| NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Unaudited
Interim Financial Information The
accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (the “SEC”) and generally accepted accounting principles in the
United States (“U.S. GAAP”) for interim financial reporting. The information furnished herein reflects all adjustments
(consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly state the
operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated
financial statements prepared in accordance with accounting principles generally accepted in the United States of America have
been omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read
in conjunction with the financial statements and footnotes thereto, included in the CompanyÂ’s 2014 Annual Report filed with
the SEC on April 30, 2015. The interim results of operations are not necessarily indicative of the results to be expected for
the full fiscal year or any future periods. Principles
of Consolidation The
condensed consolidated financial statements include the financial statements of the Company, its subsidiaries and VIEs. All significant
inter-company balances and transactions have been eliminated in consolidation. Reclassification The
Company has reclassified certain comparative balances in the consolidated financial statements for 2014 to conform to current
yearÂ’s presentation. The principal reclassification is related to the separate presentation of loans receivable, net, which
was previously included in the other financing receivable, net. The reclassification provides more transparent and comprehensive
information on the new CeraVest operation and provides more consistent disclosure with the counterpart note financing payable.
The reclassification did not have an impact on the reported total assets, liabilities, and stockholdersÂ’ equity. Use
of Estimates The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the periods presented. The most significant estimates and
related assumptions include the assessment of the provision for doubtful accounts, the assessment of the impairment of tangible
long-lived assets, the assessment of the valuation allowance on deferred tax assets and the assessment of the fair value of the
commercial vehicles which is used in determining revenue recognition by reference to the retail market price. Actual results could
differ from these estimates. Currency
Reporting The
Company uses U.S. dollars as its functional currency. The CompanyÂ’s operations in China and Hong Kong use the local currencies
- Renminbi (“RMB”) and Hong Kong dollar (“HKD”) as its functional currencies whereas amounts reported in the
accompanying unaudited condensed consolidated financial statements and disclosures are stated in U.S. dollars, the reporting currency
of the Company, unless stated otherwise. As such, the consolidated balance sheets of the Company have been translated into U.S.
dollars at the current rates listed by the PeopleÂ’s Bank of China as of June 30, 2015 and December 31, 2014 and the consolidated
statements of income and comprehensive income for the three months ended June 30, 2015 and 2014 have been translated into U.S.
dollars at the average rates during the periods the transactions were recognized. The resulting translation adjustments are recorded
as other comprehensive. The following are the exchange rates used by the Company as of June 30, 2015 and December 31, 2014, and
for the six months ended June 30, 2015 and 2014.
December
31, 2014
Exchange
rates as of the date specified 6.1190:1
RMB to USD
7.7567:1
HKD to USD
Average
exchange rates for the years ended 6.1443:1
RMB to USD
7.7556:1
HKD to USD
June
30, 2015 June
30, 2014
Exchange
rates as of the date specified 6.1136:1
RMB to USD 6.1528:1
RMB to USD
7.7544:1
HKD to USD 7.7516:1
HKD to USD
Average
exchange rates for the six-months ended 6.1294:1
RMB to USD 6.1385:1
RMB to USD
7.7544:1
HKD to USD 7.7570:1
HKD to USD Cash
and Cash Equivalents For
purposes of the consolidated statements of cash flows, cash equivalents include all highly liquid debt instruments with original
maturities of three months or less which are not securing any corporate obligations. As of June 30, 2015 and December 31, 2014,
the majority of cash, including restricted cash, was in RMB on deposit in PRC financial institutions under the CompanyÂ’s
PRC VIEs and subsidiaries, which the management believes are of high credit quality. Cash remittance in or out of the PRC are
subject to the PRC foreign exchange control regulations pursuant to which PRC government approval is required for the Company
to receive funds from or distribute funds outside the PRC. Restricted
Cash As
of June 30, 2015 and December 31, 2014, the restricted cash was $166,000 and $988,000, respectively, which was guarantee deposits
required by the China Insurance Regulatory Commission (“CIRC”) in order to protect insurance premium appropriation by
insurance agency and security deposits under the CITIC financing arrangement. Long-Term
Net Investment in Direct Financing and Sales-Type Leases Long-term
net investment in direct financing and sales-type leases are stated at the amount the Company expects to collect from its commercial
vehicle leasing customers (individuals) and represent commercial vehicle leases that the Company originates directly through its
own store network. These leases have an average length of 26 months and are secured by the commercial vehicle with GPS device
tracing. Short-term
Net Investment in Sales-Type Leases and Other Financing Receivables Both
short-term net investment in sales-type leases and other financing receivables represent financing provided to the peer stores,
which are guaranteed by their legal representative, and are stated at the amount the Company expects to collect. Short-term
net investment in sales-type leases is for commercial vehicle leases provided to peer stores, with terms within 1 year. Other
financing receivables represent 1) financing provided to peer stores for the insurance and taxes related to the purchase of a
new commercial vehicle, usually with a term of ten months; and 2) financing provided to registrant customers on the CeraPay platform,
usually with a term of 30 days. Loans
receivable Loans
receivable represent loans provided to small and medium sized businesses (“SMBs”) through the CeraVest platform with
a six-month term and an interest rate of 8.6% per annum. The SMBs are expected to repay the principal and interest to the Company
in lump-sum at the maturity of the loan, Accounts
Receivable Accounts
receivable represents the following: i) the amount the Company expects to collect from the value added services, such as the tires,
fuel and insurance financing services with the term of one to three months; ii) commissions the Company expects to collect from
insurance institutions for referring its customers to buy auto insurance; iii) the reclassified past due monthly installments
from long-term net investment in direct financing and sales-type leases, and short-term net investment in sales-type leases; iv)
the past due CeraPay receivables, which are reclassified from other financing receivables; and v) the past due CeraVest receivables,
which are reclassified from loans receivable. Provision
for doubtful accounts The
Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make
required payments. The
Company evaluates, on an individual basis, the collectability of its long-term net investment in direct financing and sales-type
leases based on a combination of factors, including customer credit-worthiness, residual value of the commercial vehicles under
lease and historical collection experience. Management reviews the receivable and adjusts the allowance based on historical experience,
financial condition of the customer and other relevant current economic factors. The allowances were deducted from accounts receivable
on an individual basis, and the portion in excess of accounts receivable were then deducted from the long-term net investment
in direct financing and sales-type leases. For
short-term net investment in sales-type leases and other financing receivables arising from transactions with peer stores, the
Company provides a general provision based on 1.5% of the ending balances. Certain various percentages of allowance are further
provided when the monthly installments default, according to the aging of such defaults. Such allowances are deducted from accounts
receivable, short-term net investment in sales-type leases and other financing receivables, respectively. For
loans receivables, arising from loans provided through the CeraVest platform to SMBs, the Company provides a general provision
of 1% of the ending balance. For overdue receivables from CeraVest, the Company provides a general provision based on 5% of the
overdue balance, which arises when the SMBs are unable to pay the loans at maturity and the loans are at default. Overdue
receivables from CeraPay result when CeraPay users do not fully repay any outstanding amounts by the end of their monthly billing
cycle. For overdue receivables from CeraPay, the Company provides a general provision based on 5.0% of the overdue balances. Concentration
of Credit Risk Financial
instruments that potentially subject the Company to concentration of credit risk consist principally of accounts receivable from
sales of commercial vehicles and, investment in direct financing and sales-type leases and other financing receivables. Credit
risk concentration with respect to accounts receivables and, investments in leases and other financing receivables is reduced
because a large number of diverse customers over a wide geographic area make up the CompanyÂ’s customer base. Inventories Inventories
are stated at the lower of cost or market. The Company uses the specific identification method to value commercial vehicles and
the first-in, first-out method (“FIFO”) to account for parts inventories. A reserve of specific inventory units
and parts inventories is maintained where the cost exceeds the estimated net realizable value. Property,
Equipment, Leasehold Improvements and Construction in progress Property
and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. All depreciation
is included in operating expenses on the accompanying unaudited condensed consolidated statements of income and comprehensive
income. Leasehold improvements are capitalized and amortized over the lesser of the life of the lease or the useful life of the
related asset. The
estimated useful lives of property, equipment and leasehold improvements are as follows:
Useful life
Buildings 40
years
Equipment 5 - 10 years
Furniture
and fixtures 5 - 10 years
Company
automobiles 3 - 5 years
Leasehold
improvements Shorter
of the remaining lease terms and estimated useful lives Expenditures
for major additions or improvements that extend the useful lives of assets are capitalized. Minor replacements, maintenance and
repairs that do not improve or extend the lives of such assets are expensed as incurred. The
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may no longer be recoverable. When these events occur, the Company assesses the recoverability of the long-lived assets
by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from
the use of the assets and their eventual disposition where the fair value is lower than the carrying value, measurement of an
impairment loss is recognized in the statements of operations and comprehensive income (loss) for the difference between the fair
value, using the expected future discounted cash flows, and the carrying value of the assets. No impairment of long-lived assets
was recognized for the periods presented. Note
financing payables Note
financing payables represent amounts received from investors through the CeraVest platform for the purchases of interest-bearing
notes that corresponds to CeraVest loans receivables. The payables have a maturity period of six months from the initial purchase
and an interest rate of approximately 8.6% per annum. The principal and interest is paid to the investors on the maturity date. The
transfer of financial assets originating from the CeraVest platform to investors does not meet the criteria of a sale of financial
assets because the Company believes it still has continuing involvement and maintains effective control of the financial assets.
Accordingly, the proceeds received from the investors under the financing agreement are accounted for as secured borrowings called
note financing payables. Long-term
bonds payable Long-term
bonds payable represent securitized bonds sold to qualified investors pursuant to China Securities Regulatory Commission (CSRC)
2014 announcement No. 49 regarding asset securitizations. Pursuant to this announcement, as of June 30, 2015 the Company securitized
approximately $101.8 million of sales-type leases, which were sold to qualified investors. The bonds bear interest at rates from
6.8% to 7.9% per annum, have a maturity of approximately 2.5 years and bear credit ratings of AA to AAA. The bonds are tradable
on the Shanghai Stock Exchange Integrated Electronic Platform for Fixed-income Securities. The bonds are issued at par with the
bond rate equivalent to the market rate and are guaranteed by and Mr. Li. Fair
Value of Financial Instruments Financial
instruments consist primarily of cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses, other financing
receivables, loans receivable, short-term net investment in sales-type leases, current maturity of net investment in direct financing
and sales-type leases, accounts payable, due to affiliates, short-term borrowings, note financing payables, other payables and
accrued liabilities, customer deposits, long-term bonds payable and long-term borrowings. The carrying amounts of the short-term
financial instruments at June 30, 2015 and December 31, 2014 approximated their fair values because of their short maturities
or existence of variable interest rates, which reflect current market rates. For long-term financial instruments, the carrying
amount approximates its fair value since the interest rates applied to determine the carrying amount is close to the market interest
rates for similar types of long-term instruments. When available, the Company measures the fair value of financial instruments
based on quoted market prices in active markets, valuation techniques that use observable market-based inputs or unobservable
inputs that are corroborated by market data. Pricing information that the Company obtains from third parties is internally validated
for reasonableness prior to use in the consolidated financial statements. When observable market prices are not readily available,
the Company generally estimates fair value using valuation techniques that rely on alternate market data or inputs that are generally
less readily observable from objective sources and are estimated based on pertinent information available at the time of the applicable
reporting periods. In certain cases, fair values are not subject to precise quantification or verification and may fluctuate as
economic and market factors vary and the CompanyÂ’s evaluation of those factors changes. Although the Company uses its best
judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique.
In these cases, a minor change in an assumption could result in a significant change in its estimate of fair value, thereby increasing
or decreasing the amounts of the CompanyÂ’s consolidated assets, liabilities, equity and net income or loss. A
financial instrumentÂ’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant
to the fair value measurement. Three levels of inputs are used to measure fair value: Level
1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. Level
2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable
for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical
assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations
in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. Level
3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to
the measurement of the fair value of the assets or liabilities. Financing
Arrangement with CITIC Bank Under
the financing arrangement with CITIC Bank, which began in March 2013, the CompanyÂ’s customers obtain financing from CITIC
while the Company provides a guarantee. The Company enters into a lease contract directly with the customer and also enters into
a contractual obligation to repay the financing on behalf of the customer. The CITIC financing has a 24-month term and as a result
the Company recognizes a long-term liability for amounts borrowed under the CITIC financing arrangement. Since January 2014, the
Company does not anticipate further utilizing the financing arrangement in the future. Comprehensive
Income (Loss) U.S.
GAAP generally requires that recognized revenue, expenses, gains and losses be included in net income or loss. Although certain
changes in assets and liabilities are reported as separate components of the equity section of the consolidated balance sheet,
such items, along with net income, are components of comprehensive income or loss. The components of other comprehensive income
or loss consist solely of foreign currency translation adjustments. Commitments
and Contingencies In
the normal course of business, the Company is subject to contingencies, including legal proceedings and claims arising out of
the business that relate to a wide range of matters, including among others, product liability and guarantees provided to CITIC
Bank for the financing arrangement. The Company recognizes a liability for such contingency if it determines it is probable that
a loss has occurred and a reasonable estimate of the loss can be made. The Company may consider many factors in making these assessments
including historical and the specific facts and circumstances of each matter. Revenue
Recognition Commercial
vehicles The
Company recognizes its long-term commercial vehicle lease financing arrangement, as well as the short-term commercial vehicle
leases under the peer stores business and financing arrangement with China CITIC Bank, as sales-type leases. For new commercial
vehicles financed by the Company, the Company recognizes revenue when the following conditions are met: (a) when the lease contract
is signed, (b) when the customer has taken possession of the vehicle, and (c) if the collectability of owed amounts are reasonably
assured. The Company recognizes revenue using the fair value of the commercial vehicles by reference to the retail market price
of the vehicles. The Company also records the sale of the GPS tracking unit sold to the lessee upon the transfer of the title
and delivery of the product. These revenues are recorded as “Commercial Vehicles”. Finance The
Company recognizes its second-hand vehicle lease financing arrangement as a direct financing lease because it does not give rise
to dealerÂ’s profit or loss to the Company. Under the second-hand vehicle lease financing program, the Company holds the title
of the new or used vehicle and then transfers title to the customer at the end of the lease term. The excess of aggregate lease
rentals over the acquisition cost of the leased second-hand vehicle constitutes unearned lease income to be taken into income
over the lease term by using the effective interest method. A
membership fee is charged to all lessees for the privilege of utilizing the CompanyÂ’s store branch network for certain services,
which include general support services, licensing and permit services, insurance services and registration services. The membership
fee is charged and collected by the Company when a direct financing and sales-type lease is signed. The Company records the amount
as a deduction of minimum lease payment receivable. Revenue from our membership fee is deferred and recognized ratably over the
term of the direct financing and sales-type lease. The difference between the gross investment in the lease and the fair value
of the commercial vehicles is recorded as unearned income and amortized based on the effective interest rate method over the lease
term. Management servicing fees are recognized when services are rendered. With
respect to the value added services (tires, fuel, insurance financing services), the Company provides one to three months of revolving
credit facilities to eligible customers, from which tires, fuel and insurance services that is charged and collected at the beginning
of the financing period is deferred and recognized ratably based on the effective interest rate method over the term of the financing
period. For
financing provided to peer stores for the insurance and taxes related to the purchase of a new commercial vehicle, the Company
charges peer stores an up-front service fee which is collected at the beginning of the financing period and is deferred and recognized
ratably based on the effective interest rate method over the term of the financing period. The
Company recognizes interest income on CeraVest loans based on the effective interest rate method over the term of the financing
period. Interest
from direct financing and sales-type leases, the membership fee amortization, management servicing fee, interest from value added
services, service fee for the financing of the insurance and taxes under the peer stores business and interest on CeraVest loans
are recorded as “Finance”. Recognition
of income is suspended and a lease/receivable is placed on non-accrual status when management determines that collection of future
income is not probable. Accrual is resumed, and previously suspended income is recognized, when the lease/receivable becomes contractually
current and/or collection doubts are removed. Cash receipts on impaired leases/receivable are recorded against the net investment/receivable
and then to any unrecognized income. Insurance
and service The
Company also receives commissions from insurance institutions for referring its customers to buy auto insurance. Insurance commission
and agency income is recorded when the insurance contract is signed and the insurance premium is paid to the insurance company.
The insurance commission and agency fee is recorded as “Insurance and service.” Penalty
income generated from the lessees and CeraPay users for late payment is recognized when the payment is overdue and the collectability
is reasonably assured. This income is recorded as “Insurance and service”. CeraPay
merchants are charged transaction fees of approximately 2%, which are recorded as “Insurance and service” when incurred. Property
lease and management Minimum
contractual rental income related to office leases are recognized on a straight-line basis over the terms of the respective leases.
Straight-line rental revenue commences when the customer assumes control of the leased premises. In accordance with the Company's
standard lease terms, rental payments are generally due on a monthly basis. Deferred rent receivable represents the cumulative
difference between rental revenue as recorded on a straight-line basis and rents received from the tenants. As of June 30, 2015,
about USD1.5 million deferred rent receivable was recorded. Tenant recovery revenue includes payments from tenants as reimbursements
for management fees and utilities, etc., which are recognized when the related expenses are incurred. Rental from office lease
and tenant recovery revenue together were recorded as “Property lease and management.” Cost
of Sales Cost
of sales from commercial vehicles consists of the purchase price of the leased vehicle plus the direct labor and other costs of
the operations. Cost
of sales from insurance and service consists of insurance commissions plus the direct labor and other costs of the operations. Cost
of sales for property lease and management consists of renovation costs, depreciation for the leased out portion of the Kai Yuan
Center, real estate taxes and salaries for customer service and maintenance personnel. Advertising
and Publicity The
Company expenses advertising costs as incurred. Advertising expenses totaled approximately $268,000 and $199,000 for the six months
ended June 30, 2015 and 2014, respectively, and $116,000 and $110,000 for the three months ended June 30, 2015 and 2014, respectively,
and are included in selling and marketing expense in the accompanying consolidated statements of operation. Value
added Tax and Business Tax In
the PRC, value added tax (the “VAT”) of 17% on invoice amount is collected in respect of the sales of goods on behalf
of tax authorities. The VAT collected is not revenue of the Company; instead, the amount is recorded as a liability on the balance
sheet until such VAT is paid to the authorities. The
CompanyÂ’s PRC subsidiaries are also subject to business tax of 5% for their revenues from membership fee, interest from sales-type
leases, management servicing fee, commission fee and revenues from tires, fuel and insurance financing services, which are recognized
after net off business tax. The office leasing segment is also subject to business tax of 5% on rental income. Segment
Reporting Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief executive officer, in deciding how to allocate resources and assessing performance. All of the CompanyÂ’s
sales are generated in the PRC and substantially all of the CompanyÂ’s assets are located in the PRC. The CompanyÂ’s operations
consist of three reporting and operating segments: 1.) The commercial vehicle sales, servicing, leasing and support business,
2.) Internet-based business, and 3.) Office leasing business. Earnings
Per Share The
Company computes earnings per share (“EPS”) in accordance with generally accepted accounting principles. Companies with
complex capital structures are to present basic and diluted EPS. Basic EPS is measured as the income available to ordinary shareholders
divided by the weighted average ordinary shares outstanding for the period. For basic EPS, the weighted average number of shares
outstanding for the period includes contingently issuable shares (i.e., shares issuable for little or no cash consideration upon
the satisfaction of the conditions of a contingent stock agreement) as of the date that all necessary conditions have been met.
Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential ordinary shares (e.g.,
convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance
date, if later. Potential ordinary shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS. Basic
and diluted earnings per share for each of the periods presented are calculated as follows (in thousands, except share and per
share data):
Three
months ended Six
months ended
2015 2014 2015 2014
(unaudited) (unaudited) (unaudited) (unaudited)
Net
income $ 3,011 $ 4,399 $ 5,678 $ 1,800
Weighted
average number of common shares outstanding – Basic 23,549,644 23,549,503 23,549,644 23,548,571
Stock
options 708,391 434,984 712,606 270,857
Weighted
average number of common shares outstanding – Diluted 24,258,035 23,984,487 24,262,250 23,819,428
Earnings per
share
Basic $ 0.13 $ 0.19 $ 0.24 $ 0.08
Diluted $ 0.12 $ 0.18 $ 0.23 $ 0.08 Share-Based
Payments The
Company records all share-based payments, including grants of employee stock options to employees, in the financial statements
based on their fair values on grant date and amortizes to expense on straight-line basis over the vesting period. The Company
used the Black-Scholes option-pricing model to estimate the fair value of the options at the date of grant. On August 6, 2012,
the CompanyÂ’s board of directors determined to amend certain Share Option Award Agreements entered into pursuant to the Incentive
Plan to reduce the exercise price per share thereunder to the current fair market value of the CompanyÂ’s ordinary shares.
The Company used the binomial model to estimate the fair value of repriced options as the Company has reassessed the exercise
pattern and determined that going forward a Binomial Pricing model is a better model for estimating the fair values of options. Recently
Issued Accounting Pronouncements Management
does not believe that any recently issued, but not yet effective, accounting standards or pronouncements, if currently adopted,
would have a material effect on the CompanyÂ’s condensed consolidated financial statements. |
