UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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. Yesþ 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). Yesþ 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 companyþ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ Noþ
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 May 12, 2016 | |
| Common Stock, $.001 par value per share | 4,034,394 shares |
PART I FINANCIAL INFORMATION
Item 1.Financial Statements
CHINA AUTO LOGISTICS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2016 (Unaudited) | December 31, 2015 | |||||||
| ASSETS: | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 5,160,437 | $ | 7,119,686 | ||||
| Restricted cash | 39,217,661 | 23,799,346 | ||||||
| Receivable related to financing services | 63,748,663 | 82,105,826 | ||||||
| Inventories | 22,712,571 | 12,163,511 | ||||||
| Advances to suppliers | 101,556,968 | 100,807,121 | ||||||
| Prepaid expenses | 26,381 | 29,372 | ||||||
| Recoverable and accrued value added tax receivable | 2,104,589 | 369,940 | ||||||
| Total current assets | 234,527,270 | 226,394,802 | ||||||
| Property, plant, and equipment, net | 61,275,113 | 61,287,192 | ||||||
| Ownership interest in Car King Tianjin | - | - | ||||||
| Deferred rent | 666,884 | 541,159 | ||||||
| Total assets | $ | 296,469,267 | $ | 288,223,153 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY: | ||||||||
| Current liabilities: | ||||||||
| Bank overdraft | $ | 2,316,101 | $ | 2,131,009 | ||||
| Lines of credit related to financing services | 61,139,626 | 73,004,179 | ||||||
| Short term borrowings | 62,656,059 | 67,290,734 | ||||||
| Accounts payable | 3,355,867 | 1,334,829 | ||||||
| Notes payable to suppliers | 49,240,838 | 33,509,483 | ||||||
| Accrued expenses | 247,513 | 365,937 | ||||||
| Customer deposits | 46,719,828 | 39,901,621 | ||||||
| Deferred revenue | 114,006 | 121,456 | ||||||
| Rental deposits | 77,545 | 77,033 | ||||||
| Payable related to Zhonghe Acquisition | 36,683,638 | 35,742,198 | ||||||
| Due to former shareholder | 2,107,077 | 2,093,182 | ||||||
| Due to director | 869,027 | 722,028 | ||||||
| Income tax payable | 664,005 | 656,098 | ||||||
| Deferred tax liability | 181,988 | 246,745 | ||||||
| Total current liabilities | 266,373,118 | 257,196,532 | ||||||
| Deferred tax liability | 9,226,790 | 9,248,814 | ||||||
| Total liabilities | 275,599,908 | 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 March 31, 2016 and December 31, 2015, respectively | 4,034 | 4,034 | ||||||
| Additional paid-in capital | 22,979,734 | 22,979,734 | ||||||
| Accumulated other comprehensive income | 5,928,784 | 5,776,306 | ||||||
| Accumulated deficit | (8,408,139 | ) | (7,347,222 | ) | ||||
| Total China Auto Logistics Inc. shareholders’ equity | 20,504,413 | 21,412,852 | ||||||
| Noncontrolling interests | 364,946 | 364,955 | ||||||
| Total equity | 20,869,359 | 21,777,807 | ||||||
| Total liabilities and shareholders’ equity | $ | 296,469,267 | $ | 288,223,153 | ||||
The accompanying notes form an integral part of these condensed consolidated financial statements
| 1 |
CHINA AUTO LOGISTICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| Three Months Ended March 31, | ||||||||
| 2016 | 2015 | |||||||
| Net revenue | $ | 137,391,006 | $ | 87,350,162 | ||||
| Cost of revenue | 136,112,906 | 86,868,320 | ||||||
| Gross profit | 1,278,100 | 481,842 | ||||||
| Operating expenses: | ||||||||
| Selling and marketing | 184,081 | 193,664 | ||||||
| General and administrative | 1,020,489 | 1,057,399 | ||||||
| Total operating expenses | 1,204,570 | 1,251,063 | ||||||
| Income (loss) from operations | 73,530 | (769,221 | ) | |||||
| Other income (expenses) | ||||||||
| Interest income | 368,016 | 84,868 | ||||||
| Interest expense | (1,591,503 | ) | (1,918,797 | ) | ||||
| Gain on sale of property and equipment | 5,702 | - | ||||||
| Equity loss – share of investee company loss | - | (293,791 | ) | |||||
| Miscellaneous | 1,569 | - | ||||||
| Total other expenses | (1,216,216 | ) | (2,127,720 | ) | ||||
| Loss before income taxes | (1,142,686 | ) | (2,896,941 | ) | ||||
| Income tax benefit | (81,744 | ) | (230,077 | ) | ||||
| Net loss | (1,060,942 | ) | (2,666,864 | ) | ||||
| Add: Net loss attributable to noncontrolling interests | (25 | ) | (423 | ) | ||||
| Net loss attributable to shareholders of China Auto Logistics Inc. | $ | (1,060,917 | ) | $ | (2,666,441 | ) | ||
| Loss per share attributable to shareholders of China Auto Logistics Inc.– basic and diluted | $ | (0.26 | ) | $ | (0.66 | ) | ||
| Weighted average number of common share Outstanding – basic and diluted | 4,034,494 | 4,034,494 | ||||||
The accompanying notes form an integral part of these condensed consolidated financial statements
| 2 |
CHINA AUTO LOGISTICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
| Three Months Ended March 31, | ||||||||
| 2016 | 2015 | |||||||
| Net loss | $ | (1,060,942 | ) | $ | (2,666,864 | ) | ||
| Other comprehensive (loss) income | ||||||||
| Foreign currency translation adjustments | 152,494 | 171,399 | ||||||
| Comprehensive loss | (908,448 | ) | (2,495,465 | ) | ||||
| Add: Comprehensive loss attributable to noncontrolling interests | (9 | ) | (308 | ) | ||||
| Comprehensive loss attributable to shareholders of China Auto Logistics Inc. | $ | (908,439 | ) | $ | (2,495,157 | ) | ||
The accompanying notes form an integral part of these condensed consolidated financial statements
| 3 |
CHINA AUTO LOGISTICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Three Months Ended March 31, | ||||||||
| 2016 | 2015 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (1,060,942 | ) | $ | (2,666,864 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities | ||||||||
| Depreciation on property, plant and equipment | 530,599 | 589,857 | ||||||
| Amortization on customer relations | - | 27,706 | ||||||
| Gain on sale of property and equipment | (5,702 | ) | - | |||||
| Equity loss – share of investee company loss | - | 293,791 | ||||||
| Bad debt | (68,813 | ) | - | |||||
| Recovery of reserve for due from Car King Tianjin | - | (293,791 | ) | |||||
| Amortization of discount | 65,465 | 135,491 | ||||||
| Change of deferred tax liabilities | (147,713 | ) | (230,077 | ) | ||||
| Deferred rent | (120,422 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Restricted cash | (15,046,585 | ) | (5,438,791 | ) | ||||
| Accounts receivable - trade | - | (172,111 | ) | |||||
| Receivables related to financing services | 18,706,213 | 12,938,491 | ||||||
| Inventories | (10,321,688 | ) | 808,693 | |||||
| Advances to suppliers | (79,577 | ) | (19,224,370 | ) | ||||
| Prepaid expenses, other current assets and other assets | 3,142 | (3,598 | ) | |||||
| Value added tax receivable | (1,707,930 | ) | 159,394 | |||||
| Accounts payable | 1,983,994 | 1,196,026 | ||||||
| Line of credit related to financing services | (12,176,165 | ) | (780,731 | ) | ||||
| Notes payable to suppliers | 15,291,689 | 3,259,559 | ||||||
| Accrued expenses | (26,560 | ) | 13,919 | |||||
| Accrued interest | 537,111 | (2,672,382 | ) | |||||
| Customer deposits | 6,461,553 | 9,011,191 | ||||||
| Deferred revenue | (8,140 | ) | 262,714 | |||||
| Income tax payable | 3,503 | - | ||||||
| Net cash provided by (used in) by operating activities | 2,813,032 | (2,785,883 | ) | |||||
| Cash flows from investing activities | ||||||||
| Proceeds from sale of property and equipment | 8,563 | - | ||||||
| Purchase of property and equipment | (120,436 | ) | - | |||||
| Net cash used in investing activities | (111,873 | ) | - | |||||
| Cash flows from financing activities | ||||||||
| Bank overdraft | 168,552 | (28,050 | ) | |||||
| Proceeds from short-term borrowings | 28,442,541 | 17,927,573 | ||||||
| Repayments of short-term borrowings | (33,452,706 | ) | (17,927,573 | ) | ||||
| Proceeds from director | 161,486 | 186,000 | ||||||
| Repayments to director | - | (152,670 | ) | |||||
| Net cash (used in) provided by financing activities | (4,680,127 | ) | 5,280 | |||||
| Effect of exchange rate change on cash | 19,719 | 25,096 | ||||||
| Net decrease in cash and cash equivalents | (1,959,249 | ) | (2,755,507 | ) | ||||
| Cash and cash equivalents at the beginning of period | 7,119,686 | 7,793,952 | ||||||
| Cash and cash equivalents at the end of period | $ | 5,160,437 | $ | 5,038,445 | ||||
| Supplemental disclosure of cash flow information | ||||||||
| Interest paid | $ | 1,554,729 | $ | 5,291,550 | ||||
| Income taxes paid | $ | 62,466 | $ | - | ||||
| Non-cash activities: | ||||||||
| Increase in advances to Car King Tianjin for unpaid rent | $ | - | $ | 244,467 | ||||
The accompanying notes form an integral part of these condensed consolidated financial statements
| 4 |
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”), Tianjin Hengjia Port Logistics Corp. (“Hengjia”), and Tianjin Zhonghe Auto Sales Service Co., Ltd. (“Zhonghe”). The Company also has a 40% ownership interest in a joint venture between Zhonghe and Car King (China) Used Car Trading Co., Ltd. (“Car King Tianjin”).
The Company’s principal businesses include (i) sales of imported automobiles, (ii) financing services related to imported automobiles, (iii) airport auto mall automotive services including selling used cars through Car King Tianjin and leasing the Airport International Auto Mall facility in Tianjin, China (the “Airport International Auto Mall”) to Car King Tianjin and other tenants and (iv) 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.
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 March 31, 2016 and the results of its operations, and cash flows for the three-month periods ended March 31, 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 period ended March 31, 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 attributable to shareholders for the three months ended March 31, 2016 was $1,060,917 as compared to $2,666,441 for the three months ended March 31, 2015.
| 5 |
As of March 31, 2016, the Company has a working capital deficit of $31,845,848, including $62,656,059 in current liabilities for short-term borrowings which are due during the period between June 2016 and March 2017, and $36,683,638 in current liabilities payable to Hezhong related to the Company’s acquisition of Zhonghe (the “Zhonghe Acquisition”), which is due in November 2016, and for which the Company does not currently have the necessary capital to re-pay. Net cash provided by (used in) operations during the three months ended March 31, 2016 and 2015 was $2,813,032 and $(2,785,883). These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The Company invested heavily in Car King Tianjin through cash investment, advances, and leasing a portion of the Airport International Auto Mall to Car King Tianjin to operate a used car business. The Company believes that there is a strong market for used car sales in China and Car King Tianjin will provide us with opportunities for future growth. However, the Company cannot precisely predict the extent of the growth and whether such growth will convert into substantial profits in the future.
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.
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 March 31, 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.
| 6 |
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, (4) automobile value added services, and (5) airport auto mall automotive 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 collectability is reasonably assured.
The Company recognizes sales of automobiles upon delivery and acceptance by the customers and where collectability 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.
Airport auto mall automotive services include (i) the rental of the Airport International Auto Mall, and (ii) equity in the income (loss) derived from the Company’s 40% equity interest in Car King Tianjin. Rental income from the Airport International Auto Mall is recognized over the lease term on a straight-line basis. The Company’s lease agreement, entered into with Car King Tianjin in January 2014 (the “Rental Agreement”), contains a contingent rental arrangement for fiscal years 2016, 2017 and 2018, under which rental income is determined based on a percentage of Car King Tianjin’s gross profit. Notwithstanding this arrangement, the Rental Agreement contains both a minimum and a maximum annual rental amount. Contingent rental income is recognized when the specified targets are met. The equity in income (loss) derived from Car King Tianjin is recognized based on the Company’s ownership share in Car King Tianjin’s net income (loss).
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. 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.
| 7 |
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 collectability 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 March 31, 2016 and December 31, 2015, the Company recorded an allowance for uncollectible account on receivable related to financing services in the amount of $3,031,995 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. During the three months ended March 31, 2016, the inventories with reserve were included in the sale of the subsidiary and others sold in the ordinary course of business. As of March 31, 2016 and December 31, 2015, there was no the reserve for obsolescence.
Basic and Diluted Loss Per Share
Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted 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 March 31, 2016 and 2015, the Company did not have any common stock equivalents, therefore, the basic loss per share is the same as the diluted 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.
| 8 |
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 2016-01 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.
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) Restricted Cash
Restricted cash consists of cash which is not available for use in the Company’s operations and is summarized as follows:
| March 31, | December 31, | |||||||
| 2016 | 2015 | |||||||
| Collateral for bank’s issuance of letters of credit to the Company’s customers | $ | 4,705,217 | $ | 4,921,950 | ||||
| Collateral for notes payable to suppliers | 34,512,444 | 18,877,396 | ||||||
| $ | 39,217,661 | $ | 23,799,346 | |||||
(3) Property and Equipment
A summary of property and equipment is as follows:
| March 31, | December 31, | |||||||
| 2016 | 2015 | |||||||
| Buildings and land use rights, net of impairment loss of $2,861,862 as of March 31, 2016 and $2,842,990 as of December 31, 2015 | $ | 66,152,856 | $ | 65,716,641 | ||||
| Computers | 152,427 | 151,422 | ||||||
| Office equipment, furniture and fixtures | 67,454 | 67,010 | ||||||
| Leasehold improvements | 32,569 | 32,354 | ||||||
| Automobiles | 1,063,158 | 987,697 | ||||||
| 67,468,464 | 66,955,124 | |||||||
| Less: Accumulated depreciation and amortization | (6,193,351 | ) | (5,667,932 | ) | ||||
| $ | 61,275,113 | $ | 61,287,192 | |||||
| 9 |
Depreciation and amortization expenses for property and equipment amounted to approximately $530,599 and $589,857 for the three months ended March 31, 2016 and 2015, respectively.
(4) Equity Investment in Car King Tianjin
The Company’s investment in Car King Tianjin is accounted for using the equity method of accounting. The results of operations and financial position of the Company’s equity basis investments are summarized below:
| Condensed statements of operations information: | Three Months Ended March 31, 2016 | Three Months Ended March 31, 2015 | ||||||
| Net sales | $ | 1,002,888 | $ | 1,795,160 | ||||
| Gross profit | 768,248 | 576,687 | ||||||
| Net loss | (327,063 | ) | (734,477 | ) | ||||
| Company’s share in net loss of investee (included in the net loss of the Airport Auto Mall Automotive Service Segment) | $ | (130,825 | ) | $ | (293,791 | ) | ||
| Excess loss over investment | 130,825 | - | ||||||
| Share of net loss in Car King Tianjin | $ | - | $ | (293,791 | ) | |||
| Condensed balance sheet information: | As of March 31, 2016 | As of December 31, 2015 | ||||||
| Current assets | $ | 646,214 | $ | 629,912 | ||||
| Non current assets | 821,774 | 860,671 | ||||||
| Total assets | $ | 1,467,988 | $ | 1,490,583 | ||||
| Current liabilities | $ | 4,116,792 | $ | 3,792,402 | ||||
| Deficit | (2,648,804 | ) | (2,310,819 | ) | ||||
| Current liabilities and deficit | $ | 1,467,988 | $ | 1,490,583 | ||||
| 10 |
The Company is entitled to 40% of Car King Tianjin’s net profit or loss. As of March 31, 2016 and December 31, 2015, the Company’s equity investment balance in Car King Tianjin was $0.
(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 $2,326,339 (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 $2,326,339 (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 $2,316,101 as of March 31, 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 $676,867 and $700,314 for the three months ended March 31, 2016 and 2015, respectively.
| 11 |
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 $10,856,248 (RMB70,000,000). Borrowings under this facility line of credit bear interest at rates to be determined upon drawing and bear interest at rates ranging between 3.43% and 4.79% per annum, and borrowings under this facility were repayable within 3 months from the dates of drawing. As of March 31, 2016 and December 31, 2015, the Company had an outstanding balance of $$2.319,936 and $6,613,276, respectively, 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 and renewed in March 2016 for a temporary period until the final approval of a new facility line of credit agreement. As of May 12, 2016, the new facility line of credit agreement has not yet been officially executed.
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 $74,442,842 (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 bear interest at rates ranging from 3.60% to 4.65% per annum, and were repayable on the due dates, which were determined prior to each draw. As of March 31, 2016 and December 31, 2015, the Company had outstanding balances of $31,147,388 and $33,531,505, respectively, under this facility line of credit. This facility matures in September 2016.
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 $18,610,710 (RMB120,000,000). Borrowings under this facility line of credit bear interest at rates ranging from 4.55% to 5.44% per annum. As of March 31, 2016 and December 31, 2015, the Company had outstanding balances of $10,171,613 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 $27,916,066 (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 subsidiary, (v) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. Borrowings under this facility line of credit bear interest at rates ranging from 4.6% to 5.3% per annum, and are repayable within 3 months from the dates of drawing. As of March 31, 2016 and December 31, 2015, the Company had outstanding balances of $2,815,866 and $8,374,161, respectively, under this facility line of credit. This facility matures in August 2016.
Industrial and Commercial Bank of China
In June 2015, the Company entered into a facility line of credit agreement withIndustrial and Commercial Bank of China, pursuant to which the Company can borrow a maximum amount of $15,508,925 (RMB100,000,000).This facility line of credit is guaranteed by Zhonghe, the Company’s subsidiary. Borrowings under this facility line of credit bear interest at rates ranging from 3.2% to 4.2% per annum, and are repayable within 3 months from the dates of drawing. As of March 31, 2016 and December 31, 2015, the Company had outstanding balances of $4,711,226 and $5,431,703, respectively, under this facility line of credit. This facility matures in June 2016.
| 12 |
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 $12,407,140 (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 subsidiary. Borrowings under this facility line of credit bore interest at rates ranging from 0.19% to 1.66% per annum, and were repayable on the due dates, which were determined prior to each draw. As of March 31, 2016 and December 31, 2015, the Company had outstanding balances of $7,385,090 and $6,248,270, respectively, under this facility line of credit. This facility matured in April 2016.
Shengjing Bank
In November 2015, the Company entered into a facility line of credit agreement withShengjing Bank, pursuant to which the Company can borrow a maximum amount of $7,754,463 (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, (iii) Tianjin Ning Chuan International Trading co., Ltd., a supplier. As of March 31, 2016 and December 31, 2015, the Company had outstanding balances of $2,588,507 and $4,714,023 under this facility line of credit. Borrowings under this facility line of credit bear interest at rates of 4.8% to 6.0% per annum. This facility matures in November 2016.
(7)Short Term Borrowings
Agricultural Bank of China
In February 2015, 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 $13,958,033 (RMB90,000,000). The outstanding balances totaled $0 and $13,865,993 as of March 31, 2016 and December 31, 2015, respectively. These short term loans bore interest at a rate of 6.16% per annum, matured in February 2016, and were secured by the Airport International Auto Mall and related land use rights.
In June 2015, the Company entered into a working capital loan agreement with Agricultural Bank of China to obtain short term financing. Under the terms of this agreement, the Company can borrow up to $6,979,016 (RMB45,000,000). The outstanding balance totaled $6,979,016 and $6,932,996 as of March 31, 2016 and December 31, 2015, respectively. This short term loan bears interest at a rate of 5.61% per annum, matures in June 2016, and is secured by the Airport International Auto Mall and related land use rights.
In July 2015, the Company entered into a working capital loan agreement with Agricultural Bank of China to obtain short term financing. Under the terms of this agreement, the Company can borrow up to $5,583,213 (RMB36,000,000). The outstanding balance totaled $5,583,213 and $5,546,397 as of March 31, 2016 and December 31, 2015, respectively. This short term loan bears interest at a rate of 5.34% per annum, matures in July 2016, and is secured by the Airport International Auto Mall and related land use rights.
| 13 |
In August 2015, the Company entered into a working capital loan agreement with Agricultural Bank of China to obtain short term financing. Under the terms of this agreement, the Company can borrow up to $5,583,213 (RMB36,000,000). The outstanding balance totaled $5,583,213 and $5,546,397 as of March 31, 2016 and December 31, 2015, respectively. This short term loan bears interest at a rate of 5.06% per annum, matures in August 2016, 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, (v) Tianjin Ying Zhi Jie International Logistics Ltd. Co., a supplier.
In September 2015, the Company entered into a working capital loan agreement with Agricultural Bank of China to obtain short term financing. Under the terms of this agreement, the Company can borrow up to $3,411,964 (RMB22,000,000). The outstanding balance totaled $3,411,964 and $3,389,465 as of March 31, 2016 and December 31, 2015, respectively. This short term loan bears interest at a rate of 5.06% per annum, matures in August 2016, 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, (v) Tianjin Ying Zhi Jie International Logistics Ltd. Co., a supplier.
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 agreement, the Company can borrow up to $12,562,230 (RMB81,000,000). The outstanding balance totaled $12,562,230 and $0 as of March 31, 2016 and December 31, 2015, respectively. 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, (v) Tianjin Ying Zhi Jie International Logistics Ltd. Co., a supplier.
China Zheshang Bank
In August and September 2015, the Company entered into five loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $4,616,072 (RMB29,763,970). Borrowings under these loan agreements bore interest at rates ranging from 4.6% to 4.85% 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 subsidiary, and (v) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $0 and $4,585,633 as of March 31, 2016 and December 31, 2015, respectively. These loans matured in February and March 2016.
In December 2015, the Company entered into three loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $3,101,785 (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 subsidiary, and (v) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $3,101,785 and $3,081,332 as of March 31, 2016 and December 31, 2015, respectively. These loans mature in June 2016.
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 $4,652,678 (RMB30,000,000). 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 subsidiary, and (v) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $4,652,678 and $0 as of March 31, 2016 and December 31, 2015, respectively. These loans mature in August and September 2016.
| 14 |
Tianjin Binhai Rural Commercial Bank
In July and August 2015, the Company entered into two loan agreements with Tianjin Binhai Rural Commercial Bank. Under the terms of this agreement, the Company borrowed a maximum amount of $24,504,102 (RMB158,000,000). Borrowings under this loan agreement bear interest at a rate of 7.03% 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) Tianjin Binhai Shisheng Trading Group Co., Ltd., the Company’s subsidiary, (v) Xin Jiang Kai Li Xiang Kong Automobile Sales Service Co., Ltd., a potential customer, (vi) Xin Jiang Kai Yuan Heng Ji Real Estate Development Co., Ltd., a potential customer’s affiliate, (vii) Cheng Jun, shareholder of the Company’s supplier, (viii) Kai Li Xiang Kong Automobile Sales Service Co., Ltd., a customer, (ix) Tianjin Ying Zhi Jie International Logistics Co. , Ltd., a supplier. The Company repaid $15,353,836 (RMB99,000,000) duirng the three months ended March 31, 2016. The total outstanding balance of these agreements was $9,150,266 and $24,342,521 as of March 31, 2016 and December 31, 2015, respectively. These loan agreements mature in July and August 2016.
In March 2016, the Company entered into two loan agreements with Tianjin Binhai Rural Commercial Bank. Under the terms of these agreements, the Company borrowed a maximum amount of $11,631,694 (RMB75,000,000). Borrowings under this loan agreement bear interest at a rate of 6.525% 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) Tianjin Binhai Shisheng Trading Group Co., Ltd., the Company’s subsidiary (v) Xin Jiang Kai Yuan Heng Ji Real Estate Development Co., Ltd., a potential customer’s affiliate, (vi) Cheng Jun, shareholder of the Company’s supplier,. The total outstanding balance of these agreements was $11,631,694 and $0 as of March 31, 2016 and December 31, 2015, respectively. These loan agreements mature in March 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 March 31, 2016, the Company had four outstanding notes payable to suppliers, maturing in June 2016, in an aggregate amount of $5,428,124 (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 $2,716,267 (RMB17,514,221) as guaranteed funds, which was classified as restricted cash as of March 31, 2016.
As of March 31, 2016, the Company had four outstanding notes payable to suppliers, maturing in July 2016, in an aggregate amount of $6,979,016 (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 $3,492,388 (RMB22,518,569) as guaranteed funds, which was classified as restricted cash as of March 31, 2016.
| 15 |
Agricultural Bank of China
As of March 31, 2016, the Company had three outstanding notes payable to suppliers, maturing in January 2017, in an aggregate amount of $15,508,925 (RMB100,000,000), 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 $15,508,925 (RMB100,000,000) as guaranteed funds, which was classified as restricted cash as of March 31, 2016.
Tianjin Binhai Rural Commercial Bank
As of December 31, 2015, the Company had fifteen outstanding notes payable to suppliers, maturing in February 2016, in an aggregate amount of $21,324,773 (RMB137,500,000), the payment of which was guaranteed by Tianjin Binhai Rural Commercial Bank for a period of six months. The Company was required to maintain approximately 60% of the note amounts, or $12,794,864 (RMB82,500,000) as guaranteed funds, which was classified as restricted cash as of March 31, 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) Long term debt
The Company has an outstanding debt due to Hezhong, the seller of Zhonghe. The debt carries an interest rate of 6% per annum. The debt is due in three installment payments of approximately $18.6 million (RMB120,000,000) each including interest and is secured by the real estate property where the Airport International Auto Mall is located.
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. On May 12, 2016, the Company entered into a second Payment Extension Agreement with Hezhong to extend the due date for the second $18.6 million installment payment for another six months from May 31, 2016 to November 30, 2016. The unpaid amount bears interest at a rate of 6% per annum. The final installment payment, due on November 30, 2016, remains unchanged. As of March 31, 2016, unpaid installment payments including interest totaled approximately $36.7 million.
Summary of this debt is as follows:
| Outstanding debt balance plus accrued interest | $ | 36,683,638 | ||
| Less current portion due in 2016 | (36,683,638 | ) | ||
| Outstanding debt balance less current portion | $ | - |
| 16 |
(10) Major Customers and Suppliers
Two customers accounted for approximately 45% of the Company’s net revenue for the three months ended March 31, 2016. Two customers accounted for approximately 32% of the Company’s net revenue for the three months ended March 31, 2015.
Two suppliers accounted for approximately 39% of the Company’s purchases during the three months ended March 31, 2016. Two suppliers accounted for approximately 32% of the Company’s purchases during the three months ended March 31, 2015.
(11) Retained earnings
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 March 31, 2016 and December 31, 2015, the Company’s statutory reserve fund was approximately $2,256,000 and $2,126,000, respectively.
(12) 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 years ended December 31, 2015 and 2014, the Company made aggregate borrowings from Ms. Cheng Weihong of $161,486 and $186,000, respectively, and made repayments of $0 and $152,670 to Ms. Cheng Weihong. As of March 31, 2016 and December 31, 2015, the outstanding balances due to Ms. Cheng Weihong were $869,027 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 $2,107,077 and $2,093,182 were outstanding as payable related to prior years’ professional fees on the consolidated balance sheets as of March 31, 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 March 31, 2016 and December 31, 2015 are interest-free, unsecured and have no fixed term of repayment. During the three months ended March 31, 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.
| 17 |
(13) Segment Information
The Company has four principal operating segments: (1) sales of automobiles, (2) financing services, (3) airport auto mall automotive services, and, (4) 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.
The Company evaluates performance based on several factors, including net revenue, cost of revenue, operating expenses, and income from operations. The following tables show the operations of the Company’s operating segments:
Three Months Ended March 31, 2016
| Airport Auto | ||||||||||||||||||||||||
| Sales of | Financing | Mall Automotive | Other | |||||||||||||||||||||
| Automobiles | Services | Services | Services | Corporate | Total | |||||||||||||||||||
| Net revenue | $ | 135,835,493 | $ | 1,220,602 | $ | 326,987 | $ | 7,924 | $ | - | $ | 137,391,006 | ||||||||||||
| Cost of revenue | 135,436,039 | 676,867 | - | - | - | 136,112,906 | ||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Selling and marketing | 78,235 | 78,234 | 18,408 | 9,204 | - | 184,081 | ||||||||||||||||||
| General and administrative | 71,435 | 71,434 | 612,293 | 10,205 | 255,122 | 1,020,489 | ||||||||||||||||||
| Total operating expenses | 149,670 | 149,668 | 630,701 | 19,409 | 255,122 | 1,204,570 | ||||||||||||||||||
| Income (loss) from operations | $ | 249,784 | $ | 394,067 | $ | (303,714 | ) | $ | (11,485 | ) | $ | (255,122 | ) | $ | 73,530 | |||||||||
| Depreciation and Amortization | $ | 11,926 | $ | 1,420 | $ | 420,233 | $ | 1,657 | $ | 95,363 | $ | 530,599 | ||||||||||||
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Three Months Ended March 31, 2015
| Airport Auto | ||||||||||||||||||||||||
| Sales of | Financing | Mall Automotive | Other | |||||||||||||||||||||
| Automobiles | Services | Services | Services | Corporate | Total | |||||||||||||||||||
| Net revenue | $ | 86,213,871 | $ | 1,113,763 | $ | - | $ | 22,528 | $ | - | $ | 87,350,162 | ||||||||||||
| Cost of revenue | 86,005,028 | 863,292 | - | - | - | 86,868,320 | ||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Selling and marketing | 77,466 | 77,466 | 19,366 | 19,366 | - | 193,664 | ||||||||||||||||||
| General and administrative | 52,868 | 52,870 | 634,439 | 52,870 | 264,352 | 1,057,399 | ||||||||||||||||||
| Total operating expenses | 130,334 | 130,336 | 653,805 | 72,236 | 264,352 | 1,251,063 | ||||||||||||||||||
| Income (loss) from operations | $ | 78,509 | $ | 120,135 | $ | (653,805 | ) | $ | (49,708 | ) | $ | (264,352 | ) | $ | (769,221 | ) | ||||||||
| Depreciation and Amortization | $ | 45,786 | $ | 5,591 | $ | 455,378 | $ | 5,154 | $ | 105,654 | $ | 617,563 | ||||||||||||
Following are total assets by segment:
Total Assets
| Airport Auto Mall | ||||||||||||||||||||||||
| Sales of | Financing | Automotive | Other | |||||||||||||||||||||
| Automobiles | Services | Services | Services | Corporate | Total | |||||||||||||||||||
| As of March 31, 2016 | $ | 164,004,444 | $ | 71,353,529 | $ | 49,787,856 | $ | 58,119 | $ | 11,265,319 | $ | 296,469,267 | ||||||||||||
| As of December 31, 2015 | $ | 136,023,326 | $ | 92,186,303 | $ | 48,482,035 | $ | 310,393 | $ | 11,221,096 | $ | 288,223,153 | ||||||||||||
(14) Subsequent Event
On May 12, 2016, the Company entered into a second Payment Extension Agreement with Hezhong to extend the due date for the second $18.6 million installment payment for another six months from May 31, 2016 to November 30, 2016.
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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.
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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.
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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 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.
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. Through the Zhonghe Acquisition and the establishment of Car King Tianjin in November 2013, the Company entered into the used car sales market. We believe that there is a strong market for used car sales in China and this joint venture will provide us with opportunities for future growth. In addition, we are also considering directly targeting retail customers by selling new imported automobiles out of this facility, which may generate higher overall gross margins.
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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.
Airport auto mall automotive services include (i) the rental of the Airport International Auto Mall, and (ii) equity income (loss) derived from the Company’s 40% equity interest in Car King Tianjin. Rental income from the Airport International Auto Mall is recognized over the lease term on a straight-line basis. The Company’s lease agreement, entered into with Car King Tianjin in January 2014 (the “Rental Agreement”), contains a contingent rental arrangement for fiscal years 2016, 2017 and 2018, under which rental income is determined based on a percentage of Car King Tianjin’s gross profit. Notwithstanding this arrangement, the Rental Agreement contains both a minimum and a maximum annual rental amount. Contingent rental income is recognized when the specified targets are met. The equity income (loss) derived from Car King Tianjin is recognized based on the Company’s ownership share in Car King Tianjin’s net income (loss).
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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 March 31, 2016 and December 31, 2015, the Company recorded an allowance for uncollectible account on receivable related to financing services in the amount of $3,031,995 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 March 31, 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 March 31, 2016 and December 31, 2015, the deferred tax liabilities amounted to $9,408,778 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 $17.1 million as of March 31, 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.
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The Company has no material uncertain tax positions as of March 31, 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 March 31, 2016, there are no interest or penalties 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 2016-01 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.
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.
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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 Operations for the Three Months Ended March 31, 2016 Compared to the Three Months Ended March 31, 2015
The following table sets forth certain information relating to our results of operations, and our condensed consolidated statements of operations as a percentage of net revenue, for the periods indicated:
Three Months Ended March 31, 2016 | % of net revenue | Three Months Ended March 31, 2015 | % of net revenue | Change in % | ||||||||||||||||
| Net revenue | $ | 137,391,006 | 100.00 | % | $ | 87,350,162 | 100.00 | % | 57.29 | % | ||||||||||
| Cost of revenue | 136,112,906 | 99.07 | % | 86,868,320 | 99.45 | % | 56.69 | % | ||||||||||||
| Gross profit | 1,278,100 | 0.93 | % | 481,842 | 0.55 | % | 165.25 | % | ||||||||||||
| Operating expenses | 1,204,570 | 0.88 | % | 1,251,063 | 1.43 | % | (3.72 | )% | ||||||||||||
| Income (loss) from operations | 73,530 | 0.05 | % | (769,221 | ) | (0.88 | )% | (109.56 | )% | |||||||||||
| Other expenses | (1,216,216 | ) | (0.89 | )% | (2,127,720 | ) | (2.44 | )% | (42.84 | )% | ||||||||||
| Loss before income taxes and noncontrolling interests | (1,142,686 | ) | (0.83 | )% | (2,896,941 | ) | (3.32 | )% | (60.56 | )% | ||||||||||
| Net loss | (1,060,942 | ) | (0.77 | )% | (2,666,864 | ) | (3.05 | )% | (60.22 | )% | ||||||||||
| Net loss attributable to shareholders of China Auto Logistics Inc. | $ | (1,060,917 | ) | (0.77 | )% | $ | (2,666,441 | ) | (3.05 | )% | (60.21 | )% | ||||||||
For the three months ended March 31, 2016, our net revenue increased 57.29% to $137,391,006 from $87,350,162 for the same period in 2015, and our cost of revenue increased 56.69% to $136,112,906 from $86,868,320 for the same period in 2015. As compared to the same period in 2015, our gross profit, income (loss) from operations, net loss and net loss attributable to shareholders of China Auto Logistics Inc. for the three months ended March 31, 2016 increased 165.25% to $1,278,100, increased 109.56% to $73,530, decreased 60.22% to $(1,060,942), and decreased 60.21% to $(1,060,917), respectively, due primarily to the increases in revenue of our Sales of Automobiles and Financing Services segments and the decrease in interest expense on the payable related to the Zhonghe Acquisition as the outstanding payable balance declined.
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Net Revenue
The following table sets forth a summary of our net revenue by category for the periods indicated, in dollars and as a percentage of total net revenue:
| Three Months Ended March 31, 2016 | % of net revenue | Three Months Ended March 31, 2015 | % of net revenue | Change in % | ||||||||||||||||
| Net revenue | $ | 137,391,006 | 100.00 | % | $ | 87,350,162 | 100.00 | % | 57.29 | % | ||||||||||
| - Sales of Automobiles | 135,835,493 | 98.87 | % | 86,213,871 | 98.69 | % | 57.56 | % | ||||||||||||
| - Financing Services | 1,220,602 | 0.89 | % | 1,113,763 | 1.28 | % | 9.59 | % | ||||||||||||
| - Airport Auto Mall Automotive Services | 326,987 | 0.24 | % | - | - | % | - | % | ||||||||||||
| - Other Services | 7,924 | 0.00 | % | 22,528 | 0.03 | % | (64.83 | )% | ||||||||||||
Sales of Automobiles
Net revenue from Sales of Automobiles increased 57.56% to $135,835,493 for the three months ended March 31, 2016 from $86,213,871 for the same period in 2015. During the three months ended March 31, 2016 and 2015, the Company sold 1,304 automobiles and 796 automobiles, respectively, representing an increase of approximately 64% in volume. The average unit selling price per automobile decreased slightly to $104,000 for the three months ended March 31, 2016 from $108,000 for the same period in 2015. Our sales increased rapidly during second half of 2015 and this trend continued during the first quarter of 2016. 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 three months ended March 31, 2016, RMB rebounded about 1% against the U.S. dollar. As many observers and economists expect the RMB to continue to devalue against the U.S. dollar and other major currencies, the Company expects many of its customers will increase their orders in anticipation of increased prices.
Our automobile sales increased in both dollars and in quantities during the three months ended March 31, 2016 while our gross margin continued to improve during this period as we witnessed, and continue to witness, a high demand for luxury automobiles during the year ended December 31, 2015 and the three months ended March 31, 2016. This high demand could be the result of the continuous growth of household income in China despite a substantial drop in the China stock market, the overall economy slowing down, and other various factors. 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 March 31, 2016, the PRC government has selected Guangzhou, Shanghai, Shenzhen and Tianjin as four experimental cities to implement “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 March 31, 2016 and 2015, sales for our top three selling brands, Land Rover, Mercedes Benz and Toyota accounted for 79% and 68%, respectively. Our gross margin for Sales of Automobiles increased to 0.29% for the three months ended March 31, 2016 from 0.24% for the three months ended March 31, 2015 and from 0.26% for the full year of 2015.
Sales to the Company’s top three customers, each of which are car dealers, accounted for 46% and 36% of the Company’s sales during the three months ended March 31, 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.
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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 increased 9.59% to $1,220,602 for the three months ended March 31, 2016 from $1,113,763 for the three months ended March 31, 2015. The Company had an aggregate amount of credit lines of approximately $157 million (RMB1.01 billion) as of March 31, 2016 and $167 million (RMB$1.02 billion) as of March 31, 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. The revenue from the fee income portion of our Financing Services increased during the three months ended March 31, 2016 compared to the same period of 2015. Excluding revenue from the interest income portion of $676,867 and $700,314 in the three months ended March 31, 2016 and 2015, respectively, the revenue from the fee income portion of our Financing Services increased 31.51% to $543,735 for the three months ended March 31, 2016 from $413,449 for three months ended March 31, 2015. The gross margin for our Financing Services segment increased to 44.55% for the months ended March 31, 2016 from 22.49% for the three months ended March 31, 2015. The increase in gross margin was primarily due to a maintenance fee charged during the three months ended March 31, 2015 on our line of credit with Agricultural Bank of China in the amount of $163,000, which was not charged during the three months ended March 31, 2016.
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. Because of a reutilization of our working capital following the Zhonghe Acquisition and the creation of Car King Tianjin, we had limited funds available for this service starting in the beginning of 2014. With the acquisition installment payments made in November 2014 and January 2015, our working capital available to provide this temporary credit service, which had been a significant part of our Financing Services and a major contributor to our gross margin in recent years, was limited. During the three months ended March 31, 2016, our liquidity slightly improved which allowed the Company to have more working capital to be used in the temporary credit extension service. 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, China Merchants Bank, Pudong Development Bank, China Zheshang Bank, Industrial and Commercial Bank of China, China Minsheng 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 March 31, 2016 and 2015, we had approximately $96 million and $104 million, respectively, lines of credit available to use in our Financing Services. As of May 12, 2016, the Company had aggregate credit lines of approximately $157 million (RMB1.01 billion). 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.
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Airport Auto Mall Automotive Services
Zhonghe operates two new businesses including (i) selling used cars through Car King Tianjin; and (ii) leasing a portion of the Airport International Auto Mall. We are also considering directly targeting retail customers by selling new imported automobiles out of this facility. We have been evaluating options to determine the best and most profitable uses for this facility. We lease a portion of the Airport International Auto Mall to Car King Tianjin to operate a used car business. Since the inception of Car King Tianjin’s business, the Company has provided advances to Car King Tianjin as working capital, while Car King China has provided consigned inventories to support Car King Tianjin’s used car sales. From the start of operations in March 2014, Car King Tianjin has gradually increased our volume in used car sales in the Tianjin region.
Due to the cumulative loss incurred by Car King Tianjin, the Company has not received any return on its investment in the Joint Venture since the inception of its operations. As a result, starting in the third quarter of 2014, the Company deferred recording the rental income related to the lease of the Airport International Auto Mall. Car King Tianjin’s cash flow improved after receiving additional working capital from Car King China during the second half of 2015. The Company recorded rental income of $326,987 and $0 during three months ended March 31, 2016 and 2015, respectively.
Since we own less than 50% of Car King Tianjin, the revenue generated from Car King Tianjin is not reported in our consolidated revenue. During the three months ended March 31, 2016 and 2015, Car King Tianjin generated revenue in the amount of $1,002,888 and $1,795,160, respectively, a decrease of $792,272 or 44.14%. This revenue represented revenue from sales of used automobiles at the Airport International Auto Mall, as well as agency commissions earned from selling automobiles owned by other Car King locations. During the three months ended March 31, 2016, Car King Tianijn acted mostly as a sales agent and earned a commission. As a result, Car King Tianjin’s revenue decreased as only the agency commission amount was recorded as revenue instead of the sales prices of the automobiles. Car King Tianjin’s gross profit increased to $768,248 during the three months ended March 31, 2016 from $576,687 during the same period of 2015. Our net loss decreased to $327,063 during the three months ended March 31, 2016 from $734,477 during the same period of 2015. The numbers of automobiles sold through Car King Tianjin, including those for which Car King Tianjin acted as an agent for other Car King locations, are summarized as follows:
| Three Months Ended March 31, | Change in | |||||||||||
| 2016 | 2015 | % | ||||||||||
| Automobile sales out of Car King Tianjin’s own inventories | $ | 4 | $ | 45 | (91.11 | )% | ||||||
| Acting as sales agent | 272 | 195 | 39.49 | % | ||||||||
| $ | 276 | $ | 240 | 15.00 | % | |||||||
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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, Financing Services and the used car business through Car King Tianjin and any potential opportunities through operating the Airport International Auto Mall. 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 64.83% to $7,924 for the three months ended March 31, 2016 from $22,528 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 March 31, 2016 | % of net revenue | Three Months Ended March 31, 2015 | % of net revenue | Change in % | ||||||||||||||||
| Net revenue | $ | 137,391,006 | 100.00 | % | $ | 87,350,162 | 100.00 | % | 57.29 | % | ||||||||||
| Cost of revenue | $ | 136,112,906 | 99.07 | % | $ | 86,868,320 | 99.45 | % | 56.69 | % | ||||||||||
| Gross profit | $ | 1,278,100 | 0.93 | % | $ | 481,842 | 0.55 | % | 165.25 | % | ||||||||||
Our cost of revenue in the three months ended March 31, 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 increased 56.69% to $136,112,906 for the three months ended March 31, 2016 from $86,868,320 for the three months ended March 31, 2015. The Sales of automobiles accounted for 98.87% of our total revenue for the three months ended March 31, 2016 as compared to 98.7% for the three months ended March 31, 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 increased 165.25% to $1,278,100 in the three months ended March 31, 2016 from $481,842 in the three months ended March 31, 2015, primarily due to a maintenance fee charged during the three months ended March 31, 2015 on our line of credit with Agricultural Bank of China in the amount of $163,000, which was not charged during the three months ended March 31, 2016. We have been negotiating with Agricultural Bank of China about the amount of this fee, if any, and the result of the negotiation cannot be predicted at this time. In addition, the Company recorded rental income of $326,987 and $0 during three months ended March 31, 2016 and 2015, respectively.
Operating Expenses
Three Months Ended March 31, 2016 | % of total | Three Months Ended March 31, 2015 | % of total | Change in % | ||||||||||||||||
| Operating Expenses | ||||||||||||||||||||
| - Selling and Marketing | $ | 184,081 | 15.28 | % | $ | 193,664 | 15.48 | % | (4.95 | )% | ||||||||||
| - General and Administrative | 1,020,489 | 84.72 | % | 1,057,399 | 84.52 | % | (3.49 | )% | ||||||||||||
| Total | $ | 1,204,570 | 100.00 | % | $ | 1,251,063 | 100.00 | % | (3.72 | )% | ||||||||||
During the three months ended March 31, 2016, our total operating expenses decreased 3.72% to $1,204,570 from $1,251,063 for the same period in 2015. This decrease was a combination result of a 4.95% decrease in selling and marketing expenses and a 3.49% decrease in general and administrative expenses for the three months ended March 31, 2016 from the same period in 2015.
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The following table sets forth a breakdown of the primary selling and marketing expenses of the Company:
Three Months Ended March 31, | Change in | |||||||||||
| 2016 | 2015 | % | ||||||||||
| Primary selling and marketing expenses | ||||||||||||
| - Payroll | $ | 51,218 | $ | 49,222 | 4.06 | % | ||||||
| - Staff-related costs | 25,935 | 37,075 | (30.05 | )% | ||||||||
| - Advertising and promotion | 3,058 | 3,911 | (21.81 | )% | ||||||||
| - Entertainment | 39,658 | 14,676 | 170.22 | % | ||||||||
Payroll expenses increased 4.06% during the three months ended March 31, 2016 primarily due to the general increase in pay rate increase per employee which was partially offset by the decrease in the number of employees. Staff-related costs decreased primarily due to the decrease in the overall benefits per employee during the three months ended March 31, 2016 compared to the same period of 2015. We incur advertising and promotion expenses from to time in our normal business operations. Entertainment expenses increased by 170.22% for the three months ended March 31, 2016 compared to the same period of 2015. Entertainment expenses fluctuate from time to time depending on the needs of our sales department personnel. We incurred more entertainment expenses on customer relation activities during the Chinese Spring Festival in 2016 compared to those in 2015.
The following table sets forth a breakdown of the primary general and administrative expenses of the Company:
Three Months Ended March 31, | Change in | |||||||||||
| 2016 | 2015 | % | ||||||||||
| Primary general and administrative expenses | ||||||||||||
| - Payroll | $ | 55,098 | $ | 73,518 | (25.06 | )% | ||||||
| - Staff- related costs | 17,149 | 19,439 | (11.78 | )% | ||||||||
| - Entertainment | 32,504 | 52,262 | (37.81 | )% | ||||||||
| - Depreciation | 530,599 | 583,829 | (9.12 | )% | ||||||||
| - Rent | 15,618 | 16,646 | (6.18 | )% | ||||||||
| - Legal and professional fees | 271,184 | 266,381 | 1.80 | % | ||||||||
Payroll expenses decreased 25.06% during the three months ended March 31, 2016 primarily due to the decrease in the number of administration employees to reduce our cost. Staff-related costs decreased 11.78% during the three months ended March 31, 2016, which was in proportion to the decrease in our payroll expenses. Entertainment expenses fluctuate from time to time depending on the needs of our management personnel. Depreciation expenses decreased 9.12% primarily due to reduced costs of fixed assets and the net effect of RMB devaluation during the three months ended March 31, 2016 compared to the same period of 2015. Rent decreased slightly primarily due to the net effect of RMB devaluation during the three months ended March 31, 2016 compared to the same period of 2015. Legal and professional fees increased 1.8% for the three months ended March 31, 2016 primarily due to a general increase in professional fees.
Income (loss) from Operations
Income from operations increased 109.56% for the three months ended March 31, 2016 to $73,530 from loss from operations of $(769,221) in the same period in 2015. The increase in income from operations was primarily due to the increase in gross profit as a result of higher automobile sales, higher fees generated from financing services and rental income.
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Other Income and Expenses
Other income and expenses consist primarily of interest income, interest expense, gain (loss) on disposal of property and equipment, foreign exchange gain (loss) and equity loss on share of investee company.
The Company’s interest income is generated by interest earned through bank deposits.
Interest income increased 333.63% to $368,016 during the three months ended March 31, 2016 compared to $84,868 during the same period of 2015. We were able to earn interest income at higher interest rates as the restricted cash balance continued to increase. The banks offered fixed deposit rates, which are substantially higher than the regular saving rates, on our restricted cash deposits.
Interest expense was $1,591,503 during the three months ended March 31, 2016 compared to $1,918,797 during the same period of 2015. The decrease of $327,294 or 17.06% was primarily due to lower incurred interest on the payables related to the Zhonghe Acquisition as the outstanding payable balance declined.
Gain on disposal of property and equipment of $5,702 during the three months ended March 31, 2016 was related to sales of certain fixed assets. We did not dispose any property and equipment during the three months ended March 31, 2015.
Equity loss – share of investee company loss of $0 and $293,791 during the three months ended March 31, 2016 and 2015, respectively, represented the share of loss on the operating results of Car King Tianjin in which we have a 40% interest. Since our share of loss on the operating results of Car King Tianjin has already exceeded our initial investments, we did not record any further equity loss in Car King Tianjin during the three months ended March 31, 2016.
Inflation
We believe that inflation has had a negligible effect on operations for the three month period ended March 31, 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.
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.
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The following table sets forth a summary of our cash flows for the three months ended March 31, 2016 and 2015.
| Three Months Ended March 31, | ||||||||
| 2016 | 2015 | |||||||
| Net cash provided by (used in) operating activities | $ | 2,813,032 | $ | (2,785,883 | ) | |||
| Net cash used in investing activities | (111,873 | ) | - | |||||
| Net cash (used in) provided by financing activities | (4,680,127 | ) | 5,280 | |||||
| Effect on exchange rate change on cash | 19,719 | 25,096 | ||||||
| Cash and cash equivalents at beginning of period | 7,119,686 | 7,793,952 | ||||||
| Cash and cash equivalents at end of period | 5,160,437 | 5,038,445 | ||||||
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 attributable to shareholders for the three months ended March 31, 2016 was $1,060,917 as compared to $2,666,441 for the three months ended March 31, 2015.
As of March 31, 2016, the Company has a working capital deficit of $31,845,848, including $62,656,059 in current liabilities for short-term borrowings which are due during the period between June 2016 and March 2017, and $36,683,638 in current liabilities payable to Hezhong related to the Company’s acquisition of Zhonghe Acquisition, which is due in November 2016, and for which the Company does not currently have the necessary capital to re-pay. Net cash provided by (used in) operations during the three months ended March 31, 2016 and 2015 was $2,813,032 and $(2,785,883). These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The Company invested heavily in Car King Tianjin through cash investment, advances, and leasing a portion of the Airport International Auto Mall to Car King Tianjin to operate a used car business. The Company believes that there is a strong market for used car sales in China and Car King Tianjin will provide us with opportunities for future growth. However, the Company cannot precisely predict the extent of the growth and whether such growth will convert into substantial profits in the future.
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 three months ended March 31, 2016, we had net cash provided by operating activities of $2,813,032 as compared to net cash used in operating activities of $2,785,883 during the same period of 2015. Net cash provided by operating activities during the three months ended March 31, 2016 primarily consisted of an increase in notes payable to suppliers of $15,291,689 due to our efforts in reserving our cash flows by deferring payments to our suppliers, and an increase in customer deposits of $6,461,553 due to increased advanced payments from our customers for future sales, which was partially offset by an increase in restricted cash due to larger balance of restricted cash required for notes payable of $15,046,585 and an increase in inventories of $10,321,688 due to anticipation of strong sales in the coming quarters as we expect many of our customers will increase their orders in anticipation of increased prices.
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Net cash used in operating activities during the three months ended March 31, 2015 primarily consisted of a net loss of $2,666,864, an increase in restricted cash due to larger balance of restricted cash required for letters of credit issuance of $5,438,791, an increase in advances to suppliers of $19,224,370 due to the building up of our inventory orders in order to increase our inventory selections for our customers, and a decrease in accrued interest of $2,672,382 due to interest payment made in January 2015 related to the Zhonghe acquisition. The net amount of cash used in operating activities was partially offset by a decrease in receivable related to Financing Services of $12,938,491 due to more collections received during the three months ended March 31, 2015, an increase in notes payable to suppliers of $3,259,559 due to our efforts in reserving our cash flows by deferring payments to our suppliers, and an increase in customer deposits of $9,011,191 due to increased advanced payments from our customers for future sales.
Investing Activities
We received cash proceeds of $8,563 and $0 related to the disposal of an automobile used by the Company during the three months ended March 31, 2016 and 2015, respectively.
We had net purchases of property and equipment in the amount of $120,436 and $0, respectively, during the three months ended March 31, 2016 and 2015, respectively.
Financing Activities
During the three months ended March 31, 2016, net cash used in financing activities was $4,680,127 as compared to net cash provided by financing activities of $5,280 during the same period in 2015. The net cash provided by financing activities during the three months ended March 31, 2016 and 2015 included mainly net repayments on short-term loans from banks in the amount of $5,010,165 and $0, respectively. Bank overdraft increased $168,552 and decreased $28,050 during the three months ended March 31, 2016 and 2015, respectively. In addition, during the three months ended March 31, 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 $161,486 and $186,000, respectively, and repaid $0 and $152,670, respectively.
Our total cash and cash equivalents increased to $5,160,437 as of March 31, 2016, as compared to $5,038,445 as of March 31, 2015.
Working Capital
As of March 31, 2016, the Company had working capital deficit of $31,845,848 compared to $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 service operations, lines of credit related to financing services and short-term borrowings. As of March 31, 2016, the decrease of working capital was primarily attributable to net loss attributable to the shareholders during the three months ended March 31, 2016.
The Company has aggregate outstanding balance of lines of credit related to financing services of $61,139,626 and $73,004,179 as of March 31, 2016 and December 31, 2015, respectively, and outstanding balances of short-term borrowings of $62,656,059 and $67,290,734 as of March 31, 2016 and December 31, 2015, respectively. In addition, we had a bank overdraft with a balance of $2,316,101 and $2,131,009 as of March 31, 2016 and December 31, 2015, respectively.
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As of March 31, 2016, unpaid installment payments including interest totaled approximately $36.7 million.
Summary of this debt is as follows:
| Outstanding debt balance plus accrued interest | $ | 36,683,638 | ||
| Less current portion due in 2016 | (36,683,638 | ) | ||
| Outstanding debt balance less current portion | $ | - |
Under the terms of the Auto Mall Acquisition Agreement, we made an installment payment of approximately $16.3 million in November 2014 and $3.2 million in January 2015, and have to remit two more installments at approximately $19.5 million each, including principal and interest in November of 2015 and 2016. 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. On May 12, 2016, the Company entered into a second Payment Extension Agreement with Hezhong to extend the due date for the second $18.6 million installment payment for another six months from May 31, 2016 to November 30, 2016. The unpaid amount bears interest at a rate of 6% per annum. The final installment payment, due on November 30, 2016, remains unchanged. As of March 31, 2016, unpaid installment payments including interest totaled approximately $36.7 million. We plan to finance these installment payments through our operating cash flows and bank loans. We expect that we will not have sufficient cash flow to remit these payments without obtaining outside financing. We believe we will be able to obtain sufficient bank loans at reasonable terms to finance our operations and these payment installments. However no assurance can be given that we will be successful in obtaining any loans on terms acceptable to us.
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 entered into several banking facilities with Agricultural Bank of China, China Merchants Bank, PuDong Development Bank, Industrial and Commercial Bank of China, China ZheShang Bank, China Minsheng Bank, Shengjing Bank and Tianjin Binhai Rural Commercial Bank. As of March 31, 2016 and December 31, 2015, the Company had aggregate credit lines of $157 million (RMB1.01 billion) and $166 million (RMB1.08 billion), respectively, and had outstanding balances under these credit lines amounted to $63 million and $66 million, respectively. As of May 12, 2016, the Company had aggregate credit lines of $157 million (RMB1.01 billion) with its banks.
As of March 31, 2016 and December 31, 2015, we had an aggregate outstanding loan balance of $62,656,059 and $67,290,734, respectively, related to certain short-term loan agreements with Agricultural Bank of China, China Zheshang Bank, and Tianjin Binhai Rural Commercial Bank. These loans carried interest at rates ranging from 0.19% to 6.00% 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 $2,316,101 and $2,131,009 with Pudong Development Bank as of March 31, 2016 and December 31, 2015, respectively.
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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 approximately $39.2 million (RMB240,000,000) was paid within 5 business days after the signing of the Agreement. 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. On May 12, 2016, the Company entered into a second Payment Extension Agreement with Hezhong to extend the due date for the second $18.6 million installment payment for another six months from May 31, 2016 to November 30, 2016. The unpaid amount bears interest at a rate of 6% per annum. The final installment payment, due on November 30, 2016, remains unchanged. As of March 31, 2016, unpaid installment payments including interest totaled approximately $36.7 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.
C. 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.
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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 March 31, 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 (1) | Office Tenancy Contract, dated February 18, 2016, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd. | |
| 10.2* | Payment Extension Agreement, dated May 12, 2016, by and between Tianjin Binhai Shisheng Trading Group Co., Ltd. and Hezhong International Development 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
(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.
| 37 |
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: May 16, 2016
| 38 |
Index to Exhibits
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 (1) | Office Tenancy Contract, dated February 18, 2016, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd. | |
| 10.2* | Payment Extension Agreement, dated May 12, 2016, by and between Tianjin Binhai Shisheng Trading Group Co., Ltd. and Hezhong International Development 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
(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.
39