Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q /A
(Amendment
No. 1)
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
FOR
THE QUARTERLY PERIOD ENDED: September 30, 2009
|
|
or
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
FOR
THE TRANSITION PERIOD FROM: _____________ TO
_____________
|
|
COMMISSION
FILE NUMBER: 000-31497
|
CHINA
LOGISTICS GROUP, INC.
(Exact
name of registrant as specified in its charter)
Florida
|
65-1001686
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
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23F. Gutai Beach Building No.
969, Zhongshan Road (South), Shanghai,
China
|
200011
|
(Address
of principal executive offices)
|
(Zip
Code)
|
86-21-63355100
(Registrant’s telephone
number, including area code)
not
applicable
(Former name, former
address and former fiscal year, if changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. o
Yes þ No
Indicate
by check mark whether the registrant has been submitted electronically and
posted on its corporate Website, if any, every Interactive Date File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). o
Yes o
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
|
o
|
Accelerated
filer
|
o
|
|||
Non-accelerated
filer
|
o
|
Smaller
reporting company
|
þ
|
|||
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
o
Yes þ
No
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. 34,508,203 shares of common
stock are issued and outstanding as of November 20, 2009.
Explanatory
Paragraph
China
Logistics Group, Inc. (“we”, “us”, “our” or the “Company”) is filing this
Amendment No. 1 to our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009 as filed on November 23, 2009, to correct the accounting
treatment previously accorded certain transactions and to restate our
consolidated balance sheets at September 30, 2009 and our consolidated
statements of operations, and consolidated statements of cash flows for the
three and nine month periods ended September 30, 2009, and our consolidated
statement of changes in equity (deficit) for the nine month period ended
September 30, 2009.
Our Form
10-Q filed on November 23, 2009 contained errors and were restated to correct
the previous accounting treatment to:
•
|
properly
record common stock purchase warrants which were not indexed to our stock
as a derivative liability at January 1, 2009 upon adoption of Derivative
and Hedging Topic of the FASB ASC 815 and properly record the subsequent
accounting for the changes in the fair value of the associated liability
at September 30, 2009;
|
As a
result of this correction to our financial statements for the three and nine
months ended September 30, 2009, we are filing this Amendment No. 1 to our Form
10-Q for the period ended September 30, 2009 to reflect the changes to our
financial statements necessitated by these restatements.
The items
of this Form 10-Q/A (Amendment No. 1) which are amended and restated as a result
of the foregoing are:
Part
I. Financial Information
|
||
·
|
Item
1. Financial Statements, including consolidated balance sheets,
consolidated statement of operation, consolidated cash flows, and Notes to
Unaudited Consolidated Financial Statements, as well as the inclusion of a
consolidated statement of changes in equity
(deficit),
|
|
·
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations, and
|
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·
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Item
4(T). Controls and
Procedures
|
This Form
10-Q/A also contains currently dated certifications as Exhibits 31.1, 31.2 and
32.1. The remaining Items in this Form 10-Q/A (Amendment No. 1)
consist of all other Items originally contained in our Form 10-Q for the periods
ended September 30, 2009. This filing supersedes in its entirety our
original Form 10-Q for the periods ended September 30, 2009 filed on November
23, 2009.
- i
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
TABLE
OF CONTENTS
Page
No.
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||
PART I.
- FINANCIAL INFORMATION
|
||
Item
1.
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Financial
Statements.
|
1
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
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24
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
32
|
Item
4T.
|
Controls
and Procedures.
|
33
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PART
II - OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings.
|
34
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Item
1A.
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Risk
Factors.
|
35
|
Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds.
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35
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Item
3.
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Defaults
Upon Senior Securities.
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35
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Item
4.
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Submission
of Matters to a Vote of Security Holders.
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35
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Item
5.
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Other
Information.
|
35
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Item
6.
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Exhibits.
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36
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OTHER
PERTINENT INFORMATION
All share
and per share information contained in this report gives retroactive effect to
the 1 for 40 (1:40) reverse stock split of our outstanding common stock
effective at the close of business on March 11, 2008.
INDEX
OF CERTAIN DEFINED TERMS USED IN THIS REPORT
When used
in this report the terms:
|
·
|
"China
Logistics," "we," "us," "our," the
"Company," and
similar terms refer to China Logistics Group, Inc., a Florida corporation
formerly known as MediaReady, Inc., and its
subsidiary,
|
|
·
|
"Shandong
Jiajia" refers to Shandong Jiajia International Freight &
Forwarding Co., Ltd., a Chinese company and a majority owned subsidiary of
China Logistics, and its branches in Shanghai, Qingdao, Tianjin, Xiamen,
and Lianyungang,
|
|
·
|
"China" or the
"PRC"
refers to the People's Republic of China,
and
|
|
·
|
"RMB" refers to
the renminbi, which is the currency of mainland PRC of which the yuan is
the principal currency.
|
- ii
-
PART
1 - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
September
30,
2009
|
December 31,
2008
|
|||||||
(Restated)
|
(Restated)
|
|||||||
ASSETS
|
(Unaudited)
|
|||||||
Current
assets:
|
||||||||
Cash
|
$
|
2,074,891
|
$
|
3,156,362
|
||||
Accounts
receivable, net
|
3,735,341
|
2,739,173
|
||||||
Other
receivables
|
543,234
|
298,442
|
||||||
Advances
to vendors
|
407,330
|
-
|
||||||
Due
from related parties
|
762,562
|
518,433
|
||||||
Prepaid
expenses and other current assets
|
19,810
|
29,510
|
||||||
Total
current assets
|
7,543,168
|
6,741,920
|
||||||
Property
and equipment, net
|
33,476
|
44,144
|
||||||
Total
assets
|
$
|
7,576,644
|
$
|
6,786,064
|
||||
LIABILITIES
AND EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
2,152,678
|
1,752,862
|
||||||
Accrued
registration agreement penalty
|
1,597,000
|
1,597,000
|
||||||
Other
accruals and current liabilities
|
597,437
|
146,953
|
||||||
Advances
from customers
|
1,295,259
|
1,133,283
|
||||||
Due
to related parties
|
203,741
|
378,697
|
||||||
Foreign
tax payable
|
8,522
|
34,898
|
||||||
Total
current liabilities
|
5,854,637
|
5,043,693
|
||||||
Derivative
liability
|
2,458,145
|
-
|
||||||
Total
liabilites
|
8,312,782
|
5,043,693
|
||||||
Equity:
|
||||||||
China
Logistics Group Inc. stockholders’ equity:
|
||||||||
Series
B convertible preferred stock- $.001 par value, 1,295,000 shares
authorized; 450,000 shares issued and outstanding at September 30, 2009
and December 31, 2008
|
450
|
450
|
||||||
Common
stock - $.001 par value, 500,000,000 shares authorized;
34,508,203 shares issued and outstanding at September 30, 2009 and
December 31, 2008
|
34,508
|
34,508
|
||||||
Additional
paid-in capital
|
17,057,203
|
19,229,513
|
||||||
Accumulated
retained deficit
|
(18,527,866
|
)
|
(18,129,491
|
)
|
||||
Accumulated
other comprehensive loss
|
(180,403
|
)
|
(187,495
|
)
|
||||
Total
China Logistics Group, Inc. stockholders’ equity
|
(1,616,108
|
) |
947,485
|
|||||
Noncontrolling
interest
|
879,970
|
794,886
|
||||||
Total
equity
|
(736,138
|
) |
1,742,371
|
|||||
Total
liabilities and equity
|
$
|
7,576,644
|
$
|
6,786,064
|
See notes
to unaudited consolidated financial statements.
- 1
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
(UNAUDITED)
|
For
the Three Months Ended September 30,
|
For
the Nine Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Restated)
|
(Restated)
|
(Restated)
|
(Restated)
|
|||||||||||||
Sales
|
$
|
5,791,128
|
$
|
12,961,259
|
$
|
13,597,689
|
$
|
27,753,459
|
||||||||
Cost
of sales
|
5,274,887
|
12,072,099
|
12,857,603
|
26,149,830
|
||||||||||||
Gross
profit
|
516,241
|
889,160
|
740,086
|
1,603,629
|
||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling,
general and administrative
|
264,236
|
528,769
|
782,524
|
956,618
|
||||||||||||
Depreciation
and amortization
|
3,121
|
4,814
|
10,206
|
12,974
|
||||||||||||
Bad
debt expense (recovery of bad debt)
|
447
|
4,434
|
1,691
|
(397,309
|
)
|
|||||||||||
Total
operating expenses
|
267,804
|
538,017
|
794,421
|
572,283
|
||||||||||||
Income
(loss) from operations
|
248,437
|
351,143
|
(54,335
|
)
|
1,031,346
|
|||||||||||
Other
income (expenses):
|
||||||||||||||||
Realized exchange (loss) gain
|
(492
|
)
|
37,648
|
35,465
|
25,241
|
|||||||||||
Non-operating bad debt expense
|
-
|
-
|
-
|
(87,221
|
)
|
|||||||||||
Registration agreement penalty
|
(1,597,000
|
)
|
(1,597,000
|
)
|
||||||||||||
Gain
(loss) on change in fair value of derivative
liability
|
13,887
|
-
|
3,397,587
|
-
|
||||||||||||
Interest expense
|
(1,375
|
)
|
(43,608
|
)
|
(562
|
)
|
(44,275
|
)
|
||||||||
Total
other income (expenses)
|
12,020
|
(1,602,960
|
)
|
3,432,490
|
(1,703,255
|
)
|
||||||||||
Income
(loss) before income taxes
|
260,457
|
(1,251,817
|
)
|
3,378,155
|
(671,909
|
)
|
||||||||||
Foreign
taxes
|
6,698
|
131,816
|
14,838
|
209,474
|
||||||||||||
Net
Income (loss)
|
253,759
|
(1,383,633
|
)
|
3,363,317
|
(881,383
|
)
|
||||||||||
Less:
Net income (loss) attributable to the noncontrolling
interest
|
(150,179
|
)
|
(238,720
|
)
|
(78,270
|
)
|
(597,943
|
)
|
||||||||
Net
income (loss) attributable to China Logistics Group,
Inc.
|
$ |
103,580
|
$ |
(1,622,353
|
)
|
$ |
3,285,047
|
$ |
(1,479,326
|
)
|
||||||
Earnings
(loss) per common share:
|
||||||||||||||||
Basic
|
$
|
0.00
|
$
|
(0.05
|
)
|
$
|
0.10
|
$
|
(0.06
|
)
|
||||||
Diluted
|
$
|
0.00
|
$
|
(0.05
|
)
|
$
|
0.08
|
$
|
(0.06
|
)
|
||||||
Weighted
average number of shares
outstanding:
|
||||||||||||||||
Basic
|
34,508,203
|
34,508,203
|
34,508,203
|
24,242,855
|
||||||||||||
Diluted
|
39,008,203
|
34,508,203
|
39,008,203
|
24,242,855
|
||||||||||||
See notes
to unaudited consolidated financial statements.
- 2
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For
the Nine Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
(Restated)
|
(Restated)
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
(loss) income
|
$
|
3,363,317
|
$
|
(881,383
|
)
|
|||
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
expense
|
10,206
|
12,974
|
||||||
Allowance for doubtful accounts
|
1,691
|
(397,309
|
)
|
|||||
Gain on change in fair value of derivative
liability
|
(3,397,587
|
)
|
-
|
|||||
Changes
in assets and liabilities:
|
||||||||
(Increase)
decrease in accounts receivable
|
(997,859
|
)
|
(255,365
|
)
|
||||
Decrease
in accounts receivable - related party
|
-
|
7,000
|
||||||
Decrease
(increase) in prepaid expenses and other current
assets
|
(235,093
|
)
|
(409,336
|
)
|
||||
Increase
(decrease) in accounts payable
|
399,816
|
(1,731,178
|
)
|
|||||
Increase
(decrease) in other accruals and current liabilities
|
450,484
|
181,726
|
||||||
(Decrease)
increase in taxes payable
|
(26,376
|
)
|
136,936
|
|||||
Increase
in accrued consulting fee
|
-
|
1,597,000
|
||||||
Increase
in accounts payable
|
(407,330
|
)
|
-
|
|||||
Decrease
(increase) in advances from customers
|
161,976
|
917,156
|
||||||
NET
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
|
(676,755
|
)
|
(821,779
|
)
|
||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Capital
expenditures
|
-
|
(25,646
|
)
|
|||||
Advances
to related parties
|
(375,472
|
)
|
(75,169
|
)
|
||||
Repayment
from advance to related parties
|
131,342
|
26,520
|
||||||
NET
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
|
(244,130
|
)
|
(74,295
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
convertible note payable - related party
|
-
|
148,200
|
||||||
Repayment
of loan payable - shareholder
|
-
|
(12,633
|
)
|
|||||
Proceeds
from 2008 unit offering private placement
|
-
|
3,778,250
|
||||||
2008
unit offering private placement expenses
|
-
|
(420,863
|
)
|
|||||
Advances
from related parties
|
16,125
|
-
|
||||||
Repayment
of advances from related parties
|
(191,081
|
)
|
-
|
|||||
NET
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
|
(174,956
|
)
|
3,492,954
|
|||||
EFFECT
OF EXCHANGE RATE ON CASH
|
14,370
|
153,488
|
||||||
NET
INCREASE (DECREASE) IN CASH
|
(1,081,471
|
)
|
2,750,368
|
|||||
CASH -
beginning of year
|
3,156,362
|
1,121,605
|
||||||
CASH
- end of year
|
$
|
2,074,891
|
$
|
3,871,973
|
||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid during the period for foreign taxes
|
$
|
20,678
|
$
|
34,524
|
||||
Convertible
note payable converted to common stock -related
party
|
$
|
-
|
$
|
2,521,380
|
||||
Accrued
compensation converted to common stock - related
party
|
$
|
-
|
$
|
448,985
|
See notes
to unaudited consolidated financial statements.
- 3
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF CHANGES IN (DEFICIT) EQUITY
|
FOR
THE YEAR ENDED DECEMBER 31, 2008 and NINE MONTH PERIOD ENDING SEPTEMBER
30, 2009
|
China Logistics Group, Inc. Shareholders' Equity | ||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||||||||
Preferred A Stock | Preferred B Stock | Common Stock | Paid-in | Accumulated | Comprehensive | Noncontrolling | Comprehensive | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Interest | Income (loss) | Total | |||||||||||||||||||||||
Restated | Restated | Restated | Restated | Restated | Restated | Restated | Restated | Restated | ||||||||||||||||||||||||||
Balance
December 31, 2007
|
1,000,000 | $ | 1,000 | 1,295,000 | $ | 1,295 | 4,999,350 | $ | 4,999 | $ | 12,927,625 | $ | (16,042,873 | ) | $ | (226,390 | ) | $ | 601,028 | $ | - | $ | (2,733,316 | ) | ||||||||||
Convertible
note payable to related party converted to common
stock
|
- | - | - | - | 2,864,606 | 2,865 | 2,518,514 | - | - | - | 2,521,379 | |||||||||||||||||||||||
Conversion
of Series A Preferred to common stock
|
(1,000,000 | ) | (1,000 | ) | - | - | 2,500,000 | 2,500 | (1,500 | ) | - | - | - | - | ||||||||||||||||||||
Conversion
of Series B Preferred to common stock
|
- | - | (845,000 | ) | (845 | ) | 8,450,000 | 8,450 | (7,605 | ) | - | - | - | - | ||||||||||||||||||||
Accrued
salary for president converted to common stock
|
- | - | - | - | 581,247 | 581 | 448,404 | - | - | - | 448,985 | |||||||||||||||||||||||
2008
Unit Offering
|
- | - | - | - | 15,113,000 | 15,113 | 3,344,075 | - | - | - | 3,359,188 | |||||||||||||||||||||||
Net
(loss) income
|
- | - | - | - | - | - | - | (2,086,618 | ) | - | 156,489 | (1,930,129 | ) | (1,930,129 | ) | |||||||||||||||||||
Other
comprehensive income, net of tax:
|
||||||||||||||||||||||||||||||||||
Unrealized
gain on foreign currency translation adjustment
|
- | - | - | - | - | - | - | - | 38,895 | 37,369 | 76,264 | 76,264 | ||||||||||||||||||||||
Other
comprehensive income
|
76,264 | 76,264 | ||||||||||||||||||||||||||||||||
Comprehensive
loss
|
$ | (1,853,865 | ) | (1,853,865 | ) | |||||||||||||||||||||||||||||
Balance
December 31, 2008
|
- | - | 450,000 | 450 | 34,508,203 | 34,508 | 19,229,513 | (18,129,491 | ) | (187,495 | ) | 794,886 | - | 1,742,371 | ||||||||||||||||||||
Cumulative
effect of a change in accounting principle – adoption of FASB ASC 815
effective January 1, 2009
|
(2,172,310 | ) | (3,683,422 | ) | (5,855,732 | ) | ||||||||||||||||||||||||||||
Net
(loss) -- unaudited
|
- | - | - | - | - | - | - | 3,285,047 | - | 78,270 | 3,363,317 | 3,363,317 | ||||||||||||||||||||||
Other
comprehensive income, net of tax - unaudited:
|
||||||||||||||||||||||||||||||||||
Unrealized
gain on foreign currency translation adjustment --
unaudited
|
- | - | - | - | - | - | - | - | 7,092 | 6,814 | 13,906 | 13,906 | ||||||||||||||||||||||
Other
comprehensive income - unaudited
|
13,906 | 13,906 | ||||||||||||||||||||||||||||||||
Comprehensive
loss - unaudited
|
$ | 3,377,223 | $ | 3,377,223 | ||||||||||||||||||||||||||||||
Balance
September 30, 2009 -- unaudited
|
- | $ | - | 450,000 | $ | 450 | 34,508,203 | $ | 34,508 | $ | 17,057,203 | $ | (18,527,866 | ) | $ | (180,403 | ) | $ | 879,970 | $ | (736,138 | ) |
See notes
to unaudited consolidated financial statements.
- 4
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
China
Logistics Group, Inc. (“we”, “us”, “our” or the “Company”) is a Florida
corporation and was incorporated on March 19, 1999 under the name of
ValuSALES.com, Inc. We changed our name to Video Without Boundaries, Inc. on
November 16, 2001. On August 31, 2006 we changed our name from Video
Without Boundaries, Inc. to MediaReady, Inc. and on February 14, 2008, we
changed our name from MediaReady, Inc. to China Logistics Group,
Inc.
During
2002, we began to reposition our company within the home entertainment
media-on-demand marketplace. It was our intent to become a producer
and distributor of interactive consumer electronics and provide streaming
digital media and video on demand services. However, we were unable to
successfully or profitably penetrate the market.
On
December 31, 2007 we entered into an acquisition agreement with Shandong
Jiajia International Freight and Forwarding Co., Ltd. (“Shandong Jiajia”) and
its sole shareholders Messrs. Hui Liu and Wei Chen, through which we
acquired a 51% interest in Shandong Jiajia. The transaction was accounted
for as a capital transaction, implemented through a reverse
recapitalization.
Shandong
Jiajia, formed in 1999 as a Chinese limited liability company, is an
international freight forwarder and logistics management company. Shandong
Jiajia acts as an agent for international freight and shipping companies.
Shandong Jiajia sells cargo space and arranges land, maritime, and air
international transportation for clients seeking to import or export merchandise
into or from China. Shandong Jiajia has branches in Shanghai,
Qingdao, Xiamen, and Lianyungang with an additional sales office in Rizhao.
Shandong Jiajia is a designated agent of cargo carriers including Nippon Yusen
Kaisha, P&O Nedlloyd, CMA CGM Group, Safmarine Container Lines, and Regional
Container Lines.
The
accompanying unaudited consolidated financial statements include our accounts
and our 51% owned subsidiary, Shandong Jiajia. Intercompany transactions and
balances have been eliminated in consolidation. All share and per
share information contained in this report gives retroactive effect to the 1 for
40 reverse stock split of our outstanding common stock effective at the close of
business on March 11, 2008.
NOTE
2- RESTATEMENT OF FINANCIAL STATEMENTS
The
September 30, 2009 financial statements included in our form 10-Q filed on
November 23, 2009 contained errors and were restated to correct the previous
accounting treatment to:
•
|
properly
record common stock purchase warrants which were not indexed to our stock
as a derivative liability at January 1, 2009 upon adoption of Derivative
and Hedging Topic of the FASB ASC 815 and properly record the subsequent
accounting for the changes in the fair value of the associated liability
at March 31, 2009;
|
Accordingly,
our consolidated balance sheet at September 30, 2009, which is included in this
report, has been restated to properly record our common stock purchase warrants
that were not indexed to our stock as a derivative liability. The effect of
correcting these errors in our balance sheet at September 30, 2009, income
statements for the three and nine months ended September 30, 2009, and
statements of cash flows for the nine months ended September 30, 2009 was as
follows:
- 5
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
Balance
Sheet Data
|
September
30, 2009
|
|||||||||||
As
filed
|
Adjustment
to Restate
|
Restated
|
||||||||||
Derivative
Liability
|
-
|
2,458,145
|
2,458,145
|
|||||||||
Total
Liabilities
|
5,854,637
|
2,458,145
|
8,312,782
|
|||||||||
China
Logistics Group, Inc. stockholders’ equity
(deficit)
|
||||||||||||
Series
B Convertible Preferred Stock- 450,000 shares issued and
outstanding at December 31, 2008
|
$
|
450
|
-
|
$
|
450
|
|||||||
Common
Stock, $0.001 par value, 500,000,000 shares authorized,
34,508,203 shares issued and outstanding December 31,
2008
|
34,508
|
-
|
34,508
|
|||||||||
Additional
Paid-in-capital
|
19,229,513
|
(2,172,310
|
)
|
17,057,203
|
||||||||
Accumulated
Deficit
|
(18,242,031
|
)
|
(285,835
|
)
|
(18,527,866
|
)
|
||||||
Accumulated
other comprehensive income loss
|
(180,403)
|
-
|
(180,403)
|
|||||||||
Total
China Logistics Group, Inc. stockholders’ equity
(deficit)
|
842,037
|
(2,458,145
|
)
|
(1,616,108
|
)
|
|||||||
Noncontrolling
interest
|
879,970
|
-
|
879,970
|
|||||||||
Total
equity (deficit)
|
1,722,007
|
(2,458,145
|
)
|
(736,138
|
)
|
|||||||
Total
liabilities and equity (deficit)
|
$
|
7,576,644
|
-
|
$
|
7,576,644
|
Income
Statement Data
|
For
the three months ended September 30, 2009
|
|||||||||||
As
filed
|
Adjustment
to Restate
|
Restated
|
||||||||||
Other
income (expense)
|
||||||||||||
Realized
exchange loss
|
(492
|
)
|
-
|
(492
|
)
|
|||||||
Gain
on change in fair value of derivative
liability
|
-
|
13,887
|
13,887
|
|||||||||
Interest
expense
|
(1,375
|
)
|
-
|
(1,375
|
)
|
|||||||
Total
other income (expense)
|
(1,867
|
)
|
13,887
|
12,020
|
||||||||
Income
(loss) before income taxes
|
246,570
|
13,887
|
260,457
|
|||||||||
Net
income
|
239,872
|
13,887
|
253,759
|
|||||||||
Net
income attributable to China Logistics Group,
Inc.
|
89,693
|
13,887
|
103,580
|
|||||||||
Earnings
(loss) per share:
|
||||||||||||
Basic
|
0.00
|
-
|
0.00
|
|||||||||
Diluted
|
0.00
|
-
|
0.00
|
|||||||||
Basic
weighted average shares outstanding
|
34,508,203
|
-
|
34,508,203
|
|||||||||
Diluted
weighted average shares outstanding
|
39,008,203
|
-
|
39,008,203
|
- 6
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
Income
Statement Data
|
For
the nine months ended September 30, 2009
|
|||||||||||
As
filed
|
Adjustment
to Restate
|
Restated
|
||||||||||
Other
income (expense)
|
||||||||||||
Realized
exchange loss
|
35,465
|
-
|
35,465
|
|||||||||
Gain
on change in fair value of derivative
liability
|
-
|
3,397,587
|
3,397,587
|
|||||||||
Interest
expense
|
(562
|
)
|
-
|
(562
|
)
|
|||||||
Total
other income (expense)
|
34,903
|
3,397,587
|
3,432,490
|
|||||||||
Income
(loss) before income taxes
|
(19,432
|
)
|
3,397,587
|
3,378,155
|
||||||||
Net
income (loss)
|
(34,270
|
)
|
3,397,587
|
3,363,317
|
||||||||
Net
income (loss) attributable to China Logistics Group,
Inc.
|
(112,540
|
)
|
3,397,587
|
3,285,047
|
||||||||
Earnings
(loss) per share:
|
||||||||||||
Basic
|
0.00
|
0.10
|
0.10
|
|||||||||
Diluted
|
0.00
|
0.08
|
0.08
|
|||||||||
Basic
weighted average shares outstanding
|
34,508,203
|
-
|
34,508,203
|
|||||||||
Diluted
weighted average shares outstanding
|
34,508,203
|
4,500,000
|
39,008,203
|
Statement
of Cash Flow Data
|
For
the three months ended March 31, 2009
|
|||||||||||
March
31, 2009
|
As
filed
|
Adjustment
to Restate
|
Restated
|
|||||||||
Net
income
|
(34,270
|
3,397,587
|
3,363,317
|
|||||||||
Gain
on change in fair value of derivative
liability
|
-
|
(3,397,587
|
)
|
(3,397,587
|
)
|
|||||||
Net
cash (used in) provided by operating
activities
|
(676,755
|
)
|
-
|
(676,755
|
)
|
The
December 31, 2008 financial statements included in our Form 10-K filed on May
18, 2009, contained errors including the method of recording the reverse
recapitalization transaction with Shandong Jiajia completed on December 31,
2007. Accordingly, our consolidated balance sheet at December 31,
2008, which is included in this report, has been restated to properly record the
transaction and has been filed with the SEC on our Form 10-K/A (Amendment No. 1)
filed on September 29, 2009. The effect of correcting these errors in our
balance sheet at December 31, 2008 was as follows:
Balance
Sheet Data at December 31, 2008
|
As
filed
|
Adjustment
to Restate
|
Restated
|
|||||||||
Equity
|
||||||||||||
Series
B Convertible Preferred Stock- 450,000 shares issued and outstanding at
December 31, 2008
|
450
|
-
|
450
|
|||||||||
Common
Stock, $0.001 par value, 500,000,000 shares authorized,
34,508,203 shares issued and outstanding December 31,
2008
|
34,508
|
-
|
34,508
|
|||||||||
Additional
Paid-in-capital
|
$
|
3,572,042
|
$
|
15,657,471
|
$
|
19,229,513
|
||||||
Accumulated
Deficit
|
(2,472,020)
|
(15,657,471)
|
(18,129,491)
|
|||||||||
Accumulated
other comprehensive income loss
|
(187,495)
|
-
|
(187,495)
|
|||||||||
Total
(China Logistics Group, Inc.) shareholders
equity
|
947,485
|
-
|
947,485
|
|||||||||
Noncontrolling
Interest
|
-
|
794,886
|
794,886
|
|||||||||
Total
equity
|
947,485
|
794,886
|
1,742,371
|
|||||||||
Total
liabilities and equity
|
$
|
6,786,064
|
-
|
$
|
6,786,064
|
- 7
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
The
September 30, 2008 financial statements included in the Company’s Form 10-Q
filed on December 22, 2008 contained errors and were restated to include the
following corrections:
•
|
the
correction of the classification in the consolidated statements of cash
flows of $75,169 in advances to related parties from cash flows from
operating activities to cash flows from investing activities,
|
||
•
|
the
correction of the classification of $397,309 in recovery of bad debts, in
the consolidated statements of operations from a component of other income
(expense) to a component of operating income, and
|
||
•
|
the
recognition of an accrued loss of $1,597,000 due under the registration
payment agreement entered into in connection with the Company’s financing
completed in April 2008.
|
Accordingly,
our consolidated statements of operations for the three and nine month periods
ended September 30, 2008 and consolidated statements of cash flows for the nine
months ended September 30, 2008, which is included in this report, has been
restated to properly record the transactions and reclassifications.
The
effect of correcting these errors in our consolidated statement of
operations for the three months ended September 30, 2008 was as
follows:
Consolidated
Statement of Operations Data
|
||||||||||||
Three
months ended September 30, 2008
|
As
Filed
|
Adjustment
to Restate
|
Restated
|
|||||||||
Sales
|
$
|
12,961,259
|
$
|
-
|
$
|
12,961,259
|
||||||
Cost
of sales
|
12,072,099
|
-
|
12,072,099
|
|||||||||
Gross
profit
|
889,160
|
-
|
889,160
|
|||||||||
Operating
expenses:
|
||||||||||||
Selling,
general and administrative
|
544,034
|
(15,265
|
)
|
528,769
|
||||||||
Depreciation
|
4,814
|
-
|
4,814
|
|||||||||
Bad
debt expense
|
-
|
4,434
|
4,434
|
|||||||||
Total
operating expenses
|
548,848
|
(10,831
|
)
|
538,017
|
||||||||
Operating
income (loss)
|
340,312
|
10,831
|
351,143
|
|||||||||
Other
income (expenses):
|
||||||||||||
Realized
exchange gain
|
37,648
|
-
|
37,648
|
|||||||||
Recovery
of bad debts (bad debt expense)
|
(4,434
|
)
|
4,434
|
-
|
||||||||
Registration
agreement penalty
|
-
|
(1,597,000
|
)
|
(1,597,000
|
)
|
|||||||
Interest
income (expense)
|
(43,608
|
)
|
-
|
(43,608
|
)
|
|||||||
Total
other income (expense)
|
(10,394
|
)
|
(1,592,566
|
)
|
(1,602,960
|
)
|
||||||
Income
(loss) from continuing operations, before tax
|
329,918
|
(1,581,735
|
)
|
(1,251,817
|
)
|
|||||||
Foreign
taxes
|
279,784
|
(147,968
|
)
|
131,816
|
||||||||
Net
income
|
50,134
|
(1,433,767
|
)
|
(1,383,633
|
)
|
|||||||
Net
income attributable to noncontrolling interest
|
238,710
|
10
|
238,720
|
|||||||||
Net
income attributable to China Logistics Group, Inc.
|
(188,576
|
)
|
(1,433,777
|
)
|
(1,622,353
|
)
|
||||||
Earnings
(loss) per share
|
||||||||||||
Basic
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
$
|
(0.05
|
)
|
|||
Diluted
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
$
|
(0.05
|
)
|
|||
Weighted
average number of shares outstanding:
|
||||||||||||
Basic
|
34,507,894
|
309
|
34,508,203
|
|||||||||
Diluted
|
34,507,894
|
309
|
34,508,203
|
- 8
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
The
effect of correcting these errors in our consolidated statement of
operations for the nine months ended September 30, 2008 was as
follows:
Consolidated
Statement of Operations Data
|
||||||||||||
Nine
months ended September 30, 2008
|
As
Filed
|
Adjustment
to Restate
|
Restated
|
|||||||||
Sales
|
$
|
27,753,459
|
$
|
-
|
$
|
27,753,459
|
||||||
Cost
of sales
|
26,149,830
|
-
|
26,149,830
|
|||||||||
Gross
profit
|
1,603,629
|
-
|
1,603,629
|
|||||||||
Operating
expenses:
|
||||||||||||
Selling,
general and administrative
|
1,129,215
|
(172,597
|
)
|
956,618
|
||||||||
Depreciation
|
17,260
|
(4,286
|
)
|
12,974
|
||||||||
Recovery
of bad debts
|
-
|
(397,309
|
)
|
(397,309
|
)
|
|||||||
Total
operating expenses
|
1,146,475
|
(574,192
|
)
|
572,283
|
||||||||
Operating
income (loss)
|
457,154
|
574,192
|
1,031,346
|
|||||||||
Other
income (expenses):
|
||||||||||||
Realized
exchange gain
|
25,241
|
-
|
25,241
|
|||||||||
Forgiveness
of Debt
|
764,220
|
(764,220
|
)
|
-
|
||||||||
Recovery
of bad debts (bad debt expense)
|
397,309
|
(397,309
|
)
|
-
|
||||||||
Non-operating
bad debt
|
-
|
(87,221
|
)
|
(87,221
|
)
|
|||||||
Registration
agreement penalty
|
-
|
(1,597,000
|
)
|
(1,597,000
|
)
|
|||||||
Interest
income (expense)
|
(44,275
|
)
|
-
|
(44,275
|
)
|
|||||||
Total
other income (expense)
|
1,142,495
|
(2,845,750
|
)
|
(1,703,255
|
)
|
|||||||
Income
(loss) from continuing operations, before tax
|
1,599,649
|
(2,271,558
|
)
|
(671,909
|
)
|
|||||||
Foreign
taxes
|
357,442
|
(147,968
|
)
|
209,474
|
||||||||
Net
income
|
1,242,207
|
(2,123,590
|
)
|
(881,383
|
)
|
|||||||
Net
income attributable to noncontrolling interest
|
597,943
|
-
|
597,943
|
|||||||||
Net
income attributable to China Logistics Group, Inc.
|
644,264
|
(2,123,590
|
)
|
(1,479,326
|
)
|
|||||||
Earnings
(loss) per share
|
-
|
|||||||||||
Basic
|
$
|
0.03
|
$
|
(0.09
|
)
|
$
|
(0.06
|
)
|
||||
Diluted
|
$
|
0.02
|
$
|
(0.08
|
)
|
$
|
(0.06
|
)
|
||||
Weighted
average number of shares outstanding:
|
-
|
|||||||||||
Basic
|
24,190,006
|
52,849
|
24,242,855
|
|||||||||
Diluted
|
34,257,798
|
(10,014,943
|
)
|
24,242,855
|
- 9
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
The
effect of correcting these errors in our consolidated statement of cash flows
for the nine months ended September 30, 2008 was as follows:
Consolidated
Statement of Cash Flows Data
|
Nine months ended September 30, 2008 | |||||||||||
|
As
Filed
|
Adjustment
to Restate
|
Restated
|
|||||||||
Net
(loss) income
|
644,264
|
(2,123,590
|
)
|
(1,479,326
|
)
|
|||||||
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
||||||||||||
Depreciation
expense
|
17,260
|
(4,286
|
)
|
12,974
|
||||||||
Bad
debt recovery
|
(401,743
|
)
|
4,434
|
(397,309
|
)
|
|||||||
Registration
rights penalty
|
-
|
1,597,000
|
1,597,000
|
|||||||||
Securities
issued for services
|
5,450
|
(5,450
|
)
|
-
|
||||||||
Changes
in assets and liabilities:
|
||||||||||||
(Increase)
decrease in accounts receivable
|
(401,531
|
)
|
146,166
|
(255,365
|
)
|
|||||||
(Increase)
in accounts receivable - related party
|
160,350
|
(153,350
|
)
|
7,000
|
||||||||
Decrease
in deposit
|
12,000
|
(12,000
|
)
|
-
|
||||||||
Decrease
(increase) in prepaid expenses and other current
assets
|
(397,843
|
)
|
(11,493
|
)
|
(409,336
|
)
|
||||||
(Decrease)
increase in accounts payable
|
(2,582,353
|
)
|
851,175
|
(1,731,178
|
)
|
|||||||
Increase
in accrued consulting fee
|
57,273
|
(57,273
|
)
|
-
|
||||||||
(Decrease)
in other accruals and current liabilities
|
267,254
|
(85,528
|
)
|
181,726
|
||||||||
Decrease
in due to related parties
|
(75,169
|
)
|
75,169
|
-
|
||||||||
(Decrease)
increase in taxes payable
|
284,905
|
(147,969
|
)
|
136,936
|
||||||||
NET
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
|
(894,784
|
)
|
73,005
|
(821,779
|
)
|
|||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
Advance
to related party
|
-
|
26,520
|
26,520
|
|||||||||
NET
CASH USED IN INVESTING ACTIVITIES
|
(25,646
|
)
|
26,520
|
874
|
||||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
Repayments
of advances from related parties
|
-
|
(75,169
|
)
|
(75,169
|
)
|
|||||||
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
3,492,954
|
(75,169
|
)
|
3,417,785
|
||||||||
NET
INCREASE IN CASH
|
2,572,524
|
24,356
|
2,596,880
|
|||||||||
EFFECT
OF EXCHANGE RATE ON CASH
|
177,844
|
(24,356
|
)
|
153,488
|
||||||||
CASH -
beginning of year
|
1,121,605
|
-
|
1,121,605
|
|||||||||
CASH
- end of year
|
3,871,973
|
-
|
3,871,973
|
Certain
amounts in Notes 5, 7 and 8 have been restated to reflect the restatement
adjustments described above.
NOTE
3 – GOING CONCERN
The
accompanying unaudited consolidated financial statements have been prepared on a
going concern basis. Our ability to continue as a going concern is dependent
upon our ability to obtain the necessary financing to meet our obligations and
repay our liabilities arising from normal business operations when they become
due, to fund possible acquisitions, and to generate profitable operations in the
future.
These
matters, among others, raise substantial doubt about our ability to continue as
a going concern. These financial statements do not include any adjustments to
the amounts and classification of assets and liabilities that may be necessary
should we be unable to continue as a going concern.
As a
result of the weak global economy, the demand for exported Chinese products has
also declined, resulting in a significant drop in the demand for our freight and
transport services. In response to the decline in our revenues,
we have reduced the controllable portions of our cost of sales and general
and administrative expenses where possible. We have seen that
these efforts have resulted in a positive gross profit in the current
quarter. We believe our cost reduction program can have the desired
result and help us achieve positive cash flow in our operations, even at the
reduced level of sales which we anticipate for the foreseeable
future.
- 10
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
If,
however, our operational cost reduction efforts are not successful to a level
which enables us to generate sufficient cash flow from operations to fund our
needs we may need to raise additional working capital. We do not have
any commitments for any additional capital and both the terms of our 2008 Unit
Offering which contain certain restrictive covenants and the overall softness of
the capital markets could hinder our efforts. In that event, it would be
necessary for us to take additional steps to further reduce our operating
expenses including personnel reductions and the possible consolidation of our
offices. We believe this cost containment approach is a viable
response to the current market conditions and, coupled with our cash on-hand,
should allow us to maintain our operations for the foreseeable
future.
NOTE
4 –BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis
of Presentation
The
accompanying unaudited consolidated financial statements for the three and nine
month periods ended September 30, 2009 and 2008 have been prepared in conformity
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q.
Certain information or footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission (the
“SEC”).
In the
opinion of management, the accompanying unaudited interim consolidated financial
statements contain all adjustments necessary to present fairly the
financial position and results of operations of the Company as of the dates and
for the periods presented.
All share
and per share information contained in this report gives retroactive effect to a
1 for 40 reverse stock split of our outstanding common stock effective March 11,
2008.
The
presentation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
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. In the opinion of management, the
accompanying financial statements include all adjustments necessary (which are
of a normal and recurring nature) for the fair presentation of the results of
the interim periods presented. While we believe that the disclosures presented
are adequate to keep the information from being misleading, we suggest that
these accompanying financial statements be read in conjunction with our audited
financial statements and notes for the year ended December 31, 2008, included in
our Form 10-K/A (Amendment No. 1) filed on September 29,
2009.
Operating
results for the three and nine month periods ended September 30, 2009 are not
necessarily indicative of the results that may be expected for the remainder of
the year ending December 31, 2009.
The
accompanying consolidated financial statements include our accounts and our 51%
owned subsidiary, Shandong Jiajia. Inter-company transactions and balances have
been eliminated in consolidation. Shandong Jiajia maintains its records and
prepares its financial statements in accordance with accounting principles
generally accepted in China. Certain adjustments and reclassifications have been
incorporated in the accompanying unaudited consolidated financial statements to
conform to accounting principles generally accepted in the United States of
America.
Revenue
Recognition
We
provide freight forwarding services generally under contract with our
customers. Our business model involves placing our customers’ freight
on prearranged contracted transport.
In
general, we record revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price to
the customer is fixed or determinable, and collectability is reasonably assured.
We provide transportation services, generally under contract, by third parties
with whom we have contracted these services.
Typically
we recognize revenue in connection with our freight forwarding service when the
payment terms are as follows:
•
|
When
the cargo departs the shipper's destination if the trade pricing term is
on a CIF (cost, insurance and freight) or CFR (cost and freight cost)
basis;
|
||
•
|
When
the cargo departs the shipper’s location when the trade pricing terms are
CFR (cost and freight cost); or
|
||
•
|
When
merchandise arrives at the destination port if the trade pricing term is
on a FOB (free on board) basis.
|
- 11
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions, including estimates of the allowance for doubtful
accounts and assumptions associated with stock based compensation recognized
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenue and expenses during the
reported periods.
Significant
estimates for the periods reported include the allowance for doubtful accounts
which is based on an evaluation of our outstanding accounts receivable including
the age of amounts due, the financial condition of our specific customers,
knowledge of our industry segment in Asia, and historical bad debt
experience. This evaluation methodology has proved to provide a
reasonable estimate of bad debt expense in the past and we intend to continue to
employ this approach in our analysis of collectability. However, we
are aware that given the current global economic situation, including that of
China, meaningful time horizons may change. We intend to enhance our
focus on the evaluation of our customers' sustainability and adjust our
estimates as may be indicted.
A
recovery of bad debt recognized in the first quarter 2008 reflected an
adjustment in our estimate of bad debt expense reflected in the allowance
account. This credit did not stem from the recovery of a previously written-off
account or accounts. It had been our policy to reserve for bad debt
expense based principally on the age of our receivables. Experience proved we
had over reserved and an adjustment was indicated. The adjustment was not
repeated in 2009.
We also
rely on assumptions such as volatility, forfeiture rate, and expected dividend
yield when deriving the fair value of share-based compensation; we did not
recognize any stock-based compensation expense during the periods presented in
this report. Further, we rely on certain assumptions and calculations
underlying our provision for taxes in China, see Note 14 – Income Taxes of our
Form 10-K for further discussion. Assumptions and estimates employed
in these areas are material to our reported financial conditions and results of
operations. These assumptions and estimates have been materially
accurate in the past and are not expected to materially change in the
future. Actual results could differ from these estimates
Cash
and Cash Equivalents
We
consider all highly liquid investments with original maturities of nine months
or less to be cash equivalents. The carrying value of these instruments
approximates their fair value.
Concentration
of Credit Risk
Financial
instruments that potentially subject us to concentration of credit risk consist
primarily of cash and accounts receivable. We place our cash with high quality
financial institutions in the United States and China. At September 30, 2009, we
had deposits of $2,074,891 in banks in China. In China, there is no equivalent
federal deposit insurance as in the United States; as such these amounts held in
banks in China are not insured. We have not experienced any losses in such bank
accounts through September 30, 2009.
Accounts
Receivable
We
provide an allowance for doubtful accounts equal to the estimated uncollectible
portion of accounts receivable. This estimate is based on the historical
collection experience and a review of the current status of trade receivables.
The allowance for doubtful accounts totaled $465,966 and $464,275 at September
30, 2009 and December 31, 2008, respectively.
Earnings
(Losses) Per Share
Basic per
share results for all periods presented were computed based on the net earnings
(loss) for the periods presented. The weighted average number of common shares
outstanding during the period was used in the calculation of basic earnings per
share. Diluted earnings per share reflects the potential dilution that could
occur if securities were exercised or converted into common stock or other
contracts to issue common stock resulting in the issuance of common stock that
would then share in our income subject to anti-dilution
limitations.
Stock
Based Compensation
We
account for stock options issued to employees by measuring the grant-date fair
value of stock options and other equity based compensation issued to employees
and recognize the costs in the financial statements over the period during which
the employees are required to provide services.
- 12
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
Advance
to Vendors
Advances
to vendors consist of prepayments or deposits from us for contracted shipping
arrangements that has not been utilized to ship cargo used by our
customers. These amounts are recognized as cost of revenues as
shipments are completed and customers utilize the shipping
arrangement. This policy follows the matching principle to match the
cost of revenue in the same period as when the associated revenue is earned in
accordance with our revenue recognition policy. Advances to vendors
totaled $407,239 at September 30, 2009 and $0 at December 31, 2008.
Advances
from Customers
Advances
from customers consist of prepayments to us for contracted cargo that has not
yet been shipped to the recipient and for other advance deposits. These amounts
are recognized as revenue as shipments are completed and customers take delivery
of goods, in compliance with the related contract and our revenue recognition
policy. Advances from customers totaled $1,295,259 and $1,133,283, at September
30, 2009 and December 31, 2008, respectively.
Other
receivables
Other
receivables at September 30, 2009 were $543,234 and is comprised of advances to
other entities with which we have a strategic or other business relationship, a
deposit we made as required by a Chinese court for potential payment to a former
customer in the event we are unsuccessful in a lawsuit we filed against our
former customer for amounts owed to us, and deferred expenses. The
amounts advanced to our strategic partners are unsecured, repayable on demand,
and bear no interest. We also advance money to employees for business
trips which are then subsequently expensed upon processing of an expense
report. The components of other receivables at September 30, 2009 and
December 31, 2008 was as follows:
September
30, 2009
|
December
31, 2008
|
|||||||
(Restated)
|
||||||||
Loans
receivable
|
$
|
484,102
|
$
|
229,742
|
||||
Legal
deposit
|
38,728
|
38,662
|
||||||
Deferred
expense
|
20,404
|
23,561
|
||||||
Other
|
-
|
6,477
|
||||||
$
|
543,234
|
$
|
298,442
|
Long-Lived
Assets
We
periodically evaluate the carrying value of long-lived assets to be held and
used in the business, other than assets held for sale when events and
circumstances warrant, generally in conjunction with the annual business
planning cycle. If the carrying value of a long-lived asset is considered
impaired, a loss is recognized based on the amount by which the carrying value
exceeds the fair market value for assets to be held and used. Fair market value
is determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risks involved. Long-lived assets to be disposed of other
than by sale are considered held and used until disposed. There was no
impairment recognized for the three or nine month periods ended September 30,
2009 or September 30, 2008, respectively.
Derivative
Liability
We issued
a total of 31,558,500 common stock purchase warrants in connection with our 2008
Unit Offering comprised of 16,445,500 Class A warrants exercisable at $0.35 per
share and 15,113,000 Class B warrants excercisble at $0.50 per
share. Other than the exercise price of the warrants, the terms of
the Class A and Class B warrants are identical and expire April 30,
2013. The exercise price of the warrants and the number of shares
issuable upon exercise is subject to reset adjustment in the event of stock
splits, stock dividends, recapitalization and similar corporate
events. If we issue or sell shares of our common stock after the 2008
Unit Offering for an amount less than the original exercise price per share, the
exercise price of the warrants is reduced to equal the new issuance price of
those shares.
- 13
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
Upon our
retroactive adoption of the Derivative and Hedging Topic of the FASB Accounting
Standards Codification (“ASC 815”) on January 1, 2009, we determined that
the warrants did not qualify for a scope exception under ASC 815 as they were
determined to not be indexed to our stock as prescribed by ASC
815. Retroactively effective January 1, 2009, the warrants, under ASC
815, were reclassified from equity to a derivative liability for the then
relative fair market value of $5,855,732 and marked to market. The
value of the warrants increased by $3,683,422 from the warrants issuance date to
the adoption date of ASC 815, January 1, 2009. As of January 1, 2009,
the cumulative effect in adopting ASC 815 was a reduction to additional paid in
capital of $2,172,310 to reclassify the warrants from equity to derivative
liability and a decrease in retained earnings of $3,683,422 as a cumulative
effect of a change in accounting principle to reflect the change in the value of
the warrants between their issuance date and January 1, 2009. For the
three and nine month periods ended September 30, 2009, we recorded a gain on
change in fair value of derivative liability of $13,887 and $3,397,587,
respectively, to mark to market for the decrease in fair value of the warrants
during the three and nine-month periods ended September 30,
2009. Under ASC 815, the warrants will be carried at fair value and
adjusted at each reporting period.
The
Company determined the fair value of the warrants at each reporting date using
the Black Scholes Option Pricing Model based on the following assumptions and
key inputs for each Class of warrants and reporting date:
Class
A Warrants
|
Class
B Warrants
|
|||||||||||||||||||||||
January
1, 2009
|
June
30, 2009
|
September
30, 2009
|
January
1, 2009
|
June
30, 2009
|
September
30, 2009
|
|||||||||||||||||||
Dividend
Yield
|
0 | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||||||
Volatility
|
231 | % | 264 | % | 264 | % | 231 | % | 265 | % | 264 | % | ||||||||||||
Risk
Free Rate
|
1.00 | % | 1.64 | % | 1.45 | % | 1.00 | % | 1.64 | % | 1.45 | % | ||||||||||||
Expected
Term
|
4.33 | 3.84 | 3.58 | 4.33 | 3.85 | 3.58 | ||||||||||||||||||
Asset
Price
|
$ | 0.19 | $ | 0.08 | $ | 0.08 | $ | 0.19 | $ | 0.08 | $ | 0.08 | ||||||||||||
Exercise
Price
|
$ | 0.35 | $ | 0.35 | $ | 0.35 | $ | 0.50 | $ | 0.50 | $ | 0.50 |
Foreign
Currency Translation
The
accompanying unaudited consolidated financial statements are presented in United
States dollars. The functional currency of Shandong Jiajia is the Renminbi
(“RMB”), the official currency of the People’s Republic of
China. Transactions and balances initially recorded in RMB are
converted into U.S. dollars and the resultant unrealized gains and losses on
foreign currency conversion are included in determining comprehensive income or
loss. Capital accounts of the unaudited consolidated financial statements are
translated into United States dollars from RMB at their historical exchange
rates when the capital transactions occurred. Assets and liabilities are
translated at the exchange rates as of the balance sheet date. Income and
expenditures are translated at the average exchange rate for the period
presented.
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through PRC authorized institutions. No
representation is made that the RMB amounts could have been, or could be,
converted into U.S. dollars at the rates used in translation.
Noncontrolling
Interest
Noncontrolling
interests in our subsidiary are recorded as a component of our equity, separate
from the parent’s equity. Purchase or sale of equity interests that do not
result in a change of control are accounted for as equity transactions.
Results of operations attributable to the noncontrolling interest are included
in our consolidated results of operations and, upon loss of control, the
interest sold, as well as interest retained, if any, will be reported at fair
value with any gain or loss recognized in earnings.
Recent
Accounting Pronouncements
On June
5, 2003, the United States Securities and Exchange Commission (“SEC”) adopted
final rules under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”),
as amended by SEC Release No. 33-9072 on October 13, 2009. Commencing
with its annual report for the year ending December 31, 2010, the Company will
be required to include a report of management on its internal control over
financial reporting. The internal control report must include a
statement
·
|
Of
management’s responsibility for establishing and maintaining adequate
internal control over its financial
reporting;
|
·
|
Of
management’s assessment of the effectiveness of its internal control over
financial reporting as of year end;
and
|
- 14
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
·
|
Of
the framework used by management to evaluate the effectiveness of the
Company’s internal control over financial
reporting.
|
Furthermore,
it is required to file the auditor’s attestation report separately on our
internal control over financial reporting on whether it believes that we have
maintained, in all material respects, effective internal control over financial
reporting.
In June
2008, the FASB ratified changes to Derivative and Hedging Topic of the FASB ASC
815 or EITF Issue No. 07-5,
Determining Whether an Instrument (or and Embedded Feature) Is Indexed to ad
Entity’s Own Stock. EITF No. 07-5 provides that an entity
should use a two step approach to evaluate whether an entity-linked financial
instrument (or embedded feature) is indexed to its own stock, including
evaluating the instrument’s contingent exercise and settlement
provisions. It also clarifies on the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation. EITF No. 07-5 is effective for fiscal
years beginning after December 15, 2008. The adoption of EITF No.
07-5 did have a material effect on our consolidated financial statements and
resulted in a restatement of these financial statements to recognize a
derivative liability of approximately $2.5 million at September 30,
2009.
In
June 2009, the FASB approved the “FASB Accounting Standards Codification”
(the “Codification”) as the single source of authoritative nongovernmental U.S.
GAAP to be launched on July 1, 2009. The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. All existing accounting standard
documents will be superseded and all other accounting literature not included in
the Codification will be considered non-authoritative. The Codification is
effective for interim and annual periods ending after September 15,
2009.
In
August 2009, the FASB issued the FASB Accounting Standards Update No.
2009-04 “Accounting for
Redeemable Equity Instruments - Amendment to Section 480-10-S99” which
represents an update to section 480-10-S99, distinguishing liabilities from
equity, per EITF Topic D-98, Classification and Measurement of
Redeemable Securities. The Company does not expect the
adoption of this update to have a material impact on its consolidated financial
position, results of operations or cash flows.
In
August 2009, the FASB issued the FASB Accounting Standards Update No.
2009-05 “Fair Value
Measurement and Disclosures Topic 820 – Measuring Liabilities at Fair
Value”, which provides amendments to subtopic 820-10, Fair Value
Measurements and Disclosures – Overall, for the fair value measurement of
liabilities. This update provides clarification that in circumstances
in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the following techniques: 1. A valuation technique that uses: a. The
quoted price of the identical liability when traded as an asset b. Quoted prices
for similar liabilities or similar liabilities when traded as assets. 2. Another
valuation technique that is consistent with the principles of topic 820; two
examples would be an income approach, such as a present value technique, or a
market approach, such as a technique that is based on the amount at the
measurement date that the reporting entity would pay to transfer the identical
liability or would receive to enter into the identical liability. The amendments
in this update also clarify that when estimating the fair value of a liability,
a reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents the
transfer of the liability. The amendments in this update also clarify that both
a quoted price in an active market for the identical liability when traded as an
asset in an active market when no adjustments to the quoted price of the asset
are required are Level 1 fair value measurements. We do
not expect the adoption of this update to have a material impact on its
consolidated financial position, results of operations or cash
flows.
In
September 2009, the FASB issued the FASB Accounting Standards Update No.
2009-08 “Earnings Per Share –
Amendments to Section 260-10-S99”,which represents technical corrections
to topic 260-10-S99, Earnings per share, based on EITF Topic D-53, Computation of Earnings Per Share
for a Period that includes a Redemption or an Induced Conversion of a Portion of
a Class of Preferred Stock and EITF Topic D-42, The Effect of the Calculation of
Earnings per Share for the Redemption or Induced Conversion of Preferred
Stock. We do not expect the adoption of this update to have a
material impact on its consolidated financial position, results of operations or
cash flows.
In
September 2009, the FASB issued the FASB Accounting Standards Update No.
2009-09 “Accounting for
Investments-Equity Method and Joint Ventures and Accounting for Equity-Based
Payments to Non-Employees”. This update represents a
correction to Section 323-10-S99-4, Accounting by an Investor for
Stock-Based Compensation Granted to Employees of an Equity Method
Investee. Additionally, it adds observer comment Accounting Recognition for Certain
Transactions Involving Equity Instruments Granted to Other Than Employees
to the Codification. We do not expect the adoption to have a material impact on
its consolidated financial position, results of operations or cash
flows.
- 15
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
In
September 2009, the FASB issued the FASB Accounting Standards Update No.
2009-12 “Fair Value
Measurements and Disclosures Topic 820 – Investment in Certain Entities That
Calculate Net Assets Value Per Share (or Its Equivalent)”, which provides
amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall,
for the fair value measurement of investments in certain entities that calculate
net asset value per share (or its equivalent). The amendments in this update
permit, as a practical expedient, a reporting entity to measure the fair value
of an investment that is within the scope of the amendments in this update on
the basis of the net asset value per share of the investment (or its equivalent)
if the net asset value of the investment (or its equivalent) is calculated in a
manner consistent with the measurement principles of Topic 946 as of the
reporting entity’s measurement date, including measurement of all or
substantially all of the underlying investments of the investee in accordance
with Topic 820. The amendments in this update also require disclosures by major
category of investment about the attributes of investments within the scope of
the amendments in this update, such as the nature of any restrictions on the
investor’s ability to redeem its investments at the measurement date, any
unfunded commitments (for example, a contractual commitment by the investor to
invest a specified amount of additional capital at a future date to fund
investments that will be make by the investee), and the investment strategies of
the investees. The major category of investment is required to be determined on
the basis of the nature and risks of the investment in a manner consistent with
the guidance for major security types in U.S. GAAP on investments in debt and
equity securities in paragraph 320-10-50-1B. The disclosures are required for
all investments within the scope of the amendments in this update regardless of
whether the fair value of the investment is measured using the practical
expedient. We do not expect the adoption to have a material impact on its
consolidated financial position, results of operations or cash
flows.
Fair value of financial
instruments
The
Company has adopted the common definition for fair value established in FASB AS
Topic 820 Fair Value
Measurements and Disclosures and adopted the framework for measuring fair
value described therein.
We define
fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. We also use valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs. These inputs are
prioritized below:
Level 1:
|
Observable
inputs such as quoted market prices in active markets for identical assets
or liabilities
|
Level 2:
|
Observable
market-based inputs or unobservable inputs that are corroborated by market
data
|
Level 3:
|
Unobservable
inputs for which there is little or no market data, which require the use
of the reporting entity’s own
assumptions.
|
The
Company did not have any Level 2 or Level 3 assets or liabilities as of
September 30, 2009.
Cash and
cash equivalents of approximately $2,074,891, that may include money market
securities and commercial paper that are considered to be highly liquid and
easily tradable as of September 30, 2009. These securities are valued using
inputs observable in active markets for identical securities and are therefore
classified as Level 1 within our fair value hierarchy.
We did
not elect the fair value option for any of its qualifying financial instruments
as permitted under FASB AS Topic 825 Financial
Instruments.
- 16
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
NOTE
5 – EARNINGS (LOSS) PER SHARE
Basic
income (loss) per common share is computed by dividing income (loss) available
to common shareholders by the weighted average number of shares of common stock
outstanding for the periods presented. Diluted income per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that would then share in the income of the Company,
subject to anti-dilution limitations.
Three
Months Ended September
30,
|
Nine
Months Ended September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Restated |
Restated
|
Restated |
Restated
|
|||||||||||||
Numerator:
|
||||||||||||||||
Net
Income (loss) applicable to common stockholders (A)
|
$
|
103,350
|
$
|
(1,622,353
|
)
|
$
|
3,285,047
|
$
|
(1,479,326
|
)
|
||||||
Denominators:
|
||||||||||||||||
Denominator
for basic earnings per share
|
||||||||||||||||
Weighted
average shares outstanding (B)
|
34,508,203
|
34,508,203
|
34,508,203
|
24,242,855
|
||||||||||||
Denominator
for diluted earnings per share
|
||||||||||||||||
Treasury
Stock Method
|
||||||||||||||||
Stock
purchase warrants issued to Mr. Chen
|
-
|
-
|
-
|
-
|
||||||||||||
Stock
purchase warrants
|
-
|
-
|
-
|
-
|
||||||||||||
Series
B preferred - unconverted
|
4,500,000
|
-
|
4,500,000
|
-
|
||||||||||||
Series
A and B preferred
|
-
|
-
|
-
|
-
|
||||||||||||
-
|
-
|
-
|
-
|
|||||||||||||
Denominator
for diluted earnings (loss) per share-
|
||||||||||||||||
adjusted
weighted average shares outstanding (C)
|
39,008,203
|
34,508,203
|
39,008,203
|
24,242,855
|
||||||||||||
Basic
and Diluted Earnings Per Common Share:
|
||||||||||||||||
Earnings
(loss) per share- basic (A)/(B)
|
$
|
0.00
|
$
|
(0.05)
|
$
|
0.10
|
$
|
(0.06)
|
||||||||
Earnings
(loss) per share- diluted (A)/(C)
|
$
|
0.00
|
$
|
(0.05)
|
$
|
0.08
|
$
|
(0.06)
|
Potentially
issuable shares at September 30, 2009 and 2008 which could result in dilution in
the future but were not included in diluted earnings per share for the periods
presented as they are anti-dilutive, included:
Three
months Ended
September
30,
|
Nine
months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Stock
purchase warrants to Mr. Chen
|
2,000,000 | 2,000,000 | 2,000,000 | 2,000,000 | ||||||||||||
Stock
purchase warrants
|
5,000 | 117,500 | 5,000 | 117,500 | ||||||||||||
Class
A and B stock purchase warrants
|
31,558,500 | 31,558,500 | 31,558,500 | 31,558,500 | ||||||||||||
Series
B convertible preferred stock
|
- | 4,500,000 | - | 4,500,000 | ||||||||||||
33,563,000 | 38,176,000 | 38,063,000 | 38,176,000 |
NOTE
6 – STOCKHOLDERS’ EQUITY
2008
Unit Offering
In April
2008, we completed an offering of 15.113 units of our securities at an offering
price of $250,000 per unit to 32 accredited investors in a private placement
exempt from registration under the Securities Act of 1933 in reliance on
exemptions provided by Regulation D and Section 4(2) of that act (the “2008
Unit Offering”). Each unit consisted of 1,000,000 shares of common stock, five
year Class A warrants to purchase 1,000,000 shares of common stock with an
exercise price of $0.35 per share and five year Class B warrants to purchase
1,000,000 shares of common stock with an exercise price of $0.50 per share. We
received gross proceeds of $3,778,250 in this offering.
The
31,558,500 warrants issued in connection with the 2008 Unit Offering and
comprised of 16,445,500 Class A warrants exercisable at $0.35 per share and
15,113,000 Class B warrants exercisable at $0.50 per share. Other
than the exercise price of the warrants, the terms of the Class A and Class B
warrants are identical.
- 17
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
These
warrants are exercisable through the last calendar day of the month in which the
fifth anniversary of the issue date occurs and are exercisable in whole or in
part at any time following the issue date.
The
exercise price of the warrants and the number of shares issuable upon exercise
is subject pre-note adjustment in the event of stock splits, stock dividends,
recapitalization and similar corporate events. At any time after the
required effective date of the related registration statement the warrants are
exercisable on a cashless basis, which currently is the case. The exercise of
the warrants is subject to a 4.99% cap on the beneficial ownership that each
warrant holder may have while the securities are outstanding. This
provision is waived during the final 45 days the warrants are
exercisable.
Skyebanc,
Inc., a broker-dealer and a member of FINRA, acted as a selling agent for us in
the 2008 Unit Offering. As compensation for its services, we paid
Skyebanc, Inc. a cash commission of $25,938 and issued that firm Class A
warrants to purchase 207,500 shares of our common stock. In addition, we paid
due diligence fees to an advisor to our company as well as to two advisors to
investors in connection with the 2008 Unit Offering for an aggregate of $315,625
in cash and Class A warrants to purchase 1,125,000 shares of our common
stock. We also paid legal fees for both investors' counsel and our counsel
of approximately $77,500. After payment of these fees and costs associated with
this offering we received net proceeds of approximately $3.3 million.
Approximately $2.0 million of the net proceeds were used by us as a contribution
to the registered capital of our subsidiary Shandong Jiajia and as additional
working capital for that company, approximately $140,000 was used to pay accrued
professional fees and the balance of the net proceeds from the transaction are
being used for working capital purposes. Subsequently, we have provided an
additional $500,000 to Shandong Jiajia as working capital.
We agreed
to file a registration statement with the SEC covering the shares of common
stock underlying the warrants so as to permit the public resale thereof. We have
filed a registration statement covering the resale of all shares of our common
stock issuable upon the exercise of the Class A and Class B Warrants included in
the units sold in the 2008 Unit Offering, together with all shares of our common
stock issuable upon exercise of the Class A warrants issued to the selling
agent, finders and consultants in the 2008 Unit Offering. We will pay
all costs associated with the filing of this registration statement. In the
event the registration statement was not filed within 60 days of the closing or
is not declared effective within 180 days following the closing date, we will be
required to pay liquidated damages in an amount equal to 2% for each 30 days (or
such lesser pro rata amount for any period of less than 30 days) of the purchase
aggregate exercise price of the warrants, but not to exceed in the aggregate 12%
of the aggregate exercise price of the warrants. Although we filed a
registration statement and we have been making a good faith effort to resolve
comments on the registration statement we received from the SEC, it has not yet
been declared effective. Accordingly, for the quarter ended September 30, 2008,
the Company accrued $1,597,000 due to the investor’s under the provisions of the
registration payment agreement.
The
transaction documents also provide for the payment of liquidated damages to the
investors if we should fail to be a current reporting issuer and/or to maintain
an effective registration statement covering the resale of the common shares
issued or issuable upon exercise of the Class A and B warrants.
The
subscription agreement for the 2008 Unit Offering provides that while the
purchasers own any securities sold in the 2008 Unit Offering such securities are
subject to anti-dilution protections afforded to the purchasers. In the event we
were to issue any shares of common stock or securities convertible into or
exercisable for shares of common stock to any third party purchaser at a price
per share of common stock or exercise price per share which is less than the per
share purchase price of the shares of common stock in this offering, or less
than the exercise price per warrant share, respectively, without the consent of
the subscribers then holding securities issued in this offering, the purchaser
is given the right to apply the lowest such price to the purchase price of share
purchased and still held by the purchaser and to shares issued upon exercise of
the warrants and still held by the purchaser (which will result in the issuance
of additional shares to the purchaser) and to the exercise price of any
unexercised warrants. In the event we enter into a transaction which triggers
these anti-dilution rights, we will:
•
|
issue
additional shares to the purchasers to take into account the amount paid
by the purchaser as of the closing date for the shares included in the
units so that the per share price paid by the purchaser equals the lower
price in the subsequent issuance;
|
||
•
|
reduce
the warrant exercise price of any unexercised warrants then held by the
purchaser to such lower price; and
|
||
•
|
if
necessary, issue additional shares to purchaser to take into account the
amount paid, whether in cash or by cashless exercise, by the purchaser if
the purchaser has exercised any warrants so that the per share exercise
price and to the exercise price for the exercised warrants equals the
lower price of the subsequent
issuance.
|
- 18
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
In
addition, until eight months after the effective date of the registration
statement, purchasers will have a right of first refusal with respect to
subsequent offers, if any, by us for the sale of our securities or debt
obligations. The anti-dilution provisions and the right of first refusal do not
apply in limited exceptions, including:
•
|
strategic
license agreements or similar partnering arrangements provided that the
issuances are not for the purpose of raising capital and there are no
registration rights granted;
|
||
•
|
strategic
mergers, acquisitions or consolidation or purchase of substantially all of
the securities or assets of a corporation or other entity provided that we
do not grant the holders of such securities registration rights;
and
|
||
•
|
the
issuance of common stock or options pursuant to stock option plans and
employee purchase plans at exercise prices equal to or higher than the
closing price of our common stock on the issue/grant date or as a result
of the exercise of warrants issued either in the unit offering or which
were outstanding prior to the unit
offering.
|
Finally,
under the terms of the subscription agreement for the 2008 Unit Offering we
agreed that:
•
|
until
the earlier of the registration statement having been effective for 240
days or the date on which all the shares of common stock sold in the 2008
Unit Offering, including the shares underlying the warrants, have been
sold we will not file any additional registration statements, other than a
Form S-8; and
|
||
•
|
until
the earlier of two years from the closing date or the date on which all
shares of common stock sold in the 2008 Unit Offering, including the
shares underlying the warrants, have been sold or transferred we agreed we
would not:
|
||
• amend
our articles of incorporation or bylaws so as to adversely affect the
rights of the investors;
|
|||
• repurchase
or otherwise acquire any of our securities or make any dividends or
distributions of our securities; or
|
|||
• prepay
any financing related or other outstanding debt
obligations.
|
Preferred
Stock
We have
10,000,000 shares of preferred stock, par value $.001, authorized, of which we
designated 1,000,000 as our Series A convertible preferred stock in
December 2007 in connection with our acquisition of a 51% interest in
Shandong Jiajia. In March 2008, all 1,000,000 shares of our Series A convertible
preferred stock were converted into 2,500,000 shares of our common
stock.
In
December 2007 we designated 1,295,000 shares of our preferred stock as
Series B convertible preferred stock in connection with our acquisition of
a 51% interest in Shandong Jiajia. In March 2008, 845,000 shares of our
Series B convertible preferred stock were converted into 8,450,000 shares
of our common stock.
At
September 30, 2009, 450,000 Series B convertible preferred stock remain issued
and outstanding.
Common
Stock
On
March 20, 2008 then a principal shareholder of our company, David Aubel,
converted the full amount of a $2,521,380 convertible note payable into
2,864,606 shares of common stock at $0.88 per share.
On
March 20, 2008 our then President and CEO, V. Jeffrey Harrell, converted
the full amount of his accrued compensation into 581,247 shares of common stock
at $0.77 per share, for a total of $448,985.
In March
2008, all 1,000,000 shares of our Series A convertible preferred stock were
converted into 2,500,000 shares of our common stock, and 845,000 shares of our
Series B convertible preferred stock were converted into 8,450,000 shares
of our common stock.
A summary
of common stock issued during the nine month periods ended September 30, 2009
and 2008 is as follows:
No.
of Shares issued
during
nine months ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Settlement
of obligation to former President and CEO, Mr. V. Jeffrey
Harrell
|
-
|
581,247
|
||||||
Settlement
(conversion) of note payable to principal shareholder, David
Aubel
|
-
|
2,864,606
|
||||||
Conversion
of 1,000,000 shares of Series A Convertible Preferred
Stock
|
-
|
2,500,000
|
||||||
Conversion
of 845,000 shares of Series B Convertible Preferred
Stock
|
-
|
8,450,000
|
||||||
-
|
14,395,853
|
- 19
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
Common
Stock Purchase Warrants issued to Mr. Chen
A summary
of our the common stock warrant activity with Mr. Chen during the three month
period ended September 30, 2009 is as follows:
No.
of Shares Underlying Warrants
|
Weighted
Average Exercise Price
|
Weighted
Average Contractual Term (years)
|
Aggregate Intrinsic
Value
|
|||||||||||||
Outstanding
at December 31, 2008
|
2,000,000
|
$
|
0.30
|
2.00
|
$
|
-
|
||||||||||
Granted
|
-
|
-
|
-
|
-
|
||||||||||||
Exercised
|
-
|
-
|
-
|
-
|
||||||||||||
Outstanding
at September 30, 2009
|
2,000,000
|
$
|
0.30
|
1.25
|
$
|
-
|
Common
Stock Purchase Warrants
A summary
of our common stock purchase warrant activity during the three month period
ended September 30, 2009 is as follows:
No.
of Shares Underlying Warrants
|
Weighted
Average Exercise Price
|
Weighted
Average Contractual Term (years)
|
Aggregate Intrinsic
Value
|
|||||||||||||
Outstanding
at December 31, 2008
|
33,676,000
|
$
|
0.45
|
4.18
|
$
|
-
|
||||||||||
Granted
|
-
|
-
|
-
|
-
|
||||||||||||
Exercised
|
-
|
-
|
-
|
-
|
||||||||||||
Expired
|
(112,500
|
)
|
7.80
|
-
|
-
|
|||||||||||
Outstanding
at September 30, 2009
|
33,563,500
|
$
|
0.42
|
4.12
|
$
|
-
|
Included
in common stock purchases warrants outsanding at December 31, 2008 are
31,558,500 warrants issued in connection with the 2008 Unit Offering, these
warrants are comprised of 16,445,500 Class A warrants exercisable at $0.35 per
share and 15,113,000 Class B warrants exercisable at $0.50 per
share. Other than the exercise price of the warrants, the terms of
the Class A and Class B warrants are identical. These warrants expire
April 30, 2013 and are exercisable in whole or in part at any time before
then.
The
exercise price of the warrants and the number of shares issuable upon exercise
is subject pre-note adjustment in the event of stock splits, stock dividends,
recapitalization and similar corporate events. At any time after the
required effective date of the related registration statement the warrants are
exercisable on a cashless basis, which currently is the case. The exercise of
the warrants is subject to a 4.99% cap on the beneficial ownership that each
warrant holder may have while the securities are outstanding. This
provision is waived during the final 45 days the warrants are
exercisable.
NOTE
7 – RELATED PARTIES
DUE
TO RELATED PARTIES
The
following advances from related parties are used for working capital and are all
unsecured, non-interest bearing and repayable on demand.
At
September 30, 2009 and December 31, 2008, we owed $109,055 and $123,458,
respectively, to Xiangfen Chen, general manager of the Xiamen branch of Shandong
Jiajia.
At
September 30, 2009 and December 31, 2008, we owed $78,777 and $62,652,
respectively, to Bin Liu general manger of the Tianjin branch of Shandong Jiajia
and a 90% owner of Tianjin Sincere Logistics Co., Ltd. (“Tianjin
Sincere").
- 20
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
At
September 30, 2009 and December 31, 2008, we owed $14,961 and $183,448,
respectively, to Tianjin Sincere.
On
September 30, 2009 and December 31, 2008, due to related parties consisted of
the following:
September
30, 2009
|
December
31, 2008
|
|||||||
(Restated) |
(Restated)
|
|||||||
Due
to Xiangfen Chen
|
$
|
109,055
|
$
|
123,458
|
||||
Due
to Bin Liu
|
78,777
|
62,652
|
||||||
Due
to Tianjin Sincere Logistics Co., Ltd
|
15,909
|
183,448
|
||||||
Other
|
-
|
9,139
|
||||||
$
|
203,741
|
$
|
378,697
|
In May
2009, Shandong Jiajia entered into a lease with Mr. Chen, our Chief
Executive Officer, for a term of one year for office space for its Shanghai
Branch in the PRC. Shandong Jiajia is paying Mr. Chen a base annual rent of
approximately $43,700 for the use of such office space plus a management fee of
approximately $20,440 per year.
There are
no assurances that the terms of the transactions with these related parties are
comparable to terms we could have obtained from unaffiliated third
parties.
DUE
FROM RELATED PARTIES
These
following advances to related parties described below are unsecured,
non-interest bearing and payable on demand.
At
September 30, 2009 our due from related party amounted to $762,562. This was
comprised of $375,471 due from Tianjin
Sincere,
and $387,091 due from Shandong Huibo Import & Export Co., Ltd., a Chinese
limited liability company which is a former minority
owner of
our company. Shandong Huibo Import & Export Co., Ltd. is owned by PeiXiang
Wang (31.7%) and PengXiang Liu
(68.3%),
unrelated third parties.
At
December 31, 2008 we were owed $518,433 representing amounts due under a loan
from Shandong Huibo Import & Export Co., Ltd., a Chinese limited
liability.
On
September 30, 2009 and December 31, 2008, due from related parties consisted of
the following:
September
30, 2009
|
December
31, 2008
|
|||||||
(Restated) |
(Restated)
|
|||||||
Shandong
Huibo Import & Export Co., Ltd.,
|
$
|
387,091
|
$
|
518,433
|
||||
Tianjin
Sincere Logistics Co., Ltd
|
375,471
|
-
|
||||||
$
|
762,562
|
$
|
518,433
|
NOTE
8 - COMPREHENSIVE INCOME
Comprehensive
income is comprised of net income and other comprehensive income or loss. Other
comprehensive income or loss refers to revenue, expenses, gains and losses that
under accounting principles generally accepted in the United States are included
in comprehensive income but excluded from net income as these amounts are
recorded directly as an adjustment to equity.
- 21
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
Our other
comprehensive income consists of foreign currency translation adjustments. The
following table sets forth the computation of comprehensive income for the third
quarters of 2009 and 2008, respectively:
For
the Three Months Ended September 30,
|
For
the Nine Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Restated |
Restated
|
Restated |
Restated
|
|||||||||||||
Net
(loss) income
|
$
|
253,759
|
$
|
(1,383,633
|
)
|
$
|
3,363,317
|
$
|
(881,383
|
)
|
||||||
Other
comprehensive (loss) income, net of tax
|
||||||||||||||||
Foreign
currency translation gain, net of tax
|
6,457
|
51,820
|
13,906
|
149,467
|
||||||||||||
Total
other comprehensive (loss) income, net of tax
|
6,457
|
51,820
|
13,906
|
149,467
|
||||||||||||
Comprehensive
Income
|
260,216
|
(1,331,813
|
)
|
3,377,223
|
(731,916
|
)
|
||||||||||
Comprehensive
Income attributable to the noncontrolling interests
|
(153,343
|
)
|
(264,148
|
)
|
(85,084
|
)
|
(674,171
|
)
|
||||||||
Comprehensive
(loss) Income attributable to China Logistics Group,
Inc.
|
$
|
106,873
|
$
|
(1,596,961
|
)
|
$
|
3,292,139
|
$
|
(1,406,087
|
)
|
||||||
NOTE
9 – FOREIGN OPERATIONS
The table
below presents information by operating region for the three months ended
September 30, 2009.
Revenues
|
Assets
|
|||||||
Restated | Restated | |||||||
United
States
|
$
|
--
|
$
|
--
|
||||
People’s
Republic of China
|
13,597,689
|
7,576,644
|
||||||
Totals
|
$
|
13,597,689
|
$
|
7,576,644
|
The table
below presents information by operating region for the nine months ended
September 30, 2008.
Revenues
|
Assets
|
|||||||
Restated
|
Restated
|
|||||||
United
States
|
$
|
--
|
$
|
293,125
|
||||
People’s
Republic of China
|
27,753,459
|
8,635,596
|
||||||
Totals
|
$
|
27,753,459
|
$
|
8,928,721
|
NOTE
9 – CONTINGENCIES
As a
result of the September 24, 2008 complaint filed by the SEC against us and
Messrs. Harrell and Aubel as described in Part II, Item 1, “Legal Proceedings”
of this Form 10-Q, we consented to the entry of a Permanent Injunction and
Other Relief to resolve the liability aspects of the complaint. The
Permanent Injunction, among other things, permanently restrains and enjoins us
from violation of Sections 5(a) and 5(c) of the Securities Act of 1933, 15
U.S.C. §§ 77e(a) and 77e(c); violations of Section 10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule l0b-5 promulgated thereunder,
17 C.F.R. §240.l0b-5; violations of Section 13(a) of the Securities Exchange Act
of 1934, 15 U.S.C. § 78m(a), and Rules 12b-20, 13a-l, and 13a-13 thereunder, 17
C.F.R. §§ 240.12b-20, 240.13a-l, and 240. 13a-13; and violations of Sections
13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, 15 U.S.C. §§
78m(b )(2)(A) and 8m(b )(2)(B).
We are
still pursuing a settlement with the SEC regarding disgorgement and prejudgment
interest they are seeking. In the event we are unable to reach an
agreement with the SEC with respect to disgorgement and prejudgment interest,
the consent provides that the Court will determine whether it is appropriate to
order disgorgement and, if so, the amount of the disgorgement. In
addition, the pending lawsuit with the SEC may result in additional claims by
stockholders, regulatory proceedings, government enforcement actions and related
investigations and litigation. We cannot predict the ultimate outcome of this
litigation and any continued litigation would result in significant expenses,
management distraction and potential damages, penalties, other remedies, or
adverse findings, which could have a material adverse effect on our business,
financial condition, results of operations and cash flows. In
addition, our agreement to entry of a consent order granting the SEC injunctive
relief restraining us from future violations of Federal securities laws may make
future financing efforts more difficult and costly.
- 22
-
CHINA
LOGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
We are
evaluating filing a lawsuit against Messrs. Harrell and Aubel and other parties
involved in the improper conduct alleged by the SEC for damages we suffered as a
result of their conduct. In addition, we are evaluating filing a lawsuit
against Mr. Aubel as a result of the uncertainty as to the validity of the
amount of the note payable in the amount of $2,521,380 which we redeemed for
2,864,606 shares of our common stock in March, 2008 pursuant to the terms of the
December 2007 agreement we entered into to a acquire a 51% interest in Shandong
Jiajia.
NOTE
10 – COMMITMENTS
Rent
expense from our office leases for the third quarter and nine months of 2009
were approximately $29,000 and $87,000, respectively and approximately $27,000
and $81,000 in the comparative periods of 2008. We did not have any
minimum, contingent, or sublease arrangements in these leases.
The table
below presents our commitments for our various office leases in the U.S. and
China for the years ended December 31, 2009 and thereafter:
Period
|
Total
|
|||
Period
Ended December 31, 2009
|
$
|
121,000
|
||
Period
Ended December 31, 2010
|
48,000
|
|||
Period
Ended December 31, 2011
|
23,000
|
|||
Period
Ended December 31, 2012
|
23,000
|
|||
Period
Ended December 31, 2013
|
23,000
|
|||
Thereafter
|
--
|
|||
$
|
238,000
|
NOTE 11 – SUBSEQUENT
EVENTS
We have
evaluated all events that occurred after the balance sheet date but before
financial statements were available to be issued through November 19, 2009 and
determined to disclose the following event:
In
connection with the October 12, 2009 appointment of Yuan Huang as our Chief
Financial Officer, we entered into an employment agreement (the “Employment
Agreement”) with her for a term of twelve (12) months commencing October 12,
2009. The Employment Agreement stipulates that Ms. Huang will receive
a base monthly salary of RMB1,500 (approximately $220) and a semiannual bonus up
to RMB 10,000 (approximately $1,464). In addition, Ms. Huang will
receive certain allowances and other benefits provided by us to all of our other
China based employees including health insurance, unemployment insurance and
other welfare programs available to our other China based
employees.
- 23
-
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The
following discussion should be read in conjunction with the information
contained in our unaudited consolidated financial statements and the notes
thereto appearing elsewhere herein and in conjunction with the Management’s
Discussion and Analysis set forth in our Annual Report on Form 10-K /A , for the year ended December 31, 2008 as filed with the
SEC on September 29, 2009.
We
maintain our financial records and report on a calendar year basis, as such the
three month period ending September 30, is referred to as our “third quarter”.
The year ended December 31, 2008 is referred to as “2008”, the coming year
ending December 31, 2009 is referred to as “2009”.
OVERVIEW
Beginning
in 2003, we sought to position our company within the entertainment and home
broadband marketplace to develop our MediaReady™ product line and provide
products and services in the converging digital media-on-demand, enhanced home
entertainment and emerging interactive consumer electronics markets. We were,
however, unable to successfully penetrate these markets, due in great part to
our limited financial resources. In the fourth quarter of 2007 our management
elected to pursue an acquisition of an operating company in an effort to improve
shareholder value.
On
December 31, 2007 we acquired a 51% interest in Shandong Jiajia. This
transaction was accounted for as a capital transaction, effected through a
reverse recapitalization. Established in November 1999, Shandong Jiajia is
a non-asset based international freight forwarder and logistics manager located
in the PRC. Since completion of this transaction, the business and operations of
Shandong Jiajia represent all of our operations. Our business focus is on
expanding the business and operations of Shandong Jiajia.
Through
Shandong Jiajia, we are seeking to develop new business opportunities by
utilizing new shipping routes and expanding our scope of services to provide a
full suite of comprehensive logistics management solutions. Our management
believes that as they expand their logistics management solutions business and
gain market share they will be able to obtain more container space thereby
increasing potential revenues and improve margins. We believe that if we are
able to ship a larger volume of products, we will be able to negotiate a more
favorable rate from our vendors and suppliers and ultimately improve profit
margins.
In
expanding our operations, we face the challenges of:
•
|
a
weakness in demand for exported Chinese products as a result of a
struggling global economy, resulting in a significant drop in the demand
for our freight and transport services;
|
||
•
|
effective
consolidation of resources among relatively independent
affiliates;
|
||
•
|
maintaining
the balance between the collection of accounts receivable and the
extension of longer credit terms offered to our current and prospective
clients in an effort to boost sales; and
|
||
•
|
our
ability to effectively handle the increases in costs due to higher fuel
prices and the weak U.S. dollar.
|
Additionally,
we also face the challenges related to the management and streamlining of the
logistical aspect of the new shipping routes that we plan to undertake and the
possibility that our new routes will not be met with acceptance by our present
and prospective clients.
During
the remainder of 2009 and beyond, we face a number of challenges in growing our
business as a result of the global economic slowdown. We forecast continued
weaker demand within our shipping business due to continuing reduced levels of
exports from China until global economic conditions improve.
It should
be noted the report of our independent registered public accounting firm in
connection with our annual report on Form 10-K /A for
the year ended December 31, 2008 filed with the SEC on September 29, 2009
contains an explanatory paragraph that raised substantial doubt as to our
ability to continue as a going concern based on our recurring losses from
operations, limited working capital and an accumulated deficit. The
accompanying unaudited consolidated financial statements do not include any
adjustments relating to the recoverability and classification of assets carrying
amounts or the amount and classification of liabilities that might result from
the outcome of these uncertainties.
- 24
-
Presentation
of Financial Statements
The
presentation of the statements of operations included in this Form 10-Q have
been modified to allow for the reporting of deductions from net income to arrive
at income (loss) applicable to common stockholders. In addition, wWe
have restated our financial statements for the year ended December 31, 2008 and
the nine months ended September 30, 2008 as discussed in “Note 2- Restatement of
Financial Statements and Basis of Presentation” included in the notes to
our financial statements included in this report.
Our
Outlook
Total
sales for the third quarter and the nine months of 2009 decreased over the prior
comparable periods in 2008 by approximately 55% and 51%,
respectively. This decline continued a trend which began in mid
2008. Sales in the first half of 2008 were increasing, primarily due to a
planned expansion of services made possible through the input of capital from
our 2008 Unit Offering completed in April 2008. Sales peaked in the
first quarter of 2008 at approximately $13 million, but thereafter sales
declined through the first quarter of 2009 with sales totaling approximately
$3.2 million. This bottoming out of the downward trend represented a reduction
of 75% from peak sales in the first quarter of 2008.
Despite
the year over year decline in our sales, our sales have rebounded on a
quarter-over-quarter basis to produce a positive trend during the current year
with sales of $4.6 million in the second quarter of 2009 and sales of $5.8
million in the current quarter.
Further,
our current quarter net income causes us to believe that we have absorbed most
of the negative financial impact of the global economic slowdown and believe
that our recent increase in sales may be a sign of a recovery and an upward
trend in revenues and shipping volume. We expect this upward trend to
continue through to the end of the year but are unable to reliably predict
either the height or duration of the current upward trend. While we have taken,
and will continue to take, steps to minimize the negative financial impact of
overall reduced shipping volumes, we are unable to predict when demand for our
services will increase to the levels previously achieved.
RESULTS
OF OPERATIONS
The
following tables provide certain comparative information based on our
consolidated results of operations for the three and nine months ended
September 30, 2009 as compared to the three and nine months ended September 30,
2008:
Three
months ended September 30,
|
|||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
||||||||||
(Restated)
|
(Restated)
|
||||||||||||
Sales
|
$
|
5,791,128
|
$
|
12,961,259
|
$
|
(7,170,131)
|
-55%
|
||||||
Cost
of Sales
|
5,274,887
|
12,072,099
|
(6,797,212)
|
-56%
|
|||||||||
Gross
Profit
|
516,241
|
889,160
|
(372,919)
|
-42%
|
|||||||||
Total
Operating Expenses
|
267,804
|
538,017
|
(270,213)
|
-50%
|
|||||||||
Income
(Loss) from Operations
|
248,437
|
351,143
|
(102,706)
|
-29%
|
|||||||||
Total
Other Income
|
12,020
|
(1,602,960)
|
1,614,980
|
-103%
|
|||||||||
Net
Income (loss)
|
253,759
|
(1,383,633)
|
1,640,396
|
-119%
|
|||||||||
Net
Income (Loss) attributable to China Logistics Group,
Inc.
|
$
|
103,580
|
|
$
|
(1,622,353)
|
$
|
1,725,933
|
-106%
|
- 25
-
Nine
months ended September 30,
|
|||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
||||||||||
Restated |
Restated
|
||||||||||||
Sales
|
$
|
13,597,689
|
$
|
27,753,459
|
$
|
(14,155,770)
|
-51%
|
||||||
Cost
of Sales
|
12,857,603
|
26,149,830
|
(13,292,227)
|
-51%
|
|||||||||
Gross
Profit
|
740,086
|
1,603,629
|
(863,543)
|
-54%
|
|||||||||
Total
Operating Expenses
|
794,421
|
572,283
|
222,138
|
39%
|
|||||||||
Income
(Loss) from Operations
|
(54,335)
|
1,031,346
|
(1,085,681)
|
-105%
|
|||||||||
Total
Other Income
|
3,432,490
|
(1,703,255)
|
5,135,745
|
-302%
|
|||||||||
Net
Income (loss)
|
3,363,317
|
(881,383)
|
4,244,700
|
-482%
|
|||||||||
Net
Income (Loss) attributable to China Logistics Group,
Inc.
|
$
|
3,285,047
|
$
|
(1,479,326)
|
$
|
4,764,373
|
-322%
|
KEY
INDICATORS
Three
months ended September 30,
|
Nine
months ended September 30,
|
||||||||
2009
|
2008
|
2009
|
2008
|
||||||
(Restated) |
(Restated)
|
(Restated) |
(Restated)
|
||||||
Cost
of sales as a percentage of sales
|
91%
|
93%
|
95%
|
94%
|
|||||
Gross
profit as a percentage of sales
|
9%
|
7%
|
5%
|
6%
|
|||||
Total
operating expenses (income) as a percentage of sales
|
5%
|
4%
|
6%
|
2%
|
Sales
Sales for
the third quarter and nine months of 2009 decreased 55% and 51%, respectively,
compared to the same periods in 2008 primarily as a result of a continuing
contraction of our customer base as some of our clients have ceased or suspended
their manufacturing operations since 2008. We believe these declines are due to
the continuing effects of the overall global economic slowdown causing a
reduction in demand for Chinese sourced raw materials and finished
goods. As demand for these goods decrease, demand for our
transportation services also decreases.
Cost
of Sales and Gross Profit
Cost of
sales as a percentage of sales decreased to 91% for the third quarter and
increased to 95% for the nine months of 2009, as compared to 93% and 94% for the
comparable periods in 2008. The overall increase for the nine months
of 2009 is primarily due to higher shipping costs caused by lower shipping
volumes, consolidation of shipping routes and competitive pricing given to our
customers. In the third quarter of 2009, however, we saw improvement
in our cost of sales as a percentage of sales as we were able to negotiate more
favorable shipping terms as the supply of container space increased relative to
demand. Our ability to negotiate more favorable shipping terms in the long run,
however, is hampered at lower shipping volumes.
Total
Operating Expenses
Total
operating expenses for the third quarter of 2009 decreased 50% as compared to
the same period in 2008 primarily as a result of a decrease in selling, general
and administrative expense of approximately $265,000 and a revision to our
estimates for our allowance for bad debt resulting in a decrease in bad debt
expense of approximately $4,000. The decrease in selling, general and
administrative expenses (which includes commissions paid to sales employees and
agents, and legal and professional fees) was due to lower commissions as a
direct result of decreased sales and further cost containment efforts to
“right-size” our operating expenses in response to decreased sales. These
decreases were partially offset by the addition of costs associated with the
opening of our new sales office in Lianyungang, China and increases in legal and
professional fees for regulatory compliance associated with our SEC reporting
obligations. We expect operating expenses to continue to remain at approximately
4-6% of sales through the end of 2009.
Total
operating expenses for the nine months of 2009 increased 39% as compared to the
same period in 2008 primarily as a result of $397,309 in recovery of bad debt
recognized in 2008 that was not repeated in 2009, partially offset by the
decrease in selling, general and administrative expenses of approximately
$265,000 and bad debt expense of $4,000 in the third quarter of
2009.
- 26
-
Total
Other Income (Expenses)
Total
other income (expense) consists of realized exchange gains and losses, interest
expense, non-operating bad debt, and registration agreement penalty and change in fair value of derivative liability . Total
other income (expense) in the third quarter of 2009 increased $1,614,980 compared to same period in 2008
primarily as a result of the absence of a registration agreement penalty accrued
in 2008. The penalty is payable to the investors in our April 2008 Unit Offering
pursuant to the agreements we entered into with them. Also, the fair value of our derivative liability recorded in
connection with our Class A and Class B warrants at September 30, 2009 compared
to June 30, 2009 decreased $13,887 creating a gain in the current
quarter.
Total
other income (expense) for the nine months of 2009 decreased $5,135,745 compared to the same period in 2008
primarily as a result of the change in fair value of
our derivative liability of $3,397,587 recorded during the current nine period
and no similar adjustment recorded in the prior period, the absence of the
$1,597,000 registration agreement penalty accrued in 2008, the absence of
approximately $87,000 in bad debt from a major shareholder and related party,
Mr. David Aubel, that was deemed uncollectible in the second quarter of 2008,
and a $10,000 increase in realized exchange gain. The large non-cash gain from the change in fair value of our
derivative liability is the result of fair value accounting and the change in
the fair value of the Class A and Class B warrants from $5,855,732 at January 1,
2009 to $2,458,145 at September 30, 2009.
Foreign
Taxes
Foreign
taxes for the third quarter and nine months of 2009 decreased $125,118 and
$194,636, respectively, compared to the same periods in 2008 due to lower income
generated in China. We did not generate revenues in the U.S. in any period
presented and only incurred corporate and non-cash
expenses and therefore have a net loss carryforward for U.S. tax
purposes.
Net
Income (Loss)
We
recognized net income in the third quarter of 2009 of $253,759 compared to a net loss of $1,383,633 in the third
quarter of 2008 primarily due to our ability to contain certain aspects of our
selling, general and administrative expenses of approximately $265,000 and
the absence of the registration rights penalty of $1,597,000 recorded in
the third quarter of 2008. We recognized net income for the nine months of 2009 of $3,363,317 compared to a net loss of $881,383 for the same
period in 2008. This increase to net income is also due to
the fair value accounting for our derivative liability , the non-recurring
nature of the registration rights penalty and non-operating bad
debt.
Net
Income (Loss) Attributable to China Logistics Group, Inc.
Our net
income attributable to China Logistics Group, Inc. consists of net income (loss)
less the net income (loss) attributable to the non-controlling interest holders
of Shandong Jiajia. The noncontrolling interest holders have claim to 49% of the
net income or loss of Shandong Jiajia. The net income attributable to the
noncontrolling interest for the third quarter and nine months of 2009 decreased
37% and 87%, respectively as a direct result in the decrease in net income
generated by Shandong Jiajia.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing
basis.
At
September 30, 2009, we had working capital of $1,688,531 as compared to
$1,698,227 at December 31, 2008. This $9,696 decline was due to the
offsetting impact of an approximately $1.0 million increase in accounts
receivable and an approximately $850,000 increase in accounts payable and
accruals, together with a decline in cash of $1.1 million. Cash at
September 30, 2009 was $2,074,891, down from $3,156,362 at December 31,
2008. This $1.1 million decline was due primarily to increase in
advance to vendors of $407,330, increase in advances to related parties of
$375,472 and repayment of advances from related parties of
$191,081.
The
report of our independent registered public accounting firm on our financial
statements for the year ended December 31, 2008 contains an explanatory
paragraph regarding our ability to continue as a going concern based upon our
recurring losses from operations, net cash used in operations, and accumulated
deficit.
- 27
-
While in
April 2008, we raised approximately $3,360,000 in net proceeds from our 2008
Unit Offering, approximately $2,000,000 was utilized to satisfy our commitments
to Shandong Jiajia, approximately $140,000 was used to reduce certain payables
and we subsequently advanced Shandong Jiajia an additional $500,000 for working
capital. In addition, we have recognized a liability in the amount of
$1,597,000 provided for under the terms of the registration statement we entered
into in connection with the warrants we issued in our 2008 Unit Offering and we
may be subject to potential disgorgement and prejudgment interest in connection
with the SEC’s September 24, 2008 complaint filed against us, Mr. Harrell and
Mr. Aubel as described in Part II, Item 1 Legal Proceedings. We believe our
current level of working capital and cash generated from operations may not be
sufficient to meet these cash requirements and potential obligations in 2009
without attaining profitable operations and/or obtaining additional
financing.
The terms
of our 2008 Unit Offering contain certain restrictive covenants which could
hinder our ability to raise additional capital. If we are not successful in
generating sufficient cash flows from operations or in raising additional
capital when required in sufficient amounts and on acceptable terms, these
failures would have a material adverse effect on our business, results of
operations and financial condition. If additional funds are raised through the
issuance of equity securities, the percentage ownership of our then-current
stockholders would be diluted. There can be no assurance that we will be able to
raise the required capital necessary to achieve our targeted growth rates on
favorable terms or at all.
As a
result of the weak global economy, the demand for exported Chinese products has
also declined, resulting in a significant drop in the demand for our freight and
transport services. In response to the decline in our revenues,
we have reduced the controllable portions of our cost of sales and general
and administrative expenses where possible. We have seen that
these efforts have resulted in a positive gross profit in the current
quarter. We believe our cost reduction program can have the desired
result and help us achieve positive cash flow in our operations, even at the
reduced level of sales which we anticipate for the foreseeable
future.
If,
however, our operational cost reduction efforts are not successful to a level
which enables us to generate sufficient cash flow from operations to fund our
needs we may need to raise additional working capital. We do not have
any commitments for any additional capital and both the terms of our 2008 Unit
Offering which contain certain restrictive covenants and the overall softness of
the capital markets could hinder our efforts. In that event, it would be
necessary for us to take additional steps to further reduce our operating
expenses including personnel reductions and the possible consolidation of our
offices. We believe this cost containment approach is a viable
response to the current market conditions and, coupled with our cash on-hand,
should allow us to maintain our operations for the foreseeable
future.
Net cash
used in operating activities for the nine months of 2009 totaled $676,755
compared to $821,779 in the comparable period of 2008. This
decrease in cash used was due primarily to a net increase in accounts payable
and accruals of $850,300, and decrease in advances from customers of $161,976
these sources of cash were offset an increase in advances to vendors of $407,330
and an increase in accounts receivable of $997,859.
Cash used
in investing activities for the nine months of 2009 totaled $244,130 compared to
cash used in investing activities of $74,295 in the comparable period of
2008. During 2009, we advanced approximately $375,000 to related
parties for the nine months of 2009 and approximately $75,000 in the comparable
period of 2008. We also received approximately $131,000 in repayments
from these related parties during the nine months of 2009 and approximately
$27,000 in the comparable period of 2008. We did not have any capital
expenditures in the nine months of 2009 compared to approximately $26,000 in the
nine months of 2008.
Cash used
in financing activities during the nine months of 2009 totaled $174,956 compared
to cash provided from financing activities of $3,492,954 in the comparable
period of 2008. Cash used during the nine months of 2009 was
comprised of $191,081 we used to repay advances from related parties offset
by $16,125 we received as advances from related parties. The decline in net cash
provided by financing activities for the nine months of 2009 compared to the
same period in 2008 was due to an absence of fund raising activities from our
2008 Unit Offering totaling $3,778,250, and convertible related party notes of
$148,200 offset by the net amount of related party advances and repayment of
such advances during these periods.
The net
impact on our cash flow of cash advances to and from related parties was
$419,086 of cash used during the nine months of 2009 compared to $48,649 of cash
used in the comparable period of 2008.
We
maintained cash balances in the United States as of December 31, 2008 and
currently maintain our cash balances in China. At September 30, 2009 and
December 31, 2008, our cash by geographic area was as follows:
September
30, 2009
|
December 31,
2008
|
|||||||||||||||
United
States
|
$
|
-
|
0%
|
$
|
201,605
|
6%
|
||||||||||
China
|
2,074,891
|
100%
|
2,954,757
|
94%
|
||||||||||||
$
|
2,074,891
|
100%
|
$
|
3,156,362
|
100%
|
- 28
-
In future
periods we anticipate a substantial portion of our cash balances will continue
to be held in the form of RMB held in bank accounts at financial institutions
located in the PRC. Cash held in banks in the PRC is not insured. While the
Chinese government introduced regulations which relaxed restrictions on the
conversion of the RMB, restrictions still remain, including but not limited to,
restrictions on foreign invested entities. Foreign invested entities may only
buy, sell or remit foreign currencies after providing valid commercial documents
at only those banks authorized to conduct foreign exchanges. Furthermore, the
conversion of RMB for capital account items, including direct investments and
loans, is subject to PRC government approval. Chinese entities are required to
establish and maintain separate foreign exchange accounts for capital account
items. We cannot be certain Chinese regulatory authorities will not impose more
stringent restrictions on the convertibility of the RMB, especially with respect
to foreign exchange transactions. Accordingly, cash on deposit in banks in the
PRC is not readily deployable by us for purposes outside of China.
Total
current assets increased $801,248 or 12% at September 30, 2009 from December 31,
2008. The change was primarily due to a $1.0 million increase in
accounts receivable due to slower payments from customers as days sales
outstanding increased to 87 days for the nine months of 2009 compared to 46 days
in the comporable period of 2008, an approximately $650,000 increase
in advances to vendors and related parties due to increases in deposits on
containers to accommodate orders received near the end of the
quarter; these increases were partially offset by a $1.1 million decrease
in cash. Other receivables at September 30, 2009 were $543,234 and was comprised
of $484,102 that was advanced to other entities with which we have a strategic
or other business relationship, $38,728 reflecting a deposit we made as required
by a Chinese court for potential payment to a former customer in the event we
are unsuccessful in a lawsuit we filed against our former customer for amounts
owed to us and $20,404 of deferred expenses.
Total
current liabilities also increased $810,944 or 16% at September 30, 2009 from
December 31, 2008 primarily due to an increase in our trade accounts payable ,
accruals and advances from customers, partially offset by decreases in due to
related parties as further described below, and advances from
customers.
In
general, we record revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price to
the customer is fixed or determinable, and collectability is reasonably assured.
We provide transportation services, generally under contract, by third parties
with whom we have contracted these services.
Typically
we recognize revenue in connection with our freight forwarding service when the
payment terms are as follows:
•
|
When
the cargo departs the shipper's destination if the trade pricing term is
on a CIF (cost, insurance and freight) or CFR (cost and freight cost)
basis;
|
||
•
|
When
the cargo departs the shipper’s location when the trade pricing terms are
CFR (cost and freight cost); or
|
||
•
|
When
merchandise arrives at the destination port if the trade pricing term is
on a FOB (free on board) basis.
|
In March
20, 2008 under the terms of our December 31, 2007 agreement with Shandong
Jiajia:
•
|
We
satisfied $448,985 of accrued compensation due our then president and CEO,
Mr. Jeffrey Harrell, through the issuance of 581,247 shares of our common
stock.
|
||
•
|
We
converted a $2,521,380 note payable due a principal shareholder of our
company, Mr. David Aubel, into 2,864,606 shares of our common
stock.
|
These
transactions had the effect of reducing our liabilities at September 30, 2008 as
compared to December 31, 2007.
Due
from/to Related Parties
At
September 30, 2009, we were due $387,091 from Shandong Huibo Import & Export
Co., Ltd., a former shareholder of Shandong Jiajia and $375,471 from Tianjin
Sincere Logistics Co., Ltd. (“Tianjin Sincere”). The loans provided are
unsecured, non-interest bearing and payable on demand. At September 30, 2009, we
owed $109,055 to Xiangfen Chen, general manager of the Xiamen branch of Shandong
Jiajia and $78,777 to Bin Liu general manger of the Tianjin branch of Shandong
Jiajia and a 90% owner of Tianjin Sincere and $15,909 to Tianjin Sincere. The
proceeds of the loans were for working capital purposes and are unsecured,
non-interest bearing and repayable on demand.
Commitments
Rent
expense from our office leases for the third quarter and nine months of 2009
were approximately $29,000 and $87,000, respectively and approximately $27,000
and $81,000 in the same periods of 2008. We did not have any minimum,
contingent, or sublease arrangements in these leases.
- 29
-
The table
below presents our commitments for our various office leases in the U.S. and
China for the years ended December 31, 2009 and thereafter:
Period
|
Total
|
|||
Period
Ended December 31, 2009
|
$
|
121,000
|
||
Period
Ended December 31, 2010
|
48,000
|
|||
Period
Ended December 31, 2011
|
23,000
|
|||
Period
Ended December 31, 2012
|
23,000
|
|||
Period
Ended December 31, 2013
|
23,000
|
|||
Thereafter
|
--
|
|||
$
|
238,000
|
OFF
BALANCE SHEET ARRANGEMENTS
We do not
have any off-balance sheet arrangements that we are required to disclose. In the
ordinary course of business, we enter into operating lease commitments, purchase
commitments and other contractual obligations. These transactions are recognized
in our financial statements in accordance with generally accepted accounting
principles in the United States.
CRITICAL
ACCOUNTING POLICIES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions, including estimates of the allowance for doubtful
accounts and stock based compensation that affect the reported amount of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements. Estimates also affect the reported
amounts of revenue and expenses during the reported period.
Significant
estimates for the periods reported include the allowance for doubtful accounts
which is based on an evaluation of our outstanding accounts receivable including
the age of amounts due, the financial condition of our specific customers and
knowledge of our industry segment in Asia. We also rely on certain
assumptions when deriving the fair value of our derivative
liability and share-based compensation and calculations underlying our
provision for taxes in China. Assumptions and estimates employed in
the areas are material to our reported financial conditions and results of
operations. Actual results could differ from these
estimates.
On June
5, 2003, the United States Securities and Exchange Commission (“SEC”) adopted
final rules under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”),
as amended by SEC Release No. 33-9072 on October 13, 2009. Commencing
with its annual report for the year ending December 31, 2010, the Company will
be required to include a report of management on its internal control over
financial reporting. The internal control report must include a
statement:
·
|
Of
management’s responsibility for establishing and maintaining adequate
internal control over its financial
reporting;
|
·
|
Of
management’s assessment of the effectiveness of its internal control over
financial reporting as of year end;
and
|
·
|
Of
the framework used by management to evaluate the effectiveness of the
Company’s internal control over financial
reporting.
|
Furthermore,
we are required to file the auditor’s attestation report separately on our
internal control over financial reporting on whether we believe that we
have maintained, in all material respects, effective internal control over
financial reporting.
In
June 2009, the FASB approved the “FASB Accounting Standards Codification”
(the “Codification”) as the single source of authoritative nongovernmental U.S.
GAAP to be launched on July 1, 2009. The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. All existing accounting standard
documents will be superseded and all other accounting literature not included in
the Codification will be considered non-authoritative. The Codification is
effective for interim and annual periods ending after September 15,
2009.
In
August 2009, the FASB issued the FASB Accounting Standards Update No.
2009-04 “Accounting for
Redeemable Equity Instruments - Amendment to Section 480-10-S99” which
represents an update to section 480-10-S99, distinguishing liabilities from
equity, per EITF Topic D-98, Classification and Measurement of
Redeemable Securities. We do not expect the adoption of
this update to have a material impact on its consolidated financial position,
results of operations or cash flows.
- 30
-
In
August 2009, the FASB issued the FASB Accounting Standards Update No.
2009-05 “Fair Value
Measurement and Disclosures Topic 820 – Measuring Liabilities at Fair
Value”, which provides amendments to subtopic 820-10, Fair Value
Measurements and Disclosures – Overall, for the fair value measurement of
liabilities. This update provides clarification that in circumstances
in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the following techniques: 1. A valuation technique that uses: a. The
quoted price of the identical liability when traded as an asset b. Quoted prices
for similar liabilities or similar liabilities when traded as assets. 2. Another
valuation technique that is consistent with the principles of topic 820; two
examples would be an income approach, such as a present value technique, or a
market approach, such as a technique that is based on the amount at the
measurement date that the reporting entity would pay to transfer the identical
liability or would receive to enter into the identical liability. The amendments
in this update also clarify that when estimating the fair value of a liability,
a reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents the
transfer of the liability. The amendments in this update also clarify that both
a quoted price in an active market for the identical liability when traded as an
asset in an active market when no adjustments to the quoted price of the asset
are required are Level 1 fair value measurements. We do
not expect the adoption of this update to have a material impact on its
consolidated financial position, results of operations or cash
flows.
In
September 2009, the FASB issued the FASB Accounting Standards Update No.
2009-08 “Earnings Per Share –
Amendments to Section 260-10-S99”,which represents technical corrections
to topic 260-10-S99, Earnings per share, based on EITF Topic D-53, Computation of Earnings Per Share
for a Period that includes a Redemption or an Induced Conversion of a Portion of
a Class of Preferred Stock and EITF Topic D-42, The Effect of the Calculation of
Earnings per Share for the Redemption or Induced Conversion of Preferred
Stock. We do not expect the adoption of this update to have a
material impact on its consolidated financial position, results of operations or
cash flows.
In
September 2009, the FASB issued the FASB Accounting Standards Update No.
2009-09 “Accounting for
Investments-Equity Method and Joint Ventures and Accounting for Equity-Based
Payments to Non-Employees”. This update represents a
correction to Section 323-10-S99-4, Accounting by an Investor for
Stock-Based Compensation Granted to Employees of an Equity Method
Investee. Additionally, it adds observer comment Accounting Recognition for Certain
Transactions Involving Equity Instruments Granted to Other Than Employees
to the Codification. We do not expect the adoption to have a material
impact on its consolidated financial position, results of operations or cash
flows.
In
September 2009, the FASB issued the FASB Accounting Standards Update No.
2009-12 “Fair Value
Measurements and Disclosures Topic 820 – Investment in Certain Entities That
Calculate Net Assets Value Per Share (or Its Equivalent)”, which provides
amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall,
for the fair value measurement of investments in certain entities that calculate
net asset value per share (or its equivalent). The amendments in this update
permit, as a practical expedient, a reporting entity to measure the fair value
of an investment that is within the scope of the amendments in this update on
the basis of the net asset value per share of the investment (or its equivalent)
if the net asset value of the investment (or its equivalent) is calculated in a
manner consistent with the measurement principles of Topic 946 as of the
reporting entity’s measurement date, including measurement of all or
substantially all of the underlying investments of the investee in accordance
with Topic 820. The amendments in this update also require disclosures by major
category of investment about the attributes of investments within the scope of
the amendments in this update, such as the nature of any restrictions on the
investor’s ability to redeem its investments at the measurement date, any
unfunded commitments (for example, a contractual commitment by the investor to
invest a specified amount of additional capital at a future date to fund
investments that will be make by the investee), and the investment strategies of
the investees.
In June
2008, the FASB ratified changes to Derivative and Hedging Topic of the FASB ASC
815 or EITF Issue No. 07-5,
Determining Whether an Instrument (or and Embedded Feature) Is Indexed to ad
Entity’s Own Stock. EITF No. 07-5 provides that an entity
should use a two step approach to evaluate whether an entity-linked financial
instrument (or embedded feature) is indexed to its own stock, including
evaluating the instrument’s contingent exercise and settlement
provisions. It also clarifies on the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation. EITF No. 07-5 is effective for fiscal
years beginning after December 15, 2008. The adoption of EITF No.
07-5 did have a material effect on our consolidated financial statements and
resulted in a restatement of these financial statements to recognize a
derivative liability of approximately $2.5 million at September 30,
2009.
The major
category of investment is required to be determined on the basis of the nature
and risks of the investment in a manner consistent with the guidance for major
security types in U.S. GAAP on investments in debt and equity securities in
paragraph 320-10-50-1B. The disclosures are required for all investments within
the scope of the amendments in this update regardless of whether the fair value
of the investment is measured using the practical expedient. We do not
expect the adoption to have a material impact on its consolidated financial
position, results of operations or cash flows.
A variety
of proposed or otherwise potential accounting standards are currently under
study by standard-setting organizations and various regulatory
agencies. Because of the tentative and preliminary nature of these
proposed standards, management has not determined whether implementation of such
proposed standards would be material to the Company’s consolidated financial
statements.
- 31
-
Cautionary
Note Regarding Forward-Looking Information and Factors That May Affect Future
Results
This
report contains forward-looking statements. The Securities and Exchange
Commission encourages companies to disclose forward-looking information so that
investors can better understand a company's future prospects and make informed
investment decisions. This Quarterly Report on Form 10-Q and other written
and oral statements that we make from time to time contain such forward-looking
statements that set out anticipated results based on management's plans and
assumptions regarding future events or performance. We have tried, wherever
possible, to identify such statements by using words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "believe," "will" and similar
expressions in connection with any discussion of future operating or financial
performance. In particular, these include statements relating to future actions,
future performance or results of current and anticipated sales efforts,
expenses, the outcome of contingencies, such as legal proceedings, and financial
results. A list of factors that could cause our actual results of operations and
financial condition to differ materially includes:
•
|
risks
from Securities and Exchange Commission litigation;
|
||
•
|
risks
from liquidated damages related to warrants sold in our April 2008
offering;
|
||
•
|
the
loss of the services of any of our executive officers or the loss of
services of any of our key persons responsible for the management,
sales, marketing and operations efforts of our
subsidiaries;
|
||
•
|
our
ability to successfully transition the internal operations of companies
which we acquired in the PRC from their prior status as privately held
Chinese companies to their current status as subsidiaries of a
publicly-held U.S. company;
|
||
•
|
our
acquisition efforts in the future, if any, may result in significant
dilution to existing holders of our securities;
|
||
•
|
liabilities
related to prior acquisitions;
|
||
•
|
continuing
material weaknesses in our disclosure controls and procedures and internal
control over financial reporting which may lead to additional restatements
of our financial statements;
|
||
•
|
difficulties
in raising capital in the future as a result of the terms of our April
2008 unit offering;
|
||
•
|
our
ability to effectively integrate our acquisitions and manage our
growth;
|
||
•
|
the
lack of various legal protections customary in certain agreements to which
we are party and which are material to our operations which are
customarily contained in similar contracts prepared in the United
States;
|
||
•
|
our
dependence upon advisory services provided by a U.S. company due to our
management’s location in the PRC;
|
||
•
|
intense
competition in the freight forwarding and logistics
industries;
|
||
•
|
the
impact of economic downturn in the PRC on our revenues from our operations
in the PRC;
|
||
•
|
our
lack of significant financial reporting experience, which may lead to
delays in filing required reports with the Securities and Exchange
Commission and suspension of quotation of our securities on the OTCBB,
which will make it more difficult for you to sell your
securities;
|
||
•
|
the
impact of changes in the political and economic policies and reforms of
the Chinese government; fluctuations in the exchange rate between the U.S.
dollars and Chinese Renminbi;
|
||
•
|
the
limitation on our ability to receive and use our revenue effectively as a
result of restrictions on currency exchange in China;
|
||
•
|
the
impact of changes to the tax structure in the PRC;
|
||
•
|
our
inability to enforce our legal rights in China due to policies regarding
the regulation of foreign investments;
|
||
•
|
the
existence of extended payment terms which are customary in China;
and
|
||
•
|
uncertainties
related to PRC regulation relating to acquisitions of PRC companies by
foreign entities that could restrict or limit our ability to operate, and
could negatively affect our acquisition
strategy.
|
These
factors are discussed in greater detail under Item 1. Description of
Business-Risk Factors in our Annual Report on Form 10-K/A (Amendment No.
1) for the year ended December 31, 2008 filed with the SEC on
September 29, 2009.
We
caution that the factors described herein and other factors could cause our
actual results of operations and financial condition to differ materially from
those expressed in any forward-looking statements we make and that investors
should not place undue reliance on any such forward-looking statements. Further,
any forward-looking statement speaks only as of the date on which such statement
is made, and we undertake no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of anticipated or unanticipated events or
circumstances. New factors emerge from time to time, and it is not possible for
us to predict all of such factors. Further, we cannot assess the impact of each
such factor on our results of operations or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
applicable for a smaller reporting company.
- 32
-
ITEM
4T. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
Under the
supervision and with the participation of our management, including our Chief
Executive Officer who then also served as our principal financial and accounting
officer, we conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) under the Securities Exchange Act of 1934, as amended, as of September
30, 2009, the end of the period covered by this report (the “Evaluation
Date”). Our management, which at that time was solely our Chief
Executive Officer, does not expect that our disclosure controls and procedures
or our internal controls will prevent all error and all fraud. A control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their
costs. Due to the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within our company have been detected.
Based on
this evaluation, our Chief Executive Officer who also served as our principal
executive officer and principal financial and accounting officer concluded that
as of September 30, 2009 our disclosure controls and procedures were not
effective such that the information relating to our company, including our
consolidating subsidiaries, required to be disclosed in our SEC reports (i) is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms and (ii) is accumulated and communicated to our
management, including our Chief Executive Officer, to allow timely decisions
regarding required disclosure. Our management concluded that our disclosure
controls and procedures were not effective as described in more detail below. A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of our annual or interim financial statements would not be
prevented or detected.
The
specific material weaknesses identified by our management were as
follows:
As of
December 31, 2007, we did not have appropriate policies and procedures in place
to ensure that the number of shares of common stock issued and outstanding would
not exceed the number of common stock shares authorized. This material weakness
was reported in our December 31, 2007 Form 10-K, as amended. In
addition, as of December 31, 2007, we did not have appropriate policies and
procedures in place to ensure that the recognition of the fair value of 450,000
shares of our Series B Convertible preferred stock to be issued for consulting
services rendered during the year ended December 31, 2007 would be accounted for
in 2007.
Subsequent
to the filing of the first amendment to our 2007 Form 10-K (Amendment No. 1) on
May 19, 2008, we discovered that, as of December 31, 2007, we did not have
appropriate policies and procedures in place to ensure that we: (i) accounted
for our acquisition of a 51% interest in Shandong Jiajia as a capital
transaction instead of using the purchase method of accounting, (ii) properly
determine that we were a public shell company prior to the Shandong Jiajia
transaction, and (iii) account for certain costs related to the Shandong Jiajia
transaction as costs directly associated with the reverse recapitalization
transaction.
Subsequent
to the filing of the December 31, 2007 Form 10-K/A (Amendment No. 2) on December
24, 2008, it was further determined that, as of December 31, 2007, we did not
have appropriate policies and procedures in place to ensure that the Company;
(i) properly accounted for the fair value of assets and liabilities of the
accounting acquire (formerly MediaReady, Inc.) recognized in connection with the
acquisition of a 51% interest in Shandong Jiajia, and (ii) properly classify
$64,945 in advances to related parties in the consolidated statements of cash
flows, and (iii) recognize the accrual of certain professional fees totaling
$141,800.
Further,
in our 2008 interim reports, we: (i) failed to properly recognize and record
$25,060 in professional fees expense attributable to that period, (ii) correctly
classify approximately $400,000 in recovery of bad debts in the consolidated
statements of operations from a component of other income (expense) to a
component of operating income, (iii) failed to recognize an overall accrual of
$137,149 in expenses, and (iv) failed to recognize an accrued loss of $1,597,000
due under a registration payment arrangement entered into in connection with our
financing completed in April 2008. We have also amended our Annual
Report on Form 10-K as originally filed to include restated financial statements
which correct the following previous errors in our financial statements: (i) we
did not properly record the reverse recapitalization transaction and its effects
on equity, and (ii) we did not properly classify and present cash flows related
to advances from, and repayments of advances from related parties.
We have
also amended our Quarterly Report on Form 10-Q for the interim three months
ended March 31, 2009 to include restated financial statements which correct the
following previous errors in our financial statements: (i) we did not properly
record the reverse recapitalization transaction and its effects on equity, (ii)
we did not properly classify and present cash flows related to advances to,
collections of advances to, advances from, and repayments of advances from
related parties, and (iii) we did not properly adopt the provisions of FASB
Accounting Standard 810, or FASB AS Topic 810-10-65, “Transition Related to FASB
Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No.
51.”
- 33
-
Finally,
we have further amended our Quarterly Report on Form 10-Q/A (Amendment No 1) for
the period ended March 31, 2009, and Quarterly Report on Form 10-Q for the
periods ended June 30, 2009 and September 30, 2009 to include restated financial
statements which correct the following previous errors in our financial
statements: (i) we did not properly record the common stock purchase warrants
which were not indexed to our stock as a derivative liability at January 1, 2009
upon adoption of Derivative and Hedging Topic of the FASB ASC 815 and properly
record the subsequent accounting for changes in the fair value of the associated
liability at March 31, 2009, June 30, 2009, and September 30, 2009;and for the
periods ended March 31, 2009 and June 30, 2009 (ii) we did not properly present
cash flows from operating activities using the indirect method to begin with net
income or loss rather than net income or loss attributable to China Logistics
Group, Inc.
We
historically have had an inadequate number of personnel with the requisite
expertise in generally accepted accounting principles to ensure the proper
application thereof. Our Chief Executive Officer who served as our principal
financial and accounting officer until October 12, 2009 is not an accountant and
we have historically relied upon the services of outside
accountants. On October 12, 2009 our Board of Directors appointed Ms.
Yuan Huang as our Chief Financial Officer. Ms. Huang is an accountant
and while she lacks expertise in U.S. GAAP, she has significant experience in
PRC accounting. The balance of our internal accounting staff is
primarily engaged in ensuring compliance with PRC accounting and reporting
requirements and their U.S. GAAP knowledge is also limited. As a result, a
majority of our internal accounting staff is relatively inexperienced with U.S.
GAAP and the related internal control procedures required of U.S. public
companies. Although our accounting staff is professional and experienced in
accounting requirements and procedures generally accepted in the PRC, management
has determined that they require additional training and assistance in U.S. GAAP
matters. Management has determined that our internal audit function is also
significantly deficient due to insufficient qualified resources to perform
internal audit functions. Finally, management determined that the lack of an
Audit Committee of our Board of Directors also contributed to insufficient
oversight of our accounting and audit functions.
These
material weaknesses at December 31, 2007 continue at September 30, 2009. To
correct these ongoing material weaknesses we plan to implement changes in our
disclosure controls and procedures and internal control over financial
reporting. Specifically, for issuances of common stock, management plans to
implement improved policies and procedures that will include a review of
issuances of common stock by appropriate personnel. For issuances of preferred
stock, management plans to implement improved policies and procedures that will
include a review of the accounting for preferred stock to be issued for
consulting services by appropriate personnel. In addition, we will make sure
that we have an adequate number of personnel involved in the preparation of the
financial statements and disclosures with the requisite expertise in generally
accepted accounting principles to ensure the proper application
thereof.
Once
fully implemented, management believes that these new policies and procedures
will be effective in remediating the identified material weaknesses. We expect
the material weakness will be remediated prior to December 31,
2009. As we improve our internal control over financial reporting and
implement remediation measures, we may supplement or modify the remediation
measures described above.
Changes
in Internal Control over Financial Reporting
There was
no change in our internal control over financial reporting identified in
connection with our evaluation that occurred during our last quarter (our fourth
quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
As
previously disclosed, the SEC filed a civil complaint on September 24, 2008 in
the U.S. District Court for the Southern District of Florida (Case No.
08-61517-CIV-GOLD MCALILEY) against Mr. V. Jeffrey Harrell, our former CEO and
principal and financial accounting officer, Mr. David Aubel, previously our
largest shareholder and formerly a consultant to us, and our company based upon
the alleged improper conduct of Messrs. Harrell and Aubel that occurred at
various times between in or about April 2003 and September 2006.
On
October 19, 2009, the Court in this case entered a Default Judgment of Permanent
Injunction and Other Relief against Mr. Aubel. The default judgment enjoins Mr.
Aubel from violating Sections 5(a), and 5(c) of the Securities Act of 1933, and
Sections 10(b), 13(d), and 16(a) of the Securities Exchange Act of 1934, and
Rules 10b-5, 13d-1, and 16a-3, thereunder. In addition, the default judgment
also bars Mr. Aubel from participating in any offering of a Penny Stock,
pursuant to Section 21(d) of the Securities Exchange Act of
1934.
- 34
-
As
previously disclosed, we cooperated with the SEC in its action against us and,
despite our lack of knowledge of any wrongdoing; in February 2009 we consented
to the entry of a Permanent Injunction and Other Relief to resolve the liability
aspects of the complaint. The Permanent Injunction among other
things, permanently restrains and enjoins us from violation of Sections 5(a) and
5(c) of the Securities Act of 1933, 15 U.S.C. §§ 77e(a) and 77e(c); violations
of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and
Rule l0b-5 promulgated thereunder, 17 C.F.R. §240.l0b-5; violations of Section
13(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78m(a), and Rules
12b-20, 13a-l, and 13a-13 thereunder, 17 C.F.R. §§ 240.12b-20, 240.13a-l, and
240. 13a-13; and violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the
Securities Exchange Act of 1934, 15 U.S.C. §§ 78m(b )(2)(A) and 8m(b )(2)(B).
The injunction also provides that the Court will determine whether it is
appropriate to order disgorgement and, if so, the amount of the
disgorgement. We are pursuing a settlement with the SEC regarding the
disgorgement and prejudgment interest they are seeking.
Except as
disclosed above, there has been no material developments related to the
disclosure in “Part I - Item 3. Legal Proceedings” of our Annual Report on Form
10-K for the year ended December 31, 2008.
ITEM
1A. RISK FACTORS.
Loans
and advances may be subject to PRC regulations.
We
currently have several company loans and advances to third parties and we may
continue to make loans or advances to third parties for strategic and other
business related purposes. PRC laws generally do not permit companies that do
not possess a financial service business license to extend loans directly to
other companies, including affiliates, without proceeding through a financial
agency. The enforcement of these restrictions remains unpredictable, and
government authorities may declare these loans and advances void, require the
forfeiture of any interest paid (although our loans and advances are interest
free) and levy fines or other penalties upon the parties involved, among
other remedies.
Additional
risk factors describing the major risks to our business can be found under Item
1A, "Risk Factors," in our Annual Report on Form 10-K/A (Amendment No. 1)
for the year ended December 31, 2008 filed with the SEC on September 29,
2009.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM
5. OTHER INFORMATION.
None.
- 35
-
ITEM
6. EXHIBITS.
Exhibit No.
|
Description
|
||
3.1
|
Articles
of Incorporation (1)
|
||
3.2
|
Articles
of Amendment (1)
|
||
3.3
|
Articles
of Amendment (5)
|
||
3.4
|
Articles
of Amendment (2)
|
||
3.5
|
Form
of Articles of Amendment (10)
|
||
3.6
|
Bylaws
(1)
|
||
4.1
|
Trilogy
Capital Partners, Inc. Warrant Agreement dated June 1,
2006(3)
|
||
4.2
|
Form
of common stock purchase warrant issued to Mr. Chen
(12)
|
||
4.3
|
Form
of common stock purchase warrant issued in the 2008 Unit Offering
(13)
|
||
10.1
|
Debt
Conversion Agreement with David Aubel dated December 3, 2005
(4)
|
||
10.2
|
Amendment
to Debt Conversion Agreement with David Aubel dated May 15, 2006
(6)
|
||
10.3
|
Consulting
and Management Agreement dated May 22, 2007 with China Direct Investments,
Inc. (7)
|
||
10.4
|
Consulting
and Management Agreement dated September 5, 2007 with Capital One Resource
Co., Ltd (8)
|
||
10.5
|
Acquisition
Agreement dated as of December 31, 2007 between MediaReady, Inc., Shandong
Jiajia International Freight & Forwarding (Logistics Co.) Ltd., and
Messrs. Hui Liu and Wei Chen (2)
|
||
10.6
|
Finder's
Agreement dated as of December 31, 2007 between MediaReady, Inc. and
Dragon Venture (Shanghai) Capital Management Co., Ltd.
(2)
|
||
10.7
|
Consulting
Agreement dated as of December 31, 2007 between MediaReady, Inc. and China
Direct, Inc. (2)
|
||
10.8
|
Form
of Amendment to Acquisition Agreement dated as of January 28, 2008 between
MediaReady, Inc., Shandong Jiajia International Freight & Forwarding
Co., Ltd., and Messrs. Hui Liu and Wei Chen (9)
|
||
10.9
|
Form
of Amendment to Finder's Agreement dated as of January 28, 2008 between
MediaReady, Inc. and Dragon Venture (Shanghai) Capital Management Co.,
Ltd. (9)
|
||
10.10
|
Form
of Amendment to Acquisition Agreement dated as of March 13, 2008 between
MediaReady, Inc., Shandong Jiajia International Freight & Forwarding
Co., Ltd., and Messrs. Hui Liu and Wei Chen (11)
|
||
10.11
|
Lease
Agreement between China Logistics Group, Inc. and ETI International, Inc.
(17)
|
||
10.12
|
Form
of Subscription Agreement for 2008 Unit Offering (13)
|
||
10.13
|
Lease
Agreement between Wei Chen and Shandong Jiajia International Freight &
Forwarding Co., Ltd.(14)
|
||
10.14
|
Lease
Agreement dated December 31, 2008 between Shandong Jiajia International
& Freight Forwarding Co., Ltd. and Shandong Import & Export Co.,
Ltd. (17)
|
||
10.15
|
Assumption
Agreement dated December 31, 2007 between David Aubel and MediaReady, Inc.
(17)
|
||
10.16
|
Conversion
Agreement dated March 20, 2008 between V. Jeffrey Harrell and China
Logistics Group, Inc. (16)
|
||
10.17
|
Conversion
Agreement dated March 20, 2008 between David Aubel and China Logistics
Group, Inc. (16)
|
||
10.18
|
Form
of promissory note in the principal amount of $561,517.27 dated January 1,
2003 issued by Video Without Boundaries, Inc. to Mr. David Aubel
(15)
|
||
10.19
|
Form
of Security Agreement dated May 23, 2001 between Valusales.com, Inc. and
Mr. David Aubel (15)
|
||
10.20
|
Promissory
note from Shanghai Yudong Logistics Co., Ltd. to Shandong Jiajia
International Freight & Forwarding Co., Ltd., dated March 30, 2009
(18)
|
||
10.21+
|
Employment
Agreement effective as of October 12, 2009 between China Logistics Group,
Inc. and Yuan Huang. (19)
|
||
14.1
|
Code
of Business Conduct and Ethics (12)
|
||
21.1
|
Subsidiaries
of the Registrant (12)
|
||
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 and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
*
|
* filed
herewith
+ Management
contract or compensatory plan or arrangement.
- 36
-
(1
|
)
|
Incorporated
by reference to the registration statement on Form 10-SB, SEC File No.
0-31497 as filed with the Securities and Exchange Commission on September
11, 2000, as amended.
|
|
(2
|
)
|
Incorporated
by reference to the Current Report on Form 8-K as filed on January 7,
2008.
|
|
(3
|
)
|
Incorporated
by reference to the Current Report on Form 8-K as filed on June 2,
2006.
|
|
(4
|
)
|
Incorporated
by reference to the Annual Report on Form 10-KSB for the year ended
December 31, 2004.
|
|
(5
|
)
|
Incorporated
by reference to the Current Report on Form 8-K as filed on September 27,
2006.
|
|
(6
|
)
|
Incorporated
by reference to the Quarterly Report on Form 10-QSB for the period ended
September 30, 2006.
|
|
(7
|
)
|
Incorporated
by reference to the Current Report on Form 8-K as filed on May 23,
2007.
|
|
(8
|
)
|
Incorporated
by reference to the Current Report on Form 8-K as filed on September 10,
2007.
|
|
(9
|
)
|
Incorporated
by reference to the Current Report on Form 8-K as filed on January 31,
2008.
|
|
(10
|
)
|
Incorporated
by reference to the definitive information statement on Schedule 14C as
filed on February 14, 2008.
|
|
(11
|
)
|
Incorporated
by reference to the Current Report on Form 8-K as filed on March 18,
2008.
|
|
(12
|
)
|
Incorporated
by reference to the Annual Report on Form 10-K for the year ended December
31, 2007.
|
|
(13
|
)
|
Incorporated
by reference to the Current Report on Form 8-K as filed on April 24,
2008.
|
|
(14
|
)
|
Incorporated
by reference to the Quarterly Report on Form 10-Q/A (Amendment No. 1) for
the period ended June 30, 2008.
|
|
(15
|
)
|
Incorporated
by reference to the Quarterly Report on Form 10-Q for the period ended
September 30, 2008.
|
|
(16
|
)
|
Incorporated
by reference to the Quarterly Report on Form 10-Q/A (Amendment No. 1) for
the period ended March 31, 2008.
|
|
(17
|
)
|
Incorporated
by reference to the registration statement on Form S-1, SEC File No.
333-151783, as amended.
|
|
(18
|
)
|
Incorporated
by reference to the Quarterly Report on Form 10-Q for the period ended
March 31, 2009.
|
|
(19
|
)
|
Incorporated
by reference to the Current Report on Form 8-K as filed on October 16,
2009.
|
- 37
-
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 GROUP, INC.
|
||
|
||
Date:
February 11, 2010
|
By:
|
/s/
Wei Chen
|
Wei
Chen
|
||
Chairman,
Chief Executive Officer and President
(Principal
Executive Officer)
|
||
Date:
February 11, 2010
|
By:
|
/s/
Yuan Huang
|
Yuan
Huang
|
||
Chief
Financial Officer
(Principal
Financial and Accounting
Officer)
|