xiamen, Lianyungang and Tianjin. Shandong Jiajia is a designated agent of cargo carriers including Nippon Yusen Kaisha, P&O Nedlloyd, CMA CGM Group, Safmarine Container Lines, Chilean carrier CSAV Group, Ryder CRSA Logistics, Horizon Lines,and Regional Container Lines (RCL).
 
NOTE 2 –BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements for the three and six month periods ended June 30, 2012 and 2011 have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The consolidated financial statements for the interim periods presented are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods presented. Financial results for interim periods are not necessarily indicative of results that should be expected for the full year. The accompanying consolidated financial statements include our accounts and those of our 51% owned subsidiary, Shandong Jiajia. All inter-company transactions and balances have been eliminated in consolidation.

Revenue Recognition

We provide freight forwarding services to our customers.  Our business model involves placing our customers’ freight on prearranged contracted transport. Our revenue recognition policy is in accordance with the guidance of Financial Accounting Standards Boards (“FASB”) Accounting Standards Codification (“ASC”) 605, “Revenue Recognition.” In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. We provide transportation services, generally under contract, by third parties with whom we have contracted these services.

Typically, we recognize revenue in connection with our freight forwarding service when the payment terms are as follows:

 
 
When merchandise departs the shipper's  location if the trade pricing terms  are CIF (cost, insurance and freight),
 
 
When  merchandise departs the shipper’s location if the trade pricing terms are CFR (cost and freight cost); or
 
 
When merchandise arrives at the destination port if the trade pricing terms are FOB (free on board) destination.

We recognize direct shipping costs concurrently with the recognition of the related revenue for each shipment. These costs are generally isolated by billings as we do not own the shipping containers or transportation vessels.


 
- 4 -

 
 
CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
 
Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reported periods.

Significant estimates for the periods reported include the allowance for doubtful accounts which is based on an evaluation of our outstanding accounts receivable including the age of amounts due, the financial condition of our specific customers, knowledge of our industry segment in Asia, and historical bad debt experience.  This evaluation methodology has provided a reasonable estimate of bad debt expense in the past and we intend to continue to employ this approach in our analysis of collectability.  However, we are aware that given the current global economic situation, including that of the PRC, meaningful time horizons may change.  We intend to enhance our focus on the evaluation of our customers' sustainability and adjust our estimates as may be indicated.
 
We also rely on certain assumptions when deriving the fair value of share-based compensation, derivative liability and calculations underlying our provision for taxes in China.  Assumptions and estimates employed in the areas are material to our reported financial conditions and results of operations.  Actual results could differ from these estimates.

Stock Based Compensation

We account for stock options and other equity based compensation issued to employees by measuring the grant-date fair value of stock options and other equity based compensation issued to employees and recognize the costs in the statement of operations over the period during which the employees are required to provide services.

Basic and Diluted Earnings per Share

Pursuant to ASC 260-10-45, basic income (loss) per common share is computed by dividing income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted income (loss) per share reflects the potential dilution that could occur if securities were exercised or converted into common stock or other contracts to issue common stock resulting in the issuance of common stock that would then share in our income subject to anti-dilution limitations.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying value of these instruments approximates their fair value.

Concentration of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and accounts receivable. We deposit our cash with high credit quality financial institutions in the United States and the PRC. At June 30, 2012, we had deposits of $2,021,535 in banks in the PRC. In the PRC, there is no equivalent federal deposit insurance as in the United States; as such these amounts held in banks in the PRC are not insured. We have not experienced any losses in such bank accounts through June 30, 2012.

Accounts Receivable

The Company provides an allowance for doubtful accounts equal to the estimated uncollectible portion of its accounts receivable. This estimate is based on the historical collection experience and a review of the current status of trade receivables. The allowance for doubtful accounts totaled $1,800,250 and $1,787,951 at June 30, 2012 and December 31, 2011, respectively.

Advance to Vendors and Other Prepaid Expenses

Advances to vendors and other prepaid expenses consist primarily of prepayments or deposits from us for contracted shipping arrangements that have not been utilized by our customers. These amounts are recognized as cost of revenues as shipments are completed and customers utilize the shipping arrangement. Advances to vendors and other prepaid expenses totaled $551,987 and $0 at June 30, 2012 and December 31, 2011, respectively.

 
- 5 -

 
 
CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
 
Property and Equipment and Long-Lived assets

Property and equipment are recorded at cost.  Expenditures for major additions and betterments are
capitalized.  Maintenance and repairs are charged to operations as incurred.  Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the assets estimated useful lives.  Leasehold improvements, if any, are amortized on a straight-line basis over the shorter of the lease period or the estimated useful life.  

We periodically evaluate the carrying value of long-lived assets to be held and used in the business, generally in conjunction with the annual business planning cycle, and when events and circumstances otherwise warrant. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair value for assets to be held and used. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risks involved. There was no impairment recognized during the six month ended June 30, 2012 and 2011.

Advances from Customers

Advances from customers consist of prepayments to us for contracted cargo that has not yet been shipped to the recipient and for other advance deposits. These amounts are recognized as revenue when all of the revenue recognition criteria have been met. Advances from customers totaled $697,769 and $485,102, at June 30, 2012 and December 31, 2011, respectively.

Foreign Currency Translation

The accompanying unaudited consolidated financial statements are presented in United States dollars. The functional currency of Shandong Jiajia is the Renminbi (“RMB”), the official currency of the PRC.  Capital accounts of the unaudited consolidated financial statements are translated into United States dollars from RMB at their historical exchange rates. Assets and liabilities are translated at the exchange rates as of the balance sheet date. Income and expenditures are translated at the average exchange rate for the periods presented.

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through PRC authorized institutions. No representation is made that the RMB amounts could have been, or could be converted into U.S. dollars at the rates used in translation.  Translation of amounts from RMB into United States dollars (“US$”) has been made at the following exchange rates for the respective periods:

   
June 30,
2012
   
June 30,
2011
   
December 31,
2011
 
Balance sheet
   
6.3089
           
6.3523
 
Statement of operations
   
6.3027
     
6.5316
         
 
Income Taxes

We follow the asset and liability method of accounting for taxes.  Deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized.

Noncontrolling Interest
 
Noncontrolling interests in our subsidiaries are recorded as a component of our equity, separate from the parent’s equity.  Purchase or sale of equity interests that do not result in a change of control are accounted for as equity transactions.  Results of operations attributable to the noncontrolling interest are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, if any, will be reported at fair value with any gain or loss recognized in earnings.

Reclassifications

Certain amounts in the comparative prior financial statements have been reclassified to conform to the current year’s presentation. Such reclassifications had no effect on previously reported net income or net assets.

 
- 6 -

 
 
CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
 
Recent Accounting Pronouncements

 In September, 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-08, Intangibles – Goodwill and Other, which simplifies how an entity is required to test goodwill for impairment. This ASU would allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under the ASU, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The ASU includes a number of factors to consider in conducting the qualitative assessment.  The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted. We have adopted this standard which did not have a material impact on our consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under the amendments, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The presentation option under current U.S.GAAP to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity has been eliminated. The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted because compliance with amendments is already permitted. We have adopted this standard which did not have material impact on our consolidated financial statements.

A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies.  Due to the tentative and preliminary nature of those proposed standards, the Company’s management has not determined whether implementation of such proposed standards would be material to its consolidated financial statements.
 
NOTE 3 – EARNINGS (LOSS) PER SHARE

Under the provisions of ASC 260, “Earnings Per Share”, basic income (loss) per common share is computed by dividing income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in our income, subject to anti-dilution limitations.

The following table sets forth the computation of basic and diluted earnings per share for the six month ended June 30, 2012 and 2011.

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Numerator:
                       
Net Income applicable to common stockholders (A)
 
$
60,823
   
$
113,114
   
$
339,580
   
$
77,787
 
Denominators:
                               
Denominator for basic earnings per share:
                               
Weighted average shares outstanding (B)
   
41,508,203
     
41,508,203
     
41,508,203
     
41,508,203
 
Series B convertible preferred stock
                               
Denominator for diluted earnings (loss) per share:
   
4,500,000
     
4,500,000
     
4,500,000
     
4,500,000
 
Diluted weighted average shares outstanding
   
46,008,203
     
46,008,203
     
46,008,203
     
46,008,203
 
Earnings per share-basic (A)/(B)
 
$
0.00
   
$
0.00
   
$
0.01
   
$
0.00
 
Earnings per share-diluted (A)/(B)
 
$
0.00
   
$
0.00
   
$
0.01
   
$
0.00
 

 
- 7 -

 
 
CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment at June 30, 2012 and December 31, 2011 consisted of the following:

 
Useful Lives
 
June 30,
 2012
   
December 31,
2011
 
     
(Unaudited)
       
Computer equipment
4 years
 
$
49,379
   
$
54,045
 
Furniture and equipment
4-5 years
   
134,814
     
112,089
 
    
     
184,193
     
166,134
 
Less: accumulated depreciation
     
(125,194
 )
   
(128,460
 )
     
$
58,999
   
$
37,674
 
 
For the six months ended June 30, 2012, and 2011, depreciation expense totaled $2,576 and $11,907 respectively.
 
NOTE 5 – OTHER RECEIVABLES

Other receivables are comprised of advances to other entities with which we have a strategic or other business relationship, a refundable deposit we made as required by a Chinese court for potential payment to a former customer in the event we are unsuccessful in a lawsuit we filed against them for amounts owed to us, and deferred expenses.  The amounts advanced to our strategic partners are unsecured, repayable on demand, and bear no interest.  We also advance money to employees for business travel expenditures which are then expensed upon conclusion of the trip and the processing of an expense report.  The components of other receivables at June 30, 2012 and December 31, 2011 were as follows:

   
June 30,
2012
   
December 31,
2011
 
   
(Unaudited)
       
Loans receivable
 
$
509,987
   
$
443,332
 
Deferred expenses
   
128,325
     
51,331
 
Legal deposit
   
31,701
     
31,488
 
Other
   
32,454
     
72,599
 
   
$
702,467
   
$
598,750
 

 NOTE 6 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities are comprised of non-interest bearing advances from unrelated parties used for working capital purposes and payable on demand, accruals for professional fees that have not yet been billed, and accrued salaries.  The components of accruals and other current liabilities at June 30, 2012 and December 31, 2011 were as follows:

   
June 30,
2012
   
December 31,
2011
 
   
(Unaudited)
       
Loans payable
 
$
558,459
   
$
494,905
 
Accrued expenses
   
250,298
     
242,818
 
Accrued salaries
   
44,599
     
51,347
 
   
$
853,356
   
$
789,070
 

NOTE 7 – STOCKHOLDERS’ EQUITY

Preferred Stock

We have 10,000,000 shares of preferred stock, par value $.001, authorized, 1,000,000 of which we designated as our Series A Convertible Preferred Stock in December 2007 in connection with our acquisition of a 51% interest in Shandong Jiajia. On March 28, 2008 shareholders holding the Series A Convertible Preferred Stock converted their 1,000,000 shares into 2,500,000 shares of common stock, and no shares of Series A Convertible Preferred Stock were outstanding at June 30, 2012 and December 31, 2011.

 
- 8 -

 
 
CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012

        In December 2007 we designated 1,295,000 shares of our preferred stock as Series B Convertible Preferred stock in connection with our acquisition of a 51% interest in Shandong Jiajia. Each share of Series B Convertible Preferred Stock is convertible into 10 shares of our common stock.  On March 28, 2008 holders of the Series B Convertible Preferred Stock converted 845,000 shares into 8,450,000 shares of common stock and 450,000 shares of Series B Convertible Preferred Stock held by CD International Enterprises, Inc. (“China Direct”) remained outstanding at June 30, 2012 and December 31, 2011.

Common Stock
 
We did not issue any common stock during the six month period ended June 30, 2012.

Common Stock Purchase Warrants

A summary of our common stock warrant activity during the six month periods ended June 30, 2012 is as follows:

   
Number of Shares Underlying
Warrants
   
Weighted 
Average exercise Price
   
Weighted Average Contractual Term
 
                   
Outstanding at December 31, 2011
    31,558,500     $ 0.20       0.80  
Granted
                       
Exercised
                       
Outstanding at June 30, 2012
    31,558,500     $ 0.20       0.80  
 

The common stock purchase warrants outstanding at June 30, 2012 include 31,558,500 warrants issued in connection with our offering of common stock in 2008. These warrants are currently exercisable at $0.20 per share and expire on April 30, 2013.

NOTE 8 –RELATED PARTY TRANSACTIONS

Due from Related Parties

On June 30, 2012 and December 31, 2011due from related parties consisted of the following:
 
   
June 30, 2012
   
December 31, 2011
 
   
(Unaudited)
       
Due from Shangdong Huibo Import & Export Co., Ltd
 
$
358,608
   
$
365,918
 
Due from Tianjin Sincere Logistics Co., Ltd
   
234,563
     
199,240
 
Due from Lianyunbu
   
92,717
     
65,307
 
Total
 
$
685,888
   
$
630,465
 

Due from related parties of $685,888 and $630,465 at June 30, 2012 and December 31, 2011, respectively, reflected advances due from Shangdong Huibo Import & Export Co., Ltd., a 24.3% shareholder in Shangdong Jiajia, Tianjin Sincere Logistics Co., Ltd, and Lianyunbu which is an entity affiliated with Hui Liu, a member of our Board of Directors and Chief Executive Officer of Shangdong Jiajia. The loans are unsecured, non-interest bearing and repayable on demand.

 
- 9 -

 
 
CHINA LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
 
Due to Related Parties

On June 30, 2012 and December 31, 2011, due to related parties consisted of the following:

   
June 30,
 2012
 
December 31,
 2011
 
   
(Unaudited)
       
Due to Xiangfen Chen
$
88,270
 
$
87,667
 
Due to Bin Liu
 
192,265
   
296,872
 
Due to Tianjin Sincere Logistics Co., Ltd.
 
559,374
   
561,062
 
Due to CD International Enterprises, Inc.
 
405,484
   
405,142
 
Total
$
1,245,393
 
$
1,350,743
 

Xiangfen Chen is the general manager of Shandong Jiajia Xiamen branch. Bin Liu is the general manager of Shandong Jiajia Tianjin branch. Mr. Liu is a 90% owner of Tianjin Sincere Logistics Co., Ltd.  These loans are unsecured, non-interest bearing and repayable on demand. Shandong Jiajia used the proceeds for general working capital purposes. The amounts due to CD International Enterprises, Inc. (“China Direct”) relate to professional fees, primarily legal and accounting fees paid by China Direct on our behalf of $82,484 and promissory notes payable of $323,000 at June 30, 2012.  The proceeds from these notes were used for working capital purposes.  The notes accrue interest at 4% annually and are due at various dates in 2012.
 
There are no assurances that the terms of the transactions with these related parties are comparable to terms we could have obtained from unaffiliated third parties.

NOTE 9 – FOREIGN OPERATIONS

        The tables below present information by operating region for the six months ended June 30, 2012 and 2011, respectively:

 
For the Six Months Ended June 30,
 
 
2012
 
2011
 
 
Revenues
 
Assets
 
Revenues
 
Assets
 
United States
 
$
-
   
$
2,755
   
$
-
   
$
502
 
People’s Republic of China
   
11,567,472
     
6,168,767
     
10,673,664
     
6,979,294
 
Total
 
$
11,567,472
   
$
6,171,522
   
$
10,673,664
   
$
6,979,796
 
 
NOTE 10 – CONTINGENCIES AND COMMITMENTS

        Rent expense from our office leases for the six months ended June 30, 2012 and 2011 were approximately $52,692 and $29,000, respectively.  We did not have any minimum, contingent, or sublease arrangements in these leases.
 
        The table below presents our commitments for our various office leases in China of the six months ended June 30, 2012:
 
Period
 
Total
 
       
Period ended June 30, 2012
 
$
52,692
 
Thereafter
   
-
 
Total
 
$
52,692
 
 
 
- 10 -

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion should be read in conjunction with the information contained in our unaudited consolidated financial statements and footnotes, and in conjunction with the Management’s Discussion and Analysis in our Annual Report on Form 10-K, for the year ended December 31, 2011.
 
OVERVIEW

We are a non-asset based international freight forwarder and logistics manager located in the PRC. We act as an agent for international freight and shipping companies. We sell cargo space and arrange international transportation via land, maritime, and air routes primarily for clients seeking to export goods from China. We are a non-asset based freight forwarder and we do not own any containers, trucks, aircraft or ships. We contract with companies owning these assets to provide transportation services required for shipping freight on behalf of our customers. Our headquarters are in Qingdao, China, and we have branches in Shanghai, Tianjin, Xiamen, and Lianyungang. We coordinate with agents in North America, Europe, South America, Australia, Asia, and Africa.

Our Performance

Our revenues for the second quarter of 2012 grew by 2% as compared to the same period in 2011. For the first six months of 2012, revenues increased by $0.9 million, or 8% as compared to the same period in 2011.  Our gross profit margin increased to 6.8% in the second quarter of 2012 from 5.7% for the same period in 2011. For the first six months of 2012, our gross profit margin was 10.6%, compared to 7.2% in the first six months of 2011.  Our operating expenses increased by $0.1million in the second quarter of 2012 as compared to the same period in 2011, and remained the same in the first six months of 2012, as compared to 2011. Our operating income was $0.1million and $0.7million for the three and six months ended June 30, 2012, respectively, as compared to operating income of $0.2 million for both the three and six months ended June 30, 2011. Our net income for the three and six months ended June 30, 2012 was $0.1 million and $0.7 million, respectively, as compared to net income of $0.1 million and $0.2 million for the three and six months ended June 30, 2011.
 
Our Outlook

The shipping industry experienced a difficult year in 2011, with many shipping companies reporting financial losses. In 2012, a succession of major shipping companies have sought to regain profits by raising shipping charges which might further hinder the already weak growth in China's exports. In late January 2012, the world's biggest container shipper by capacity Maersk Line, which has been struggling with market overcapacity and high fuel costs, raised its rates by $775 per 20 foot equivalent unit, with effect from March 1, 2012, more than a doubling of the then current spot level. In late February 2012, Maersk Line removed 9% vessel capacity and made the second raise on its key Asia to Europe routes by a further $400 per 20 foot equivalent unit, effective from April 1, 2012. When both rate increases are put into effect, they will add $1,175 to the price of shipping a container from all Asian ports and to all destinations in Europe (North Europe and Mediterranean). Following Maersk's announcements, nearly every large carrier involved in trade between Asia and Europe increased the cost of shipping a container by approximately $750 to $800 starting on March 1, 2012. The shipping industry's decisions have prompted concerns that the rate increases might be passed onto Chinese exporters and adversely impact exporter's profits. 

Consistent with the growth of import volumes along with steady appreciation of the Chinese currency against U.S. dollar and despite that Chinese imports decreased by 15.3% in January 2012 due to week-long lunar new year celebrations in the month and compound factors in domestic and global economy slow down, we believe that the imports-related business in China will continue to emerge as a driving force in the Chinese freight forwarding industry in the coming decade. The industry is under pressure to make adjustments in operations and consolidate resources to cater to this gradual transformation in Chinese foreign trade. In the second quarter of 2012, our sales from the imports business accounted for approximately 3.0% of our total revenues, which is consistent with the same period in 2011. During 2012 we will continue our efforts to seek to secure the services of foreign agents to expand our operations internationally in an effort to increase our revenues from the import-related freight forwarding business.

While there has been improved quoting and booking activities and an increase in our total sales revenues in the second quarter of 2012, we face a number of challenges in growing our business. We expect that the continuing increases in oil prices will further increase our shipping costs and likely impact our gross profit margin in 2012. In addition, the reaction to China’s restrictive monetary policies and potential slowing of the Chinese economy, combined with renewed global financial worries, could endanger the fragile worldwide economic recovery, causing the global economy to revert back into recession.  We also foresee continued competition in the marketplace that may negatively impact our gross profit margin. 

 
- 11 -

 

RESULTS OF OPERATIONS

Sales Revenues

In the second quarter of 2012 the increase in our sales revenues of 2% reflected increased shipping activities across all of China’s major shipping ports with respect to outbound container and cargo shipments. However, the increase in freight traffic volume was offset by decreases in shipping rates due primarily to excess freight cargo capacity and lower pricing by shippers as a result of the slowdown in exports from the PRC due to sluggish global economy during 2011 and the first two quarters of 2012.

Revenues for the first six months of 2012 increased by $0.9 million, or 8%, as increases in shipping volumes were more than offset by a decrease in the average price per standard shipping container. Since 2010, global freight carriers have placed a number of additional ships into service in anticipation of an increase in shipping demand that has largely failed to materialize. As a result, overseas shipping prices dropped significantly, especially in northeastern China, which is a highly competitive environment for freight carriers.

Cost of Sales and Gross Profit Margins
 
Cost of sales, which represents the cost of the cargo space we obtain for our customers, increased slightly by 1% in the second quarter of 2012 as compared to the same period in 2011. Our gross profit margin improved to 6.8% in the second quarter of 2012 as compared to 5.7% in the same period of 2011.   
 
 Cost of sales increased by $0.4 million, or 4.0%, for the first six months of 2012, as compared with the same period in 2011. For the first six months of 2012, our gross margin was 10.6%, compared to 7.2% in the first six months of 2011. During the first six months of 2012 our gross margin was impacted by weaker demand for our services than originally anticipated resulting in unused reserved cargo space that we had to absorb in our cost of sales. The improved gross profit margin for the first six months of 2012 was primarily due to lower prices provided to us by freight carriers that more than offset the price decrease we extended to our customers as a result of the oversupply of freight cargo capacity originating from the PRC.

Total Operating Expenses
 
Total operating expenses increased $0.1million in the second quarter of 2012 over the same period in 2011. The increase for the second quarter of 2012 was primarily due to a 53% increase in selling, general and administrative expenses resulting from higher travel, office expense, and employee's benefits expense. Total operating expenses decreased by 2% in the first six months of 2012 as compared to the same period in 2011.  

Total Other Income (Expenses)

Total other income, net, which consists of interest income and expense, non-operating income and expense items and other gains and losses not reflected within income from operations, resulted in a net other expense of $2,203 in the second quarter of 2012 and $2,704 for the first six months of 2012 as compared to $6,407 and $16,549, respectively, for the same period in 2011.
  
Net Income
 
Net income for the second quarter and first six months of 2012 totaled $0.1 million and $0.7 million, respectively, compared to net income of $0.1 million and $0.2 million for the second quarter and first six months of 2011. The improvement in earnings is primarily due to higher gross profit in 2012.


 
- 12 -

 

LIQUIDITY AND CAPITAL RESOURCES
 
Liquidity is the ability of a company to generate adequate amounts of cash to meet its needs for cash requirements.  At June 30, 2012, we had cash on hand of $2.0 million as compared to $1.4 million at December 31, 2011. Our working capital was $0.6 million at June 30, 2012, as compared to a deficit in working capital of $0.2 million at December 31, 2011.  We maintain cash balances in the United States and China. At June 30, 2012 and December 31, 2011, our cash by geographic area was as follows:
 
   
June 30, 2012
   
December 31, 2011
 
United States
 
$
2,755
     
0.1%
   
$
22,256
     
1.6%
 
China
   
2,021,535
     
99.9%
     
1,374,640
     
98.4%
 
   
$
2,024,290
     
100%
   
$
1,396,896
     
100%
 

Substantially all of our cash is held and will continue to be held in the form of RMB in bank accounts at financial institutions located in the PRC.  Cash held in banks in the PRC is not insured. The value of cash on deposit in the PRC of $2.0 million at June 30, 2012 has been converted based on the exchange rate as of June 30, 2012. 

   We do not currently have any commitments for capital expenditures and no external sources of capital. We rely on cash generated in our business and loans to provide sufficient working capital for our operations. We currently have $0.6 million of loans payable due on demand to third parties and $0.3 million of notes due during 2012 to a related party. While there can be no assurances given the continued economic uncertainties, we believe that our cash on hand and other components of our working capital will be sufficient to fund our operations and satisfy our obligations for the next twelve months.  If, however, circumstances change regarding the overall export volumes currently being experienced at China’s shipping ports or if other economic factors beyond our control were to adversely impact our business, we may be required to raise additional capital.  We do not have any commitments for any additional capital and have been relying on advances from related and unrelated parties to supplement our working capital needs.  If it were to become necessary for us to raise additional capital there are no assurances such funds will be available on terms that are acceptable to us, or at all.

Our days’ sales outstanding of gross accounts receivable as of June 30, 2012 was 61 days, as compared to 63 days as of December 31, 2011, with no bad debt expense for 2012.

From time to time we lend working capitals to unrelated key customers and strategic partners who refer businesses to us. Generally, the loans are short term demand notes which are unsecured and non-interest bearing. We believe it is in our best interest to make these loans in order to build long-term relationships, encourage continued business, and benefit from additional referrals. The decision to make these loans is made by our senior management, subject to the availability of sufficient capital. We have not established a reserve for these loans as historically all such loans have been repaid on a timely basis. These amounts, which totaled $0.7 million and $0.6 million at June 30, 2012 and December 31, 2011, respectively, are reflected in Other Receivables. Other receivables also include $for expected refunds of customs duties and miscellaneous receivables incurred in the ordinary course of business.

Accounts payable - trade decreased by $0.8 million primarily due to payments for previously accrued freight costs to shippers.

Other accruals and current liabilities increased by $0.1 million due to decreases in advances from unrelated parties and lower accruals in the normal course of business associated with the increase in sales volume. 

    We engage in a number of transactions with related parties. Due from related parties consist of unsecured, non-interest bearing advances to Shangdong Huibo Import & Export Co., Ltd., a Chinese limited liability company, which is a minority owner of our company. These advances which increased by 8.8% at June 30, 2012 from December 31, 2011, are payable on demand. Due to related parties represents amounts advanced for working capital, and amounts due China Direct for legal and accounting fees paid by it on our behalf and promissory notes for amounts lent to us for working capital.  Due to related parties decreased 7.8% at June 30, 2012 from December 31, 2011, primarily as a result of repayments of $0.1 million.

 
- 13 -

 
 
Cash Flow Analysis

 Net cash provided by operating activities in the second quarter of 2012 amounted to $0.7million compared to net cash provided of $0.5 million for the same period in 2011. The increase in net cash in 2012 was primarily due to net income of $0.7 million and $1.2 million decrease in accounts receivable due to collections on accounts, offset by $0.8 million increase in accounts payable due to freight costs for the period, and an increase of $0.6 million in prepayments to vendors.
 
 Net cash used in investing activities for the second quarter of 2012 amounted to $22,784, primarily due expenditures for property and equipment with $4,274 for the same period in 2011.

         Net cash used in financing activities in the first quarter of 2012 amounted to $0.1million, as compared to of $0.7 million in 2011, primarily due to payments of advances to related parties.

OFF BALANCE SHEET ARRANGEMENTS

 Under SEC regulations, we are required to disclose our off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:

 
 
Any obligation under certain guarantee contracts,
 
 
Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets,
 
 
Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in stockholder’s equity in our statement of financial position, and
 
 
Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

   We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with "U.S. GAAP”.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods.  The more critical accounting estimates include estimates related to the allowance for doubtful accounts and the valuation of warrants that are deemed to be not indexed to our common stock.  We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in note 2 to our financial statements. 

Revenue Recognition 
 
In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.  We provide transportation services, generally under contract, by third parties with whom we have contracted these services.  We typically recognize revenue in connection with our freight forwarding service when the payment terms are as follows:

 
 
when the cargo departs the shipper's destination if the trade pricing term is on a CIF (cost, insurance and freight) or CFR (cost and freight) basis;
 
 
when merchandise arrives at the destination port if the trade pricing term is on a FOB (free on board) basis.
 
 
- 14 -

 
 
Allowance for Doubtful Accounts

    The allowance for doubtful accounts is based on an evaluation of our outstanding accounts receivable including the age of amounts due, the financial condition of our specific customers and knowledge of our industry segment in Asia. This evaluation methodology has provided a reasonable estimate of bad debt expense in the past and we intend to continue to employ this approach in our analysis of collectability. However, recent experience given the current global economic situation, including that of China, meaningful time horizons may change. We have enhanced our focus on the evaluation of our customers’ sustainability and adjusted our estimates as indicted in the current year.

The allowance for doubtful accounts is based on an evaluation of our outstanding accounts receivable including the age of amounts due, the financial condition of our specific customers and knowledge of our industry segment in Asia. This evaluation process resulted in no bad debt expense recognized for the first six months of 2012 and 2011, respectively.  This evaluation methodology has provided a reasonable estimate of bad debt expense in the past and we intend to continue to employ this approach in our analysis of collectability.  However, recent experience given the current global economic situation, including that of China, meaningful time horizons may change.  We have enhanced our focus on the evaluation of our customers’ sustainability and adjusted our estimates as indicted in the current year.
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Not applicable for a smaller reporting company.
 
ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

   We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported as specified in the SEC’s rules and forms and that such information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer (CEO), and our Chief Financial Officer (CFO), to allow timely decisions regarding required disclosure. Management, with the participation of our CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2012.

  Based on this evaluation we concluded that as of June 30, 2012 our disclosure controls and procedures were not effective such that the information relating to our company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure as a result of continuing significant deficiencies or material weaknesses previously identified in our Annual Report on Form 10-K for the year ended December 31, 2011.
 
Changes in Internal Control over Financial Reporting

  There was no change in our internal control over financial reporting identified in connection with our evaluation that occurred during the quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

         There has been no change in our Legal Proceedings from those previously discussed in Item 3, “Legal Proceedings”, in our Annual Report on Form 10-K for the period ended December 31, 2011.

 ITEM 1A.  RISK FACTORS.
 
There have been no material developments related to the disclosure in “Part I - Item 3. Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2011.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

  None.  

 
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ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

     None.

ITEM 4.  MINE SAFETY DISCLOSURES.
 
                 Not applicable to our company.

ITEM 5.  OTHER INFORMATION.

     None.

ITEM 6.  EXHIBITS.

Exhibit No.
 
Description
 
3.1
 
Articles of Incorporation (Incorporated by reference to registration statement on from 10-SB, SEC File No. 0-31497, as filed with the SEC on September 11, 2000, as amended).
 
3.2
 
Articles of Amendment to the Articles of Incorporation (Incorporated by reference to registration statement on from 10-SB, SEC File No. 0-31497, as filed with the SEC on September 11, 2000, as amended).
 
3.3
 
Articles of Amendment to the Articles of Incorporation (Incorporated by reference to Current Report on Form 8-K as filed with the SEC on September 27, 2006).
 
3.4
 
Articles of Amendment to the Articles of Incorporation (Incorporated by reference to Current Report on Form 8-K as filed with the SEC on January 7, 2008).
 
3.5
 
Articles of Amendment to the Articles of Incorporation (Incorporated by reference to the definitive Information Statement on Schedule 14C as filed with the SEC on February 14, 2008).
 
3.6
 
Bylaws (Incorporated by reference to registration statement on form 10-SB, SEC File No. 0-31497, as filed with the SEC on September 11, 2000, as amended).
 
4.1
 
Form of common stock purchase warrant issued in the 2008 unit offering (Incorporated by reference to Current Report on Form 8-K as filed with the SEC on April 24, 2008).
 
10.1
 
Acquisition Agreement dated as of December 31, 2007 between MediaREADY, Inc., Shandong Jiajia International Freight & Forwarding (Logistics Co.) Ltd. and Messrs. Hui Lui and Wei Chen (Incorporated by to reference to Current Report on Form 8-K as filed with the SEC on January 7, 2008).
 
10.2
 
Amendment to Acquisition Agreement as of January 28, 2008 between MediaREADY, Inc., Shandong Jiajia International Freight & Forwarding (Logistics Co.) Ltd. and Messrs. Hui Lui and Wei Chen (Incorporated by to reference to Current Report on Form 8-K as filed with the SEC on January 31, 2008).
 
10.3
 
Amendment to Acquisition Agreement as of March 13, 2008 between MediaREADY, Inc., Shandong Jiajia International Freight & Forwarding (Logistics Co.) Ltd. and Messrs. Hui Lui and Wei Chen (Incorporated by to reference to Current Report on Form 8-K as filed with the SEC on March 18, 2008).
 
10.4
 
Form of subscription agreement for 2008 unit offering (Incorporated by to reference to Current Report on Form 8-K as filed with the SEC on April 14, 2008).
 
10.5
 
Lease Agreement dated June 1, 2011 between Wei Chen and Shandong Jiajia International Freight & Forwarding ,Ltd.*(Incorporated by reference to the Annual Report on Form 10-K for the period ended December 31, 2011)
 
10.6
 
Office Lease Contract dated January 26, 2011 between Sinochem International Information Company, Qingdao Branch (On behalf of China Foreign Economic and Trade Trust Limited Company) and Shandong Jiajia International Freight & Forwarding ,Ltd.*(Incorporated by reference to the Annual Report on Form 10-K for the period ended December 31, 2011)
 
10.7
 
Rental Agreement dated March 25, 2011between Yonggan Fan and Shandong Jiajia International Freight & Forwarding ,Ltd. *(Incorporated by reference to the Annual Report on Form 10-K for the period ended December 31, 2011)
 
10.8
 
Lease Agreement dated December 31, 2011 between Xiangfen Chen and Shandong Jiajia International Freight & Forwarding, Ltd. *(Incorporated by reference to the Annual Report on Form 10-K for the period ended December 31, 2011)
 
10.9
 
Promissory Notes due China Direct Investments, Inc. including note extension *(Incorporated by reference to the Annual Report on Form 10-K for the period ended December 31, 2011)
 
10.10
 
Employment Agreement dated October 12, 2011 between China Logistics Group, Inc. and Yuan Huang *(Incorporated by reference to the Annual Report on Form 10-K for the period ended December 31, 2011)
 
14.1
 
Code of Business Conduct and Ethics (Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 2007).
 
21.1
 
Subsidiaries of the Registrant (Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 2007).

 
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31.1
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer *
 
31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer *
 
32.1
 
Section 1350 Certification of Chief Executive Officer*
 
32.2
 
Section 1350 Certification of Chief Financial Officer*
101.INS
 
XBRL INSTANCE DOCUMENT **
101.SCH
 
XBRL TAXONOMY EXTENSION SCHEMA **
101.CAL
 
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE **
101.DEF
 
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE **
101.LAB
 
XBRL TAXONOMY EXTENSION LABEL LINKBASE **
101.PRE
 
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE **

    *  filed herewith.
 
    ** In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date: August 8 , 2012
 
CHINA LOGISTICS GROUP, INC.
     
 
By:  
/s/ Wei Chen
   
Wei Chen
   
Chairman, Chief Executive Officer and President
(principal executive officer)
     
 
By:
/s/ Yuan Huang
   
Yuan Huang
   
Chief Financial Officer (principal financial and accounting officer)


 
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