U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2010
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
For the Transition Period From ____to _____
Commission File Number: 001-10559
CHINA LOGISTICS, INC.
NEVADA | 65-1021346 |
(State or other jurisdiction of | (IRS Employer identification No.) |
incorporation or organization) |
Suite 910, Yi An Plaza, 33 Jian She Liu Road
Guangzou, P.R.China 510000
(Address of principal executive offices)
(8629) 8436-8561
(Issuer's telephone number)
Indicate by check mark if the registrant is a well-know seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [x]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act
Yes [ ] No [x]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 such shorter period that the registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 if Regulation S-K (229.405 of this Chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-Q or any amendments to this Form 10-Q.
Yes [ ] No [x]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) |
Accelerated filer | ¨ |
Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the exchange act).
Yes [ ] No [x]
Number of shares of common stock outstanding as of August 4, 2010: 54,786,726
Number of shares of preferred stock outstanding as of August 4, 2010: 3,295,000
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
The discussion contained in this 10-Q under the Securities Exchange Act of 1934, as amended, contains forward-looking statements that involve risks and uncertainties. The issuer's actual results could differ significantly from those discussed herein. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "the Company believes," "management believes" and similar language, including those set forth in the discussions under "Notes to Financial Statements" and "Management's Discussion and Analysis or Plan of Operation" as well as those discussed elsewhere in this Form 10-Q. We base our forward-looking statements on information currently available to us, and we assume no obligation to update them. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements that are subject to the "safe harbor" created by the Private Securities Litigation Reform Act of 1995.
1
INDEX TO FORM 10-Q | |
Page No. | |
PART I | |
Item 1. Financial Statements | 3 |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 11 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 14 |
Item 4. Controls and Procedures | 14 |
Item 4T. Controls and Procedures | 14 |
PART II | |
Item 1. Legal Proceedings | 15 |
Item 1A. Risk Factors | 15 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 15 |
Item 3. Defaults Upon Senior Securities | 15 |
Item 4. Submission of Matters to a Vote of Security Holders | 15 |
Item 5. Other Information | 15 |
Item 6. Exhibits | 15 |
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CHINA LOGISTICS, INC. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CHINA LOGISTICS, INC. | PAGE |
Unaudited Consolidated Balance Sheet | 4 |
Unaudited Consolidated Statement of Operations | 5 |
Unaudited Consolidated Statement of Cash Flows | 6 |
Notes to Unaudited Consolidated Financial Statements | 7 |
3
China Logistics, Inc and Subsidiary | ||||||||
Unaudited Condensed Consolidated Balance Sheets | ||||||||
As of June 30, 2010 and December 31, 2009 | ||||||||
ASSETS | ||||||||
June 30, 2010 | December 31, 2009 | |||||||
(Audited) | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 1,153,341 | $ | 1,223,829 | ||||
Accounts receivable,trade | 2,213,911 | 4,418,594 | ||||||
Other receivables | 175,591 | 146,524 | ||||||
Inventory | 403,401 | 3,844,655 | ||||||
Prepaid expenses | 164,971 | 290,903 | ||||||
Prepaid VAT tax | - | 483,068 | ||||||
TOTAL CURRNET ASSETS | 4,111,215 | 10,407,573 | ||||||
FIXED ASSETS | ||||||||
Property, plant, and equipment | 47,579 | 47,319 | ||||||
Accumulated depreciation | (15,078 | ) | (12,082 | ) | ||||
NET FIXED ASSETS | 32,501 | 35,237 | ||||||
TOTAL ASSETS | $ | 4,143,716 | $ | 10,442,810 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 2,465,209 | $ | 8,690,450 | ||||
Other payables & current liabilities | 70,825 | 114,355 | ||||||
Other payables-related party | 14,479 | 36,816 | ||||||
Received in advance | 378,437 | 335,076 | ||||||
Tax payable | 7,571 | 9,422 | ||||||
TOTAL CURRENT LIABILITIES | 2,936,521 | 9,186,119 | ||||||
TOTAL LIABILITIES | 2,936,521 | 9,186,119 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
Redeemable preferred stock (par value $.01, 5,000,000 Shares | 32,950 | 32,950 | ||||||
authorized, 3,295,000 shares issued and outstanding as of | ||||||||
June 30, 2010 and December 31, 2009 | ||||||||
STOCKHOLDERS' EQUITY | ||||||||
Common stock (par value $.0001, 250,000,000 shares authorized, | 5,478 | 5,478 | ||||||
54,787,026 shares issued and outstanding as of | ||||||||
June 30, 2010 and December 31, 2009 | ||||||||
Additional paid in capital | 2,146,261 | 2,146,261 | ||||||
Statutory reserves | 850 | 850 | ||||||
Accumulated other comprehensive income | 146,270 | 139,213 | ||||||
Retained earnings (deficit) | (1,124,614 | ) | (1,068,060 | ) | ||||
TOTAL STOCKHOLDERS' EQUITY | 1,174,245 | 1,223,742 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 4,143,716 | $ | 10,442,810 | ||||
The accompanying notes are an integral part of these financial statements. |
4
Unaudited Condensed Consolidated Statements of Operations | |||||||||||||||||
For the Three and Six Months ended June 30, 2010 and 2009 | |||||||||||||||||
For the Three months ended | For the Six months ended | ||||||||||||||||
June 30, 2010 | June 30, 2009 | June 30, 2010 | June 30, 2009 | ||||||||||||||
Revenues | |||||||||||||||||
Product | $ | 1,427,577 | $ | 430,347 | $ | 5,213,469 | $ | 1,800,268 | |||||||||
Services | 80,984 | 130,799 | 569,211 | 270,179 | |||||||||||||
1,508,561 | 561,146 | 5,782,680 | 2,070,447 | ||||||||||||||
Cost of revenues | 1,210,197 | 415,918 | 5,156,891 | 1,797,022 | |||||||||||||
Gross profits | 298,364 | 145,229 | 625,789 | 273,425 | |||||||||||||
Operating expenses | |||||||||||||||||
Selling General and Administrative | 306,877 | 147,042 | 630,271 | 283,706 | |||||||||||||
Income (Loss) from Operations | (8,513 | ) | (1,813 | ) | (4,482) | (10,281 | ) | ||||||||||
Other income (expenses) | |||||||||||||||||
Finance income (costs) | (5,108 | ) | (2,121 | ) | (47,693 | ) | (1,951 | ) | |||||||||
Non-operating income (expense) | 1,465 | - | 1,465 | - | |||||||||||||
Total other income (loss) | (3,643 | ) | (2,121 | ) | (46,228 | ) | (1,951 | ) | |||||||||
Income (loss) from Operations | (12,156 | ) | (3,934 | ) | (50,710 | ) | (12,232 | ) | |||||||||
Income taxes | 2,366 | 862 | 5,844 | 5,422 | |||||||||||||
Net Income (Loss) | (14,522 | ) | (4,796 | ) | (56,554 | ) | (17,654 | ) | |||||||||
Other comprehensive income (loss) | |||||||||||||||||
Foreign currency translation gain (loss) | 6,700 | 683 | 7,057 | (1,527 | ) | ||||||||||||
Comprehensive income (loss) | $ | (7,822 | ) | $ | (4,113 | ) | $ | (49,497 | ) | $ | (19,181 | ) | |||||
Weighted average common shares outstanding | |||||||||||||||||
Basic & diluted | 54,787,026 | 50,245,026 | 54,787,026 | 50,245,026 | |||||||||||||
Net loss per common share | |||||||||||||||||
Basic & diluted | ** | ** | ** | ** | |||||||||||||
** | Less than $.01 | ||||||||||||||||
The accompanying notes are an integral part of the financial statements |
5
China Logistics, Inc and Subsidiary | ||||||||
Unaudited Condensed Consolidated Statements of Cash Flows | ||||||||
For the Six Months Ended June 30, 2010 and 2009 | ||||||||
For the Six months ended | ||||||||
June 30, 2010 | June 30, 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income (loss) | $ | (56,554 | ) | $ | (17,654 | ) | ||
Adjustments to reconcile net income (loss) to | ||||||||
net cash (used in) operating activities: | ||||||||
Depreciation | 2,915 | 1,706 | ||||||
Accounts receivable ,trade | 2,217,784 | 4,095,489 | ||||||
Other receivable | (28,121 | ) | (109,976 | ) | ||||
Prepaid expense | 126,891 | 4,118 | ||||||
Inventory | 3,445,022 | 305,592 | ||||||
Accounts payable | (6,241,541 | ) | (3,237,933 | ) | ||||
Tax payable | 481,394 | (117,711 | ) | |||||
Other payable | (43,733 | ) | (20,439 | ) | ||||
Received in advance & others | 41,312 | 509,350 | ||||||
NET CASH (USED IN) OPERATING ACTIVITIES | (54,630 | ) | 1,412,542 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Short-term investment | (512,235 | ) | ||||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | - | (512,235 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Increase (decrease) of due to shareholders' | (22,426 | ) | (455,157 | ) | ||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | (22,426 | ) | (455,157 | ) | ||||
FOREIGN CURRENCY TRANSLATION ADJUSTMENT | 6,569 | (619 | ) | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (70,488 | ) | 444,531 | |||||
CASH AND CASH EQUIVALENTS: | ||||||||
Beginning of period | 1,223,829 | 531,297 | ||||||
End of period | $ | 1,153,341 | $ | 975,828 | ||||
The accompanying notes are an integral part of these financial statements. |
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CHINA LOGISTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010
(UNAUDITED)
1. | BASIS OF PRESENTATION |
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial information, and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.
The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the Company’s annual audited consolidated financial statements for the preceding fiscal year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the years ended December 31, 2009 and 2008 thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2009.
2. | ORGANIZATION AND BUSINESS BACKGROUND |
China Logistics Inc. (the “Company” or “CLGZ”) was incorporated in the State of Nevada on December 23, 1988, formerly known as China International Tourism Holdings, Limited, Dark Dynamite, Inc., NCI Holdings, Inc., Vector Holding, Inc., and prior to June 26, 2002, Vector Aeromotive Corporation. The name change from China International Tourism Holdings, Limited to China Logistics Inc. took effective on August 10, 2009.
On February 18, 2009, a Plan of Exchange (the “Exchange”) was executed between and among the Company, Chengkai Logistics Co Ltd., a corporation organized under the laws of the Peoples’ Republic of China (“Chengkai”), and the shareholders of Chengkai (“Chengkai Shareholders”). The Exchange was consummated on May 19, 2009, pursuant to which 50,000,000 (after taking into account the Reverse Split) shares of the Company’s common stock were issued to the stockholder of Chengkai. Thereafter, Chengkai became the Company’s wholly-owned subsidiary.
Simultaneously, pursuant to a Purchase Agreement, the former president of the Company tendered a cash purchase price of $100 and assumed certain liabilities in exchange for all outstanding shares of Shanxi Kai Da Lv You Gu Wen Xian Gong Si, the Company’s wholly-owned subsidiary organized under the laws of the Peoples’ Republic of China ("Kai Da"). As a result of the transactions consummated at the closing, the purchase and issuance gave the former president a 'controlling interest' in Kai Da, and Kai Da was no longer a wholly-owned subsidiary of the Company.
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CHINA LOGISTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010
(UNAUDITED)
The Exchange between the Company and Chengkai have been respectively accounted for as reverse acquisition and recapitalization of the Company and Chengkai whereby Chengkai is deemed to be the accounting acquirer (legal acquiree) and the Company to be the accounting acquiree (legal acquirer) under the Exchange. The condensed consolidated financial statements are in substance those of Chengkai, with the assets and liabilities, and revenues and expenses, of the Company being included effective from the respective consummation dates of the Exchange.
CLGZ and its wholly-owned subsidiary Chengkai are hereafter referred to as (the “Company”).
The Company is a logistic company specializing in logistical services for car manufacturers, car components, food assortments, chemicals, paper, and machinery in China. The services cover various aspects of transportation management, including logistical planning, import and export management, electronic customs declaration systems, supply chain planning, transporting products from ports to warehouses or vice versa, organization of transportation, and storage and distribution of products.
The Company’s customers include international companies and domestic enterprises in China from various industries. The Company’s customer base has been increasing at a rapid pace, especially within the Food Industry, Paper Industry, Mechanical Industry, Garment Industry, Furniture Industry and Daily Commodity Industry.
3. | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
Fair Value Measurements and Disclosures
(Accounting Standards Update (“ASU”) 2010-06)
In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements.” ASU 2010-06 requires new disclosures regarding transfers in and out of the Level 1 and 2 and activity within Level 3 fair value measurements and clarifies existing disclosures of inputs and valuation techniques for Level 2 and 3 fair value measurements. ASU 2010-06 also includes conforming amendments to employers’ disclosures about postretirement benefit plan assets. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure of activity within Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010, and for interim periods within those years. The adoption of this statement is not expected to have a material impact on our consolidated financial position or results of operation.
4. | SUPPLEMENTAL CASH FLOW INFORMATION |
Supplemental disclosures of cash flow information for the six months ended June 30, 2010 and 2009 are summarized as follows:
Cash paid during the six months ended June 30, 2010 and 2009 for interest and income taxes:
For the six months ended June 30,
2010 2009
Income Taxes $30,829 $28,258
Interest $ -0- $ - -0-
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CHINA LOGISTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010
(UNAUDITED)
5. | ACCOUNTS RECEIVABLE, NET |
The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required. Based upon the aforementioned criteria, management has determined that the allowances for doubtful accounts of $22,326 and $22,204 were required as of June 30, 2010 and December 31, 2009, respectively.
June 30, 2010 | December 31, 2009 | |||||||
Accounts receivable, gross | $ | 2,236,237 | $ | 4,440,798 | ||||
Less: allowance for doubtful accounts | (22,326) | (22,204) | ||||||
Accounts receivable, net | $ | 2,213,911 | $ | 4,418,594 |
6. | INVENTORIES |
June 30, 2010 | December 31, 2009 | |||||||
Inventories | $ | 403,401 | $ | 3,844,655 | ||||
There was no provision for obsolete inventories recorded by the Company as of June 30, 2010 and December 31, 2009, respectively.
7. | RECEIVED IN ADVANCE |
As of June 30, 2010, the Company had customer deposits of $378,437, representing payments received for orders not yet shipped. The Company expects to ship these orders in the third quarter of 2010.
9
CHINA LOGISTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010
(UNAUDITED)
8. | CONCENTRATION AND RISK |
(a) | Major customers |
For the six months ended June 30, 2010 and for the year ended December 31, 2009, 100% of the Company’s assets were located in the PRC and 100% of the Company’s revenues and purchases were derived from customers and vendors located in the PRC.
The Company had one customer that individually comprised 86% and 84% of net revenue for the six months ended June 30, 2010 and for the year ended December 31, 2009, respectively.
As of June 30, 2010
Customers | Revenues | Accounts Receivable | ||||||||||||
Customer A | $ | 4,952,942 | 86 | % | $ | 1,975,522 | ||||||||
Total: | $ | 4,952,942 | 86 | % | Total: | $ | 1,975,522 |
As of December 31, 2009
Customers | Revenues | Accounts Receivable | ||||||||||||
Customer A | $ | 10,265,199 | 84 | % | $ | 4,329,289 | ||||||||
Total: | $ | 10,265,199 | 84 | % | Total: | $ | 4,329,289 |
(b) Credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company performs ongoing credit evaluations of its customers' financial condition, but does not require collateral to support such receivables.
9. | GOING CONCERN UNCERTAINTIES |
These consolidated financial statements have been prepared assuming that Company will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.
As of June 30, 2010, the Company had an accumulated deficit of $1,124,614. Management has taken certain action and continues to implement changes designed to improve the Company’s financial results and operating cash flows. The actions involve certain cost-saving initiatives and growing strategies, including (a) reductions in headcount and corporate overhead expenses; and (b) expansion into new market. Management believes that these actions will enable the Company to improve future profitability and cash flow in its continuing operations through June 30, 2010. As a result, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of the Company’s ability to continue as a going concern.
10. | SUBSEQUENT EVENTS |
We evaluated subsequent events through the date and time our financial statements were issued on August 18, 2010. There are no subsequent events through August 18, 2010.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Management’s Discussion and Analysis contains various “forward looking statements” within regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this 10-Q, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to “anticipates”, “believes”, “plans”, “expects”, “future” and similar statements or expressions, identify forward looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company’s business, including but not limited to, reliance on key customers and competition in its markets, market demand, product performance, technological developments, maintenance of relationships with key suppliers, difficulties of hiring or retaining key personnel and any changes in current accounting rules, all of which may be beyond the control of the Company. Management will elect additional changes to revenue recognition to comply with the most conservative SEC recognition on a forward going accrual basis as the model is replicated with other similar markets (i.e. SBDC). The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth therein.
Management’s Discussion and Analysis of Results of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the financial statements included herein.
HISTORY
China Logistics Inc. (the “Company” or “CLGZ”) was incorporated in the State of Nevada on December 23, 1988, formerly known as China International Tourism Holdings, Ltd., Dark Dynamite, Inc., NCI Holdings, Inc., Vector Holding, Inc., and prior to June 26, 2002, Vector Aeromotive Corporation.
On February 17, 2009, the Company entered into a transfer & change of control agreement with Ms. Wanwen Su (“Ms. Su”) and Mr. Ming Lei (“Mr. Lei”), pursuant to which, Ms. Su acquired from Mr. Lei 2,636,000 shares of preferred stock of the Company and received a “controlling interest” in the Company.
On February 18, 2009, our Board of Directors adopted a resolution approving a two hundred to one reverse split of our issued and outstanding Common Stock. The reverse split combined our outstanding Common Stock on the basis of 200 outstanding shares being changed to 1 outstanding share. Each shareholder’s percentage ownership in the Company (and relative voting power) remained essentially unchanged as a result of the reverse split. The reverse split was effective on April 3, 2009.
On February 18, 2009, a Plan of Exchange (the “Exchange”) was executed between and among the Company, Chengkai Logistics Co Ltd., a corporation organized under the laws of the Peoples’ Republic of China (“Chengkai”), and the shareholders of Chengkai (“Chengkai Shareholders”). The Exchange was consummated on May 19, 2009, pursuant to which 50,000,000 (after taking into account the Reverse Split) shares of the Company’s common stock were issued to the stockholder of Chengkai. Thereafter, Chengkai became the Company’s wholly-owned subsidiary.
On April 23, 2009, China Logistics, Inc. (F/K/A China International Tourism Holdings, Ltd.), entered into an Agreement (the “Agreement”) between and among the Registrant, Shanxi Kai Da Lv You Gu Wen Xian Gong Si, a corporation organized under the laws of the Peoples’ Republic of China (“Kai Da”), and Mr. Lei Ming, an individual (“Buyer”).
Pursuant to the terms of the Agreement, the Buyer acquired 100% of the total assets of $407,616 and total liabilities of $481,275 (collectively “Kai Da Assets and Liabilities) from the Registrant for the payment of good and valuable consideration of $100.00 (the “Purchase Price”). As a result of the transactions consummated at the closing, the purchase and issuance gave the former president a 'controlling interest' in Kai Da, and Kai Da was no longer a wholly-owned subsidiary of the Company.
On August 10, 2009, the Company changed its corporate name from China International Tourism Holdings, Ltd. to China Logistics Inc. and believed that the new corporate name would provide a more accurate description of the Company’s current operations and be consistent with the Company’s marketing efforts in the logistic industry. Accordingly, the ticker symbol of the Company’s Common Stock was changed to “CLGZ”.
BUSINESS DESCRIPTION OF THE ISSUER
Since the reverse merger with Chengkai was consummated, we have continued operations of Chengkai, a logistic company specializing in logistical services for car manufacturers, car components, food assortments, chemicals, paper, and machinery in China.
Chengkai was incorporated in the PRC on October 19, 2004 as a limited liability company, with registered capital of approximately $1,200,000 as of December 31, 2007. Chengkai is located in Guangzhou City, one of the largest commercial bases in China, and a booming transportation hub with easy access to railroad, highway, and rivers. Chengkai has two logistic centers located in Baiyun Airport and the Huangpu Xingang Port in Guangzhou City, Guangdong Province, China.
Chengkai specializes in logistical services for car manufacturers, car components, food assortments, chemicals, paper, and machinery in China. The services cover various aspects of transportation management, including logistical planning, import and export management, electronic customs declaration systems, supply chain planning, transporting products from ports to warehouses or vice versa, organization of transportation, and storage and distribution of products.
Chengkai’s customers include international companies and domestic enterprises in China from various industries. Their clients from the automobile industry include Rolls Royce Automobile Accessories, Mercedes Benz Automobile Accessories, Peugeot Automobile Accessories, BMW Automobile Accessories, and Nissan Automobile Accessories. Their electronic industries clients include IBM Electronics and Creator Corporation China. Chengkai’s chemical industries clients include Korean LG Chemical Engineering Company, French Rhodia Chemical Company, Spanish Caster Rubber Company, and Korean Dongsung Chemical Co., Ltd. Chengkai’s customer base has been increasing at a rapid pace, especially within the Food Industry, Paper Industry, Mechanical Industry, Garment Industry, Furniture Industry and Daily Commodity Industry.
CHENGKAI SERVICES
International Trade and Import & Export Management
Import & export trade, domestic distribution and purchasing solutions are provided by Chengkai to reach a win-win business solution. Through several years of practice of commercial trading in China, Chengkai has accumulated resourceful working experiences and gained close partnerships with financial institutions. These financial institutions help us combine our business procedures and financial status to provide value-added and win-win business solutions for our clients.
· Purchasing process | |
· Services orienting towards foreign purchasers |
· Services for domestic manufacturing purchasers | |
· Distribution process |
· Efficient import & export customs declaration | |
· Supply-chain financing service |
Some international purchasers, who need to purchase their commodities and balance the account among several districts within the country, will more or less be restricted by the local policies such as the leverage of foreign exchange, value-added tax, and import & export trading rights. In order to solve such inadequacies, Chengkai strives to improve their clients’ working efficiency, and help minimize costs. We minimize costs by integrating manufacturing resources such as purchasing, R&D and manufacturers. We center on a specific or diversified products that highlight core business. We also incorporate management of materials, information and financing. We commit to a more reliable and efficient supply-chain partnership with manufacturers and transnational purchasers.
11
Customs Declaration
Chengkai provides customs affairs trusteeship, consultations, and software application solutions on customs network supervision.
Customs affairs have become very complicated in China given the supervision on processing trade, factors concerning China’s policies, and the local implementation and the conflicts that might occur within enterprises. We, as the third party that gets involved in between the government and enterprises, strive to keep sound relationships with governmental departments. With the support of some relevant departments, and our experiences and specialty in dealing with customs affairs, we can provide a comprehensive backup service for our clients.
Specialties:
In regards to the supervision policies on processing trade, we provide declaration management strategies and computerized system for enterprises engaged in processing trade, so as to improve their management level, optimize their declaration procedures, and control their declaration risks.
· We automatically collect data in the manufacturing management database. | |
· We safely connect the manufacturing management system and accounting management system of the enterprises. |
· We develop customized planning that corresponds to each enterprise. | |
· We monitors and analyzes capital flow. |
Warehousing and Transportation
Chengkai provides diversified logistics solutions.
In order to construct an efficient logistics system, Chengkai has established solutions with our co-partners, based on the needs of our clients. Through effective integration of logistics, we provide various logistics solution for our clients. Our experienced consultants diagnose and analyze elements that make up of the whole supply-chain to help customize a logistic system that shortens the time of order to the time of delivery.
Specialties:
· Production Logistics | |
· Sales Logistics |
· International Logistics |
Production Logistics
Our client’s competitiveness is measured through the enterprise’s capacity to improve its production efficiency, lower its comprehensive cost and practice expenditures, all of which are realized through the optimization and improvement of production logistics system. In-time supply and keeping appropriate inventory are of the most concerned by manufacturers. We, together with other enterprises, have worked for many years in establishing an efficient logistics system in line with our client’s needs.
· Production accessories and raw material supply | |
· Vendor managed inventory (VMI :Vendor Managed Inventory) |
· Land transportation | |
· In-factory logistics |
Sales Logistics
Chengkai provides managerial operations as well as delivery service for product agents, dealers, and department stores.
· National network transportation | |
· Management and operation in the logistics center |
· 3C digital product logistics | |
· Quality inspection of clothing and textile goods |
International Logistics
Through our talented staff and reliable partnerships, Chengkai provides international cargo transportation that supports business expansion efforts of clients.
· International Logistics Business |
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RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (UNAUDITED)
Sales
We had revenues of $1,508,561 for the three months ended June 30, 2010, of which $1,427,577 from sales of products and $80,984 from services rendered, increasing by $947,415 compared to revenues of $561,146 for the same period ended June 30, 2009, of which $430,347 from sales of products and $130,799 from services rendered.
For the six months ended June 30, 2010 and 2009, we had revenues of $5,782,680 and $2,070,447, respectively, of which $5,213,469 from sales of products and $569,211 from services rendered during the six months ended June 30, 2010, compared to $1,800,268 from sales of products and $270,179 from services rendered for the same period ended June 30, 2009.
The increase in 2010 was due to the recovery from global financial crisis, which had significant impact on our revenues in 2009. Our revenues were derived from logistic services and import / export business. Since the US is China’s biggest export partner and we are a logistics company devoted to the import and export of products between China and the US, the global financial crisis starting in 2008 had significant impact on our business in 2009.
Income / Loss
We had net loss of $14,522 and $56,554 for the three and six months ended June 30, 2010, respectively, compared to net loss of $4,796 and $17,654 for the three and six months ended June 30, 2009, respectively. The increase in net loss during the three months ended June 30, 2010 was due primarily to the decrease in revenues from services rendered, which decreased by $49,815, or 38%, compared to the same period ended June 30, 2009. The revenues from service rendered had significant contribution to our net income due to the high profit margin. The increase in net loss for both three-month and six-month periods ended June 30, 2010 was also due to the increase in our selling, general and administrative expenses, which increased by $159,835 and $346,565, respectively, compared to the comparable periods ended June 30, 2009.
Expenses
We had operating expenses of $306,877and $630,271 for the three and six months ended June 30, 2010, respectively, increased by $159,835 and $346,565, compared to operating expenses of $147,042 and $283,706 for the comparable periods ended June 30, 2009, respectively. The significant increase in operating expenses during the three and six months ended June 30, 2010 was due primarily to the increase in transportation cost as a result of significant increase in sales during the first half of 2010.
Cost of Revenues
We had $1,210,197 and $5,156,891 in cost of revenues, or 80.22% and 89.18% of revenues, during the three and six months ended June 30, 2010, respectively, compared to cost of revenues of $415,918 and $1,797,022, or 74.12% and 86.79% of revenues, during the comparable periods ended June 30, 2009. Cost of sales as a percentage of sales was high in general determined by our business model as a logistic services provider for import/export business. The intensive competition in logistic industry as a result of globalization restricts the growth in our gross margin.
Impact of Inflation
We believe that inflation has had a negligible effect on operations during this period. We believe that we can offset inflationary increases in the cost of sales by increasing sales and improving operating efficiencies.
Liquidity and Capital Resources
Cash flows used in operating activities were $54,630 during the six months ended June 30, 2010, compared to cash flows of $1,412,542 provided by operating activities during the six months ended June 30, 2009. Negative cash flows from operations during the six months ended June 30, 2010 were due primarily to the decrease in accounts payable in the amount of $6,241,541, partially offset by the decrease in accounts receivable and inventory in the amount of $2,217,784 and $3,445,022, respectively, and the increase in tax payable by $481,394. Positive cash flows from operation during the six months ended June 30, 2009 were due primarily to the effective collection of accounts receivable in the amount of $4,095,489, and the decrease in inventory in the amount of $305,592, partially offset by the decrease in accounts payable by $3,237,933.
We had no cash flows from investing activities during the six months ended June 30, 2010. Cash flows used in investing activities were $512,235 for the six months ended June 30, 2009, due primarily to a short term investment.
Cash flows used in financing activities were $22,426 and $455,157 for the six months ended June 30, 2010 and 2009, respectively. The negative cash flows in both periods were due to the repayments to a shareholder loan.
Overall, we have funded our cash needs from inception through June 30, 2010 with a series of debt and equity transactions, primarily with related parties. If we are unable to receive additional cash from our related parties, we may need to rely on financing from outside sources through debt or equity transactions. Our related parties are under no legal obligation to provide us with capital infusions. Failure to obtain such financing could have a material adverse effect on operations and financial condition.
We had cash of $1,153,341 on hand as of June 30, 2010. Currently, we have enough cash to fund our operations through the end of 2010. This is based on current working capital and projected revenues. However, if the projected revenues fall short of needed capital we may not be able to sustain our capital needs. We will then need to obtain additional capital through equity or debt financing to sustain operations for an additional year. Our current level of operations would require capital of approximately $700,000 per year starting in 2011. Modifications to our business plans may require additional capital for us to operate. For example, if we are unable to raise additional capital in the future we may need to curtail our number of product offers or limit our marketing efforts to the most profitable geographical areas. This may result in lower revenues and market share for us. In addition, there can be no assurance that additional capital will be available to us when needed or available on terms favorable to us.
On a long-term basis, liquidity is dependent on continuation and expansion of operations, receipt of revenues, additional infusions of capital and debt financing. However, there can be no assurance that we will be able to obtain additional equity or debt financing in the future, if at all. If we are unable to raise additional capital, our growth potential will be adversely affected. Additionally, we will have to significantly modify our business plan.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors. Certain officers and directors of the Company have provided personal guarantees to our various lenders as required for the extension of credit to the Company
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We do not use derivative financial instruments in our investment portfolio and has no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable and long-term obligations. We consider investments in highly liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents. However, in order to manage the foreign exchange risks, we may engage in hedging activities to manage our financial exposure related to currency exchange fluctuation. In these hedging activities, we might use fixed-price, forward, futures, financial swaps and option contracts traded in the over-the-counter markets or on exchanges, as well as long-term structured transactions when feasible.
Foreign Exchange Rates
All of our sales are denominated in Renminbi (“RMB”). As a result, changes in the relative values of U.S. Dollars and RMB affect our reported levels of revenues and profitability as the results are translated into U.S. Dollars for reporting purposes. Fluctuations in exchange rates between the U.S. dollar and RMB affect our gross and net profit margins and could result in foreign exchange and operating losses.
Our results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in our statement of shareholders’ equity. We recorded net foreign currency gains of $7,057 for the six months ended June 30, 2010, $4,053 in fiscal 2009 and $77,251 in fiscal 2008. We have not used any forward contracts, currency options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future.
Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. The value of your investment in our stock will be affected by the foreign exchange rate between U.S. dollars and RMB. To the extent we hold assets denominated in U.S. dollars, including the net proceeds to us from this offering, any appreciation of the RMB against the U.S. dollar could result in a change to our statement of operations and a reduction in the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of RMB against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in our company and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the price of our stock.
The exchange rates used to translate amounts in RMB into U.S. Dollars for the purposes of preparing the financial statements or otherwise stated in this MD&A were as follows:
2010 | 2009 | |||
Balance sheet items, except for the registered and paid-up capital as of June 30, 2010 and December 31, 2009 | USD 0.1473:RMB 1 | USD 0.1466:RMB 1 | ||
Amounts included in the statement of operations, statement of changes in stockholders’ equity and statement of cash flows for the six months ended June 30, 2010 and 2009 | USD 0.1465:RMB 1 | USD 0.1464:RMB 1 |
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the specified time periods. Our Chief Executive Officer and its Chief Financial Officer (collectively, the “Certifying Officers”) are responsible for maintaining our disclosure controls and procedures. The controls and procedures established by us are designed to provide reasonable assurance that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.
As of the end of the period covered by this report, the Certifying Officers evaluated the effectiveness of our disclosure controls and procedures. Based on the evaluation, the Certifying Officers concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure.
The Certifying Officers have also concluded, based on their evaluation of our controls and procedures that as of June 30, 2010, our internal controls over financial reporting are effective and provide a reasonable assurance of achieving their objective.
The Certifying Officers have also concluded that there was no change in our internal controls over financial reporting identified in connection with the evaluation that occurred during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 4T. CONTROLS AND PROCEDURES
(a) Conclusions regarding disclosure controls and procedures. Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management is responsible for establishing and maintaining adequate internal control over financial reporting.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Exchange Act as of June 30, 2010, and, based on their evaluation, as of the end of such period, the our disclosure controls and procedures were effective as of the end of the period covered by the Quarterly Report,
(b) Management’s Report On Internal Control Over Financial Reporting. It is management’s responsibilities to establish and maintain adequate internal controls over the Company’s financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers and effected by the issuer’s management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management of the issuer; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.
As of the end of the period covered by the Quarterly Report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our internal control over financial reporting.
Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, internal controls over financial reporting were effective as of the end of the period covered by the Report.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
This Quarterly Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Quarterly Report.
(c) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
We may be subject to, from time to time, various legal proceedings relating to claims arising out of our operations in the ordinary course of our business. We are not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on the business, financial condition, or results of operations of the Company.
ITEM 1A. RISK FACTORS
The information to be reported under this item has not changed since the previously filed 10K, for the year ended December 31, 2009.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We have not had any unregistered sales of equity securities.
We have not had any default upon senior securities.
We have not had any submissions of matters to a vote of security holders.
We do not have any other information to report.
ITEM 6. EXHIBITS
31.2 CFO Certification Pursuant to Section 302 (included in Exhibit 31.1)
32.2 CFO Certification Pursuant to Section 906 (included in Exhibit 32.1)
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHINA LOGISTICS, INC. (Registrant) | ||
Date: August 18, 2010 | By: | |
Wanwen Su President, Chief Executive Officer, and Chief Financial Officer |