UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2016

 

☐ 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: 001-34393

 

CHINA AUTO LOGISTICS INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada		98-0657597
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
Floor 1 FTZ International Auto Mall
86 Tianbao Avenue, Free Trade Zone
Tianjin Province, The People’s Republic of China		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 ☒ No ☐

 

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

 

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

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☒

 

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

 

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 November 11, 2016
Common Stock, $.001 par value per share		4,034,394 shares

 

 

 

TABLE OF CONTENTS

 

PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements	1
	CONDENSED CONSOLIDATED BALANCE SHEETS	1
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)	2
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)	3
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)	4
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	41
PART II.	OTHER INFORMATION	42
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	42
SIGNATURES		43

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CHINA AUTO LOGISTICS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 30, 2016 (Unaudited)				December 31, 2015
ASSETS:
Current assets:
Cash and cash equivalents		$	1,390,772			$	7,119,686
Restricted cash			24,978,329				23,799,346
Receivable related to financing services			48,607,894				82,105,826
Inventories			19,382,417				12,163,511
Advances to suppliers			63,333,915				100,807,121
Prepaid expenses			41,153				29,372
Recoverable and accrued value added tax receivable			1,725,419				369,940
Total current assets			159,459,899				226,394,802
Property, plant, and equipment, net			352,929				72,742
Other assets			31,577				-
Non current assets of discontinued operations			-				61,755,609
Total assets		$	159,844,405			$	288,223,153
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Bank overdraft		$	-			$	2,131,009
Lines of credit related to financing services			47,161,036				73,004,179
Short term borrowings			13,494,508				67,290,734
Accounts payable			3,210,172				1,334,829
Notes payable to suppliers			26,989,015				33,509,483
Accrued expenses			109,365				273,497
Customer deposits			39,976,474				39,901,621
Deferred revenue			71,061				121,456
Due to former shareholder			2,037,104				2,093,182
Due to director			1,265,476				722,028
Income tax payable			577,270				656,098
Deferred tax liability			-				246,745
Current liabilities of discontinued operations			-				35,911,671
Total current liabilities			134,891,481				257,196,532
Non current liability of discontinued operations			-				9,248,814
Total liabilities			134,891,481				266,445,346
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, 4,034,394 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively			4,034				4,034
Additional paid-in capital			22,979,734				22,979,734
Accumulated other comprehensive income			5,026,061				5,776,306
Accumulated deficit			(3,421,910	)			(7,347,222	)
Total China Auto Logistics Inc. shareholders’ equity			24,587,919				21,412,852
Noncontrolling interests			365,005				364,955
Total equity			24,952,924				21,777,807
Total liabilities and shareholders’ equity		$	159,844,405			$	288,223,153

 

The accompanying notes form an integral part of these condensed consolidated financial statements

 

 

CHINA AUTO LOGISTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Net revenue		$	96,293,622			$	150,170,868			$	327,177,025			$	331,209,443
Cost of revenue			95,671,721				149,129,426				324,958,268				328,853,778
Gross profit			621,901				1,041,442				2,218,757				2,355,665
Operating expenses:
Selling and marketing			180,371				209,190				532,676				570,719
General and administrative			460,664				375,992				1,374,340				1,167,947
Total operating expenses			641,035				585,182				1,907,016				1,738,666
(Loss) income from continuing operations			(19,134	)			456,260				311,741				616,999
Other income (expenses)
Interest income			18,811				99,754				233,274				214,122
Interest expense			(202,803	)			(622,156	)			(1,331,835	)			(2,050,389	)
Gain on sale of property and equipment			-				-				2,707				(8,254	)
Loss on sale of equity interest in subsidiary			-				(209,638	)			-				(209,638	)
Miscellaneous			3,091				(29	)			6,546				133
Total other expenses			(180,901	)			(732,069	)			(1,089,308	)			(2,054,026	)
Loss from continuing operations before income taxes			(200,035	)			(275,809	)			(777,567	)			(1,437,027	)
Income tax expense			-				78,350				87,737				186,022
Net loss from continuing operations			(200,035	)			(354,159	)			(865,304	)			(1,623,049	)
Discontinued operations:
Income (loss) from operations of discontinued Airport Automall Automotive Services (including gain on disposal of $6,701,350 for the nine months ended September 30, 2016)			-				1,373,179				4,543,918				(2,734,650	)
Income tax benefit			-				(229,737	)			(246,791	)			(693,675	)
Net income (loss) from discontinued operations			-				1,602,916				4,790,709				(2,040,975	)
Net loss (income)			(200,035	)			1,248,757				3,925,405				(3,664,024	)
Less: Net (loss) income attributable to noncontrolling interests			(35	)			(123	)			93				(1,100	)
Net (loss) income attributable to shareholders of China Auto Logistics Inc.		$	(200,000	)		$	1,248,880			$	3,925,312			$	(3,662,924	)
Net (loss) income attributable to shareholders of China Auto Logistics Inc.
– continuing operations		$	(200,000	)		$	(354,036	)		$	(865,397	)		$	(1,621,949	)
– discontinued operations			-				1,602,916				4,790,709				(2,040,975	)
		$	(200,000	)		$	1,248,880			$	3,925,312			$	(3,662,924	)
(Loss) income per share attributable to shareholders of China Auto Logistics Inc. from
– continuing operations - basic and diluted		$	(0.05	)			(0.09	)		$	(0.21	)		$	(0.40	)
– discontinued operations - basic and diluted		$	-			$	0.40			$	1.19			$	(0.51	)
Total (loss) income per share attributable to shareholders of China Auto Logistics Inc.		$	(0.05	)		$	0.31			$	0.98			$	(0.91	)
Weighted average number of common shares Outstanding
– basic and diluted			4,034,494				4,034,494				4,034,494				4,034,494

 

The accompanying notes form an integral part of these condensed consolidated financial statements

 

 

CHINA AUTO LOGISTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Net (loss) income		$	(200,035	)		$	1,248,757			$	3,925,405			$	(3,664,024	)
Other comprehensive (loss) income
Foreign currency translation adjustments			(111,136	)			(1,407,306	)			(750,288	)			(1,117,777	)
Comprehensive (loss) income			(311,171	)			(158,549	)			3,175,117				(4,781,801	)
Less: Comprehensive (loss) income attributable to noncontrolling interests			(99	)			(93	)			50				(838	)
Comprehensive (loss) income attributable to shareholders of China Auto Logistics Inc.		$	(311,072	)		$	(158,456	)		$	3,175,067			$	(4,780,963	)

 

The accompanying notes form an integral part of these condensed consolidated financial statements

 

 

CHINA AUTO LOGISTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		Nine Months Ended September 30,
		2016				2015
Cash flows from operating activities
Net income (loss)		$	3,925,405			$	(3,664,024	)
Add: loss from discontinued operations			1,910,641				2,040,975
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation on property, plant and equipment			58,532				49,164
Amortization on customer relations			-				82,799
(Gain) loss on disposal of property and equipment			(5,702	)			8,254
Loss on sale of equity interest in subsidiary			-				209,638
Change in allowance for receivable related to financing services			(68,813	)			-
Change in Inventory reserve			-				692
Change in reserve for advances to suppliers			(76,554	)			104,719
Gain on sale of Zhonghe			(6,701,350	)			-
Changes in operating assets and liabilities:
Restricted cash			(35,507,788	)			(29,328,731	)
Accounts receivable			-				1,291
Receivables related to financing services			31,710,041				12,822,334
Inventories			(7,938,670	)			(1,215,690	)
Advances to suppliers			(54,723,792	)			(42,899,839	)
Prepaid expenses, other current assets and other assets			(14,304	)			(8,933	)
Value added tax receivable			(1,390,994	)			226,351
Other assets			(32,244	)			-
Accounts payable			1,952,284				1,553,900
Line of credit related to financing services			(24,103,238	)			6,160,561
Notes payable to suppliers			36,344,159				36,809,837
Accrued expenses			318,354				(59,694	)
Accrued interest			897,826				(1,570,313	)
Customer deposits			2,161,062				13,588,419
Deferred revenue			(47,981	)			(724,987	)
Income tax payable			(62,549	)			29,376
Cash used in operating activities from continuing operations			(51,395,675	)			(5,783,901	)
Cash used in operating activities from discontinued operations			(1,299,109	)			(640,931	)
Net cash used in operating activities			(52,694,784	)			(6,424,832	)
Cash flows from investing activities
Cash proceeds from sale of Zhonghe, net of cash at Zhonghe of $175,767 and amount owed to Zhonghe of $4,092,476			21,750,802				-
Proceeds from disposal of property and equipment			8,563				9,275
Proceeds from sale of equity interest in Zhengji, net			-				3,030,303
Purchase of property and equipment			(342,435	)			(2,318	)
Cash provided by investing activities from continuing operations			21,416,930				3,037,260
Cash provided by investing activities from discontinued operations			-				-
Net cash provided by investing activities			21,416,930				3,037,260
Cash flows from financing activities
Bank overdraft			(2,117,974	)			(91,222	)
Proceeds from short-term borrowings			84,846,873				88,339,880
Repayments of short-term borrowings			(57,538,686	)			(86,160,953	)
Proceeds from director			484,919				599,120
Repayments to director			-				(455,373	)
Cash provided by financing activities from continuing operations			25,675,132				2,231,452
Cash provided by financing activities from discontinued operations			-				-
Net cash provided by financing activities			25,675,132				2,231,452
Effect of exchange rate change on cash			(126,192	)			(199,829	)
Net decrease in cash and cash equivalents			(5,728,914	)			(1,355,949	)
Cash and cash equivalents at the beginning of period			7,119,686				7,793,952
Cash and cash equivalents at the end of period		$	1,390,772			$	6,438,003
Supplemental disclosure of cash flow information
Interest paid		$	3,958,670			$	8,369,596
Income taxes paid		$	150,355			$	149,194
Non-cash activities:
Assumption of outstanding payable to former owner of Zhonghe by Huitong to offset the sale price of Zhonghe		$	36,755,594			$	-

 

The accompanying notes form an integral part of these condensed consolidated financial statements

 

 

CHINA AUTO LOGISTICS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(1)	Organization, Nature of Business and Basis of Presentation, Going Concern, and 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”) and Shisheng’s wholly owned and majority owned subsidiaries, Tianjin Ganghui Information Technology Corp. (“Ganghui”), and Tianjin Hengjia Port Logistics Corp. (“Hengjia”).

 

The Company’s principal businesses include (i) sales of imported automobiles, (ii) financing services related to imported automobiles, and (iii) other services including automobile information websites and advertising services, and logistics services related to the automobile importing process and other automobile value added services, such as assistance with customs clearance, storage and nationwide delivery services.

 

On June 1, 2016, Shisheng entered into (i) an Equity Transfer Agreement (“Equity Transfer Agreement”) with Wuxi Huitong Automobile Sales and Service Co., Ltd. (“Huitong”) to sell 100% of the equity of Tianjin Zhonghe Automobile Sales and Service Co., Ltd. (“Zhonghe”), a wholly owned subsidiary of the Company prior to this transaction, and (ii) a Debt Transfer Agreement, dated June 1, 2016, by and among Shisheng, Huitong, and Hezhong (Tianjin) International Development Co., Ltd. (“Hezhong”) (the “Debt Transfer Agreement”). Zhonghe owns and operates the Airport International Automall located in the Tianjin Airport Economic Area and owns 40% of Tianjin Car King Used Car Trading Company Ltd. (“Car King Tianjin”). Upon the completion of this transaction, the Company relinquished ownership of the Airport International Automall property and its 40% of Car King Tianjin. As a result, the Airport Automall Automotive Services business has been discontinued.

 

The accompanying condensed consolidated balance sheet as of December 31, 2015, 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 (the “SEC”). 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 (“U.S. 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 September 30, 2016 and the results of its operations for the three-month and nine-month periods ended September 30, 2016 and 2015 and cash flows for the nine-month periods ended September 30, 2016 and 2015. 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, 2015. The results of operations for the three-month and nine-month periods ended September 30, 2016 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 U.S. 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.

 

 

Going Concern

 

The Company incurred operating losses and had negative operating cash flows and may continue to generate negative cash flows as the Company implements its business plan for 2016. There can be no assurance that the Company’s continuing efforts to execute its business plan will be successful and that the Company will be able to continue as a going concern. The accompanying interim condensed consolidated financial statements have been prepared in conformity with US GAAP, which contemplates the Company’s continuation as a going concern. The Company’s net loss from continuing operations attributable to shareholders was $200,000 and $354,036 for the three months ended September 30, 2016 and 2015, respectively, and $865,397 and $1,621,949 for the nine months ended September 30, 2016 and 2015, respectively.

 

As of September 30, 2016, the Company has an accumulated deficit of $3,421,910 and net cash used in operating activities from continuing operations of $51,395,675 during the nine months ended September 30, 2016. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

On June 1, 2016, the Company sold 100% equity interest in Zhonghe to Huitong for approximately $62.8 million and entered into a Debt Transfer Agreement which transferred the outstanding payable balance related to the Zhonghe acquisition of approximately $36.8 million to Huitong. The Company received net cash proceeds of approximately $21.9 million (net of payable to Zhonghe of approximately $4.1 million). The Company expects to use the cash proceeds for working capital.

 

The Company does not currently have sufficient cash or commitments for financing to sustain its operations for the next twelve months. The Company’s plan continues to be to develop new customer relationships and substantially increase our cash flows from operations and revenue derived from our products/services. If the Company’s revenues do not reach the level anticipated in our plan, the Company may require additional financing in order to execute our operating plan. If additional financing is required, the Company cannot predict whether this additional financing will be in the form of equity, debt, or another form, and the Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that financing sources are not available, or that the Company is unsuccessful in increasing its revenues and profits, the Company may be unable to implement its current plans for expansion, repay our debt obligations or respond to competitive pressures, any of which would have a material adverse effect on its business, prospects, financial condition and results of operations. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses in the condensed consolidated financial statements and accompanying notes. Significant accounting estimates reflected in the Company’s condensed consolidated financial statements include the collectibility of accounts receivable, the useful lives and impairment of property and equipment, goodwill and intangible assets, the valuation of deferred tax assets and inventories and the provisions for income taxes. Actual results could differ from those estimates.

 

Principles of Consolidation

 

The condensed 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 condensed consolidated financial statements. On June 1, 2016, the Company sold 100% of the equity interest in Zhonghe. Accordingly, Zhonghe’s operating results have been consolidated with the Company’s condensed consolidated financial statements through May 31, 2016.

 

 

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 September 30, 2016 and December 31, 2015 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 foreign currency translation adjustments are recorded in determining other comprehensive income in the condensed consolidated statements of comprehensive income and as a separate component of equity in the condensed consolidated balance sheets.

 

Revenue Recognition

 

The Company’s main source of income was generated through (1) sales of automobiles, (2) service fees for assisting customers to get bank financing on purchases of automobiles, (3) web-based advertising services including fees from (i) displaying graphical advertisements on the Company websites and (ii) web-based listing services that allow customers to place automobile related information on the Company’s websites, and (4) automobile value added services.

 

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 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 graphical 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 offers sales incentives to its customers in the form of (i) subscription exemption, (ii) discounted prices and (iii) free advertisements. The Company classifies sales incentives as a reduction of net revenues. Revenues, net of discounts and allowances, are recognized ratably over the service periods.

 

The Company recognizes revenue from automobile value added services when such services are performed.

 

Value added taxes (“VAT”) 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 VAT on a net basis. Through April 30, 2016, the Company recorded and paid business taxes based on a percentage of the net service revenues and reported the service revenue net of the business taxes and other sales related taxes. Effective May 1, 2016, VAT replaced business tax in all industries, on a nationwide basis. A VAT rate of 6% applies to revenue derived from the provision of certain services. Unlike business tax, a taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the output VAT chargeable on the revenue from services provided. Accordingly, although the 6% VAT rate is higher than the previously applicable 5% business tax rate, no materially different tax cost to the Company has resulted nor does the Company expect a materially different tax cost to result from the replacement of the business tax with a VAT on the Company’s services.

 

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 condensed 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. During the year ended December 31, 2015, the Company experienced difficulties in collecting the receivable from a financing service customer, but the receivable was secured by certain imported automobiles. The Company took possession of these secured automobiles and sold them during the year ended December 31, 2015. The sales proceeds were used to offset the outstanding receivable from this customer. The Company will continue to pursue collecting the remaining receivable balance. As of September 30, 2016 and December 31, 2015, the Company recorded an allowance for uncollectible account on receivable related to financing services in the amount of $2,931,307 and $3,081,331, respectively.

 

Inventories

 

Inventory is stated at the lower of cost (using the specific identification method) or market (net realizable). We continually evaluate the composition of our inventory, assessing slow-moving and ongoing products. Our products are 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. As of September 30, 2016 and December 31, 2015, there was no reserve for obsolescence.

 

Basic and Diluted Earnings (Loss) Per Share

 

Basic earnings (loss) per common share is computed by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings (loss) 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 September 30, 2016 and 2015, the Company did not have any common stock equivalents, therefore, the basic earnings (loss) per share is the same as the diluted earnings (loss) per share.

 

New Accounting Standards

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance.  The standard is effective for public entities for annual and interim periods beginning after December 15, 2017.  Early adoption is permitted as of one year prior to the current effective date. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company is in the process of evaluating the impact of adoption on the Company's consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern, Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how reporting entities must disclose going concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date of issuance of the entity's financial statements. Additionally, an entity must provide certain disclosures if there is substantial doubt about the entity's ability to continue as a going concern. The new standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company is in the process of evaluating the impact of adoption on the Company's consolidated financial statements.

 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Under ASU 2015-17, a reporting entity is required to classify deferred tax assets and liabilities as noncurrent in a classified statement of financial position. Current guidance requiring the offsetting of deferred tax assets and liabilities of a tax-paying component of an entity and presentation as a single noncurrent amount is not affected. The standard is effective for public entities for the annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for financial statements as of the beginning of an interim or annual reporting period. Entities may apply the update prospectively to all deferred tax assets and liabilities, or retrospectively for all periods presented. The effects of this update on our financial position, results of operations and cash flows are not expected to be material.

 

 

The FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted for all public business entities and all nonpublic business entities upon issuance. The Company has not yet determined the effect of the adoption of this standard on the Company’s consolidated financial position and results of operations.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718). ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public companies, the amendments in this standard are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The effects of this standard on our financial position, results of operations and cash flows are not expected to be material.

 

The Company is not aware of any recently issued accounting pronouncements that, when adopted, will have a material effect on the Company’s financial position, results of operations or cash flows.

 

(2)	Sale of Zhonghe

 

On June 1, 2016, Shisheng entered into (i) an Equity Transfer Agreement with Huitong to sell 100% of the equity of Zhonghe, and (ii) a Debt Transfer Agreement, by and among Shisheng, Huitong, and Hezhong. Zhonghe owns and operates the Airport International Automall located in the Tianjin Airport Economic Area and owns 40% of Car King Tianjin.

 

Under the terms of the Equity Transfer Agreement, the sale price for the Zhonghe equity was approximately $62.8 million (RMB 410,000,000). The sale price was payable in two parts: (i) Huitong paid Shisheng approximately $26 million (RMB 169,938,192) in cash and (ii) under the terms of the Debt Transfer Agreement, Huitong assumed Shisheng’s outstanding payment obligations to Hezhong of $36.8 million (RMB 240,061,808) under the Equity Transfer Agreement, dated November 30, 2013, by and between Hezhong and Shisheng. Upon signing, Shisheng transferred control of Zhonghe to Huitong. Failure by either party to fulfill their obligations under the Debt Transfer Agreement may result in the termination of the Equity Transfer Agreement, as well as a penalty of 10% of the total transfer price.

 

Upon the completion of this transaction, the Company relinquished ownership of the Airport International Automall property and its 40% ownership of Car King Tianjin.

 

Zhonghe operated in two segments, Sales of Automobiles and Airport Automall Automotive Services. As a result of the sale of Zhonghe, the airport automall automotive services unit has been discontinued. The disposal of Zhonghe and its Sales of Automobiles division is not considered a strategic shift on the Company’s Sales of Automobiles as such disposal does not impact any of the geographic coverage, line of business or any other divisions or operations of the Company. Therefore the Company concluded that the disposal of Zhonghe’s Sales of Automobiles division should not be classified as discontinued operations.

 

 

The Airport Automall Automotive Services unit was comprised of two sectors including (1) the rental of the airport automall and (2) the joint venture investment in Car King Used Cars. Huitong obtained control of Zhonghe on June 1, 2016. After the completion of the disposal, the Company is no longer involved with the rental or used car business and has no continuing cash inflows or outflows from this unit. The disposal of the Airport Automall Automotive Services unit has a material impact on the Company’s cash flow and operating results. Therefore the Company concluded that the disposal of the Airport Auto Mall Automotive Services unit should be classified as discontinued operations.

 

The income (loss) from discontinued operations presented in the condensed statements of operations consists of the following for the three months and nine months ended September 30, 2016 and 2015:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Net revenue		$	-			$	1,450,886			$	326,988			$	1,450,886
Cost of revenue			-				-				-				-
Gross profit			-				1,450,886				326,988				1,450,886
(Recovery of operating expenses) operating expenses			-				(937,664	)			945,283				290,437
Income (loss) from discontinued operations			-				2,388,550				(618,295	)			1,160,449
Other expenses			-				(1,015,371	)			(1,539,137	)			(3,895,099	)
Income (loss) from discontinued operations before income tax benefits			-				1,373,179				(2,157,432	)			(2,734,650	)
Gain on sale of discontinued operations			-				-				6,701,350				-
Gain (loss) on discontinued operations before income tax benefits			-				1,373,179				4,543,918				(2,734,650	)
Income tax benefit			-				(229,737	)			(246,791	)			(693,675	)
Net income (loss) from discontinued operations		$	-			$	1,602,916			$	4,790,709			$	(2,040,975	)

 

(3)	Restricted Cash

 

Restricted cash consists of cash which is not available for use in the Company’s operations and is summarized as follows:

 

		September 30,				December 31,
		2016				2015
Collateral for bank’s issuance of letters of credit to the Company’s customers		$	3,986,872			$	4,921,950
Collateral for notes payable to suppliers			20,991,457				18,877,396
		$	24,978,329			$	23,799,346

 

 

(4)	Property and Equipment

 

A summary of property and equipment is as follows:

 

		September 30,				December 31,
		2016				2015
Computers			75,101				74,057
Office equipment, furniture and fixtures			46,608				44,731
Leasehold improvements			155,480				32,354
Automobiles			1,081,408				970,810
			1,358,597				1,121,952
Less: Accumulated depreciation and amortization			(1,005,668	)			(1,049,210	)
		$	352,929			$	72,742

 

Depreciation and amortization expenses for property and equipment from continuing operations amounted to $22,811 and $11,053 for the three months ended September 30, 2016 and 2015, respectively, and $58,532 and $49,164, for the nine months ended September 30, 2016 and 2015, respectively. Depreciation and amortization for property and equipment from discontinued operations amounted to $0 and $550,468 for the three months ended September 30, 2016 and 2015, respectively, and $869,103 and $1,682,711 for the nine months ended September 30, 2016 and 2015, respectively.

 

(5)	Bank Overdraft

 

In January 2015, the Company entered into an overdraft agreement with PuDong Development Bank. Under the terms of the agreement, the Company can draw on its bank account up to $2,249,085 (RMB15,000,000) in excess of the funds on deposit. The overdraft amount is subject to an annual interest rate of 6.72% and the maximum overdraft period cannot exceed 89 days. The overdraft agreement is guaranteed by Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and a non-related entity which is a supplier of the Company, and matured in December 2015. The outstanding balance of the facility was $2,131,009 as of December 31, 2015.

 

In January 2016, the Company entered into an overdraft agreement with PuDong Development Bank. Under the terms of the agreement, the Company can draw on its bank account up to $2,249,085 (RMB15,000,000) in excess of the funds on deposit. The overdraft amount is subject to an annual interest rate of 6% and the maximum overdraft period cannot exceed 89 days. The overdraft agreement is guaranteed by Mr. Tong Shiping, the Company’s Chairman, President and CEO, Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and a non-related entity which is a supplier of the Company, and matures in December 2016. The outstanding balance of the facility was $0 as of September 30, 2016.

 

 

(6)	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 10% to 15% of the purchase price of the automobiles. If customers default on payment, the banks take custody of the automobiles until the borrowings are fully repaid.

 

Interest charged by the banks for draws on these facility lines of credit is classified as cost of revenue in the consolidated statements of operations. Interest expense related to these lines of credit was $539,650 and $946,254 for the three months ended September 30, 2016 and 2015, respectively and $1,771,252 and $2,572,409 for the nine months ended September 30, 2016 and 2015, respectively.

 

A summary of the Company’s lines of credit related to financing services follows:

 

China Merchants Bank

 

In March 2015, the Company entered into a facility line of credit agreement with China Merchants Bank, pursuant to which the Company can borrow a maximum amount of $10,495,728 (RMB70,000,000). Borrowings under this facility line of credit bear interest at rates to be determined upon drawing and bear interest at rate of 4.79% per annum, during the three months ended September 30, 2016 and borrowings under this facility were repayable within 3 months from the dates of drawing. As of December 31, 2015, the Company had an outstanding balance of $6,613,276 under this facility line of credit. This facility line of credit is guaranteed by Mr. Tong Shiping, the Company’s Chairman, President and CEO, Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and a non-related entity which is a supplier of the Company, and matured in March 2016 which was not renewed.

 

Agricultural Bank of China

 

In September 2015 the Company entered into a facility line of credit agreement with Agricultural Bank of China, pursuant to which the Company can borrow a maximum amount of $71,970,708 (RMB480,000,000). This facility line of credit is guaranteed by five non-related entities, which are customers, suppliers or both. Borrowings under this facility line of credit bore interest at rates ranging from 3.60% to 5.01% per annum, and were repayable within 3 months to 4 months from the date of the drawing. As of September 30, 2016 and December 31, 2015, the Company had outstanding balances of $0 and $33,531,505, respectively, under this facility line of credit. This facility matured in September 2016 and was not renewed.

 

In September 2016 the Company entered into a facility line of credit agreement with Agricultural Bank of China, pursuant to which the Company can borrow a maximum amount of $71,970,708 (RMB480,000,000). This facility line of credit is guaranteed by five non-related entities, which are customers, suppliers or both. Borrowings under this facility line of credit bore interest at rates ranging from 3.60% to 5.01% per annum, and were repayable within 3 months to 4 months from the date of the drawing. As of September 30, 2016 and December 31, 2015, the Company had outstanding balances of $36,060,181 and $0, respectively, under this facility line of credit. This facility matures in September 2017.

 

PuDong Development Bank

 

In December 2015, the Company entered into a facility line of credit agreement with PuDong Development Bank, pursuant to which the Company can borrow a maximum amount of $17,992,677 (RMB120,000,000). Borrowings under this facility line of credit bear interest at rates ranging from 4.48% to 5.66% per annum, and are repayable within 3 months from the dates of drawing. As of September 30, 2016 and December 31, 2015, the Company had outstanding balances of $4,565,635 and $8,091,241, respectively, under this facility line of credit. This facility line of credit is guaranteed by Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and a non-related entity, which is a supplier of the Company, and matures in December 2016.

 

 

China Zheshang Bank

 

In August 2015, the Company entered into a facility line of credit agreement with China Zheshang Bank, pursuant to which the Company can borrow a maximum amount of $26,989,015 (RMB180,000,000). This facility line of credit is guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, and (iv) Zhonghe, the Company’s former subsidiary, (v) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. Borrowings under this facility line of credit bore interest at a rate of 4.5% per annum, and are repayable within 3 months to 6 months from the dates of drawing. As of September 30, 2016 and December 31, 2015, the Company had outstanding balances of $0 and $8,374,161, respectively, under this facility line of credit. This facility matured in August 2016.

 

In August 2016, the Company entered into a facility line of credit agreement with China Zheshang Bank, pursuant to which the Company can borrow a maximum amount of $32,986,574 (RMB220,000,000). This facility line of credit is guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Kai Li Xing Kong Real Property Ltd., Co., an entity majorly owned by Ms. Cheng Weihong (v) Zhonghe, the Company’s former subsidiary, and (vi) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. Borrowings under this facility line of credit bear interest at a rate of 4.5% per annum, and are repayable within 3 months to 6 months from the dates of drawing. As of September 30, 2016, the Company had outstanding balances of $2,522,070 under this facility line of credit. This facility matures in August 2017.

 

Industrial and Commercial Bank of China

 

In June 2015, the Company entered into a facility line of credit agreement with Industrial and Commercial Bank of China, pursuant to which the Company can borrow a maximum amount of $14,993,897 (RMB100,000,000). This facility line of credit is guaranteed by Zhonghe, the Company’s former subsidiary. Borrowings under this facility line of credit bear interest at rates ranging from 3.2% to 4.25% per annum, and are repayable within 3 months to 6 months from the dates of drawing. As of September 30, 2016 and December 31, 2015, the Company had outstanding balances of $0 and $5,431,703, respectively, under this facility line of credit. This facility matured in June 2016 and was not renewed.

 

China Minsheng Bank

 

In April 2015, the Company entered into a facility line of credit agreement with China Minsheng Bank, pursuant to which the Company can borrow a maximum amount of $11,995,118 (RMB80,000,000). This facility line of credit is guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, and (iv) Zhonghe, the Company’s former subsidiary. Borrowings under this facility line of credit bore interest at rates ranging from 1.03% to 1.32% per annum, and were repayable on the due dates, which were determined prior to each draw. As of September 30, 2016 and December 31, 2015, the Company had outstanding balances of $0 and $6,248,270, respectively, under this facility line of credit. This facility matured in April 2016 and was not renewed.

 

Shengjing Bank

 

In November 2015, the Company entered into a facility line of credit agreement with Shengjing Bank, pursuant to which the Company can borrow a maximum amount of $7,496,949 (RMB50,000,000). This facility line of credit is guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and (iii) Tianjin Ning Chuan International Trading co., Ltd., a supplier. Borrowings under this facility line of credit bear interest at rates of 4.8% to 5.0% per annum, and are repayable within 3 months to 6 months from the dates of drawing. As of September 30, 2016 and December 31, 2015, the Company had outstanding balances of $4,013,150 and $4,714,023 under this facility line of credit. This facility matures in November 2016.

 

 

(7)	Short Term Borrowings

 

Agricultural Bank of China

 

In January 2016, the Company entered into three working capital loan agreements with Agricultural Bank of China to obtain short term financing. Under the terms of these agreements, the Company can borrow up to $12,145,057 (RMB81,000,000). The outstanding balance totaled $0 as of September 30, 2016. These short term loans bear interest at a rate of 4.785% per annum, matures in January 2017, and is guaranteed by (i) Tianjin Binhai International Automall Ltd. Co., a customer, and (ii) Tianjin Ning Chuan International Trading Ltd. Co., a supplier, (iii) Tianjin Jing Dian Automobile Sales Information Ltd. Co., a supplier, (iv) Tianjin Shi Mao International Trading Ltd. Co., a supplier, and (v) Tianjin Ying Zhi Jie International Logistics Ltd. Co., a supplier. This loan was disposed of as a result of sale of Zhonghe.

 

In June 2016, the Company entered into two working capital loan agreements with Agricultural Bank of China to obtain short term financing. Under the terms of these agreements, the Company can borrow up to $6,597,315 (RMB44,000,000). One of the loan agreements in the amount of $599,756 (RMB4,000,000) expired in September 2016 and the outstanding balance was repaid. The other loan agreement had an outstanding balance of $5,997,559 as of September 30, 2016. The other loan agreement bears interest at a rate of 4.785% per annum, matures in January 2017, and is guaranteed by (i) Tianjin Binhai International Automall Ltd. Co., a customer, and (ii) Tianjin Ning Chuan International Trading Ltd. Co., a supplier, (iii) Tianjin Jing Dian Automobile Sales Information Ltd. Co., a supplier, (iv) Tianjin Shi Mao International Trading Ltd. Co., a supplier, and (v) Tianjin Ying Zhi Jie International Logistics Ltd. Co., a supplier.

 

China Zheshang Bank

 

In February and March 2016, the Company entered into three loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $4,498,169 (RMB30,000,000). Borrowings under these loan agreements bore interest at a rate of 4.35% for a borrowing period of six months and were guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Zhonghe, the Company’s former subsidiary, and (v) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $0 as of September 30, 2016. These loans matured in August and September 2016.

 

In May and June 2016, the Company entered into three loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $2,998,780 (RMB20,000,000). Borrowings under these loan agreements bear interest at a rate of 4.35% for a borrowing period of six months and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Zhonghe, the Company’s former subsidiary, and (v) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $2,998 as of September 30, 2016. These loans mature in November and December 2016.

 

In July and August 2016, the Company entered into five loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $4,498,169 (RMB30,000,000). Borrowings under these loan agreements bear interest at a rate of 5.655% for a borrowing period of six months and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Zhonghe, the Company’s former subsidiary, and (v) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $4,498,169 as of September 30, 2016. These loans mature in January and February 2017.

 

 

(8)	Notes Payable to Suppliers

 

From time to time, the Company issues notes payable to suppliers, which are guaranteed by various banks. The terms of these notes payable vary depending on the negotiations with the suppliers. Typical terms are in the range of three to six months. Prior to the expiration dates of the notes, the note holders can present these notes to the banks to draw on the note amounts if the Company does not settle the outstanding amount payable to these suppliers. The Company is subject to a bank fee of 0.05% on notes payable amounts.

 

Bank of Jinzhou

 

As of September 30, 2016, the Company had four outstanding notes payable to suppliers, which mature in December 2016, in an aggregate amount of $5,247,864 (RMB35,000,000), the payment of which was guaranteed by Bank of Jinzhou for a period of six months. The Company was required to maintain approximately 50% of the note amounts, or $2,623,933 (RMB17,500,000) as guaranteed funds, which was classified as restricted cash as of September 30, 2016.

 

As of September 30, 2016, the Company had five outstanding notes payable to suppliers, which mature in January 2017, in an aggregate amount of $6,747,254 (RMB45,000,000), the payment of which was guaranteed by Bank of Jinzhou for a period of six months. The Company was required to maintain approximately 50% of the note amounts, or $3,373,627 (RMB22,500,000) as guaranteed funds, which was classified as restricted cash as of September 30, 2016.

 

Agricultural Bank of China

 

As of September 30, 2016, the Company had three outstanding notes payable to suppliers, maturing in January 2017, in an aggregate amount of $14,993,897 (RMB100,000,000), the payment of which was guaranteed by Agricultural Bank of China for a period of one year. The Company was required to maintain approximately 100% of the note amounts, or $14,993,897 (RMB100,000,000) as guaranteed funds, which was classified as restricted cash as of September 30, 2016.

 

The purpose of these arrangements is to provide additional time for the Company to remit payments while ensuring that suppliers do not bear any credit risk, since the suppliers’ payments are guaranteed by the banks.

 

(9)	Major Customers and Suppliers

 

Two customers accounted for approximately 41% and 39% of the Company’s net revenue during the three months and nine months ended September 30, 2016. Two customers accounted for an aggregate of 45% and 39% of the Company’s net revenue during the three months and nine months ended September 30, 2015, respectively.

 

Two suppliers accounted for approximately 27% and 33% of the Company’s purchases during the three months and nine months ended September 30, 2016, respectively. Two suppliers accounted for an aggregate of 44% and 38% of the Company’s purchases during the three months and nine months ended September 30, 2015, respectively.

 

 

(10)	Retained earnings - PRC

 

According to the Law of the PRC on Enterprises with Wholly-Owned Foreign Investment, the Company’s subsidiaries in the PRC are required to make appropriations from after-tax profits as determined under accounting principles generally accepted in the PRC (“PRC GAAP”) to nondistributable reserves. These reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise expansion reserve and (iii) a staff bonus and welfare fund. A wholly-owned PRC subsidiary is not required to make appropriations to the enterprise expansion reserve but annual appropriations to the general reserve are required to be made at 10% of the profit after tax as determined under PRC GAAP at each year-end, until such fund has reached 50% of its respective registered capital. The staff welfare and bonus reserve is determined by the board of directors. The general reserve is used to offset future losses. The subsidiary may, upon a resolution passed by the stockholder, convert the general reserve into capital. The staff welfare and bonus reserve are used for the collective welfare of the employees of the subsidiary. The enterprise expansion reserve is for the expansion of the subsidiary operations and can be converted to capital subject to approval by the relevant authorities. These reserves represent appropriations of the retained earnings determined in accordance with Chinese law.

 

In addition to the general reserve, the Company’s PRC subsidiaries are required to obtain approval from the local PRC government prior to distributing any registered share capital. Accordingly, both the appropriations to general reserve and the registered share capital of the Company’s PRC subsidiary are considered as restricted net assets and are not distributable as cash dividends. As of September 30, 2016 and December 31, 2015, the Company’s statutory reserve fund was approximately $2,638,000 and $2,126,000, respectively.

 

(11)	Related Party Balances and Transactions

 

Ms. Cheng Weihong (the 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. For the nine months ended September 30, 2016 and 2015, the Company made aggregate borrowings from Ms. Cheng Weihong of $484,919 and $599,120, respectively, and made repayments of $0 and $455,373 to Ms. Cheng Weihong. As of September 30, 2016 and December 31, 2015, the outstanding balances due to Ms. Cheng Weihong were $1,265,476 and $722,028, respectively.

 

The Company’s former shareholder, Sino Peace Limited (“Sino Peace”), paid certain accrued expenses in the previous years on behalf of the Company. The amounts of $2,037,104 and $2,093,182 were outstanding as payable related to prior years’ professional fees on the consolidated balance sheets as of September 30, 2016 and December 31, 2015, respectively. In January 2015, the Company received notification from an individual who claimed to be the owner of St. George International Limited ("St. George") and made a claim that the debt owed to Sino Peace by the Company had been transferred to St. George.  However, the Company neither received any evidence to support such assignment nor any notification from the owner of Sino Peace that Sino Peace was transferring its legal right of collecting the receivable from the Company to St. George. The Company has been unable to locate the owner of Sino Peace to confirm such transfer and therefore considers such claim by St. George legally nonbinding at this time.

 

The balances as discussed above as of September 30, 2016 and December 31, 2015 are interest-free, unsecured and have no fixed term of repayment. During the three months and nine months ended September 30, 2016 and 2015, there was no imputed interest charged in relation to these balances.

 

Mr. Tong Shiping and Ms. Cheng Weihong personally guarantee borrowings on various lines of credit related to our financing services and short-term borrowings.

 

 

(12)	Segment Information

 

The Company has three principal operating segments: (1) sales of automobiles, (2) financing services, and (3) other services. These operating segments were determined based on the nature of the 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. On June 1, 2016, the Company disposed the Airport Automall Automotive Services business unit as a result of the sale of Zhonghe. The operating results of the airport auto mall services business are classified as discontinued operations.

 

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 continuing operations of the Company’s operating segments:

 

Three Months Ended September 30, 2016

 

		Sales of Automobiles				Financing Services				Other Services				Corporate				Total
Net revenue		$	95,261,933			$	1,028,259			$	3,430			$	-			$	96,293,622
Cost of revenue			95,132,071				539,650				-				-				95,671,721
Operating expenses
Selling and marketing			76,659				76,658				9,019				18,035				180,371
General and administrative			32,247				32,246				4,607				391,564				460,664
Total operating expenses			108,906				108,904				13,626				409,599				641,035
Income (loss) from continuing operations		$	20,956			$	379,705			$	(10,196	)		$	(409,599	)		$	(19,134	)
Depreciation and Amortization		$	7,804			$	7,804			$	2,745			$	4,458			$	22,811

 

Three Months Ended September 30, 2015

 

		Sales of Automobiles				Financing Services				Other Services				Corporate				Total
Net revenue		$	148,614,443			$	1,541,186			$	15,239			$	-			$	150,170,868
Cost of revenue			148,183,172				946,254				-				-				149,129,426
Operating expenses
Selling and marketing			92,974				92,973				23,243				-				209,190
General and administrative			46,997				46,999				46,999				234,997				375,992
Total operating expenses			139,971				139,972				70,242				234,997				585,182
Income (loss) from continuing operations		$	291,300			$	454,960			$	(55,003	)		$	(234,997	)		$	456,260
Depreciation and Amortization		$	34,021			$	1,544			$	1,785			$	882			$	38,232

 

 

Nine Months Ended September 30, 2016

  

		Sales of Automobiles				Financing Services				Other Services				Corporate				Total
Net revenue		$	323,872,354			$	3,276,141			$	28,530			$	-			$	327,177,025
Cost of revenue			323,187,016				1,771,252				-				-				324,958,268
Operating expenses
Selling and marketing			226,390				226,387				26,634				53,265				532,676
General and administrative			162,376				162,373				23,197				1,026,394				1,374,340
Total operating expenses			388,766				388,760				49,831				1,079,659				1,907,016
Income (loss) from continuing operations		$	296,572			$	1,116,129			$	(21,301	)		$	(1,079,659	)		$	311,741
Depreciation and Amortization		$	23,701			$	17,154			$	7,876			$	9,801			$	58,532

 

Nine Months Ended September 30, 2015

 

		Sales of Automobiles				Financing Services				Other Services				Corporate				Total
Net revenue		$	326,924,561			$	4,235,307			$	49,575			$	-			$	331,209,443
Cost of revenue			326,118,391				2,735,387				-				-				331,209,443
Operating expenses
Selling and marketing			253,654				253,653				63,412				-				570,719
General and administrative			145,987				145,993				145,994				729,973				1,167,947
Total operating expenses			399,641				399,646				209,406				729,973				1,738,666
Income (loss) from continuing operations		$	406,529			$	1,100,274			$	(159,831	)		$	(729,973	)		$	616,999
Depreciation and Amortization		$	108,367			$	9,311			$	8,965			$	5,320			$	131,963

 

Following are total assets by segment:

 

Total Assets

 

		Sales of Automobiles				Financing Services				Other Services				Corporate				Assets of Discontinued Operations				Total
As of September 30, 2016		$	105,942,754			$	53,733,706			$	43,450			$	124,495			$	-			$	159,844,405
As of December 31, 2015		$	133,938,214			$	91,735,299			$	39,790			$	754,241			$	61,755,609			$	288,223,153

 

 

Item 2. Management’s 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 and majority-owned subsidiaries, 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 condensed 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, 2015.

 

 

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 its wholly-owned subsidiary, Community Alliance, Inc. (“Community Alliance”), an entity which marketed 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 the Exchange Agreement with 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 1,950,000 (pre reverse split of 11,700,000) newly-issued shares of our common stock. The Closing occurred on the same day, immediately following the cancellation of an aggregate of 189,167 (pre reverse split 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% of the issued and outstanding common stock of Fresh Ideas Media, Inc., respectively. 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 were those of HKCo. Shortly after the Closing, Fresh Ideas Media, Inc. changed its name from Fresh Ideas Media, Inc. to China Auto Logistics Inc.

 

In connection with the consummation of the Exchange, Fresh Ideas Media, Inc. agreed to consummate 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 and was to be consummated upon the satisfactory resolution of all of the SEC’s comments to the Form 10 registration statement relating to Community Alliance’s common stock and such registration statement’s effectiveness. Upon the consummation of the spin-off, the business and operations of HKCo were 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, Shisheng a company established under the laws of the People’s Republic of China, became a wholly-owned foreign enterprise of HKCo and this arrangement was approved by relevant ministries of the PRC government.

 

Upon the completion of the 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 are classified as a recapitalization of Shisheng and the historical financial statements of Shisheng are reported as the Company’s historical financial statements.

 

On November 1, 2010, Shisheng acquired all issued and outstanding stocks of Qizhong and completed the acquisition simultaneously. As a result, Qizhong became a wholly-owned subsidiary group of the Company and was included in the Company’s consolidated financial statements from the date of acquisition.

 

On March 15, 2011, the Company entered into a Memorandum of Understanding with the former owners of Qizhong and agreed that the remaining cash consideration totaling $2.09 million and the consideration share of 177,238 (pre reverse split of 1,063,427) shares of common stock of the Company should be paid to the former owners of Qizhong no later than June 30, 2011.

 

 

Pursuant to the Agreement and the Memorandum of Understanding, the purchase price, net of cash acquired of $1.68 million from Qizhong, was $4.47 million for the acquisition of 100% of Qizhong’s equity interests. The purchase price of $4.47 million consisted of $1.01 million in cash ($2.69 million payable in cash less cash acquired of $1.68 million from Qizhong) and the issuance of 177,238 (pre reverse split of 1,063,427) shares of common stock valued at approximately $3.46 million. The value of common stock was determined based on $19.50 (pre reverse split of $3.25) per share, the per share price of the Company’s common stock on the acquisition date. The Company remitted approximately $600,000 and the remaining balance of the cash consideration in fiscal years 2010 and 2011, respectively. The 177,238 (pre reverse split of 1,063,427) shares of the Company’s common stock was to be unconditionally issued and was included in the Company’s equity as of December 31, 2010; the Company issued these shares during fiscal year 2011.

 

On November 22, 2013, the Company, through its wholly-owned subsidiary, Zhonghe, entered into a Cooperation Framework Agreement with Car King China, with respect to the establishment of a joint venture that will own and operate a used car business. The establishment of this joint venture was contingent upon the successful completion by the Company of the acquisition of Zhonghe which owns and operates the Airport International Auto Mall, where the used car business will be operated. Following the Zhonghe Acquisition, on November 30, 2013, Tianjin Car King Used Car Trading Company Ltd (the “Joint Venture”) was established in accordance with the terms of the Cooperation Framework Agreement. Pursuant to the terms of the Articles of Association of Car King Tianjin, the Company will contribute approximately $1,303,000 (RMB8,000,000) and Car King China will contribute approximately $1,955,000 (RMB12,000,000) to form Car King Tianjin, which will have total registered capital of approximately $3,258,000 (RMB20,000,000). Prior to being acquired by the Company, Zhonghe contributed approximately $652,000 (RMB4,000,000) in November 2013. The Company is entitled to 40% of Car King Tianjin’s net profit or loss.

 

On November 30, 2013, Shisheng signed the Auto Mall Acquisition Agreement with Hezhong (Tianjin) International Development Ltd. Co. (“Hezhong”) to purchase 100% of the equity of Zhonghe, which owns and operates the Airport International Auto Mall. Under the terms of the Auto Mall Acquisition Agreement, Shisheng will pay RMB559,768,000 (approximately $91.4 million) to Hezhong, in four annual installments with an annualized rate of interest of 6%. The initial payment of RMB240,000,000 (approximately $39.2 million) was paid within 5 business days after the signing of the Agreement. Upon the payment by Shisheng of this first installment, Hezhong transferred control of Zhonghe to Shisheng. Failure by Shisheng to pay the remaining installments may result in the termination of the Auto Mall Acquisition Agreement, as well as a penalty of 10% of the total transfer price. We made an installment payment of approximately $16.3 million in November 2014 and $3.2 million in January 2015. On November 10, 2015, the Company entered into a Payment Extension Agreement with Hezhong to extend the due date for the second $18.6 million installment payment from November 30, 2015 to May 31, 2016. The final installment payment remains to be due on November 30, 2016. The unpaid amount bears interest at a rate of 6% per annum. As of December 31, 2015, unpaid installment payments including interest totaled approximately $36.7 million.

 

On September 23, 2015, the Company sold its 98% equity interest in Zhengji, which was engaged in automobile sales, to Mr. Wu Xiang Yang, an unrelated party, at a price of $3,048,483 (net of cash of $7,408 at Zhengji and amount due to Zhengji of $5,231,941). Zhengji’s assets consisted of automobile inventories of $3,422,658, other assets of $12,493 and other current liabilities of $2,329 on the disposal date resulting in a loss on sale of equity interest in subsidiary in the amount of $210,895 after consideration of the non controlling interest of $173,444 in Zhengji. Zhengji had no material operations during 2015 through the disposal date.

 

On June 1, 2016, Shisheng entered into (i) an Equity Transfer Agreement (“Equity Transfer Agreement”) with Wuxi Huitong Automobile Sales and Service Co., Ltd. (“Huitong”) to sell 100% of the equity of Zhonghe, and (ii) a Debt Transfer Agreement, by and among Shisheng, Huitong, and Hezhong (the “Debt Transfer Agreement”). At the time, Zhonghe was the owner and operator of the Airport International Automall located in the Tianjin Airport Economic Area and the 40%owner of Car King Tianjin.

 

 

Under the terms of the Zhonghe Equity Transfer Agreement, the sale price for the Zhonghe equity was approximately $62.8 million (RMB 410,000,000). The sale price was payable in two parts: (i) Huitong will paid Shisheng approximately $26 million (RMB 169,938,192) in cash and (ii) under the terms of the Debt Transfer Agreement, Huitong assumed Shisheng’s outstanding payment obligations to Hezhong of $36.8 million (RMB 240,061,808) under the Equity Transfer Agreement, dated November 30, 2013, by and between Hezhong and Shisheng. Upon signing, Shisheng transferred control of Zhonghe to Huitong. Failure by either party to fulfill their obligations under the Debt Transfer Agreement may result in the termination of the Equity Transfer Agreement, as well as a penalty of 10% of the total transfer price.

 

Upon the completion of this transaction, the Company relinquished ownership of the Airport International Automall property and its 40% ownership of Car King Tianjin.

 

Current Business of the Company

 

The Company provides individual and business customers with services in relation to automobile sales, financing services, custom clearance, storage, national transportation, quotation platform, and information relating to automotive services and products, through its websites (www.at188.com, www.at160.com). The Company also sells imported automobiles and, as the only one-stop service provider in Tianjin, provides dealer financing to our customers.

 

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 condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”), which require us to make estimates and assumptions that affect the reported amounts of our assets and liabilities, revenues and expenses; to disclose contingent assets and liabilities on the date of the condensed consolidated financial statements; and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. The most significant estimates and assumptions include the valuation of accounts receivable, and the useful lives and impairment of property and equipment, goodwill and intangible assets, the valuation of deferred tax assets and inventories and the provision 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 condensed consolidated 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 consolidated financial statements:

 

Revenue Recognition

 

We recognize 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 graphical 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 offers sales incentives to its customers in the form of (i) subscription exemptions, (ii) discounted prices, and (iii) free advertisements. The Company classifies sales incentives as a reduction of net revenues. Revenues, net of discounts and allowances, are recognized ratably over the service periods.

 

The Company recognizes revenue from automobile value-added services when such services are performed.

 

Receivables Related to Financing Services

 

We record a receivable related to financing services when cash is loaned to customers to finance their purchases of automobiles. Upon repayments by customers, we record 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. We charge a fee for providing loan services and such fee is prepaid by customers. We amortize these fees over the receivable terms, which range between three months and six months, using the straight-line method. We record such amortized amounts as financing fee income, and the unamortized amount is classified as deferred revenue on the Company’s condensed consolidated balance sheets.

 

We evaluate the collectibility of outstanding receivables at the end of each of the reporting periods and make estimates for potential credit losses. During the year ended December 31, 2015, we experienced difficulties in collecting the receivable from a financing service customer, but the receivable was secured by certain imported automobiles. We took possession of these secured automobiles and sold them during the year ended December 31, 2015. The sales proceeds were used to offset the outstanding receivable from this customer. The Company will continue to pursue collecting the remaining receivable balance. As of September 30, 2016 and December 31, 2015, the Company recorded an allowance for uncollectible account on receivable related to financing services in the amount of $2,931,307 and $3,081,331, respectively.

 

Inventories

 

Inventory is stated at the lower of cost (using the specific identification method) or market (net realizable). We continually evaluate the composition of our inventory, assessing slow-moving and ongoing products. Our products are 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. As of September 30, 2016 and December 31, 2015, there was no reserve for obsolescence.

 

Income Taxes

 

In the process of preparing consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

 

 

We account for income taxes using an asset and liability approach for financial accounting and reporting for income tax purposes. Under the asset and liability method, deferred income taxes are recognized for temporary differences, net operating loss carryforwards 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. We conduct this analysis on a quarterly basis. As of September 30, 2016 and December 31, 2015, the deferred tax liabilities amounted to $0 and $9,495,559, respectively.

 

The Company has not provided deferred taxes on unremitted earnings attributable to its international subsidiaries as they are to be reinvested indefinitely. These earnings relate to ongoing operations and are approximately $20.3 million as of September 30, 2016. Because of the availability of US foreign tax credits, it is not practicable to determine the US income tax liability that would be payable if such earnings were not indefinitely reinvested.

 

The Company has no material uncertain tax positions as of September 30, 2016 or unrecognized tax benefit which would affect the effective income tax rate in future periods. The Company classifies interest and/or penalties related to income tax matters in income tax expense. As of September 30, 2016, there are no penalties or interest related to uncertain tax positions. The Company does not anticipate any significant increases or decreases to its liability for unrecognized tax benefits within the next 12 months.

 

New Accounting Standards

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance.  The standard is effective for public entities for annual and interim periods beginning after December 15, 2017.  Early adoption is permitted as of one year prior to the current effective date. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company is in the process of evaluating the impact of adoption on the Company's consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern, Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how reporting entities must disclose going concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date of issuance of the entity's financial statements. Additionally, an entity must provide certain disclosures if there is substantial doubt about the entity's ability to continue as a going concern. The new standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company is in the process of evaluating the impact of adoption on the Company's consolidated financial statements.

 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Under ASU 2015-17, a reporting entity is required to classify deferred tax assets and liabilities as noncurrent in a classified statement of financial position. Current guidance requiring the offsetting of deferred tax assets and liabilities of a tax-paying component of an entity and presentation as a single noncurrent amount is not affected. The standard is effective for public entities for the annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for financial statements as of the beginning of an interim or annual reporting period. Entities may apply the update prospectively to all deferred tax assets and liabilities, or retrospectively for all periods presented. The effects of this update on our financial position, results of operations and cash flows are not expected to be material.

 

 

The FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted for all public business entities and all nonpublic business entities upon issuance. The Company has not yet determined the effect of the adoption of this standard on the Company’s consolidated financial position and results of operations.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718). ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public companies, the amendments in this standard are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The effects of this standard on our financial position, results of operations and cash flows are not expected to be material.

 

The Company is not aware of any recently issued accounting pronouncements that, when adopted, will have a material effect on the Company’s financial position, results of operations or cash flows.

 

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. The following should be read in conjunction with the accompanying condensed consolidated financial statements and their related notes included in this Quarterly Report on Form 10-Q.

 

Results of Continuing Operations for the Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015

 

The following table sets forth certain information relating to our results of operations, and our condensed consolidated statements of operations for our continuing operations as a percentage of net revenue, for the periods indicated:

 

		Three Months Ended September 30, 2016				% of net revenue				Three Months Ended September 30, 2015				% of net revenue				Change in %
Net revenue		$	96,293,622				100.00	%		$	150,170,868				100.00	%			(35.88	)%
Cost of revenue			95,671,721				99.35	%			149,129,426				99.31	%			(35.85	)%
Gross profit			621,901				0.65	%			1,041,442				0.69	%			(40.28	)%
Operating expenses			641,035				0.67	%			585,182				0.39	%			9.54	%
(Loss) income from continuing operations			(19,134	)			(0.02	)%			456,260				0.30	%			(104.19	)%
Other expenses			(180,901	)			(0.19	)%			(732,069	)			(0.49	)%			(75.29	)%
Loss from continuing operations before income taxes and noncontrolling interests			(200,035	)			(0.21	)%			(275,809	)			(0.18	)%			(27.47	)%
Net loss from continuing operations			(200,035	)			(0.21	)%			(354,159	)			(0.24	)%			(43.52	)%
Net loss from continuing operations attributable to shareholders of China Auto Logistics Inc.			(200,000	)			(0.21	)%			(354,036	)			(0.24	)%			(43.51	)%

 

 

For the three months ended September 30, 2016, our net revenue decreased 35.88% to $96,293,622 from $150,170,888 for the same period in 2015, and our cost of revenue decreased 35.85% to $95,671,721 from $149,129,426 for the same period in 2015. As compared to the same period in 2015, our gross profit, income from continuing operations, net loss from continuing operations and net loss from continuing operations attributable to shareholders of China Auto Logistics Inc. for the three months ended September 30, 2016 decreased 40.28% to $621,901, decreased 104.19% to a loss of $(19,134), decreased 43.52% to $(200,035), and decreased 43.51% to $(200,000), respectively, due primarily to a decrease in the sales of automobiles’ gross margin, the decrease in fee income from financing services and increases in general and administrative expense which was partially offset by a decrease in interest expense.

 

Net Revenue

 

The following table sets forth a summary of our net revenue by continuing segment for the periods indicated, in dollars and as a percentage of total net revenue:

 

		Three Months Ended September 30, 2016				% of net revenue				Three Months Ended September 30, 2015				% of net revenue				Change in %
Net revenue		$	96,293,622				100.00	%		$	150,170,868				100.00	%			(35.88	)%
- Sales of Automobiles			95,261,933				98.93	%			148,614,443				98.96	%			(35.90	)%
- Financing Services			1,028,259				1.07	%			1,541,186				1.03	%			(33.28	)%
- Other Services			3,430				0.00	%			15,239				0.01	%			(77.49	)%

 

Sales of Automobiles

 

Net revenue from Sales of Automobiles decreased 35.9% to $95,261,933 for the three months ended September 30, 2016 from $148,614,443 for the same period in 2015. During the three months ended September 30, 2016 and 2015, the Company sold 902 automobiles and 1,418 automobiles, respectively, representing a decrease of approximately 36% in volume. The average unit selling price per automobile increased to $106,000 for the three months ended September 30, 2016 from $105,000 for the same period in 2015. Our gross margin dropped to 0.14% during the three months ended September 30, 2016 compared to 0.29% during the same period in 2015. During the three months ended September 30, 2016, we incurred losses on sales of certain high end automobiles which negatively impacted our overall gross profit percentage. Our sales increased rapidly during the second half of 2015 and this trend continued during the first quarter of 2016. While our sales for the three months ended September 30, 2016 remained fairly strong, our year over year numbers were substantially lower because of the exceptional results during the same period of 2015. During the three months ended September 30, 2015, we believe the strong demands for our automobiles occurred because our customers anticipated increased prices and therefore increased their orders.

 

 

In early August 2015, China’s official currency Renmenbi (“RMB”) devalued by over 3% against the U.S. dollar over a 5-day period. During the year ended December 31, 2015, the RMB devaluated over 5.5% against the U.S. dollar. During the nine months ended September 30, 2016, RMB declined about 4.6% against the U.S. dollar. Many observers and economists expect the RMB’s devaluation pace to be substantially slower in the coming months, but further downward pressure on the currency remains in the short term. The Company started to see automobile sales decline substantially in the second quarter of 2016 after strong sales in the first quarter of 2016. In conjunction with the belief that the RMB’s devaluation pace will slow, we expect automobile sales will stabilize in the remainder of 2016. We nevertheless believe upward movement in overall market demand is possible and, given implementation of the new “Parallel Imported Vehicles” scheme, a re-allocation of the market share between China’s traditional "4S" authorized dealers and auto resellers like us. These possibilities may result from such things as changes in consumer preference with respect to luxury automobiles and the frequency with which consumers purchase them. The extent to which these changes may impact our business cannot be reasonably determined at this time.

 

In August 2014, the China Commerce and Industry Bureau authorized the “Parallel Imported Vehicles” scheme. The “Parallel Imported Vehicles” scheme permits foreign made automobiles to be imported by importers in addition to authorized automobile dealers. This policy officially opened the imported automobile market to importers like us, so that we can now be in direct competition with the authorized dealers. This is an antitrust effort by the Chinese government to address complaints about the authorized automobile dealers overcharging for foreign-made automobiles. These new rules will also officially allow imported automobiles sold by parties other than authorized dealers to be treated the same as those sold through authorized dealers (i.e., with respect to insurance coverage and the registration process). As of September 30, 2016, the PRC government has selected Guangzhou, Shanghai, Shenzhen and Tianjin as four experimental cities to implement the “Parallel Imported Vehicles” scheme.

 

While we remain one of the leaders in the imported automobile market, we continue to sell our automobiles at a low gross margin in the very competitive market in order to maintain or expand our market share and maintain our market leader status. During the three months ended September 30, 2016 and 2015, sales for our top three selling brands, Land Rover, Mercedes Benz and Toyota accounted for 77% and 74%, respectively, of total sales.

 

Sales to the Company’s top three customers, each of which are car dealers, accounted for 44% and 46% of the Company’s sales during the three months ended September 30, 2016 and 2015, 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 by actively looking for new customers to enlarge its customer base. 

 

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 from its customers for drawing its facility lines of credit 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 decreased 33.28% to $1,028,259 for the three months ended September 30, 2016 from $1,541,186 for the three months ended September 30, 2015. The Company had an aggregate amount of credit lines of approximately $130 million (RMB870 million) as of September 30, 2016 and $170 million (RMB1.08 billion) as of September 30, 2015. Our Financing Services income and related cost of revenue are affected by the interest rate charged by banks. Our Financing Services revenue consists of two portions: interest income and fee income. Excluding revenue from the interest income portion of $539,650 and $946,254 in the three months ended September 30, 2016 and 2015, respectively, the revenue from the fee income portion of our Financing Services decreased 17.87% to $488,609 for the three months ended September 30, 2016 from $594,932 for three months ended September 30, 2015. The gross margin for our Financing Services segment increased to 47.52% for the months ended September 30, 2016 from 38.6% for the three months ended September 30, 2015. The increase in gross margin was primarily due to lower interest expense incurred during the three months ended September 30, 2016 compared to the same period in 2015.

 

Historically, a significant portion of our financing income has been related to fees that we charge to our customers for extending temporary credit beyond the financing terms for which these customers have contracted with banks. In the beginning of 2014, we had limited funds available for this financing service because our available cash was not as sufficient due to significant losses incurred during the past two years which were primarily attributable to the operations of Zhonghe and Car King Tianjin. On June 1, 2016, the Company sold 100% equity interest in Zhonghe. After the sale of Zhonghe, our working capital significantly improved. However we have been experiencing increased competitions in the financing service industry as there are more competitors offering similar products as we do in the market. We expect growth potential be limited in the financial services. As a result, we have been allocating more of our working capital to the Sales of Automobiles segment in an effort to continue increasing the sales volume and maintaining our leadership position. We will seek to continue better managing the use of our cash flow in order to generate additional fee income in the future.

 

We provide Financing Services to our customers with our lines of credit with major commercial banks in the PRC, including Agricultural Bank of China, Pudong Development Bank, China Zheshang Bank, and Shengjing Bank. We continue to strengthen our relationship with these banks and aim to negotiate with more banks for higher lines of credit at more favorable terms. Based on the Company’s business relationships with some 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 September 30, 2016 and 2015, we had approximately $83 million and $104 million, respectively, lines of credit available to use in our Financing Services. As of November 11, 2016, the Company had aggregate credit lines of approximately $130 million (RMB 870 million). Although all of our lines of credit have maturities of less than one year 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.

 

Our revenue growth from Financing Services is heavily dependent on overall industry growth and the economic conditions of the market in the PRC. As discussed above, we have established credit lines with most major commercial banks in the PRC, and although an enormous decrease or the simultaneous expiration of credit lines or other bank facilities may temporarily reduce our capacity to provide financing services and affect our purchase power, we have not experienced formidable difficulties in the access of credit lines and any other bank facilities in the past. Therefore, we do not foresee any difficulty at this time in obtaining credit lines and loan facilities from our banks. However as banks in China continue to reduce their credit risk and improve the quality of their outstanding loans, we continue to experience more requirements for obtaining bank lines and loans such as requiring personal guarantees by our executives and directors, guarantees by our major customers, suppliers, and business partners.

 

 

Other Services

 

Other services include revenue generated from Web-based Advertising. We have revised our business plan and moved away from Web-based Advertising Services and Automobile Value Added Services to focus on Automobile Sales and Financing Services and any potential business opportunities. We expect that the revenue generated from this segment will continue to be low compared to other segments. Our Web-based Advertising Services revenue decreased 77.49% to $3,430 for the three months ended September 30, 2016 from $15,239 for the same period of 2015. Revenue from Web-based Advertising Services was generated by subscription fees and advertisements.

 

Cost of Revenue

 

		Three Months Ended September 30, 2016				% of net revenue				Three Months Ended September 30, 2015				% of net revenue				Change in %
Net revenue		$	96,293,622				100.00	%		$	150,170,868				100.00	%			(35.88	)%
Cost of revenue		$	95,671,721				99.35	%		$	149,129,426				99.31	%			(35.85	)%
Gross profit		$	621,901				0.65	%		$	1,041,442				0.69	%			(40.28	)%

 

Our cost of revenue in the three months ended September 30, 2016 consisted primarily of the cost of automobiles purchased and certain direct labor for our the Sales of Automobiles and interest expense and line of credit fees related to our Financing Services. Our cost of revenue decreased 35.85% to $95,671,721 for the three months ended September 30, 2016 from $149,129,426 for the three months ended September 30, 2015. The Sales of automobiles accounted for 98.93% of our total revenue for the three months ended September 30, 2016 as compared to 98.96% for the three months ended September 30, 2015.

 

As our cost of revenue consists primarily of the purchase price of imported automobiles, we have limited influence on such costs. The prices of imported automobiles are determined solely by suppliers and are dependent upon the 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.

 

Gross profit decreased 40.28% to $621,901 in the three months ended September 30, 2016 from $1,041,442 in the three months ended September 30, 2015, primarily due to lower gross margin in the sales of automobiles as a result of losses on sales of certain high end automobiles and a decrease in the fee revenue of the financing service.

 

 

Operating Expenses

 

		Three Months Ended September 30, 2016				% of total				Three Months Ended September 30, 2015				% of total				Change in %
Operating Expenses
- Selling and Marketing		$	180,371				28.14	%		$	209,190				35.75	%			(13.78	)%
- General and Administrative			460,664				71.86	%			375,992				64.25	%			22.52	%
Total		$	641,035				100.00	%		$	585,182				100.00	%			9.54	%

 

During the three months ended September 30, 2016, our total operating expenses increased 9.54% to $641,035 from $585,182 for the same period in 2015. This increase was primarily a result of a 22.52% increase in general and administrative expenses to $460,664 for the three months ended September 30, 2016 from $375,992 for the same period in 2015.

 

The following table sets forth a breakdown of the primary selling and marketing expenses of the Company:

 

		Three Months Ended September 30,								Change in
		2016				2015				%
Primary selling and marketing expenses
- Payroll		$	42,217			$	48,030				(12.10	)%
- Staff-related costs			24,217				43,798				(44.71	)%
- Advertising and promotion			3,582				1,864				92.17	%
- Entertainment			16,831				26,663				(36.88	)%

 

Payroll expenses decreased 12.1% during the three months ended September 30, 2016 compared to the same period in 2015. Staff-related costs decreased 44.71% during the three months ended September 30, 2016 primarily due to the decrease in the overall benefits per employee compared to the same period in 2015. Advertising and promotion increased 92.17% to $3,582 during the three months ended September 30, 2016 from $1,864 during the same period in 2015 as we incur advertising and promotion expenses from to time in our normal business operations. Entertainment expenses decreased by 36.88% for the three months ended September 30, 2016 compared to the same period in 2015. Entertainment expenses fluctuate from time to time depending on the needs of our sales department personnel.

 

The following table sets forth a breakdown of the primary general and administrative expenses of the Company:

 

		Three Months Ended September 30,								Change in
		2016				2015				%
Primary general and administrative expenses
- Payroll		$	57,780			$	65,933				(12.37	)%
- Staff- related costs			24,230				11,438				111.84	%
- Entertainment			61,074				16,755				264.51	%
- Depreciation			22,811				11,053				106.38	%
- Rent			59,970				16,329				267.26	%
- Legal and professional fees			138,621				102,254				35.57	%

 

 

Payroll expenses decreased 12.37% during the three months ended September 30, 2016 primarily due to the decrease in the number of administration employees to reduce our cost. Staff-related costs increased 111.84% during the three months ended September 30, 2016, primarily due to the increase in the overall benefits. Entertainment increased 264.51% during the three months ended September 30, 2016 as the management incurred more expenses for business meetings compared to the same period of 2015. Entertainment expenses fluctuate from time to time depending on the needs of our management personnel. Depreciation expenses increased 106.38% primarily due to the depreciation on leasehold improvements for the additional office space during the three months ended September 30, 2016 compared to the same period of 2015. Rent expense increased 267.26% during the three months ended September 30, 2016 compared to the same period in 2015 primarily due to the new lease signed for additional office space in April 2016, which is used to substitute for the office space previously used at the Airport International Automall. Legal and professional fees increased 35.57% for the three months ended September 30, 2016 primarily due to more professional services being performed in the three months ended September 30, 2016 compared to the same period in 2015. We expect the amount of professional fees for the year of 2016 to be comparable to that for the year of 2015.

 

Income (loss) from Continuing Operations

 

Income (loss) from continuing operations decreased 104.19% for the three months ended September 30, 2016 to a loss of $(19,134) from $456,260 in the same period in 2015. The decrease in income from continuing operations was primarily due to the decrease in the gross margin of the sales of automobiles business and the decrease in the fee income from the financing services. In addition, we incurred more rent and depreciation expense related to the leasehold improvements for the additional office space.

 

Other Income and Expenses

 

Other income and expenses consist primarily of interest income, interest expense, gain (loss) on disposal of property and equipment.

 

The Company’s interest income is generated by interest earned through bank deposits. Interest income decreased 81.14% to $18,811 during the three months ended September 30, 2016 compared to $99,754 during the same period in 2015 because of a lower average prevailing interest rate during the three months ended September 30, 2016.

 

Interest expense was $202,803 during the three months ended September 30, 2016 compared to $622,156 during the same period in 2015. The decrease of $419,353 or 67.4% was primarily due to lower average borrowing rates and lower bank borrowing balances during the three months ended September 30, 2016 compared to the same period of 2015. After the disposal of Zhonghe, the Company had lower working capital requirements to finance the Zhonghe acquisition payments. As a result, the Company incurred less interest expense due to reduced bank borrowings during the three months ended September 30, 2016.

 

Loss on sale of equity interest in subsidiary in the amount of approximately $210,000 was incurred related to the sale of 98% interest in Zhengji on September 23, 2015. The Company sold its equity interest in Zhengji to Mr. Wu Xiang Yang, an unrelated party, at a price of approximately $3 million (net of cash of approximately $7,000 at Zhengji and amount due to Zhengji of approximately $5.2 million). Zhengji’s assets consisted of automobile inventories of approximately $3.4 million, other assets of approximately $12,000 and other current liabilities of approximately $2,000 on the disposal date resulting a loss on sale of equity interest in subsidiary in the amount of approximately $210,000 after consideration of the non controlling interest of approximately $170,000 in Zhengji. Zhengji had no material operations during 2015 through the disposal date.

 

 

Results of Continuing Operations for the Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015

 

The following table sets forth certain information relating to our results of continuing operations, and our condensed consolidated statements of operations as a percentage of net revenue, for the periods indicated:

 

		Nine Months Ended September 30, 2016				% of net revenue				Nine Months Ended September 30, 2015				% of net revenue				Change in %
Net revenue		$	327,177,025				100.00	%		$	331,209,443				100.00	%			(1.22	)%
Cost of revenue			324,958,268				99.32	%			328,853,778				99.29	%			(1.18	)%
Gross profit			2,218,757				0.68	%			2,355,665				0.71	%			(5.81	)%
Operating expenses			1,907,016				0.58	%			1,738,666				0.52	%			9.68	%
Income from continuing operations			311,741				0.10	%			616,999				0.19	%			(49.47	)%
Other expenses			(1,089,308	)			(0.33	)%			(2,054,026	)			(0.62	)%			(46.97	)%
Loss from continuing operations before income taxes and noncontrolling interests			(777,567	)			(0.24	)%			(1,437,027	)			(0.43	)%			(45.89	)%
Net loss from continuing operations			(865,304	)			(0.26	)%			(1,623,049	)			(0.49	)%			(46.69	)%
Net loss from continuing operations attributable to shareholders of China Auto Logistics Inc.		$	(865,397	)			(0.26	)%		$	(1,621,949	)			(0.49	)%			(46.64	)%

 

For the nine months ended September 30, 2016, our net revenue decreased 1.22% to $327,177,025 from $331,209,443 for the same period in 2015, and our cost of revenue decreased 1.18% to $324,958,268 from $328,853,778 for the same period in 2015. As compared to the same period in 2015, our gross profit, income from continuing operations, net loss from continuing operations and net loss from continuing operations attributable to shareholders of China Auto Logistics Inc. for the nine months ended September 30, 2016 decreased 5.81% to $2,218,757, decreased 49.47% to $311,741, decreased 46.69% to $(865,304), and decreased 46.64% to $(865,397), respectively, due primarily to the decrease in interest expense which was partially offset by the decreases in revenue of our Sales of Automobiles.

 

 

Net Revenue

 

The following table sets forth a summary of our net revenue by continuing segment for the periods indicated, in dollars and as a percentage of total net revenue:

 

		Nine Months Ended September 30, 2016				% of net revenue				Nine Months Ended September 30, 2015				% of net revenue				Change in %
Net revenue		$	327,177,025				100.00	%		$	331,209,443				100.00	%			(1.22	)%
- Sales of Automobiles			323,872,354				98.99	%			326,924,561				98.71	%			(0.93	)%
- Financing Services			3,276,141				1.00	%			4,235,307				1.28	%			(22.65	)%
- Other Services			28,530				0.01	%			49,575				0.01	%			(42.45	)%

 

Sales of Automobiles

 

Net revenue from Sales of Automobiles decreased 0.93% to $323,872,354 for the nine months ended September 30, 2016 from $326,924,561 for the same period in 2015. During the nine months ended September 30, 2016 and 2015, the Company sold 3,111 automobiles and 3,060 automobiles, respectively, representing an increase of approximately 2% in volume. The average unit selling price per automobile decreased to $104,000 for the nine months ended September 30, 2016 from $107,000 for the same period in 2015. Our gross margin decreased to 0.21% during the nine months ended September 30, 2016 compared to 0.25% during the same period in 2015.

 

While we remain one of the leaders in the imported automobile market, we continue to sell our automobiles at a low gross margin in the very competitive market in order to maintain or expand our market share and maintain our market leader status. During the nine months ended September 30, 2016 and 2015, sales for our top three selling brands, Land Rover, Mercedes Benz and Toyota accounted for 76% and 74%, respectively.

 

Sales to the Company’s top three customers, each of which are car dealers, accounted for 40% and 41% of the Company’s sales during the nine months ended September 30, 2016 and 2015, 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 by actively looking for new customers to enlarge its customer base. 

 

Financing Services

 

Net revenue from Financing Services decreased 22.65% to $3,276,141 for the nine months ended September 30, 2016 from $4,235,307 for the nine months ended September 30, 2015. Our Financing Services revenue consists of two portions: interest income and fee income. Excluding revenue from the interest income portion of $1,771,252 and $2,572,409 in the nine months ended September 30, 2016 and 2015, respectively, the revenue from the fee income portion of our Financing Services decreased 9.5% to $1,504,889 for the nine months ended September 30, 2016 from $1,662,898for nine months ended September 30, 2015. The gross margin for our Financing Services segment increased to 45.93% for the nine months ended September 30, 2016 from 35.41% for the nine months ended September 30, 2015. The increase in gross margin was primarily due to lower interest expense incurred during the nine months ended September 30, 2016 compared to the same period of 2015. In addition, we were charged a maintenance fee during the nine months ended September 30, 2015 on our line of credit with Agricultural Bank of China in the amount of $163,000, which was not charged during the nine months ended September 30, 2016.

 

 

Other Services

 

Other services include revenue generated from Web-based Advertising. We have revised our business plan and moved away from Web-based Advertising Services and Automobile Value Added Services to focus on Automobile Sales and Financing Services and any potential business opportunities. We expect that the revenue generated from this segment will continue to be low compared to other segments. Our Web-based Advertising Services revenue decreased 42.45% to $28,530 for the nine months ended September 30, 2016 from $49,575 for the same period of 2015. Revenue from Web-based Advertising Services was generated by subscription fees and advertisements.

 

Cost of Revenue

 

		Nine Months Ended September 30, 2016				% of net revenue				Nine Months Ended September 30, 2015				% of net revenue				Change in %
Net revenue		$	327,177,025				100.00	%		$	331,209,443				100.00	%			(1.22	)%
Cost of revenue		$	324,958,268				99.32	%		$	328,853,778				99.29	%			(1.18	)%
Gross profit		$	2,218,757				0.68	%		$	2,355,665				0.71	%			(5.81	)%

 

Our cost of revenue in the nine months ended September 30, 2016 consisted primarily of the cost of automobiles purchased and certain direct labor for our the Sales of Automobiles and interest expense and line of credit fees related to our Financing Services. Our cost of revenue decreased 1.18% to $324,958,268 for the nine months ended September 30, 2016 from $328,853,778 for the nine months ended September 30, 2015. The sales of automobiles accounted for 98.99% of our total revenue for the nine months ended September 30, 2016 as compared to 98.71% for the nine months ended September 30, 2015.

 

As our cost of revenue consists primarily of the purchase price of imported automobiles, we have limited influence on such costs. The prices of imported automobiles are determined solely by suppliers and are dependent upon the 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.

 

Gross profit decreased 5.81% to $2,218,757 in the nine months ended September 30, 2016 from $2,355,665 in the nine months ended September 30, 2015, primarily due to lower gross margin in the sales of automobiles as a result of losses on sales of certain high end automobiles and a decrease in the fee revenue of the financing service.

 

 

Operating Expenses

 

		Nine Months Ended September 30, 2016				% of total				Nine Months Ended September 30, 2015				% of total				Change in %
Operating Expenses
- Selling and Marketing		$	532,676				27.93	%		$	570,719				32.83	%			(6.67	)%
- General and Administrative			1,374,340				72.07	%			1,167,947				67.17	%			17.67	%
Total		$	1,907,016				100.00	%		$	1,738,666				100.00	%			9.68	%

 

During the nine months ended September 30, 2016, our total operating expenses increased 9.68% to $1,907,016 from $1,738,666 for the same period in 2015. This increase was primarily a result of a 17.67% increase in general and administrative expenses to $1,374,340 for the nine months ended September 30, 2016 from $1,167,947 for the same period in 2015.

 

The following table sets forth a breakdown of the primary selling and marketing expenses of the Company:

 

		Nine Months Ended September 30,								Change in
		2016				2015				%
Primary selling and marketing expenses
- Payroll		$	135,394			$	146,996				(7.89	)%
- Staff-related costs			80,707				109,639				(26.39	)%
- Advertising and promotion			10,590				7,745				36.73	%
- Entertainment			76,743				51,664				48.54	%

 

Payroll expenses decreased 7.89% during the nine months ended September 30, 2016 compared to the same period of 2015. Staff-related costs decreased 26.39% during the nine months ended September 30, 2016 primarily due to the decrease in the overall benefits per employee compared to the same period in 2015. Advertising and promotion increased 36.73% to $10,590 during the nine months ended September 30, 2016 from $7,745 during the same period in 2015 as we incur advertising and promotion expenses from to time in our normal business operations. Entertainment expenses increased by 48.54 for the nine months ended September 30, 2016 compared to the same period in 2015. Entertainment expenses fluctuate from time to time depending on the needs of our sales department personnel.

 

The following table sets forth a breakdown of the primary general and administrative expenses of the Company:

 

		Nine Months Ended September 30,								Change in
		2016				2015				%
Primary general and administrative expenses
- Payroll		$	171,725			$	203,542				(15.63	)%
- Staff - related costs			60,823				40,477				50.27	%
- Entertainment			142,499				97,332				46.41	%
- Depreciation			45,302				49,164				(7.86	)%
- Rent			121,751				49,621				145.36	%
- Legal and professional fees			525,487				505,196				4.02	%

 

 

Payroll expenses decreased 15.63% during the nine months ended September 30, 2016 primarily due to the decrease in the number of administration employees to reduce our cost. Staff-related costs increased 50.27% during the nine months ended September 30, 2016, primarily due to the increase in the overall benefits, compared to the same period in 2015. Entertainment increased 46.41% during the nine months ended September 30, 2016 as the management incurred more expenses for business meetings compared to the same period of 2015. Entertainment expenses fluctuate from time to time depending on the needs of our management personnel. Depreciation expenses decreased 7.86% primarily due to certain equipment has been fully depreciated during the nine months ended September 30, 2016 compared to the same period of 2015. Such decrease was partially offset by the increase in depreciation on the leasehold improvements related to the additional office space acquired during the nine months ended September 30, 2016. Rent expense increased 145.36% during the nine months ended September 30, 2016 compared to the same period in 2015 primarily due to the new lease signed for additional office space in April 2016, which is used to substitute for the office space previously used at the Airport International Automall. Legal and professional fees increased 4.02% for the nine months ended September 30, 2016 primarily due to a slight increase in the professional service performed during the nine months ended September 30, 2016 compared to the same period in 2015. We expect the amount of professional fees for the year of 2016 to be comparable to that for the year of 2015.

 

Income from Continuing Operations

 

Income from continuing operations decreased 49.74% for the nine months ended September 30, 2016 to $311,741 from $616,999 in the same period in 2015. The decrease in income from continuing operations was primarily due to the decrease in overall gross profit from the sales of automobiles.

 

Other Income and Expenses

 

Other income and expenses consist primarily of interest income, interest expense, gain (loss) on disposal of property and equipment.

 

The Company’s interest income is generated by interest earned through bank deposits.

 

Interest income increased 8.94% to $233,274 during the nine months ended September 30, 2016 compared to $214,122 during the same period of 2015 primarily due to the increase in average restricted cash balances which earned interest at fixed deposit rates that were partially offset by the lower average prevailing interest rates.

 

Interest expense was $1,331,835 during the nine months ended September 30, 2016 compared to $2,050,389 during the same period in 2015. The decrease of $718,554 or 35.04% was primarily due to lower average borrowing rates and lower bank borrowing balances since the disposal of Zhonghe on June 1, 2016 compared to the same period in 2015. After the disposal of Zhonghe, the Company had less working capital requirements to finance the Zhonghe acquisition payments. As a result, we incurred less interest expense due to reduced bank borrowings during the nine months ended September 30, 2016.

 

The Company recognized a gain in disposal of property and equipment in the amount of $2,707 during the nine months ended September 30, 2016. During the same period in 2015, we incurred $8,254 loss on disposal of property and equipment.

 

Loss on sale of equity interest in subsidiary in the amount of approximately $210,000 was incurred related to the sale of 98% interest in Zhengji on September 23, 2015. The Company sold its equity interest in Zhengji to Mr. Wu Xiang Yang, an unrelated party, at a price of approximately $3 million (net of cash of approximately $7,000 at Zhengji and amount due to Zhengji of approximately $5.2 million). Zhengji’s assets consisted of automobile inventories of approximately $3.4 million, other assets of approximately $12,000 and other current liabilities of approximately $2,000 on the disposal date resulting a loss on sale of equity interest in subsidiary in the amount of approximately $210,000 after consideration of the non controlling interest of approximately $170,000 in Zhengji. Zhengji had no material operations during 2015 through the disposal date.

 

 

Inflation

 

We believe that inflation has had a negligible effect on operations for the three months and nine month period ended September 30, 2016. 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.

 

Discontinued Airport Automall Automotive Services Business Unit

 

On June 1, 2016, the Company discontinued the Airport Automall Automotive Services business unit as a result of the sale of Zhonghe. In connection with the sale, we recognized a gain of $6,701,350, which was excluded from the operating results of the continuing results. The operating results of Airport Automall Automotive Services business unit was included in the discontinued operations. The Company received approximately $21.9 million net cash proceeds (net of the amount owed to Zhonghe and the outstanding payable to former owner of Hezhong which was assumed by Huitong) from the sale of Zhonghe. The Company expects to use the cash proceeds from the sale for working capital.

 

Excluding the gain from the disposal of Zhonghe, income (loss) from discontinued operations amounted to $0 and $1,602,916 during the three months ended September 30, 2016 and 2015, respectively, and $(1,910,641) and $(2,040,975) during the nine months ended September 30, 2016 and 2015, respectively. The loss from discontinued operations was primarily attributable to the depreciation expense on the airport automall property and interest expense related to the payable related to the Zhonghe acquisition and short term borrowings to finance the prior acquisition payments.

 

Upon the completion of this transaction, the Company relinquished ownership of the Airport International Automall property and its 40% ownership of Car King Tianjin.

 

Please refer to Note 2 of the unaudited condensed consolidated financial statements for further details.

 

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.

 

 

The following table sets forth a summary of our cash flows for the nine months ended September 30, 2016 and 2015.

 

		Nine Months Ended September 30,
		2016				2015
Net cash used in operating activities		$	(52,694,784	)		$	(6,424,832	)
Net cash provided by investing activities			21,416,930				3,037,260
Net cash provided by financing activities			25,675,132				2,231,452
Effect on exchange rate change on cash			(126,192	)			(199,829	)
Cash and cash equivalents at beginning of period			7,119,686				7,793,952
Cash and cash equivalents at end of period			1,390,772				6,438,003

 

Going Concern

 

The Company incurred operating losses and had negative operating cash flows and may continue to generate negative cash flows as the Company implements its business plan for 2016. There can be no assurance that the Company’s continuing efforts to execute its business plan will be successful and that the Company will be able to continue as a going concern. The accompanying interim condensed consolidated financial statements have been prepared in conformity with US GAAP, which contemplates the Company’s continuation as a going concern. The Company’s net loss from continuing operations attributable to shareholders was $200,000 and $354,036 for the three months ended September 30, 2016 and 2015, respectively, and $865,397 and $1,621,949 for the nine months ended September 30, 2016 and 2015, respectively.

 

As of September 30, 2016, the Company has an accumulated a deficit of $3,421,910 and net cash used in operating activities from continuing operations of $51,395,675 during the nine months ended September 30, 2016. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

On June 1, 2016, the Company sold 100% of the equity interest in Zhonghe to Huitong for approximately $62.8 million and entered into an agreement to transfer the outstanding payable balance related to the Zhonghe acquisition of approximately $36.8 million to Huitong. We received a net cash proceeds of approximately $21.9 million (net of payable to Zhonghe of approximately $4.1 million). The Company expects to use the cash proceeds from the sale for working capital.

 

The Company does not currently have sufficient cash or commitments for financing to sustain its operations for the next twelve months. The Company’s plan continues to be to develop new customer relationships and substantially increase our cash flows from operations and revenue derived from our products/services. If the Company’s revenues do not reach the level anticipated in our plan, the Company may require additional financing in order to execute our operating plan. If additional financing is required, the Company cannot predict whether this additional financing will be in the form of equity, debt, or another form, and the Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that financing sources are not available, or that the Company is unsuccessful in increasing its revenues and profits, the Company may be unable to implement its current plans for expansion, repay our debt obligations or respond to competitive pressures, any of which would have a material adverse effect on its business, prospects, financial condition and results of operations. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Operating Activities

 

During the nine months ended September 30, 2016, we had net cash used in operating activities of $52,694,784 (including net cash used in operating activities of $1,299,109 from discontinued operations) as compared to net cash used in operating activities of $6,424,832 (including net of net cash used in operating activities of $640,931) from discontinued operations) during the same period of 2015. Net cash used in operating activities during the nine months ended September 30, 2016 primarily consisted of an increase in restricted cash of $35,507,788 due to an increase in notes payable to suppliers, which required maintaining certain levels of restricted cash, and an increase in advances to suppliers of $54,723,792 as we continue to be positive about China’s luxury automobile sales market, which was partially offset by an increase in notes payable to suppliers of $36,344,159.

 

 

During the nine months ended September 30, 2015, net cash used in operating activities primarily consisted of a net loss of $3,664,024, an increase in restricted cash due to larger balance of restricted cash required for notes payable of $29,328,731, an increase in advances to suppliers of $42,899,839 due to the building up of our inventory orders in order to increase our inventory selections for our customers and certain purchase orders being subsequently canceled as a result of our change of assessment in the market demands. The net amount of cash used in operating activities was partially offset by an increase in notes payable to suppliers of $36,809,837, and an increase in customer deposits of $13,588,419 due to increased advanced payments from our customers for future sales.

 

Investing Activities

 

We received net proceeds of $21,750,802 from the sale of Zhonghe during the nine months ended September 30, 2016. We received cash proceeds of $8,563 and $9,275 related to the disposal of an automobile used by the Company during the nine months ended September 30, 2016 and 2015, respectively. We paid $342,435 and $2,318 to purchase property and equipment during the nine months ended September 30, 2016 and 2015, respectively.

 

Financing Activities

 

During the nine months ended September 30, 2016, net cash provided by financing activities was $25,675,132 as compared to net cash provided by financing activities of $2,231,452 during the same period in 2015. The net cash provided by financing activities during the nine months ended September 30, 2016 and 2015 included mainly net proceeds of $27,308,187 and $2,178,927, respectively, on short-term loans from banks. Bank overdraft decreased $2,117,974 during the nine months ended September 30, 2016 and $91,222 during the same period in 2015. In addition, during the nine months ended September 30, 2016 and 2015, we received non-interest bearing short-term advances from our Director and Senior Vice President, Ms. Cheng Weihong, in the amount of $484,919 and $599,120, respectively, and repaid $0 and $455,373, respectively.

 

Our total cash and cash equivalents decreased to $1,390,772 as of September 30, 2016, as compared to $6,438,003 as of September 30, 2015.

 

Working Capital

 

As of September 30, 2016, the Company had working capital of $24,568,418 compared to working capital deficit of ($30,801,730) as of December 31, 2015.

 

The Company’s cash is used to finance the purchases of inventory, payments for advances from suppliers, and restricted cash as requirements for our financing services operation, lines of credit related to financing services and short-term borrowings. As of September 30, 2016, the increase of working capital was primarily attributable to net cash received of approximately $21.9 million and the relief of the payable related to the Zhonghe acquisition of approximately $36.8 million.

 

The Company has aggregate outstanding balance of lines of credit related to financing services of $47,161,036 and $73,004,179 as of September 30, 2016 and December 31, 2015, respectively, and outstanding balances of short-term borrowings of $13,494,508 and $67,290,734 as of September 30, 2016 and December 31, 2015, respectively. In addition, we had a bank overdraft with a balance of $0 and $2,131,009 as of September 30, 2016 and December 31, 2015, respectively.

 

 

We aim to continue to improve the level of our working capital through increased net profits and cash flow and efficiently controlling costs. The Company previously adopted measures to lower holding costs of inventories and continues to develop and maintain good relationships with banks for favorable financing terms.

 

Indebtedness

 

We have entered into several banking facilities with Agricultural Bank of China, PuDong Development Bank, China ZheShang Bank, and Shengjing Bank. As of September 30, 2016 and December 31, 2015, the Company had aggregate credit lines of approximately $130 million (RMB870 million) and $166 million (RMB1.08 billion), respectively, and had outstanding balances under these credit lines amounted to approximately $47 million and $73 million, respectively. As of November 11, 2016, the Company had aggregate credit lines of approximately $130 million (RMB870 million) with its banks.

 

As of September 30, 2016 and December 31, 2015, we had an aggregate outstanding loan balance of $13,494,508 and $67,290,734, respectively, related to certain short-term loan agreements with Agricultural Bank of China and China Zheshang Bank. These loans carried interest at rates ranging from 4.35% to 5.66% per annum and maturity dates between six months to one year from the original loan agreement dates. These loans were used for our working capital. We continue to take advantage of the low interest rate environment and our excellent relationships with the major banks to secure loans at attractive terms. In order to expand our revenues on Sales of Automobiles, we are required to have a significant amount of working capital since our suppliers require deposits for orders. As we continue to see growth in our automobile sales business, we expect to continue to use short term loans to finance our business expansion.

 

We had an overdraft of $0 and $2,131,009 with Pudong Development Bank as of September 30, 2016 and December 31, 2015, respectively.

 

On June 1, 2016, the Company sold 100% equity interest in Zhonghe to Huitong for approximately $62.8 million and entered into an agreement to transfer the outstanding payable balance related to the Zhonghe acquisition of approximately $36.8 million to Huitong. We received a net cash proceed of approximately $21.9 million (net of payable to Zhonghe of approximately $4.1 million).

 

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 us 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 us.

 

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.       Material Weaknesses

 

As discussed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2015, we identified a material weakness in the design and operation of our internal controls. The material weakness is: the Company’s accounting department personnel have limited knowledge and experience in US GAAP.

 

To remediate the material weakness identified in internal control over financial reporting of the Company, we have commenced to: (a) continue our efforts to recruit additional personnel with sufficient knowledge and experience in US GAAP; and (b) continue our efforts to provide ongoing training courses in US GAAP to existing personnel, including our Chief Financial Officer and the Financial Controller.

 

We will continue to monitor and assess our remediation initiatives to ensure that the aforementioned material weakness stated is remediated.

 

B.       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. Based upon that evaluation and solely due to the unremediated material weakness described above, the Company’s principal executive and financial officers have concluded that such disclosure controls and procedures were not effective for the purpose for which they were designed as of the end of such period. As a result of this conclusion, the financial statements for the period covered by this report were prepared with particular attention to the unremediated material weaknesses previously disclosed. Accordingly, management believes that the condensed consolidated financial statements included in this report fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows as of and for the periods presented, in accordance with accounting principles generally accepted in the U.S, notwithstanding the unremediated weaknesses.

 

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.

 

 

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, 2015.

 

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. Mine Safety Disclosures.

 

Not applicable.

 

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 September 30, 2016.

 

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:

 

Exhibit Number		Exhibit Description
3.1 (1)		Amended Articles of Incorporation of the Company
3.2 (2)		Amended and Restated Bylaws of the Company
10.1*		Office Tenancy Contract, dated effected as of April 1, 2016, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd.
10.2*		Office Management Contract, dated effected as of April 1, 2016, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd.
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
101.INS**		XBRL Instance Document.
101.SCH**		XBRL Taxonomy Extension Schema Document.
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document
101.INS**		XBRL Instance Document.

 

* Filed herewith

** Furnished herewith

(1)       Incorporated by reference to the Company’s Form 10-K, filed with the Securities and Exchange Commission on April 7, 2016.

(2)       Incorporated by reference to the Company’s Definitive Schedule 14C Information Statement filed with the Securities and Exchange Commission on December 5, 2008.

 

 

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
	By:	/s/ Wang Xinwei
		Wang Xinwei
		Chief Financial Officer

 

Date: November 14, 2016

 

 

Exhibit Number		Exhibit Description
3.1 (1)		Amended Articles of Incorporation of the Company
3.2 (2)		Amended and Restated Bylaws of the Company
10.1*		Office Tenancy Contract, dated effected as of April 1, 2016, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd.
10.2*		Office Management Contract, dated effected as of April 1, 2016, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd.
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
101.INS**		XBRL Instance Document.
101.SCH**		XBRL Taxonomy Extension Schema Document.
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document
101.INS**		XBRL Instance Document.

 

* Filed herewith

** Furnished herewith

(1)       Incorporated by reference to the Company’s Form 10-K, filed with the Securities and Exchange Commission on April 7, 2016.

(2)       Incorporated by reference to the Company’s Definitive Schedule 14C Information Statement filed with the Securities and Exchange Commission on December 5, 2008.

 

 

44