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EXCEL - IDEA: XBRL DOCUMENT - China Auto Logistics IncFinancial_Report.xls
EX-10.2 - MAXIMUM AMOUNT GUARANTEE CONTRACT - China Auto Logistics Incf10k2014ex10ii_chinaauto.htm
EX-10.1 - MAXIMUM AMOUNT GUARANTEE CONTRACT - China Auto Logistics Incf10k2014ex10i_chinaauto.htm
EX-31.1 - CERTIFICATION - China Auto Logistics Incf10k2014ex31i_chinaauto.htm
EX-10.5 - OFFICE TENANCY CONTRACT - China Auto Logistics Incf10k2014ex10v_chinaauto.htm
EX-32.1 - CERTIFICATION - China Auto Logistics Incf10k2014ex32i_chinaauto.htm
EX-31.2 - CERTIFICATION - China Auto Logistics Incf10k2014ex31ii_chinaauto.htm
EX-10.4 - OFFICE TENANCY CONTRACT - China Auto Logistics Incf10k2014ex10iv_chinaauto.htm
EX-10.3 - PRIMARY CREDIT FACILITY AGREEMENT - China Auto Logistics Incf10k2014ex10iii_chinaauto.htm

 

  

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2014

 

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: 000-52625

 

CHINA AUTO LOGISTICS INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada   20-2574314
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)

 

Floor 1 FTZ International Auto Mall 86 Tianbao Avenue, Free Trade Zone

Tianjin Province, The People’s Republic of China 300461

(Address of Principal Executive Offices, Zip Code)

(86) 22-2576-2771

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $0.001 per share traded on the NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☐  No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes  ☐   No  ☒

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   ☒   No  ☐

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☒

 

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

 

Large accelerated filer   ☐ Accelerated filer   ☐ Non-accelerated filer    ☐ Smaller reporting company ☒

 

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

 

As of June 30, 2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $4,891,821 based on the closing price as reported on the NASDAQ Global Market.

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class   Outstanding at March 31, 2015
Common Stock, $0.001 par value per share   4,034,394 shares

 

 

 

 
 

 

PART I

 

ITEM 1. BUSINESS.

 

Introduction

 

On November 10, 2008 (the “Closing”), China Auto Logistics Inc. (formerly known as Fresh Ideas Media, Inc.) (“USCo” or the “Company”)) entered into a Share Exchange Agreement (the “Exchange Agreement”) with Ever Auspicious International Limited, a Hong Kong company (“HKCo”) and Bright Praise Enterprises Limited, a British Virgin Islands company and the sole shareholder of HKCo (the “Stockholder”), pursuant to which USCo acquired all of the issued and outstanding capital stock of HKCo, an inactive holding company, from the Stockholder in exchange for 1,950,000 (pre reverse split of 11,700,000) newly-issued shares of USCo’s common stock, representing approximately 64.64% of USCo’s issued and outstanding common stock (the “Exchange”). The closing of the Exchange Agreement occurred on the same day, immediately following the cancellation of an aggregate of 189,167 (pre reverse split of 1,135,000) shares of USCo’s common stock held by Phillip E. Ray and Ruth Daily, USCo’s principal stockholders immediately prior to the Closing, which was a condition of the Closing. As a result of the Exchange, HKCo became USCo’s wholly owned subsidiary. USCo’s primary business operations are those of HKCo. Shortly after the closing, USCo changed its name to China Auto Logistics Inc. (the “Company”).

 

On November 1, 2010, the Company acquired all of the outstanding shares of Chongqing Qizhong Technology Development Co., Ltd for $4.47 million which consisted of $1.01 million in cash, net of cash acquired and the issuance of 177,238 (pre reverse split of 1,063,427) shares of common stock valued at $3.46 million. During 2012, the Company deregistered the wholly owned subsidiaries of Qizhong, including Beijing Goodcar, Xiamen Goodcar, Wuhan Youlu, Chengdu Haoche, Tianjin Goodcar and Kaizhi. All of these subsidiaries’ operations have been assumed by their parent company, Qizhong. The Company disposed of a majority of the assets of these subsidiaries and transferred the remaining net assets to our other subsidiaries. During 2013, the Company deregistered Qizhong and completely discontinued its operations.

 

As discussed in greater detail below in “History and Organizational Structure,” in November 2013 the Company acquired Tianjin Zhonghe Auto Sales Service Co., Ltd. (“Zhonghe”), which owns and operates a 26,000 square meter automobile mall facility on a 68,000 square meter land parcel located in the Tianjin Airport Economic Area (the “Airport International Auto Mall,” with such transaction referred to herein as the “Zhonghe Acquisition”). Upon completion of the Zhonghe Acquisition, the Company entered into a joint venture, Tianjin Car King Used Car Trading Company Ltd. (“Car King Tianjin”) with Car King (China) Used Car Trading Co., Ltd. (“Car King China”) to operate a used car business at the Airport International Auto Mall.

 

The following are disclosures regarding the Company, its wholly owned and majority owned operating subsidiaries, including Tianjin Binhai Shisheng Trading Group Co., Ltd., (“Shisheng”) Tianjin Hengjia Port Logistics Corp. (“Hengjia”), Tianjin Ganghui Information Technology Corp. (“Ganghui”), Tianjin Zhengji International Trading Corp. (“Zhengji”) and Zhonghe.

 

During 2012 and 2013, the Company deregistered Chongqing Qizhong Technology Co., Ltd. (“Qizhong”), Beijing Goodcar Technology Development Co., Ltd. (“Beijing Goodcar”), Xiamen Goodcar Network Technology Co., Ltd. (“Xiamen Goodcar”), Wuhan Youlu Network Technology Co., Ltd. (“Wuhan Youlu”), Chengdu Haoche Technology Development Co., Ltd (“Chengdu Haoche”), Tianjin Goodcar Technology Development Co., Ltd. (“Tianjin Goodcar”) and Chongqing Kaizhi Technology Co., Ltd. (“Kaizhi”), and discontinued their operations.

 

Each of these subsidiaries is formed under the laws of the People’s Republic of China (the “PRC” or “China”) and conduct business in the PRC.

 

Except as otherwise indicated by the context, references in this report to “we,” “us,” “our,” or the “Company” are to the consolidated business of the Company, Shisheng, Hengjia, Ganghui, Zhengji, Zhonghe, Qizhong, Beijing Goodcar, Xiamen Goodcar, Wuhan Youlu, Chengdu Haoche, Tianjin Goodcar and Kaizhi, except such terms, when used with reference to the audited consolidated financial statements and related notes contained elsewhere in this report or “Management’s Discussion and Analysis of Financial Condition and Results of Operations” Section, are to the consolidated business of Shisheng, Hengjia, Ganghui, Zhengji, Zhonghe, Qizhong, Beijing Goodcar, Xiamen Goodcar, Wuhan Youlu, Chengdu Haoche, Tianjin Goodcar and Kaizhi.

 

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General

 

Our primary business is to provide a high quality comprehensive imported automobile sales and trading service and a web-based automobile sales and trading information platform to our customers. Shisheng, together with its majority owned subsidiaries Zhengji, Hengjia and Zhonghe, sells imported automobiles (“Sales of Automobiles”), which consisted of approximately 98% of our revenue generated in the last full fiscal year. Additionally, Shisheng provides customized services such as financing services (“Financing Services”), airport auto mall automotive services (“Airport Auto Mall Automotive Services”), and management services to auto mall operators (“Auto Mall Management Services”); provides, through its majority owned subsidiaries Hengjia and Ganghui, customs clearance, storage, nationwide delivery services, provision of information and discounted services relating to automobiles (“Automobile Value Added Services”) to imported automobile distributors and agents as well as individual customers in China; operates, through its majority owned subsidiaries Ganghui and Hengjia, two websites which provide subscribers with up to date sales and trading information for imported and domestically manufactured automobiles and information about automobiles and auto-related products and service (“Web-based Advertising Services”); and, through its wholly owned subsidiary Zhonghe, provides a used car business and other automotive services at the Airport International Auto Mall. Our mission is to be a one-stop shop for our customers in providing valuable pre- and post-sale services and information for imported and domestically manufactured automobiles.

 

We are currently the only one-stop service provider in Tianjin for Financing Services and Automobile Value Added Services. We also offer two websites: (a) www.at160.com (formerly www.1365car.com), which provides quotes and other information on domestically manufactured automobiles in Tianjin and (b) www.at188.com, which provides information on imported automobiles for the industry and individuals and boasts a fee-based membership of more than 90% of the automobile dealers and agents in Tianjin.

 

History and Organizational Structure

 

In September 1995, Shisheng was founded by Mr. Tong Shiping and his family as a private company under the name “Tianjin Tariff-Free Zone Shisheng Property Management Corp.” Its core business was selling the domestically manufactured automobile model CHARADE, which had 10% of the automobile market share in China between 1995 and 2000. With the increased popularity of imported cars and the maturation of the Internet, Shisheng switched its core business to the sale of imported automobiles and was subsequently renamed “Tianjin Shisheng Investment Group Co. Ltd.”

 

In August 2001, Shisheng formed Ganghui to provide web-based, real-time information on imported automobiles. Ganghui was 80% owned by Shisheng and 20% was owned by Bian Guiying.

 

In September 2003, Shisheng formed Hengjia to provide Financing Services and Automobile Value Added Services to wholesalers and distributors in the imported vehicle sales and trading industry. Hengjia is 80% owned by Shisheng, with the remainder of Hengjia’s equity interest owned by Yang Jitian, Cheng Beiting, and Qian Lige.

 

In February 2005, Shisheng and three other founders formed Zhengji to enhance our presence in the imported automobile sales and trading industry. In January 2007, Shisheng injected additional capital of $1,024,498 (equivalent to RMB8,000,000) into Zhengji; consequently, Shisheng’s equity interest in Zhengji increased from 32% to 86.4%, and Zhengji’s financial results were consolidated into those of Shisheng effective January 1, 2007. The remainder of Zhengji’s equity interests was owned by Yang Bin (a former Senior Vice President and director of the Company), Qian Shuqing and Zhou Shanglan.

 

On October 17, 2007, HKCo, a wholly owned subsidiary of Bright Praise Enterprises Limited, was incorporated in Hong Kong to act as a holding company for Shisheng. On November 1, 2007, HKCo entered into a Share Exchange Agreement with Cheng Weihong, Xia Qiming, and Qian Yuxi (collectively, the “Sellers”), pursuant to which the Sellers transferred their interest in Shisheng to HKCo for an aggregate purchase price of $12,067,254 (RMB95,000,000). As a result of this transaction, HKCo owns all of the capital stock of Shisheng. In connection with this transaction, Shisheng changed its name from “Tianjin Shisheng Investment Group Co. Ltd.” to “Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.”

 

On July 23, 2009, Shisheng entered into Share Transfer Agreements to acquire additional ownership interests from other noncontrolling interest shareholders to increase its ownership interests in Ganghui, Hengjia and Zhengji to 98% each for an aggregate purchase price of $444,120.

 

Bright Praise Enterprises Limited is 100% owned by Mr. Choi Chun Leung Robert as trustee for the benefit of Tong Shiping (the Company’s President and CEO) and Cheng Weihong (a director of the Company and the wife of Mr. Tong). Mr. Choi is not involved in the management of Shisheng.

 

On November 1, 2010, Shisheng entered into a Share Transfer Agreement with the owners of Qizhong to acquire all issued and outstanding stocks of Qizhong for a net purchase price of $4.47 million, net of acquired cash, and completed the acquisition simultaneously. Qizhong, together with its wholly owned subsidiaries, Beijing Goodcar, Xiamen Goodcar, Wuhan Youlu, Chengdu Haoche, Tianjin Goodcar, Kaizhi, (collectively, “Goodcar”) engaged in the development and operation of the website www.goodcar.cn and the business of providing customers with information and discounted services relating to automobile, including discounted gas, car washes, and body-shop repair and car maintenance.

 

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During 2012 and 2013, the Company deregistered Chongqing Qizhong Technology Co., Ltd. (“Qizhong”), Beijing Goodcar Technology Development Co., Ltd. (“Beijing Goodcar”), Xiamen Goodcar Network Technology Co., Ltd. (“Xiamen Goodcar”), Wuhan Youlu Network Technology Co., Ltd. (“Wuhan Youlu”), Chengdu Haoche Technology Development Co., Ltd (“Chengdu Haoche”), Tianjin Goodcar Technology Development Co., Ltd. (“Tianjin Goodcar”) and Chongqing Kaizhi Technology Co., Ltd. (“Kaizhi”), and discontinued their operations.

 

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

 

On November 30, 2013, Shisheng signed the Auto Mall Acquisition Agreement with Hezhong (Tianjin) International Development Ltd. Co. (“Hezhong”) to purchase 100% of the equity of Zhonghe, which owns and operates the Airport International Auto Mall. Under the terms of the Auto Mall Acquisition Agreement, Shisheng will pay RMB559,768,000 (approximately $91.4 million) to Hezhong, in four annual installments with an annualized rate of interest of 6%. The initial payment of RMB240,000,000 (approximately $39.2 million) was paid within 5 business days after the signing of the Agreement. Upon the payment by Shisheng of this first installment, Hezhong transferred control of Zhonghe to Shisheng. Failure by Shisheng to pay the remaining installments may result in the termination of the Auto Mall Acquisition Agreement, as well as a penalty of 10% of the total transfer price. We made an installment payment of approximately $16.3 million in November 2014 and $3.2 million in January 2015, and have to remit two more installments of approximately $19.5 million each, including principal and interest in November of 2015 and 2016.

 

Industry Overview

 

China’s auto industry growth has been driven by rising domestic demand stemming from rising incomes and expanding middle and upper-middle classes. For the middle and upper-middle classes, automobiles serve not only as modes of transportation but also as status symbols. As a result, imported automobiles, particularly luxury automobiles like Mercedes Benz, BMW, Lexus and Land Rover, are in high demand. The expansion of China’s roads and highway network, coupled with the expanding middle and upper-middle classes, are expected to lead to robust auto sales in the years to come.

 

In November 2001, China became a member of the World Trade Organization (the “WTO”). Due to the Chinese government’s trade restrictions, imported automobiles did not flood into the Chinese market, thereby creating an opportunity for the development and growth of the domestic automobile manufacturing industry. The result has been a steady increase in the sales of Chinese manufactured automobiles, not only to the domestic market, but also into the international market.

 

China experienced significant economic growth and overtook the US as the world’s largest automobile market in 2011. According to data issued by the China Association of Automobile Manufacturers, approximately 23.7 million vehicles were produced in China in 2014, an increase of 7.26% from 2013. Approximately 23,491,900 vehicles were sold in China during 2014, an increase of 6.86% from 2013. Even though the Chinese market continued to grow in terms of both production and sales, this market growth slowed to approximately 7% in 2014, from about 14% in 2013. In addition, similar to 2013, the growth in the number of vehicles sold in 2014 was lower than the growth in the number of vehicles produced, signaling a surplus in Chinese automobile inventories.

 

According to data issued by the China Association of Automobile Manufacturers, imported foreign automobile sales continued to show growth in 2014 at a rate of approximately 13% over 2013, but we saw a slowdown in growth in the second half of 2014. In addition, discounts offered on vehicles continued to climb, as high inventories put pressures on sales prices. This phenomenon is a result of the recent economic slowdown in China and increased competition from domestic brand automobiles. The sales volume of imported foreign automobiles in China reached 1.42 million units in 2014.

 

In August 2014, the China Commerce and Industry Bureau authorized the “Parallel Imported Vehicles” scheme to be implemented in the Shanghai Free Trade Zone. “Parallel Imported Vehicles” permitted foreign made automobiles to be imported by importers in addition to authorized automobile dealers. This policy officially opened the imported automobile market to importers like us, so that we can now be in direct competition with the authorized dealers. This is an antitrust effort by the Chinese government to address complaints about the authorized automobile dealers for overcharging for foreign-made automobiles. These new rules will also allow imported automobiles sold by parties other than authorized dealers to be treated the same as those sold through authorized dealers (i.e., with respect to insurance coverage and the registration process). Following Shanghai, Beijing will be the second region to implement this “Parallel Imported Vehicles” scheme. We expect this new policy will create long-term benefits for our business.

 

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In December 2014, Shenzhen became the eighth city subject to restrictions on automobile purchases, behind Beijing, Shanghai, Guangzhou, Guiyang, Shijiazhuang, Tianjin and Hangzhou. The restrictions vary from city to city, however most of these cities set an annual limit on the maximum number of vehicles in each category that may be licensed, in order to limit the number of new vehicles added to the roads each year. Some cities, such as Beijing, have adopted a lottery system wherein only potential buyers who win the lottery draw will be able to purchase vehicles. As more cities become subject to these and similar purchase restrictions, the future growth in the automobile market in China will be negatively impacted.

 

Our Competitive Strengths

 

We are committed to keeping our competitive edge by constantly evaluating and responding to market demand and providing new products and services. Our goals are to establish successful and long-term partnerships with our customers, employees and suppliers and to provide high quality services and products. In particular, we believe the following strengths differentiate our business:

 

  We are headquartered in Tianjin, which is the largest port city among the top 5 port cities in China for imported automobiles. Tianjin has a strong established presence in the imported automobile market in China, which provides us with first-hand knowledge of product information and developing industry trends.

 

  We have a unique business model that combines Sales of Automobiles, Financing Services, Automobile Value Added Services, an Internet-based information platform, and Airport Auto Mall Automotive Services, which enhances our ability to be a one-stop service provider for all of our customers’ needs with respect to imported automobiles and used automobiles in the PRC.

 

  We have continued to grow and maintain a referral network with all major automobile distributors and agents in the PRC.

 

  We maintain close relationships with many major commercial banks in the PRC, including the Agricultural Bank of China, China Merchants Bank, PuDong Development Bank, Industrial and Commercial Bank of China, China ZheShang Bank, China Minsheng Bank, Shengjing Bank and Tianjin Binhai Rural Commercial Bank, which give us a competitive advantage over our competitors in providing Financing Services. As of April 10, 2015, the Company had aggregate credit lines of $166 million (RMB1.02 billion) with its banks.

 

  Our key personnel each have more than ten years of Chinese automobile industry experience.

 

Our Growth Strategy

 

We intend to pursue the following key elements to our growth strategy:

 

  Create New Services. Through the Zhonghe Acquisition and the establishment of Car King Tianjin in November 2013, we entered into the used car sales market in 2014. We believe that there is a strong market for used car sales in China and this joint venture will provide us with opportunities for long-term growth. We are also considering expanding into the retail automobile sales market, which may generate higher overall gross margins than our current service offerings, by selling imported automobiles out of the Airport International Auto Mall.  In November 2014, we started selling automobiles directly to consumers through displaying our automobiles at our exhibition show room and the marketing efforts by our sales team.  We are still in the process of implementing a detailed plan for our retail operations.

 

  Emphasize Service and Support. We will continue to build on our menu of established business offerings as a clear and viable alternative to price-only selling. We will also aim to expand our existing banking relationships and explore other cooperative relationships with major commercial banks to increase our lines of credit to provide additional Financing Services to our customers.

 

  Build a Relationship-Oriented Business. We have a history of building long-term relationships with clients rather than focusing on single-transactions. To that end, we aim to capitalize on our existing client base by establishing a national automobile dealer network for faster information exchange and closer coordination. We will also continue to place an emphasis on obtaining authorized agent licenses with large international automobile manufacturers.

 

  Build Brand Recognition. We will build brand name recognition through diverse marketing channels such as online advertising, public relations and trade-show participation.

 

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Our Business Lines and Products

 

Sale of Automobiles

 

We conduct our sales operations of imported automobiles primarily through Shisheng, Hengjia, Zhengji and Zhonghe. We are a general agent and wholesaler authorized by the Chinese government to import vehicles into the PRC. We sell our vehicles to authorized dealers like Ford or Lexus, as they are not able to import all models directly, free traders or wholesalers located in inland China or non-port cities, and individual customers. We have the core competencies within our network to sell all makes and models of imported vehicles. Our sales network penetrates to agents and dealers in more than 100 cities. We have close working relationships with some of the largest automobile dealers in China.

 

Our revenues from the sale of imported automobiles and related activities were $248.0 million for fiscal year 2010 (96.03% of all revenues), $439.0 million for fiscal year 2011 (97.08% of all revenues), $581.2 million for fiscal year 2012 (98.30% of all revenues), and $450.1 for the fiscal year 2013 (98.03%) and $393.7 million for fiscal year 2014 (97.86% of all revenues) representing a 12.5% decrease from the prior fiscal year.

 

Financing Services

 

Many of our customers, including both authorized agents and general dealers, contend with a shortage of working capital. The imported automobile service industry has developed to address these barriers by providing short-term financing services in connection with the importation of automobiles. These service providers are located in the port cities of Dalin, Tianjin, Shanghai and Guangzhou. 

 

Our Financing Services include letter of credit issuance services, purchase deposit financing, and import duty advance services. Our competitive advantage comes from relationships with major Chinese commercial banks, including Agricultural Bank of China, China Merchants Bank, PuDong Development Bank, Industrial and Commercial Bank of China, China ZheShang Bank, China Minsheng Bank, Shengjing Bank and Tianjin Binhai Rural Commercial Bank. As of April 10, 2015, the Company had aggregate credit lines of $166 million (RMB1.02 billion) with its banks. We are currently negotiating a number of new credit lines with various banks and the Company is optimistic that it will be able to obtain financing on an as-needed basis that will be sufficient for us to provide Financing Services to our customers.

 

The Company provides Financing Services to its customers using its facility lines of credit with its banks. The Company earns a service fee for drawing its facility lines related to customers’ purchases of automobiles and payment of import taxes. The customers bear all the interest and fees charged by the banks and prepay such amounts upon the execution of their service contracts with the Company. The customers are also required to make a deposit in the range of 10% to 15% of the purchase price of the automobile with the Company. The banks are granted a security interest in automobiles until the borrowings are fully paid.

 

Our revenues from Financing Services were $2,332,013 for fiscal year 2010 (0.90% of total revenues), $4,102,254 for fiscal year 2011 (0.91% of total revenues), $7,085,357 for fiscal year 2012 (1.20% of total revenues), $6,893,985 for fiscal year 2013 (1.50% of total revenues), and $7,403,202 for fiscal year 2014 (1.84% of total revenues) representing an increase of 7.39% from the prior fiscal year.

 

Automobile Value Added Services

 

In addition to a shortage of working capital, all automobile dealers in China, whether they are authorized agents or general dealers, contend with cumbersome procedures relating to the import business. The imported automobile service industry has developed to address these barriers by providing customs clearance, storage and delivery services for the dealers and agents. These service providers are located in the port cities of Zhejiang and Tianjin. Our efficient customs clearance service allows us to complete all vehicle import-related procedures in just three to five days. Once vehicles are cleared through customs, we offer a value-added delivery service to inland China (by air, by sea or by truck).

 

Our revenues from Automobile Value Added Services were $1,159,340 for fiscal year 2010 (0.45% of total revenues) and $1,951,056 for fiscal year 2011 (0.43% of all revenues), $1,178,274 for fiscal year 2012 (0.20% of all revenues), $740,338 for fiscal year 2013 (0.16% of total revenues), and $124,840 for fiscal year 2014 (0.03% of all revenues) representing a decrease of 83.14% from the prior fiscal year.

 

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Web-based Advertising Services

 

We have experienced strong competition in the web-based advertising arena which continues to drive the pricing of advertising revenue down. Starting in 2012, we began to shift our focus of our websites from generating advertising revenue to providing automotive information to our website visitors. We are targeting to create a platform which allows our customers and potential customers to have access to our products including automobile sales, Automobile Valued Added Services and Financing Services. Through offering extensive automotive information and news, we hope to attract more potential customers to visit our websites. We believe our business strategy of using our websites as a platform to expand our reach to our customers and potential customers will benefit us in the long term.

 

www.at188.com - Imported Automobiles

 

With the continuous development of network technology and the growing popularization of the Internet, value-added Internet-based businesses are experiencing rapid growth in China. Accompanying the growth of the automobile markets in China, there is a strong demand for timely information regarding demand changes, market status and competitors’ quotations. www.at188.com was established by the Company in August 2000 to provide subscribers easily accessible and accurate sales and trading information about imported automobiles. In addition to imported automobile sales and trading and new model information, www.at188.com also provides parts and components information. After years of development and operation, www.at188.com has linked automobile wholesalers and retailers in China and also cooperates with major media outlets such as newspapers and television and radio stations in major cities in China.

 

www.at188.com charges subscribers an annual membership fee and generates revenue from on-line advertisements and web-based listing services, in addition to subscription revenues.

 

www.at160.com (formerly www.1365car.tj.cn) - Domestic Automobiles

 

To provide real-time price comparison and sales and trading information directly to the domestic automobile market, we launched the website www.at160.com, formerly www.1365car.tj.cn, in 2005. This website is a platform that connects manufacturers, regional distributors and end users of domestically manufactured cars, providing them with a compelling source of information about domestic vehicles and serving as a timelier alternative to traditional magazines and television. www.at160.com currently provides real-time price comparison and sales and trading information in the PRC markets with respect to domestically manufactured automobiles.

 

www.at160.com targets customers interested in purchasing vehicles, and it generates revenues from subscriptions and advertisements. Most domestic automobile purchases are made from “4S” shops which offer sales, service, spare parts and survey. In addition to providing customers with online information directly through the website, the Company is considering offering value-added services including automobile insurance, automobile financing, after-sale service and used car quotations.

 

Since 2012, due to our revised business plan focusing on imported automobiles and related services, we gradually moved away from promoting this website which provides information on the domestic automobile market. As a result, revenue generated from this website declined substantially starting in 2012, which decline has continued in 2014.

 

Our revenues from our websites were $5,962,493 for fiscal year 2010 (2.31% of total revenues), $6,192,644 for fiscal year 2011 (1.37% of all revenues), $819,344 for fiscal year 2012 (0.14% of all revenues) and $471,277 for fiscal year 2013 (0.10% of all revenues), and $242,250 for fiscal year 2014 (0.06% of all revenues) representing a decrease of 48.6% from the prior fiscal year.

 

Airport Auto Mall Automotive Services

 

Zhonghe operates two new businesses including (i) selling used cars through Car King Tianjin; and (ii) leasing a portion of the Airport International Auto Mall. We are also considering directly targeting retail customers by selling new imported automobiles out of this facility. We are still finalizing our operating plans to determine the best and most profitable uses for this facility. We lease a portion of the Airport International Auto Mall to Car King Tianjin to operate a used car business. Since the inception of Car King Tianjin’s business, the Company has provided advances to Car King Tianjin as working capital, while Car King China has provided consigned inventories to support Car King Tianjin’s used car sales. From the start of operations in March 2014, Car King Tianjin has gradually increased the volume of its used car sales in the Tianjin region. As of December 31, 2014, we had approximately $1.8 million due from Car King Tianjin. Due to the cumulative loss incurred by Car King Tianjin, we fully reserved the $1.8 million due from Car King Tianjin as a result of the uncertainties of collecting these advances. We have not yet received any return on our investment in this joint venture since the inception of its operations. As a result, starting in the third quarter of 2014, we did not record any rental income related to the Airport International Auto Mall lease. Our revenues from Airport Auto Mall Automotive Services were $665,693 (0.17% of all revenues) for the fiscal year 2014.

 

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During the course of the impairment evaluation for the Airport Auto Mall Automotive Services reporting unit at December 31, 2014, the Company determined that the carrying value of the Airport International Auto Mall exceeded its fair value. The fair value is determined using the income approach of valuation, which is based on the estimated future discounted cash flow generated from this property. Consequently, the Company recorded an impairment loss of $3,003,809 during the year ended December 31, 2014, which represents the excess of the carrying value of this property over its fair value.

 

As of December 31, 2014, we performed an impairment test on our goodwill for the Sales of Automobiles and Airport Auto Mall Automotive units. Due to the significant vacant space not being rented out at the Airport International Auto Mall property, the continued loss from Car King Tianjin, our actual operating profits and cash flows being lower than expected during fiscal year 2014, and the estimated fair value being less than the carrying value for the Airport Auto Mall Automotive unit, the Company concluded that an impairment existed at December 31, 2014. The fair values were estimated based on the future discounted cash flow generated from these reporting units. As a result, the Company recorded an impairment loss on goodwill of $16,041,383 related to the Airport Auto Mall Automotive unit for the fiscal year 2014. As of December 31, 2013, no indication of goodwill impairment existed.

 

Auto Mall Management Services

 

We entered a management service agreement in March 2010 to manage the Tianjin FTZ International Automobile Exhibition and Sales Center for a 1-year term. In March 2011, 2012 and 2013, the management services agreement was renewed for an additional one-year period. On March 14, 2014, the Company announced that the Cooperation Agreement dated March 1, 2013, by and between the Company and Tianjin Prominent Hero International Logistics Co., Ltd, to manage the Airport International Auto Mall in Tianjin, China, had not been renewed. The Cooperation Agreement expired according to its terms on February 28, 2014. We plan to focus on managing the recently acquired Airport International Auto Mall and growing our other business segments.

 

Our revenues from Auto Mall Management Services were $800,050 for fiscal year 2010 (0.31% of total revenues), $945,277 for fiscal year 2011 (0.21% of all revenues), $939,760 for fiscal year 2012 (0.16% of all revenues), $970,255 for fiscal year 2013 (0.21% of all revenues), and $164,616 for the fiscal year 2014 (0.04% of all revenues), representing a decrease of 83.03% from the prior fiscal year.

 

Products Under Development

 

The further development of our websites may be an attractive means for us to develop our business due to the relatively low cost of operation, the global reach of the medium, and the security enhancements that have been and will be put in place. The business model could be expanded to combine Internet commerce and traditional sales. The success of the Internet business can help us build brand name recognition and awareness in the automobile sales and trading industry and increase our automobile sales volume.

 

We operate our domestic automobile website in the city of Tianjin. In response to the intensified competition in the online advertising markets in China and our revised plan of focusing our business on imported automobiles and related services, we continue to focus our website portals’ geographical coverage on the city of Tianjin.

 

In the coming years, we will continue to shift the business focus of the Company from a traditional automobile trader to a more diversified automotive service provider. As a result of the Zhonghe Acquisition, we intend to offer additional automotive related services to strengthen and further diversify our revenue stream. We plan to dedicate a substantial portion of the Airport International Auto Mall to the operation of a used car sales and an automobile repair business through Car King Tianjin,. The remaining portion of the facility may be leased out or reserved for our own use. We are also considering directly targeting retail customers by selling imported automobiles out of this facility.

 

Although we expect sales of imported automobile to continue to represent a considerable percentage of our revenues, we expect the percentage of our net profit generated from imported automobile sales to be low. While we intend to maintain our position as one of the leading imported automobile traders in Tianjin, we do not anticipate that revenues generated by automobile sales will maintain the same growth rate as in the past, though we do expect the percentage of our net profits generated from Financing Services will continue to be a significant contributor to our gross profit.

 

Major Suppliers and Customers

 

We have stable relationships with both Chinese domestic and foreign automobile manufacturers. We derive a significant portion of our revenues on an aggregate basis from our top five customers, and we make a significant portion of our purchases from our top five suppliers. Sales to the Company’s top five customers, each of which is a car dealer, accounted for 28% and 36% of the Company’s net revenues during 2014 and 2013, respectively. Purchases from the Company’s top five suppliers accounted for 32% and 37% of the Company’s total net purchases during 2014 and 2013, respectively.

 

8
 

 

The following table sets out our major customers who individually accounted for over 10% of our total net sales for the years ended December 31, 2014 and 2013:

 

   As a Percentage of Our
Total Net Revenues
 
   Fiscal Year Ended December 31, 
   2014     2013   
Tianjin Jing Dian Automobile Sales Information Co., Limited   15%   **%
Nanjing Guang Xin Shun Industrial Co., Ltd. and affiliate    **  %   15%

 

** Accounted for less than 10% of our total net revenues.

 

The following table sets out our major suppliers who individually accounted for more than 10% of our total net purchases for the years ended December 31, 2014 and 2013:

 

   As a Percentage of Our
Total Net Purchases
 
   Fiscal Year Ended December 31, 
   2014    2013   
Tianjin Ying Zhi Jie International Logistics Co., Limited   11%   ** 
Tianjin Tian Ming Automobile Trading Co., Ltd.    **%   16%

 

** Accounted for less than 10% of our total net purchases.

 

Some of our clients are both our customers and suppliers. None of the activities transacted between the Company and clients who are both customers and suppliers involved any commitments between the parties to repurchase identical automobiles. We maintain close working relationships with our top customers and suppliers, although we also continue to diversify our customers and suppliers. We do not believe that the loss of any one major customer or supplier in and of itself would have a material adverse effect on our financial condition or results of operations.

 

Intellectual Property

 

Our websites, www.at188.com and www.at160.com, have registered domain names expiring in June 2015 and July 2019, respectively. These registrations, together with registrations for other sub-websites of the Company, will be renewed in the ordinary course of our business. The geographic focus of our website portals continues to be the city of Tianjin.

 

Competition and Pricing

 

Tianjin is a major entry port in China. Many of the vehicles imported into Tianjin are imported by general dealers such as Toyota, Honda, Nissan, Ford, BMW, Land Rover and Mercedes-Benz. We purchase our inventory through our suppliers, who import vehicles directly from the foreign countries in which they are manufactured. Competition has increased in recent years due to an increase in the number of smaller shops entering this market. For the specialized services market related to Automobile Value Added Services and Financing Services, we believe we have secured a substantial share of the market for such services in Tianjin. In March 2014, we began to operate a used car sales business through Car King Tianjin. Although there are several other companies in the Tianjin market that provide the individual service we provide, we believe that we are the only one-stop automobile service provider in Tianjin.

 

Competitive threats may come from any company that is able to provide the services offered by us at a lower price and better quality. We charge appropriately for the high-end, high-quality services and products we offer, and we do not aspire to be the lowest cost provider of our services. Rather, we aim to distinguish ourselves from our competitors by providing the highest value to our customers. However in recent years, due to strong competition from other importers and other authorized dealers, we have been forced to lower our prices in order to maintain our leadership position. Consequently our gross margin continues to decline, but we believe that our gross margin is at its lowest level, and we expect it to stay at the current level in future quarters.

 

Costs and Effects of Compliance with Environmental Laws; Government Regulation

 

Our products and operations are currently in compliance with all Chinese laws and environmental standards. We are not aware of any other governmental approvals required for any of our products or operations.

 

9
 

 

Research and Development

 

We spent $0 and $0 on research and development activities for fiscal year 2014 and fiscal year 2013, respectively. None of these costs were borne directly by our customers.

 

Employees

 

We currently employ 68 employees, of which all are full-time employees. None of our employees are unionized.

 

Geographical Area of the Company’s Business

 

All of our revenue is derived from operations within the PRC, and all of our assets are located in the PRC. For risks relating to our operations in the PRC, see discussions in the section entitled “Risk Factors” below.

 

ITEM 1A. RISK FACTORS

 

You should carefully consider the following risks and the other information set forth elsewhere in this current report. If any of these risks occur, our business, financial condition and results of operations could be adversely affected. As a result, the trading price of our common stock could decline, perhaps significantly.

 

RISKS RELATING TO OUR COMPANY

 

We may be unable to continue as a going concern based on our recent performance, which has included significant losses and a working capital deficit. We may continue to generate losses and be unable to service our outstanding liabilities in the future.

 

We incurred operating losses and had negative operating cash flows and may continue to generate negative cash flows as we implement our business plan for 2015. There can be no assurance that our continuing efforts to execute our business plan will be successful and that we will be able to continue as a going concern as our Independent Registered Public Accounting Firm has indicated these factors raised substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“US GAAP”), which contemplates our continuation as a going concern. Our net loss attributable to shareholders for the year ended December 31, 2014 was $26,863,297as compared to net income attributable to shareholders of $524,260 for the year ended December 31, 2013. The operating results for the year ended December 31, 2014 included $3,003,809 of net losses related to an impairment loss recorded on the Airport International Auto Mall.

 

As of December 31, 2014, we had a working capital deficit of $7,298,690, including $68,909,343 in current liabilities for short-term borrowings which are due during the period between January, and September 2015, and $16,900,426 in current liabilities payable to Hezhong related to the Zhonghe Acquisition, which is due in November in 2015, and for which we do not currently have the necessary capital to re-pay.

 

Net cash used in operations during the year ended December 31, 2014 was $54,440,890.

 

We invested heavily in Car King Tianjin through cash investment, advances, and leasing a portion of the Airport International Auto Mall to Car King Tianjin to operate a used car business. We believe that there is a strong market for used car sales in China and Car King Tianjin will provide us with opportunities for long-term growth. However we cannot precisely predict the extent of the growth and whether such growth will convert into substantial profits in the future.

 

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

 

10
 

 

Our business may adversely change due to the cyclical nature of the automotive industry. If the Chinese luxury automotive market does not grow as we expect or grows at a slower rate than we expect, our sales and profitability may be materially and adversely affected.

 

Our financial performance depends, in large part, on the varying conditions in the automotive markets, specifically the market for imported luxury automobiles in China. The volume of automobile production in Asia, North America, Europe and the rest of the world has fluctuated, sometimes significantly, from year to year, and such fluctuations often are in response to overall economic conditions and factors such as changes in interest rate levels, vehicle manufacturer incentive programs, fuel costs, consumer spending and confidence, and environmental issues. If the automotive market experiences a downturn, our results of operations and business will suffer.

 

We derive most of our sales revenue from sales of imported automobiles and related services in China. The continued development of our business depends, in large part, on continued growth in the luxury automotive market in China and the increase in disposable income among the Chinese population. Although China’s luxury automotive market has grown rapidly in the past, it may not continue to grow at the same rate in the future or at all. However, the developments in our market are, to a large extent, outside of our control and any reduced demand for imported automobiles or related services, or any other downturn or other adverse changes in China’s economy that impacts the disposable income of ultimate luxury car purchasers could severely harm our business.

 

Our business may adversely be affected due to the government policy on restrictions on automobile purchases.

 

The local governments of various cities in China imposed restrictions on automobile purchases. Through December 31, 2014, Beijing, Shanghai, Guangzhou, Guiyang, Shijiazhuang, Tianjin, Hangzhou and Shenzhen had adopted such restrictions. The restrictions vary from city to city, however most of these cities set an annual limit on the maximum number of vehicles in each category that may be licensed, in order to limit the number of new vehicles added to the roads each year. Some cities, such as Beijing, have adopted a lottery system wherein only potential buyers who win the lottery draw will be able to purchase vehicles. As more cities become subject to these and similar purchase restrictions, the future growth in the automobile market in China will be negatively impacted. As a result, our future growth may be negatively impacted.

 

A disproportionate amount of our income (loss) from operations is derived from the sale of imported automobiles and related services, and a disruption in, or compromise of, our sale operations or our ability to provide Financing Services could adversely impact our financial condition and results of operations.

 

In 2014, our operating income (loss) is allocated to each segment in percentage as follows:

 

Sales of Automobiles   (1.19)%
Financing Services   10.46%
Web-based Advertising Services   (0.04)%
Automobile Value Added Services   (0.14)%
Airport Auto Mall Automotive Services   (102.46)%
Auto Mall Management Services   0.31%
Corporate overhead   (6.94)%
    (100.00)%

 

We view our Financing Services and our Automobile Value Added Services to be integrally related, as our business model emphasizes our ability to be a “one-stop” services provider for all such services. A disruption in, or compromise of, our sales operations or our ability to provide Automobile Value Added Services and/or Financing Services to our customers could have a material adverse effect on our financial condition and results of operations. In March 2014, we began to operate the used car sales business through Car King Tianjin at the Airport International Auto Mall under the Airport Auto Mall Automotive Services segment. Effective March 1, 2014, we no longer perform the Auto Mall Management Services, as the services agreement entered into by and between the Company and Tianjin Prominent Hero International Logistics Co., Ltd. expired and was not renewed. The operating income generated from this segment declined substantially during the year ended December 31, 2014.

 

We derive a significant amount of our revenue from a limited number of customers and purchase a significant portion of our inventories from a limited number of suppliers. Certain of our major customers are also major suppliers, and therefore the loss of such customers or suppliers could adversely impact our financial condition and results of operations.

 

We derived a significant portion of our revenues on an aggregate basis from our top five customers, and a significant portion of our purchases comes from our top five suppliers. Some of our customers are also our suppliers. We maintain close working relationships with our top customers and suppliers and continue to reduce the business concentration of our revenues and purchases among our top customers and suppliers. While we do not believe that the loss of any one major customer or supplier in and of itself would have a material adverse effect on our financial condition or results of operation, the loss of more than one such major customer or supplier, or our failure to replace such customer or supplier with other customers and suppliers, could have a material adverse effect on our financial condition and our results of operations.

 

11
 

  

The imported automobile sales and services market in Tianjin is competitive; failure to maintain our current relationships with various Chinese banks or to renew existing credit lines or enter into new credit lines may hamper our growth and negatively affect our results.

 

As the only one-stop service provider in Tianjin, our market share in the combined Financing Services and Automobile Value Added Services maintained its leading position in Tianjin. However, in the future we anticipate increasing pressure on our business from competitors, and failure to maintain our relationships with various Chinese banks in Tianjin may adversely affect our ability to provide Financing Services to our customers and to be a “one-stop” service provider for Automobile Value Added Services and Financing Services. In addition, if our competitors are able to establish similar relationships with these banks or other financial institutions in Tianjin or our future markets, we will no longer enjoy our current competitive advantage.

 

As of April 10, 2015, the Company had aggregate credit lines of $166 million (RMB1.02 billion) with its banks. We are currently negotiating a number of new credit lines with various banks, although there can be no guarantee that we will be successful in doing so. If we are unable to renew existing credit lines or enter into new credit lines on a consistent basis that allows us to meet the requirements of our business or the demand of our customers for Financing Services, our business, operating margins, financial condition, cash flows and profitability could be adversely affected.

 

We face competition from other companies, which could force us to lower our prices, thereby adversely affecting our operating margins, financial condition, cash flows and profitability.

 

The markets in which we operate are highly competitive, and this competition could harm our business, results of operations, cash flow and financial condition. We believe that one significant competitive factor for our products is selling price. Although we do not aspire to be the lowest cost provider but rather the highest value provider to our customers, we could be subject to adverse results caused by our competitors’ pricing decisions. The average selling prices for our automobiles have been on a downward trend in recent years and our gross margins have continued to decline due to stiff competition in the automobile industry which has resulted in lower net profits. If we do not compete successfully, our business, operating margins, financial condition, cash flows and profitability could be adversely affected.

 

Concerns about security of e-commerce transactions and confidentiality of information on the Internet may reduce the use of our websites and impede our growth, and our Internet operations may be vulnerable to hacking, viruses and other disruptions.

 

A significant barrier to e-commerce and confidential communications over the Internet has been the need for security. Internet usage could decline if any well-publicized compromise of security occurred. We may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by these breaches. If unauthorized persons are able to penetrate our network security, they could misappropriate proprietary information or cause interruptions in our services. As a result, we may be required to expend capital and resources to protect against or to alleviate these problems. Security breaches could have a material adverse effect on our business, financial condition and results of operations.

 

We cannot assure you that our organic growth strategy will be successful.

 

One of our growth strategies is to grow organically through increasing the distribution and sales of our products, increasing our market share and entering new geographical markets in the PRC. However, many obstacles to increasing our market share and entering such new markets exist, including but not limited to, costs associated with entering into such markets and attendant marketing efforts. We cannot therefore assure you that we will be able to successfully overcome such obstacles and establish our products in any additional markets. Our inability to implement this organic growth strategy successfully may have a negative impact on our ability to grow and on our future financial condition, results of operations or cash flows.

 

If we are not able to implement our strategies in achieving our business objectives, our business operations and financial performance may be adversely affected.

 

Our business plan is based on circumstances currently prevailing and the bases and assumptions that certain circumstances will or will not occur, as well as the inherent risks and uncertainties involved in various stages of development. However, there is no assurance that we will be successful in implementing our strategies or that our strategies, even if implemented, will lead to the successful achievement of our objectives. If we are not able to successfully implement our strategies, our business operations and financial performance may be adversely affected.

 

12
 

 

We may not be able to manage our expanding operations effectively, which could harm our business.

 

We anticipate expanding our business as we address growth in our customer base and market opportunities. In addition, the geographic dispersion of our operations as a result of overall internal growth requires significant management resources that our locally-based competitors do not need to devote to their operations. In order to manage the expected growth of our operations and personnel, we will be required to improve and implement operational and financial systems, procedures and controls, and expand, train and manage our growing employee base. Further, our management will be required to maintain and expand our strategic relationships necessary to our business. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations. If we are not successful in establishing, maintaining and managing our personnel, systems, procedures and controls, our business will be materially and adversely affected.

 

Our business and growth could suffer if we are unable to retain our key executives.

 

We depend upon the continued contributions of our senior management and other key executives, many of whom are difficult to replace. In particular, our future success is heavily dependent upon the continued service of Mr. Tong Shiping, Ms. Wang Xinwei, Mr. Yang Bin, and Ms. Cheng Weihong. If one or more of our key executives are unable or unwilling to continue in their present positions, we may not be able to easily replace them, and our business, financial condition and results of operations may be materially and adversely affected. In addition, if any of these key executives joins a competitor or forms a competing company, we may lose customers and suppliers and incur additional expenses to recruit and train personnel. Each of our executive officers has entered into standard employment agreements with us (in accordance with the format issued by the Labor and Social Security Administration in Tianjin and Chongqing) but is not subject to specific non-competition or non-solicitation agreements, as such agreements are not standard in China. We also do not maintain key-man life insurance for any of our key executives.

 

We face a competitive labor market in China for skilled personnel and therefore are highly dependent on the skills and services of our existing key skilled personnel and our ability to hire additional skilled employees.

 

Competition for highly-skilled software design, technical, managerial, finance, marketing, sales and customer service personnel is intense in China. Failure to attract, assimilate or retain qualified personnel to fulfill our current or future needs could impair our growth. Limitations on our ability to hire and train a sufficient number of personnel at all levels would limit our ability to undertake projects in the future and could cause us to lose market share. We may need to increase the levels of our employee compensation more rapidly than in the past in order to remain competitive. These additional costs could reduce our profitability and cause losses.

 

If we need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.

 

As we implement our growth strategies, we may experience increased capital needs and we may not have enough capital to fund our future operations without additional capital investments. Our capital needs will depend on numerous factors, including: (i) our profitability; (ii) the release of competitive products by our competition; (iii) the level of our investment in research and development; and (iv) the amount of our capital expenditures. We cannot assure you that we will be able to obtain capital in the future to meet our needs.

 

If we cannot obtain additional funding, we may be required to limit our marketing efforts and decrease or eliminate capital expenditures.

 

Such reductions could materially and adversely affect our business and our ability to compete. Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are acceptable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of investors in our common stock. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.

 

We have limited insurance coverage and do not carry any business interruption or third party liability insurance or insurance that covers the risk of loss of automobiles in shipment.

 

Operation of our facilities involves many risks, including natural disasters, power outages, labor disturbances and other business interruptions. We do not carry any business interruption insurance or third-party liability insurance for accidents on our property or damage relating to our operations. In addition, our existing insurance coverage may not be sufficient to cover all risks associated with our business. As a result, we may be required to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our business, financial condition and results of operations.

 

13
 

 

Our efforts in protecting our intellectual property rights from infringement may not be sufficient, and our failure to adequately protect our intellectual property rights may undermine our competitive position.

 

We regard our domain name registrations and other intellectual property as critical to our success. Our domain names for our websites are currently registered domain names. However, no assurance can be given that such registrations and licenses will not be challenged, invalidated, infringed or circumvented or that such intellectual property rights will provide a competitive advantage to us.

 

Currently we sell our products only in China. China will remain our primary market for the foreseeable future. To date, no trademark filings have been made. Therefore, the measures we take to protect our proprietary rights may be inadequate and we cannot give you any assurance that our competitors will not independently develop formulations and processes (including websites similar to www.at188.com and www.at160.com) that are substantially equivalent or superior to our own or copy our products.

 

Intellectual property related laws in China may not be effective in protecting our intellectual property rights, and litigation to protect our intellectual property rights may be costly.

 

We strive to strengthen and differentiate our product portfolio by developing new and innovative products and product improvements. As a result, we believe that the protection of our intellectual property will become increasingly important to our business. Implementation and enforcement of intellectual property-related laws in China has historically been lacking due primarily to ambiguities in PRC intellectual property law. Accordingly, protection of intellectual property and proprietary rights in China may not be as effective as in the United States or other countries. As a result, third parties may use the technologies and proprietary processes that we have developed and compete with us, which could negatively affect any competitive advantage we enjoy, dilute our brand and harm our operating results.

 

In addition, policing the unauthorized use of our proprietary technology can be difficult and expensive. Litigation may be necessary to enforce our intellectual property rights, and given the relative unpredictability of China’s legal system and potential difficulties enforcing a court judgment in China, there is no guarantee litigation would result in an outcome favorable to us. Furthermore, any such litigation may be costly and may divert management attention away from our core business. An adverse determination in any lawsuit involving our intellectual property is likely to jeopardize our business prospects and reputation. We have no insurance coverage against litigation costs so we would be forced to bear all litigation costs if we cannot recover them from other parties. All of the foregoing factors could harm our business and financial condition.

 

We may be exposed to infringement claims by third parties, which, if successful, could cause us to pay significant damage awards.

 

Third parties may initiate litigation against us alleging infringement of their proprietary rights. In the event of a successful claim of infringement and our failure or inability to develop non-infringing technology or license the infringed or similar technology on a timely basis, our business could be harmed. In addition, even if we are able to license the infringed or similar technology, license fees could be substantial and may adversely affect our results of operations.

 

Unexpected network interruptions caused by system failures may result in reduced visitor traffic, reduced revenue and harm to our reputation.

 

As the number of Chinese websites and the amount of Chinese Internet traffic increases, we cannot assure you that we will be able to increase the scale of our systems proportionately. We are also dependent upon web browsers, Internet service providers, content providers and other website operators in China, which have experienced significant system failures and system outages in the past. Any system failure or inadequacy that causes interruptions in the availability of our services, or increases the response time of our services, as a result of increased traffic or otherwise, could reduce our user satisfaction, future traffic and our attractiveness to users and advertisers.

 

In addition, we have limited backup systems and redundancy and we have experienced system failures and electrical outages from time to time in the past which have disrupted our operations. We do not have a disaster recovery plan in the event of damage from fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins and similar events. If any of the foregoing occurs, we may experience a complete system shut-down. We do not carry any business interruption insurance. To improve the performance and to prevent disruption of our services, we may have to make substantial investments to deploy additional servers or one or more copies of our websites to mirror our online resources. To the extent we do not address the capacity restraints and redundancy described above, such constraints could have a material adverse effect on our business, financial condition and results of operations.

 

14
 

 

Acquisitions could have negative consequences, which could harm our business.

 

On November 30, 2013, we signed the Auto Mall Acquisition Agreement to purchase 100% of the equity of Zhonghe, which owns and operates the Airport International Auto Mall. Under the terms of the Auto Mall Acquisition Agreement, Shisheng will pay RMB559,768,000 (approximately $91.4 million) to Hezhong, in four annual installments with an annualized rate of interest of 6%. The initial payment of RMB240,000,000 (approximately $39.2 million) was paid within 5 business days after the signing of the Agreement. We made an installment payment of approximately $16.3 million in November 2014 and $3.2 million in January 2015, and have to remit two more installments at approximately $19.5 million each, including principal and interest in November of 2015 and 2016. During the year ended December 31, 2014, we incurred substantial loss on Zhonghe primarily due to the depreciation expense on the Airport International Auto Mall. We lease a portion of the Airport International Auto Mall to Car King Tianjin to operate a used car business. We believe that there is a strong market for used car sales in China and Car King Tianjin will provide us with opportunities for long-term growth. In addition, we are considering using this facility to expand into the retail automobile sales market, which may generate overall higher gross margins. However, it is uncertain that these plans will be successfully implemented and will generate any profits.

 

Additional acquisitions could require significant capital infusions and could involve many risks including, but not limited to, the following:

 

Difficulty integrating the acquired company’s personnel, products, product roadmaps, technologies, systems, processes and operations, including product delivery, order management, and information systems;

 

Difficulty in forming the acquired company’s financial policies and practices to our policies and practices and in implementing and maintaining adequate internal systems and controls over financial reporting and information systems of the acquired company;

 

Diversion of management’s attention and disruption of ongoing business;

 

Difficulty in combining service and technology offerings and entering into new markets or geographical areas in which we have no or limited direct experience and where our competitors may have stronger market positions;

 

Loss of management, sales, technical or other key personnel;

 

Revenue from the acquired companies not meeting our expectations, and the potential loss of the acquired companies’ customers, distributors, resellers, suppliers, or other partners;

 

Delays or difficulties and the attendant expense in evaluating, coordinating, and combining administrative, sales, research and development and other operations, facilities, and relationships with third parties in accordance with local laws and other obligations while maintaining adequate standards, controls and procedures, including financial controls and controls over information systems;

 

Incurring amortization expense related to intangible assets and recording goodwill and non-amortizable assets that will be subject to impairment testing and possible impairment charges;

 

Dilution of existing stockholders as a result of issuing equity securities, including the assumption of any stock options or other equity awards issued by the acquired company;

 

Overpayment for any acquisition or investment or unanticipated costs or liabilities;

 

Responsibility for the liabilities of the acquired company, including any potential intellectual property infringement claims or other litigation; and

 

Incurring substantial write-offs, restructuring charges, and transactional expenses.

 

Our failure to manage these risks and challenges could materially harm our business, financial condition, and results of operations. Further, if we do not successfully address these challenges in a timely manner, we may not fully realize all of the anticipated benefits or synergies on which the value of a transaction was based. Future transactions could cause our financial results to differ from expectations of market analysts or investors for any given quarter, which could, in turn, cause a decline in our stock price.

 

15
 

 

We may require additional capital in the future, which may not be available on favorable terms or at all.

 

Our future capital requirements will depend on many factors, including industry and market conditions, our ability to successfully implement new business plan and marketing initiatives. We have to remit a total of approximately $39.1 million (RMB240,000,000) including principal and interest of $19.5 million each in November of 2015 and 2016. We anticipate that we may need to raise additional funds in order to grow our business, implement our business strategy and fund the future payments of the payable related to the Zhonghe Acquisition. We anticipate that any such additional funds may be raised through equity or debt financings. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. Even if we are able to raise capital through equity or debt financings, as to which there can be no assurance, the interest of existing shareholders in our company may be diluted, and the securities we issue may have rights, preferences and privileges that are senior to those of our common stock or may otherwise materially and adversely affect the holdings or rights of our existing shareholders. If we cannot obtain adequate capital, we may not be able to fully implement our business strategy and may not make the payments due to the banks or to the seller of Zhonghe, and our business, results of operations and financial condition could be adversely affected. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

We may be required to write down our real estate property and a significant impairment charge would adversely affect our operating results.

 

At December 31, 2014, we had approximately $67 million for the carrying value of the Airport International Auto Mall on our consolidated balance sheet. The fair market value of this property is affected by the condition of the real estate market in China, especially in Tianjin. Even though the real estate market has been on an upward trend in recent years, it is uncertain that this trend will continue. If the Chinese real estate market declines, the market value of our real estate property may decline below its carrying value on our consolidated balance sheet. As a result, we may be required to record a significant amount of impairment charge which will adversely affect our operating results and financial condition. During the course of the impairment evaluation for the Airport Auto Mall Automotive Service reporting unit at December 31, 2014, we determined that the carrying value of the Airport International Auto Mall property exceeded its fair value. Consequently, the Company recorded an impairment loss of $3,003,809 during the year ended December 31, 2014, which represents the excess of the carrying value of this property over its fair value.

 

If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.

 

We review our goodwill and intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be evaluated for impairment at least annually. Factors that may be considered are changes in circumstances indicating that the carrying value of our goodwill or intangible assets may not be recoverable, which include a decline in stock price and market capitalization, a decrease in future cash flows, and slower growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or intangible assets is determined, resulting in an impact on our results of operations. As of December 31, 2014, we performed an impairment test on our goodwill for the Sales of Automobiles and Airport Auto Mall Automotive units. Due to the significant vacant space not being rented out at the Airport International Auto Mall property, the continued loss from Car King Tianjin, our actual operating profits and cash flows being lower than expected during fiscal year 2014, and the estimated fair value being less than the carrying value for the Airport Auto Mall Automotive unit, the Company concluded that an impairment existed at December 31, 2014. The fair values were estimated based on the future discounted cash flow generated from these reporting units. As a result, the Company recorded an impairment loss on goodwill of $16,041,383 related to the Airport Auto Mall Automotive unit for the fiscal year 2014.  

 

We incur significant costs ensuring compliance with US corporate governance and accounting requirements.

 

We incur significant legal and financial compliance costs associated with our public company reporting requirements, costs associated with applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the SEC. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board of Directors (the “Board”) or as executive officers. We are currently evaluating and monitoring developments with respect to these applicable rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

 

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The staff of our accounting department lack training and experience in U.S. accounting principles, which may result in accounting errors in the financial statements that we file with the Securities and Exchange Commission (the “SEC”).

 

Our executive offices are located in Tianjin in the PRC. Our entire bookkeeping and accounting staff is located there. Our books and records are maintained in Chinese, using Chinese accounting principles. Chinese accounting principles vary in many important respects from US accounting principles. To file our Company’s financial statements with the SEC, our accounting staff must convert the financial statements from Chinese accounting principles to US accounting principles. However, none of the members of our accounting staff has extensive experience or training in the preparation of financial statements in conformity with US GAAP. Neither do we have any employee who has previous experience in accounting for a US public company. This situation creates a risk that the financial statements we file with the SEC will fail to present our financial condition and/or results of operations as required by SEC rules and the principles of accounting generally applied in the United States.

 

RISKS RELATING TO THE PEOPLE’S REPUBLIC OF CHINA

 

Political and economic policies of the PRC government could affect our business; PRC economic reform policies or nationalization could result in a total investment loss in our common stock.

 

All of our business, assets and operations are located in China, and all of our revenues are derived from our operations in China. Accordingly, our business, financial condition and results of operations are affected to a significant degree by economic, political and legal developments in China. Changes in political, economic and social conditions in China, adjustments in PRC government policies or changes in laws and regulations could adversely affect our business, financial condition and results of operations. The economy of China differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development in a number of respects, including:

 

structure;

 

level of government involvement;

 

level of development;

 

level of capital reinvestment;

 

growth rate;

 

control of foreign exchange; and

 

methods of allocating resources.

 

Since 1949, China has primarily been a planned economy subject to a system of macroeconomic management. Although the Chinese government still owns the majority of productive assets in China, economic reform policies since the late 1970s have emphasized decentralization, autonomous enterprises and the utilization of market mechanisms. Because many reforms are unprecedented or experimental, they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect our operations.

 

If the PRC imposes restrictions to reduce inflation, future economic growth in the PRC could be severely affected.

 

China’s economy registered a high rate of growth in the decade ending in 2010. Even though the growth rate began to slow starting in 2011, it has continued to grow at a rate in the high single digits since 2011. However, China’s growth rate has not been evenly spread among all sectors of the economy, nor have all geographical regions of the country experienced the same levels of growth. Furthermore, the type of rapid growth that China is currently experiencing is often related to an increased risk of inflation. If the need arises to control inflation, the Chinese government may take similar measures as it has done in the past, including restrictions on the availability of domestic credit, reductions of the purchasing capability of certain of our customers, and limited re-centralization of the approval process for purchases of some foreign products. If similar restrictions are imposed, it may lead to a slowing of economic growth and reduce credit to finance the purchase of vehicles.

 

17
 

  

The PRC government exerts substantial influence over the manner in which we must conduct our business activities.

 

The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

 

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

 

The recent nature and uncertain application of many PRC laws applicable to us create an uncertain environment for business operations and they could have a negative effect on us.

 

The PRC legal system is a civil law system. Unlike the common law system, the civil law system is based on written statutes in which decided legal cases have little value as precedent. Furthermore, although China has made considerable progress in introducing new laws and regulations concerning foreign investment, corporate organization and governance, commerce and trade and taxation, these laws and regulations are relatively new, and the interpretation and enforcement of these laws involve significant uncertainties. Furthermore, the promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could have a negative impact on our business and business prospects. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty.

 

Currency conversion and exchange rate volatility could adversely affect our financial condition.

 

The PRC government imposes control over the conversion of Renminbi (“RMB”) into foreign currencies. Under the current unified floating exchange rate system, the People’s Bank of China publishes an exchange rate (the “PBOC exchange rate”), based on the previous day’s dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency may enter into foreign exchange transactions at exchange rates within an authorized range above or below the PBOC exchange rate according to market conditions.

 

Enterprises in the PRC that require foreign exchange for transactions relating to current account items, may, without approval of the State Administration of Foreign Exchange (“SAFE”), effect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks by providing valid receipts and proofs.

 

Convertibility of foreign exchange in respect of capital account items, such as direct investment and capital contribution, is still subject to certain restrictions, and prior approval from the SAFE or its relevant branches must be sought.

 

In 2005, the Chinese government announced that they would begin pegging the exchange rate of the RMB against a number of currencies, rather than just the United States dollar. Under the new policy, RMB has fluctuated within a narrow and managed band against a basket of certain foreign currencies. As our operations are located in China, any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert United States dollars into RMB for our operations, appreciation of this currency against the United States dollar could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert RMB into United States dollars for other business purposes and the United States dollar appreciates against this currency, the United States dollar equivalent of the RMB we convert would be reduced.

 

Laws and regulations applicable to the Internet in China remain unsettled and could have a material adverse effect on Internet’s growth and thereby have a material adverse effect on our business.

 

Growth of the Internet in China could be materially and adversely affected by governmental regulation of the industry. Due to the increasing popularity and use of the Internet and other online services, it is possible that regulations may be adopted with respect to the Internet or other services covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust and characteristics and quality of products and services. Furthermore, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies conducting business online. The adoption of additional laws or regulations may slow the growth of the Internet or other services, which could in turn lead to reduced Internet traffic and increase our cost of doing business. While we are not aware of any existing or proposed regulations that have a significant direct adverse effect on our business, a restrictive regulatory policy regarding the Chinese Internet industry would have a material adverse effect on us by slowing the industry’s growth in China.

 

18
 

 

We may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us.

 

We conduct our operations in China and all of our assets are located in China. In addition, most of our directors and executive officers reside within China, and substantially all of the assets of these persons are located within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon those directors or executive officers, including with respect to matters arising under US federal securities laws or applicable state securities laws. Moreover, our Chinese counsel has advised us that China does not have treaties with the US and many other countries that provide for the reciprocal recognition and enforcement of judgment of courts. As a result, recognition and enforcement in China of judgments of a court of the US or any other jurisdiction in relation to any matter may be difficult or impossible.

 

Restrictions on paying dividends or making other payments to us bind our subsidiaries in China.

 

We are a holding company and do not have any assets or conduct any business operations in China other than our investments in our subsidiaries in China. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid by our PRC subsidiaries. If our PRC subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our PRC subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC laws and regulations, our PRC subsidiaries are required to allocate at least 10% of their after-tax profits each year, if any, to PRC statutory reserves before distributing dividends until the balance of such fund has reached 50% of its registered capital. Our PRC subsidiaries with foreign investment are also required to further set aside a portion of its after-tax profits to fund the employee welfare fund at the discretion of the board. Although PRC statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of our PRC subsidiaries, the reserve funds are not distributable as cash dividends except in the event of liquidation of any of our PRC subsidiaries.

 

The Chinese government also imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency. If we or any of our subsidiaries are unable to receive all of the revenues from our operations through these arrangements, we may be unable to effectively finance our operations or pay dividends on our common stock.

 

Our significant amount of deposits in certain banks in China may be at risk if these banks go bankrupt during our deposit period, and the risk of bankruptcy of the banks with which we have lines of credit may adversely affect our ability to provide financial services to our customers.

 

As of December 31, 2014, we had approximately $7.8 million of cash deposited in banks, such as time deposits and bank notes, and $12.2 million of restricted cash, which constitute substantially all of our total cash and cash equivalents (both unrestricted and restricted) as of December 31, 2014. The terms of these deposits are, in general, up to twelve months. Historically, deposits in Chinese banks are secure due to the state policy on protecting depositors’ interests. However, China promulgated a new Bankruptcy Law in August 2006, which came into effect on June 1, 2007, and which contains a separate article expressly stating that the State Council may promulgate implementation measures for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the new Bankruptcy Law, a Chinese bank may go bankrupt. In addition, since China’s accession to the WTO, foreign banks have been gradually permitted to operate in China and have been competitors against Chinese banks in many aspects, especially since the opening of Chinese business to foreign banks in late 2006. Therefore, the risk of bankruptcy of those banks in which we have deposits has increased. In the event of bankruptcy of one of the banks which holds our deposits, we are unlikely to claim our deposits back in full since we are unlikely to be classified as a secured creditor based on PRC laws. In the event that one or more of our banks files for bankruptcy protection, our ability to offer Financing Services to our customers may be materially and adversely impacted, thereby having a material adverse effect on our operations and profitability.

 

PRC regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate

 

On August 8, 2006, six PRC regulatory agencies namely, the PRC Ministry of Commerce, the State Assets Supervision and Administration Commission (“SASAC”), the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission (“CSRC”), and SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), which became effective on September 8, 2006, as amended on June 22, 2009. The M&A Rules significantly revised China’s regulatory framework governing onshore-to-offshore restructurings and foreign acquisitions of domestic enterprises. The M&A Rules signify greater PRC government attention to cross-border merger, acquisition and other investment activities, by confirming MOFCOM as a key regulator for issues related to mergers and acquisitions in China and requiring MOFCOM approval of a broad range of merger, acquisition and investment transactions. Further, the M&A Rules establish reporting requirements for acquisition of control by foreigners of companies in key industries, and reinforce the ability of the Chinese government to monitor and prohibit foreign control transactions in key industries. Among other things, the M&A Rules include new provisions that purport to require that an offshore special purpose vehicle, or SPV, formed for listing purposes and controlled directly or indirectly by PRC companies or individuals must obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. However, the application of this PRC regulation remains unclear regarding the scope and applicability of the CSRC approval requirement.

 

19
 

  

We are committed to complying with and to ensuring that our beneficial owners who are subject to the M&A Rules will comply with the relevant rules. However, we cannot assure you that all of our current or future beneficial owners who are PRC residents will comply with our request to make or obtain any applicable registrations or comply with these rules. Any failure by any of our current or future beneficial owners to comply with relevant requirements under this regulation could subject us to fines or sanctions imposed by the PRC government, including restrictions on our PRC subsidiaries’ ability to pay dividends or make distributions to us and our ability to increase our investment in our PRC subsidiaries.

 

RISKS RELATING TO OUR COMMON STOCK

 

The market price for shares of our common stock could be volatile; the sale of material amounts of our common stock could reduce the price of our common stock and encourage short sales.

 

The market price for the shares of our common stock may fluctuate in response to a number of factors, many of which are beyond our control. Such factors may include, without limitation, the general economic and monetary environment, quarter-to-quarter variations in our anticipated and actual operating results, future financing activities and the open-market trading of our shares in particular.

 

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act of 1933, as amended, subject to certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who has satisfied a six month holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitations, by a non-affiliate of our Company that has satisfied a one year holding period. Any substantial sale of common stock pursuant to Rule 144 may have an adverse effect on the market price of our common stock.

 

One stockholder exercises significant control over matters requiring stockholder approval.

 

Bright Praise Enterprises Limited has voting power equal to approximately 40.85% of our voting securities. As a result, Bright Praise Enterprises Limited, through such stock ownership, exercises significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership in Bright Praise Enterprises Limited may also have the effect of delaying or preventing a change in control of us that may be otherwise viewed as beneficial by stockholders other than Bright Praise Enterprises Limited.

 

If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results and prevent fraud. As a result, current and potential stockholders could lose confidence in our financial statements, which would harm the trading price of our common stock.

 

Companies that file reports with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404. SOX 404 requires management to establish and maintain a system of internal control over financial reporting and annual reports on Form 10-K filed under the Exchange Act to contain a report from management assessing the effectiveness of a company’s internal control over financial reporting. Separately, under SOX 404, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, public companies that are large accelerated or accelerated filers must include in their annual reports on Form 10-K an attestation report of their regular auditors attesting to and reporting on management’s assessment of internal control over financial reporting. Non-accelerated filers and smaller reporting companies are not required to include an attestation report of their auditors in annual reports.

 

A report of our management is included under Item 9A “Controls and Procedures” of this report. We are a smaller reporting company and, consequently, are not required to include an attestation report of our auditor in this annual report. However, if and when we become subject to the auditor attestation requirements under SOX 404, we can provide no assurance that we will receive an unqualified report from our independent auditors.

 

20
 

 

During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2014, management identified a material weakness relating to our lack of sufficient accounting personnel with an appropriate understanding of US GAAP and SEC reporting requirements.

 

We are undertaking remedial measures, which measures will take time to implement and test, to address this material weakness. There can be no assurance that such measures will be sufficient to remedy the material weakness identified or that additional material weaknesses or other control or significant deficiencies will not be identified in the future. If we continue to experience material weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Each of the foregoing results could cause investors to lose confidence in our reported financial information and lead to a decline in our stock price. See Item 9A “Controls and Procedures” for more information.

 

We do not foresee paying cash dividends in the foreseeable future.

 

We have not paid cash dividends on our stock, and we do not plan to pay cash dividends on our stock in the foreseeable future.

 

We may be required to raise additional financing by issuing new securities with terms or rights superior to those of our shares of common stock, which could adversely affect the market price of our shares of common stock.

 

We may require additional financing to fund future operations, including expansion in current and new markets, programming development and acquisition, capital costs and the costs of any necessary implementation of technological innovations or alternative technologies. We may not be able to obtain financing on favorable terms, if at all. If we raise additional funds by issuing equity securities, the percentage ownership of our current stockholders will be reduced, and the holders of the new equity securities may have rights superior to those of the holders of shares of our common stock, which could adversely affect the market price and the voting power of shares of our common stock. If we raise additional funds by issuing debt securities, the holders of these debt securities would similarly have some rights senior to those of the holders of shares of common stock, and the terms of these debt securities could impose restrictions on operations and create a significant interest expense for us.

 

We may have difficulty raising necessary capital to fund operations as a result of market price volatility for our shares of common stock.

 

In recent years, the securities markets in the United States have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operations, performances, underlying asset values or prospects of such companies. For these reasons, our shares of common stock can also be expected to be subject to volatility resulting from purely market forces over which we will have no control. If our business development plans are successful, we may require additional financing to continue to develop and exploit existing and new technologies and to expand into new markets. The exploitation of our technologies may, therefore, be dependent upon our ability to obtain financing through debt and equity or other means.

 

We are responsible for the indemnification of our officers and directors which could result in substantial expenditures, which we may be unable to recoup.

 

Our Articles of Incorporation and Bylaws provide for the indemnification of our directors and officers, under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of us. This indemnification policy could result in substantial expenditures, which we may be unable to recoup.

 

We rely on our PRC subsidiaries for the distribution of any dividends to our shareholders.

 

We are a company incorporated in the United States and our cash flow depends on dividends from our PRC subsidiaries. In order for us to distribute any dividends to our shareholders, we will rely on dividends distributed by our PRC subsidiaries. PRC regulations currently permit payment of dividends only out of accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Under current PRC laws and regulations, our PRC subsidiaries are required, where applicable, to allocate a portion of their net profits to PRC statutory reserves before distributing dividends, including at least 10% of their net profit to PRC statutory reserves until the balance of such fund has reached 50% of their registered capital. These reserves can only be used for specific purposes, including making-up cumulative losses of previous years, conversion to our equity capital, and application to business expansion, and are not distributable as dividends. Further, if our PRC subsidiaries incur debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Our PRC subsidiaries’ restricted net assets as of December 31, 2014 amounted to approximately $3,437,000.

 

21
 

 

Techniques employed by short sellers may drive down the market price of the Company’s common stock.

 

Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s best interests for the price of the stock to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. These short attacks have, in the past, led to selling of shares in the market.

 

Recently, public companies that have substantially all of their operations in China have been the subject of short selling. Much of the scrutiny and negative publicity has centered around allegations of a lack of effective internal control over financial reporting resulting in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result, many of these companies are now conducting internal and external investigations into the allegations and, in the interim, are subject to shareholder lawsuits and/or SEC enforcement actions.

 

It is not clear what effect such negative publicity would have on the Company, if any. If the Company were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, the Company could have to expend a significant amount of resources to investigate such allegations and/or defend itself. While the Company would strongly defend against any such short seller attacks, the Company may be constrained in the manner in which it can proceed against the relevant short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could distract the Company’s management from growing the Company. Even if such allegations are ultimately proven to be groundless, allegations against the Company could severely impact its business operations and stockholders equity, and any investment in the Company’s stock could be greatly reduced or rendered worthless.

 

A DTC “Global Lock” on the electronic clearing of trades in our securities in the future may affect the liquidity of our stock and our ability to raise capital.

 

On July 16, 2014, the Company received a letter from the Depository Trust Company (“DTC”), notifying the Company of DTC’s intention to suspend all book-entry services provided to its participants with respect to the common shares of the Company (a “Global Lock”). On October 13, 2014, the Company received notice from DTC that it was suspending the notice of Global Lock contained in this letter. DTC reserved its right to proceed with the institution of a Global Lock in the future, but noted that no Global Lock would be instituted without first providing to the Company notice and an opportunity to object. If a Global Lock were to be imposed, the Company’s common shares would not be eligible for delivery, transfer or withdrawal through DTC until the Global Lock was removed, if ever.

  

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

Not applicable.

 

22
 

 

ITEM 2. PROPERTIES.


Our main offices are located at Floor 1 FTZ International Auto Mall, 86 Tianbao, Tianjin Province, PRC. The lease relating to our main offices has a 1-year term which expired on December 31, 2014, was renewed in December 2014 for a one year term through December 31, 2015. The annual rent for the office is approximately $19,500 (RMB120,000).

 

Additional office and show room space is located at Floor 1 FTZ International Auto Mall, 86 Tianbao, Tianjin Province, PRC. The lease relating to our main offices has a 1-year term which expired on November 30, 2014. A revised lease was entered into with an annual rent of $20,000 (RMB124,968) for a 1-year term which expires on November 30, 2015.

 

The Company owns the Airport International Auto Mall, a 26,000 square meter airport automobile mall facility on a 68,000 square meter land parcel located at 8 Huanhe W. Road, Tianjin, China. The land use right of this property expires in November 2044.

 

We believe that all our properties and equipment have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.

 

ITEM 3. LEGAL PROCEEDINGS.

 

As of the date of this filing, neither the Registrant nor any of its subsidiaries are a party to any legal proceeding that could reasonably be expected to have a material impact on its operations or finances.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable

 

23
 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Since January 8, 2010, the Company’s common stock has been listed on the NASDAQ Global Market under the ticker symbol “CALI”. The following table sets forth the quarterly average high and low bid prices per share for our common stock for the two most recently completed fiscal years in the period that ended on December 31, 2014.

 

Fiscal Year Ended  Common Stock 
   High   Low 
December 31, 2014        
First Quarter  $4.69   $3.45 
Second Quarter  $3.83   $1.86 
Third Quarter  $2.38   $1.57 
Fourth Quarter  $1.84   $0.72 
           
December 31, 2013          
First Quarter  $5.21   $2.45 
Second Quarter  $4.45   $2.80 
Third Quarter  $3.41   $2.05 
Fourth Quarter  $4.30   $2.18 

 

The source for the high and low closing bids quotations is www.finance.yahoo.com and does not reflect inter-dealer prices. Such quotations are without retail mark-ups, mark-downs or commissions, and may not represent actual transactions.

 

Holders

 

As of April 10, 2015, we had 15 holders of record of our common stock, and our common stock had a closing bid price of $1.64 per share.

 

Outstanding Options, Conversions, and Planned Issuance of Common Stock.

 

As of December 31, 2014, there were no warrants or options outstanding to acquire any shares of our common stock.

 

Dividends and Related Policy

 

We presently intend to retain all earnings, if any, for use in our business operations and accordingly, the Board of Directors (the “Board”) does not anticipate declaring any cash dividends for the foreseeable future. Any future determination to pay dividends will be at the discretion of the Board and will be contingent upon our financial condition, results of operations, current and anticipated cash needs, restrictions contained in current or future financing instruments, plans for expansion and such other factors as the Board deems relevant. We have not paid any cash dividends on our common stock.

 

PRC regulations currently permit payment of dividends only out of accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Under current PRC laws and regulations, each of our PRC subsidiaries is required, where applicable, to allocate a portion of its respective net profits to PRC statutory reserves before distributing dividends, including at least 10% of its respective net profits to PRC statutory reserves until the balance of such fund has reached 50% of its respective registered capital. These reserves can only be used for specific purposes, including making-up cumulative losses of previous years, conversion to our equity capital, and application to business expansion, and are not distributable as dividends. Further, if any of our PRC subsidiaries incur debt in the future, the instruments governing the debt may restrict such Subsidiary’s ability to pay dividends or make other distributions to us. For risks associated with the restrictions that limit our ability to pay dividends on common stock, see “Risk factors- We rely on our PRC subsidiaries for the distribution of any dividends to our shareholders.”

 

Transfer Agent and Registrar

 

Our transfer agent is Corporate Stock Transfer, located at 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209. Their telephone number is (303) 282-4800.

 

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Recent Sales of Unregistered Securities

 

None.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

 

None.

 

ITEM 6. SELECTED FINANCIAL DATA.

 

Not applicable.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

 

Forward Looking Statements

 

The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management and should be read in conjunction with the accompanying financial statements and their related notes included in this Report. References in this section to “we,” “us,” “our,” or the “Company” are to the consolidated business of China Auto Logistics Inc. and its wholly owned and majority owned subsidiaries.

 

This Report contains forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expects,” “intends,” “estimates,” “continues,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Report or other reports or documents we file with the SEC from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

 

Business Overview

 

Prior Operations of China Auto Logistics Inc.

 

China Auto Logistics Inc., formerly Fresh Ideas Media, Inc., was incorporated in the State of Nevada on February 22, 2005. Fresh Ideas Media, Inc. was engaged in the advertising and consulting business. In February 2005, Fresh Ideas Media, Inc. formed its wholly-owned subsidiary, Community Alliance, Inc. (“Community Alliance”), an entity which marketed sub-licenses for take home school folders. Fresh Ideas Media, Inc. had only commenced limited operations and had not yet generated significant revenues, and was therefore considered a development stage company.

 

The Exchange and the Spin-Off

 

On November 10, 2008, Fresh Ideas Media, Inc. entered into the Exchange Agreement with HKCo, whereby Fresh Ideas Media, Inc. acquired all of the issued and outstanding securities of HKCo in exchange for the issuance by Fresh Ideas Media, Inc. of 1,950,000 (pre reverse split of 11,700,000) newly-issued shares of our common stock. The Closing occurred on the same day, immediately following the cancellation of an aggregate of 189,167 (pre reverse split of 1,135,000) shares of Fresh Ideas Media, Inc.’s common stock held by Phillip E. Ray and Ruth Daily, Fresh Ideas Media, Inc.’s principal stockholders immediately prior to the Closing. Prior to the Exchange, Phillip E. Ray and Ruth Daily owned approximately 23.89% and 16.58% of the issued and outstanding common stock of Fresh Ideas Media, Inc., respectively. As of the Closing, HKCo beneficially owned approximately 64.64% of the voting capital stock of Fresh Ideas Media, Inc. As a result of the Exchange, HKCo became a wholly owned subsidiary of Fresh Ideas Media, Inc. and Fresh Ideas Media, Inc.’s primary business operations were those of HKCo. Shortly after the Closing, Fresh Ideas Media, Inc. changed its name from Fresh Ideas Media, Inc. to China Auto Logistics Inc..

 

In connection with the consummation of the Exchange, Fresh Ideas Media, Inc. agreed to consummate the spin-off of Community Alliance through a dividend of all of the issued and outstanding capital stock of Community Alliance to holders of Fresh Ideas Media, Inc.’s common stock as of September 9, 2008. The spin-off was approved by the Board of Directors of Fresh Ideas Media, Inc. on September 9, 2008 and was to be consummated upon the satisfactory resolution of all of the SEC’s comments to the Form 10 registration statement relating to Community Alliance’s common stock and such registration statement’s effectiveness. Upon the consummation of the spin-off, the business and operations of HKCo were the sole business and operations of Fresh Ideas Media, Inc.

 

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HKCo was incorporated in Hong Kong on October 17, 2007. Prior to December 25, 2007, HKCo had minimal assets and no operations. On December 25, 2007, Shisheng a company established under the laws of the People’s Republic of China, became a wholly-owned foreign enterprise of HKCo and this arrangement was approved by relevant ministries of the PRC government.

 

Upon the completion of the transactions on December 25, 2007 and November 10, 2008, the Company owned 100% of HKCo which owned 100% of Shisheng, the operating entity of HKCo. For financial reporting purposes, these transactions are classified as a recapitalization of Shisheng and the historical financial statements of Shisheng are reported as the Company’s historical financial statements.

 

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

 

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

 

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

 

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

 

On November 30, 2013, Shisheng signed the Auto Mall Acquisition Agreement with Hezhong to purchase 100% of the equity of Zhonghe, which owns and operates the Airport International Auto Mall. Under the terms of the Auto Mall Acquisition Agreement, Shisheng will pay RMB559,768,000 (approximately $91.4 million) to Hezhong, in four annual installments with an annualized rate of interest of 6%. The initial payment of RMB240,000,000 (approximately $39.2 million) was paid within 5 business days after the signing of the Agreement. Upon the payment by Shisheng of this first installment, Hezhong transferred control of Zhonghe to Shisheng. Failure by Shisheng to pay the remaining installments may result in the termination of the Auto Mall Acquisition Agreement, as well as a penalty of 10% of the total transfer price.

 

Current Business of the Company

 

The Company provides individual and business customers with services in relation to automobile sales, Financing Services, custom clearance, storage, national transportation, quotation platform, and information relating to automotive services and products, through its websites (www.at188.com, www.at160.com), Also, the Company sells imported automobiles, manages an auto mall for customers, and as the only one-stop service provider in Tianjin provides dealer financing to our customers. As a result of the Zhonghe Acquisition and the establishment of the Joint Venture in November 2013, we entered into the used car sales market. We believe that there is a strong market for used car sales in China and that the Joint Venture will provide us with opportunities for long term growth. In addition, we intend to use the Airport International Auto Mall to expand into the retail automobile sales market which may generate higher overall gross margins.

 

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Critical Accounting Policies, Estimates and Assumptions

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These consolidated financial statements are prepared in accordance with US GAAP, which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenues and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. The most significant estimates and assumptions include the valuation of accounts receivable, and the useful lives and impairment of property and equipment, goodwill and intangible assets, the valuation of deferred tax assets and inventories and the provision for income taxes. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed in this Form 10-K reflect the more significant judgments and estimates used in preparation of our consolidated financial statements. We believe there have been no material changes to our critical accounting policies and estimates.

 

The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our consolidated financial statements:

 

Revenue Recognition

 

We recognize revenue when there is persuasive evidence of an arrangement, delivery has occurred upon shipment or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectibility is reasonably assured.

 

The Company recognizes the sales of automobiles upon delivery and acceptance by the customers and where collectibility is reasonably assured.

 

Service revenue related to financing services is recognized ratably over the financing period.

 

Service fees for graphical advertisements on the Company’s websites are charged on a fixed fee basis. The Company recognizes the advertising revenue when the service is performed over the service term. The Company charges a monthly fee for listing services and recognizes the revenue when services are performed. The Company offers sales incentives to its customers in the form of (i) subscription exemptions; (ii) discounted prices and (iii) free advertisements. The Company classifies sales incentives as a reduction of net revenues. Revenues, net of discounts and allowances, are recognized ratably over the service periods.

 

Airport auto mall automotive services include (i) the rental of the Airport International Auto Mall, and (ii) equity income (loss) derived from Car King Tianjin.

 

Rental income from the Airport International Auto Mall is recognized over the lease term on a straight-line basis. The Company’s lease agreement, entered into with Car King Tianjin in January 2014 (the “Rental Agreement”), contains a contingent rental arrangement for fiscal years 2016, 2017 and 2018, under which rental income is determined based on a percentage of Car King Tianjin’s gross profit. Notwithstanding this arrangement, the Rental Agreement contains both a minimum and a maximum annual rental amount. Contingent rental income is recognized when the specified targets are met.

 

The equity income (loss) derived from Car King Tianjin is recognized based on the Company’s ownership share in Car King Tianjin’s net income (loss) 

 

The Company recognizes revenue from Automobile Value-added Services when such services are performed.

 

Value Added Taxes represent amounts collected on behalf of specific regulatory agencies that require remittance by a specified date. These amounts are collected at the time of sale and are detailed on invoices provided to customers. The Company accounts for value added taxes on a net basis. The Company recorded and paid business taxes based on a percentage of the net service revenues and reported the service revenue net of the business taxes and other sales related taxes.

 

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Receivables Related to Financing Services

 

We record a receivable related to financing services when cash is loaned to customers to finance their purchases of automobiles. Upon repayments by customers, we record the amounts as reductions of receivables related to financing services. Receivables related to financing services represents the aggregate outstanding balance of loans from customers related to their purchases of automobiles. We charge a fee for providing loan services and such fee is prepaid by customers. We amortize these fees over the receivable term, which is typically 90 days, using the straight-line method. We record such amortized amounts as financing fee income and the unamortized amount is classified as deferred revenue on the Company’s consolidated balance sheets.

 

We evaluate the collectibility of outstanding receivables at the end of each of the reporting periods and make estimates for potential credit losses. We have not experienced any losses on our accounts receivable historically.

 

Inventories

 

Inventory is stated at the lower of cost (using the first-in, first-out method) or market. We continually evaluate the composition of our inventory, assessing slow-moving and ongoing products. Our products are comprised of the purchase cost of automobiles which declines in value over time. We continuously evaluate our inventory to determine the reserve amount for slow-moving inventory.

 

Income Taxes

 

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

 

We account for income taxes using an asset and liability approach for financial accounting and reporting for income tax purposes. Under the asset and liability method, deferred income taxes are recognized for temporary differences, net operating loss carryforwards and credits by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We conduct this analysis on a quarterly basis. As of December 31, 2014, deferred tax liabilities totaled $11,028,988.

 

The Company has not provided deferred taxes on unremitted earnings attributable to its international subsidiaries as they are to be reinvested indefinitely. These earnings relate to ongoing operations and are approximately $28.7 million as of December 31, 2014. Because of the availability of US foreign tax credits, it is not practicable to determine the US income tax liability that would be payable if such earnings were not indefinitely reinvested.

 

The Company has no material uncertain tax positions as of December 31, 2014 or unrecognized tax benefit which would affect the effective income tax rate in future periods. The Company classifies interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2014, there are no interest or penalties related to uncertain tax positions. The Company does not anticipate any significant increases or decreases to its liability for unrecognized tax benefits within the next 12 months.

 

Long-Lived Assets

 

Long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related assets or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value of asset less disposal costs. During the course of the impairment evaluation for the Airport International Mall Automotive Service reporting unit at December 31, 2014, the Company determined that the carrying value of Airport International Mall property exceeded its fair value. Consequently, the Company recorded an impairment loss of $3,003,809 during the year ended December 31, 2014, which represents the excess of the carrying value of this property over its fair value.

 

Goodwill and Acquired Intangible Assets Impairment

 

We perform our impairment tests for goodwill and acquired intangible assets with indefinite lives on an annual basis, during the fourth quarter of our fiscal year, or more frequently, if changes in facts and circumstances indicate that impairment in the value of goodwill and acquired intangible assets recorded on our consolidated balance sheet may exist. In order to estimate the fair value of goodwill and intangible assets with indefinite lives, we typically estimate future revenue, consider market factors and estimate our future cash flows. Based on these key assumptions, judgments and estimates, we determine whether we need to record an impairment charge to reduce the value of the asset carried on our balance sheet to its estimated fair value. Assumptions, judgments and estimates about future values are complex and often subjective. They can be affected by a variety of external and internal factors, including industry and economic trends and changes in our business strategy or our internal forecasts. Although we believe the assumptions, judgments and estimates we have made have been reasonable and appropriate, different assumptions, judgments and estimates could materially affect our reported financial results.

 

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As of December 31, 2014, we performed an impairment test on our goodwill for the Sales of Automobiles and Airport Auto Mall Automotive units. Due to the significant vacant space not being rented out at the Airport International Auto Mall property, the continued loss from Car King Tianjin, our actual operating profits and cash flows being lower than expected during fiscal year 2014, and the estimated fair value being less than the carrying value for the Airport Auto Mall Automotive unit, the Company concluded that an impairment existed at December 31, 2014. The fair values were estimated based on the future discounted cash flow generated from these reporting units. As a result, the Company recorded an impairment loss on goodwill of $16,041,383 related to the Airport Auto Mall Automotive unit for the fiscal year 2014. As of December 31, 2013, no indication of goodwill impairment existed.

 

New Accounting Pronouncements

 

In August 2014, FASB issued Accounting Standards Update (ASU) No. 2014-15 Preparation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern.    Under US GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity's liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity's liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements—Liquidation Basis of Accounting. Even when an entity's liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this Update should be followed to determine whether to disclose information about the relevant conditions and events.  The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.  The adoption of this guidance did not have a significant effect on the Company’s consolidated financial statements.

 

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

 

Results of Operations for the Fiscal Year Ended December 31, 2014 Compared To the Fiscal Year Ended December 31, 2013

 

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

 

   Year ended December 31,   Change in 
   2014   2013   % 
Net revenue  $402,269,611    100.00%  $459,235,057    100.00%   (12.40)%
Cost of revenue   397,829,464    98.90%   452,379,416    98.51%   (12.06)%
Gross profit   4,440,147    1.10%   6,855,641    1.49%   (35.23)%
Operating expenses   26,183,425    6.51%   3,925,894    0.85%   566.94%
(Loss) income from operations   (21,743,278)   (5.41)%   2,929,747    0.64%   (842.16)%
Other (loss) income   (6,525,473)   (1.62)%   (778,572)   (0.17)%   738.13%
(Loss) income before income taxes and non controlling interests   (28,268,751)   (7.03)%   2,151,175    0.47%   (1,414.11)%
Net (loss) income   (26,883,648)   (6.68)%   516,657    0.11%   (5,303.38)%
Net (loss) income attributable to shareholders of China Auto Logistics Inc.  $(26,863,297)   (6.68)%  $524,260    0.11%   (5,224.04)%

 

Our net revenue for 2014 decreased 12.4% to $402,269,611 from $459,235,057 for 2013 and our cost of revenue for 2014 decreased 12.06% to $397,829,464 from $452,379,416 for 2013. Gross profit margin decreased 39 basis points from 1.49% for 2013 to 1.10% for 2014. As compared to 2013, our gross profit, (loss) income from operations, net (loss) income and net (loss) income attributable to shareholders of China Auto Logistics Inc. for 2014 decreased 35.23% to $4,440,147, decreased 842.16% to $(21,743,278), decreased 5,303.38% to $(26,883,648), and decreased 5,224.04% to $(26,863,297), respectively primarily due to the decline of Sales of Automobiles, Web-based Advertising Services and Automobile Value Added Services and the impairment losses on the Airport International Auto Mall property and goodwill.

 

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Net Revenue

 

The following table sets forth a summary of our net revenue by categories for years indicated, in dollars and as a percentage of total net revenue:

 

   Year ended December 31,   Change in 
   2014   2013   % 
Net revenue  $402,269,611    100.00%  $459,235,057    100.00%   (12.40)%
- Sales of Automobiles   393,669,010    97.86%   450,143,413    98.03%   (12.55)%
- Financing Services   7,403,202    1.84%   6,893,986    1.50%   7.39%
- Web-based Advertising Services   242,250    0.06%   471,277    0.10%   (48.60)%
- Automobile Value Added Services   124,840    0.03%   740,338    0.16%   (83.14)%
- Airport Auto Mall Automotive Services   665,693    0.17%   15,788    0.00%   4,116.45%
- Auto Mall Management Services   164,616    0.04%   970,255    0.21%   (83.03)%

 

Sales of Automobiles

 

Net revenue from Sales of Automobiles decreased 12.55% to $393,669,010 for 2014 from $450,143,413 for 2013. During 2014 and 2013, the Company sold 3,737 automobiles and 4,837 automobiles, respectively, representing a decrease of 22.74% in volume. After a long decline in the average selling price of our automobiles, the average unit selling price per automobile increased in 2014 by 11.70% to approximately $105,000 from approximately $94,000 for 2013.

 

Even though average selling prices rebounded in 2014, our profit margin percentage remained at a relatively low level due to strong competition in the automobile industry, especially in major cities. Our sales volume declined in 2014 primarily due to relatively weak demands as a result of slower economy. However we continue to witness high demand for luxury automobiles as household incomes in China continues to climb. According to an article, “China Luxury Car Sales Seen Beating U.S. in 2016” published by Bloomberg in March 2013, China premium car sales will likely surpass sales in the U.S. as early as 2016, and equal that of Western Europe by 2020, as a result of rising income levels in the world’s second-largest economy based on data provided by McKinsey & Co. In addition, demand for luxury vehicles in China is expected to more than double by 2020 to 3 million from 1.25 million vehicles sold in 2012, outpacing the growth of the worldwide automobile market. The Company will continue its focus on the marketing of luxury automobiles.

 

Since the first quarter of 2013, we have experienced increased competition as more companies enter the imported automobile market. While we remain one of the leaders in the imported automobile market, we continue to sell our automobiles at a low gross margin in order to expand our market share and maintain our market leader status. During the year ended December 31, 2014, sales of our top three selling brands, BMW, Land Rover and Mercedes Benz, accounted for 66% of our total net automobile sales. During the year ended December 31, 2013, sales of our top three selling brands, BMW, Mercedes Benz and Toyota, accounted for 73% of our net automobile sales. We sold substantially more Land Rover vehicles during 2014 than during 2013. Toyota, one of our top three selling brands in 2013, ranked fourth in terms of number of units sold during 2014. Since the average selling prices for Land Rover were significantly higher than those of Toyota, this resulted in higher overall selling prices in 2014 compared to 2013. Our gross margin on automobile sales decreased to 0.02% for the year ended December 31, 2014 from 0.09% for year ended December 31, 2013. Our reserve amount for slow-moving inventories increased from $192,000 during 2013 to $810,000 during 2014, an increase of $618,000. Excluding the increase in the reserve of $618,000 for 2014 and $192,000 for 2013, our gross margin would have been 0.17% and 0.13%, respectively. We do not expect our gross margin excluding the inventory reserve to drop any further in the future.

 

In order to expand our market share and maintain our leading position in the competitive luxury automobile market, we have continued to offer better prices to our customers as compared to our competitors. We achieved this in part by decreasing our gross margin for automobiles throughout fiscal year 2013. We believe this approach will prevent our competitors from being able to match our selling prices. However, as noted above, the average unit selling price increased in fiscal year 2014 compared to fiscal year 2013, and we expect our gross margin to stabilize in 2015.

 

In December 2014, Shenzhen became the eighth city subject to restrictions on automobile purchases, behind Beijing, Shanghai, Guangzhou, Guiyang, Shijiazhuang, Tianjin and Hangzhou. The restrictions vary from city to city , however most of these cities set an annual limit on the maximum number of vehicles in each category that may be licensed, in order to limit the number of new vehicles added to the roads each year. Some cities, such as Beijing, have adopted a lottery system wherein only potential buyers who win the lottery draw will be able to purchase vehicles. As more cities become subject to these and similar purchase restrictions, the future growth in the automobile market in China will be negatively impacted.

 

Sales to the Company’s top five customers, each of which is a car dealer, accounted for 28% and 36% of the Company’s sales during 2014 and 2013, respectively. The Company will continue to maintain close working relationships with its top customers while attempting to reduce the concentration of revenues among these top customers actively looking for new customers to enlarge its customer base.

 

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Financing Services

 

The Company provides Financing Services to its customers using the Company’s bank facility lines of credit. The Company earns a service fee from its customers for drawing its facility lines of credit related to its customers’ purchases of automobiles and payment of import taxes. Customers bear all the interest and fees charged by the banks and prepay those fees upon the execution of their service contracts with the Company.

 

Net revenue from Financing Services for 2014 increased 7.39% to $7,403,202 from $6,893,986 for 2013. The Company had an aggregate amount of credit lines of approximately $182 million (RMB1.12 billion) as of December 31, 2014. Our Financing Services income and related cost of revenue are affected by the interest rate charged by banks. Our Financing Services revenue consists of two portions: interest income and fee income. The revenue from the fee income portion of our Financing Services decreased during the year ended December 31, 2014. The ratio of the revenue from our interest income portion to our net Financing Services revenue was higher during the year ended December 31, 2014 as compared to that during 2013. Excluding revenue from the interest income portion of $4,130,301 and $2,537,905 in the years ended December 31, 2014 and 2013, respectively, the revenue from the fee income portion of our Financing Services decreased 24.87% to $3,272,901 for the year ended December 31, 2014 from $4,356,061 for the year ended December 31, 2013. The gross margin for our Financing Services segment decreased to 43.3% for the year ended December 31, 2014 from 62.87% for the year ended December 31, 2013. After strong growth in the fee income portion of our Financing Services beginning in 2012, we began to see a flattening of our revenue from this segment starting in the third quarter of 2013. Historically, a significant portion of our financing income has been related to fees that we charge to our customers for extending temporary credit beyond the financing terms these customers have contracted for with banks. Because of a reutilization of our working capital following the Zhonghe Acquisition and the creation of Car King Tianjin, we had to limit our provision of this service in the first half of 2014. As a result of better management of our working capital, and by obtaining additional short term financing arrangements during the second half of 2014, we were able to increase our fee income from the temporary credit service in the second half of the year, which partially offset the loss in the first half of the year. Temporary credit service has been a significant part of our financing service and has been a major contributor to our gross margin in the recent years. Our gross margin was negatively impacted by the decrease of the temporary credit service during fiscal year 2014 as compared to fiscal year 2013 when we had less available working capital to offer this service after the acquisition of Zhonghe. We will seek to continue to better manage the use of our cash flow in order to generate additional fee income in the future.

 

We provide Financing Services to our customers with our lines of credit with major commercial banks in the PRC, including Agricultural Bank of China, China Merchants Bank, and Pudong Development Bank, China Zheshang Bank, Industrial and Commercial Bank of China, China Minsheng Bank, and Shengjing Bank. We continue to strengthen our relationship with these banks and aim to negotiate with more banks for higher lines of credit at more favorable terms. Based on the Company’s business relationships with some financial institutions, we are able to obtain financing on an “as-needed” basis and we are in negotiations for a number of new credit lines. As of December 31, 2014, we had approximately $119 million lines of credit available to use in our Financing Services. As of April 10, 2015, the Company had aggregate credit lines of approximately $166 million (RMB1.02 billion). Although all of our lines of credit have maturities of less than one year and may not be renewed on the same terms, if at all, we do not expect that the expiration of our lines of credit with any one of our existing banks will have a material adverse effect on our ability to provide Financing Services. However, if the automobile market in the PRC, and in particular the market for imported automobiles, slows down in the future, our revenue from Financing Services would be materially and adversely affected by a decreased number of transactions.

 

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

 

Web-based Advertising Services

 

Our Web-based Advertising Services revenue decreased 48.6% to $242,250 for 2014 from $471,277 for 2013. Revenue from Web-based Advertising Services was generated by subscription fees and advertisements. Since the fiscal year 2012, we have revised our business plan and moved away from Web-based Advertising Services to focus on Automobile Sales, Financing Services and, starting in the first quarter of 2014, the newly developed used car business through Car King Tianjin and any potential opportunities through operating the Airport International Auto Mall. We expect that the revenue generated from this segment will continue to be low compared to other segments.

 

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Automobile Value Added Services

 

Revenue from our Automobile Value Added Services which includes services such as assistance with customs clearance, storage and nationwide delivery services decreased 83.14%, to $124,840 in 2014 from $740,338 in 2013. We expect our Automobile Value Added Services revenue to fluctuate from time to time depending on our customers’ needs.

 

Airport Auto Mall Automotive Services

 

Zhonghe operates two new businesses including (i) selling used cars through Car King Tianjin; and (ii) leasing a portion of the Airport International Auto Mall. We are also considering directly targeting retail customers by selling new imported automobiles out of this facility. We are still finalizing our operating plans to determine the best and most profitable uses for this facility. We lease a portion of the Airport International Auto Mall to Car King Tianjin to operate a used car business. Since the inception of Car King Tianjin’s business, the Company has provided advances to Car King Tianjin as working capital, while Car King China has provided consigned inventories to support Car King Tianjin’s used car sales. From the start of operations in March 2014, Car King Tianjin has gradually increased our volume in used car sales in the Tianjin region. As of December 31, 2014, we had approximately $1.8 million due from Car King Tianjin. Due to the cumulative loss incurred by Car King Tianjin, we fully reserved the $1.8 million due from Car King Tianjin as a result of the uncertainties of collecting these advances. We have not yet received any return on our investment in this joint venture since the inception of its operations. As a result, starting in the third quarter of 2014, we did not record any rental income related to the Airport International Auto Mall lease. Our revenues from Airport Auto Mall Automotive Services were $665,693 (0.17% of all revenues) for the fiscal year 2014. We expect to record rental income revenue when Tianjin’s liquidity improves and it can demonstrate an ability to remit its rental payments under the lease.

 

Since we own less than 50% of Car King Tianjin, the revenue generated from Car King Tianjin is not reported in our consolidated revenue. During the year ended December 31, 2014, Car King Tianjin generated revenue in the amount of $3,430,914. This revenue represented revenue from sales of used automobiles at the Airport International Auto Mall, as well as agency commissions earned from selling automobiles owned by other Car King locations. The number of automobiles sold through Car King Tianjin, including those for which Car King Tianjin acted as an agent for other Car King locations, reached about 858 automobiles, including 49 automobile sales out of our own inventories and 409 automobiles for which we acted as sales agent, during the year ended December 31, 2014. Because the used car market in China is still in a preliminary development stage, we expect the overall used car market to continue to grow, and we hope that our investment will generate reasonable returns in the coming years

 

Auto Mall Management Services

 

Pursuant to a services agreement entered into by and between the Company and Tianjin Prominent Hero International Logistics Co., Ltd., dated as of March 1, 2010, the Company agreed to provide services to manage Tianjin FTZ International Automobile Exhibition and Sales Center for a one-year period for an aggregate consideration of $1,000,000. This agreement had been renewed annually. On March 14, 2014, the Company announced that the Cooperation Agreement dated March 1, 2013, by and between the Company and Tianjin Prominent Hero International Logistics Co., Ltd, to manage the International Auto Mall in Tianjin, China, had not been renewed. The Cooperation Agreement expired according to its terms on February 28, 2014. As a result, the Company has ceased to provide Auto Mall Management Services, and we plan to focus on managing the recently acquired Airport International Auto Mall and growing our other business segments.

 

Our Auto Mall Management Services revenue for the year ended December 31, 2014 and 2013 was $164,616 and $970,255, respectively. This 83.03% decrease was primarily due to the expiration of the management agreement two months into the year, which meant that we only recognized two months of revenue during the year ended December 31, 2014 compared to a full year’s revenue during the year ended December 31, 2013.

 

Cost of Revenue

 

   Year ended December 31,   Change in 
   2014   2013   % 
Net revenue  $402,269,611    100.00%  $459,235,057    100.00%   (12.40)%
Cost of revenue   397,829,464    98.90%   452,379,416    98.51%   (12.06)%
Gross profit   4,440,147    1.10%   6,855,641    1.49%   (35.23)%

 

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Our cost of revenue in 2014 consisted primarily of the cost of automobiles purchased and certain direct labor and overhead costs related to our Financing Services, Web-based Advertising Services, Automobile Value Added Services, Airport Auto Mall Automotive Services and Auto Mall Management Services. Our cost of revenue decreased 12.06%, from $452,379,416 in 2013 to $397,829,464 in 2014. The decrease was primarily due to the decrease in the sales volume of imported automobiles in the year.

 

As our cost of revenue consists primarily of the purchase price of imported automobiles, we have limited influence on such costs. The prices of imported automobiles are determined solely by suppliers and are dependent upon the market conditions. We will continue to work on obtaining more favorable terms and discounts by strengthening our relationship with suppliers and placing more batch orders.

 

Gross profit decreased 35.23% from $6,855,641 in 2013 to $4,440,147 in 2014, due to revenue declining at a higher rate than the decrease of cost of revenue. Our reserve amount for slow-moving inventories increased during the year ended December 31, 2014 which resulted in a lower percentage decrease in our cost of revenue compared to the percentage decrease in our net revenue.

 

Operating Expenses

 

   Year ended December 31,   Change in 
   2014   2013   % 
Operating expenses                    
- Selling and marketing  $855,088    3.26%  $751,114    19.13%   13.84%
- General and administrative   6,283,145    23.99%   3,174,780    80.87%   61.91%
- Impairment loss on the Airport International Auto Mall property   3,003,809    11.48%   -    -%   -%
- Impairment loss on goodwill   16,041,383    61.27%   -    -%   -%
Total  $26,183,425    100.00%  $3,925,894    100.00%   566.94%

 

Operating expenses increased 566.94%, from $3,925,894 in 2013 to $26,183,425 in 2014. This increase was primarily due to the impairment loss on the Airport International Auto Mall of $3,003,809 and impairment on goodwill of $16,041,383 in 2014, while we did not incur any impairment loss in 2013. In addition, our selling and marketing expenses increased 13.84% from $751,114 in 2013 to $855,088 in 2014. In addition, our general and administrative expenses increased from $3,174,780 in 2013 to $6,283,145 in 2014

 

Selling and Marketing Expenses

 

Selling and marketing expenses increased 13.84% in 2014. The following table sets forth a breakdown of the primary selling and marketing expenses of the Company:

 

   Year Ended December, 31   Change in 
   2014   2013   % 
Primary selling and marketing expenses            
- Payroll  $154,997   $134,527    15.22%
- Staff related costs   104,893    60,824    72.45%
- Advertising and promotion   86,098    34,699    148.13%
- Entertainment   61,996    106,018    (41.52)%
- Rent   66,662    122,691    (45.67)%

 

Payroll costs increased 15.22% to $154,997 in 2014 from $134,527 in 2013. Payroll related costs increased 72.45% to $104,893 in 2014 from $60,824 in 2013. The Company’s payroll and related cost increased as a result of the Zhonghe Acquisition in November 2013, which was partially offset by the decrease in the number of employees in the Web-based Advertising segment. Advertising and promotion expenses increased by 148.13% during 2014 as we incurred more advertising expenses for certain web advertisements to promote our services in 2014. Entertainment expenses fluctuate from time to time depending on activities we conduct. Rental expenses decreased 45.67% primarily due to the Company’s reduction of the office and exhibition space during 2014 compared to 2013.

 

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General and Administrative Expenses

 

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

 

   Year Ended December, 31   Change in 
   2014   2013   % 
Primary general and administrative expenses            
- Depreciation  $2,467,231   $275,837    794.45%
- Entertainment   133,099    159,484    (15.80)%
- Payroll   322,743    293,866    9.83%
- Staff related costs   97,160    86,491    12.34%
- Legal and professional fees   722,912    1,693,241    (57.31)%

 

Depreciation expenses increased 794.45% to $2,467,231 in 2014 from $275,837 in 2013 as we incurred additional depreciation expenses after the Zhonghe Acquisition. Payroll costs increased 9.83% to $322,743 in 2014 from $293,866 in 2013. Staff related costs increased 12.34% to $97,160 in 2014 from $86,491 in 2013. The Company’s payroll and related costs increased as a result of the Zhonghe Acquisition in November 2013 which was partially offset by the decrease in the number of employees in the web-based advertising segment. Legal and professional fees decreased 57.31% to $722,912 in 2014 from $1,693,241 in 2013 as we incurred additional professional fees and the value of common stock issuance as acquisition costs related to the Zhonghe Acquisition during 2013.

 

Impairment Loss on the Airport International Auto Mall

 

During the course of the impairment evaluation for the Airport International Auto Mall Automotive Service reporting unit at December 31, 2014, the Company determined that the carrying value of Airport International Auto Mall property exceeded its fair value. The fair value is determined using the income approach of valuation, which is based on the estimated future discounted cash flow generated from this property. Consequently, the Company recorded an impairment loss of $3,003,809 during the year ended December 31, 2014, which represents the excess of the carrying value of this property over its fair value. We believe the long term prospect for the real estate market in Tianjin especially the Tianjin airport area which falls within the free trade zone continues to be bright. We did not incur any impairment losses during the year ended December 31, 2013.

 

Impairment Loss on Goodwill

 

As of December 31, 2014, we performed an impairment test on our goodwill for the Sales of Automobiles and Airport Auto Mall Automotive units. Due to the significant vacant space not being rented out at the Airport International Auto Mall property, the continued loss from Car King Tianjin, our actual operating profits and cash flows being lower than expected during fiscal year 2014, and the estimated fair value being less than the carrying value for the Airport Auto Mall Automotive unit, the Company concluded that an impairment existed at December 31, 2014. The fair values were estimated based on the future discounted cash flow generated from these reporting units. As a result, the Company recorded an impairment loss on goodwill of $16,041,383 related to the Airport Auto Mall Automotive unit for the fiscal year 2014. As of December 31, 2013, no indication of goodwill impairment existed.

 

(Loss) Income from Operations 

 

Loss from operations increased 842.16% to $21,743,278 in 2014 from income from operations of $2,929,747 in 2013. The decrease in income was primarily due to the decline of revenue from our Web-based Advertising Services and Automobile Value Added service segments. In addition, we recorded an impairment loss on the Airport International Auto Mall property and impairment loss on goodwill in 2014. Furthermore, our Airport Auto Mall Automotive Services segment is still in early stage development, and we therefore suffered losses from operating this segment primarily due to the depreciation expense. However, we believe we will continue to maintain our leading position in the imported luxury automobiles industry despite the current slow economy and competitive automobile industry.

 

Other Income (Expenses), Net

 

Other income (expenses) primarily consist of interest income related to bank deposits, interest expense related to bank borrowings and payables related to the Zhonghe Acquisition, gain on disposal of property and equipment, and equity loss – sale of investee company losses. We recorded net other expenses of $6,525,473 for 2014 and $778,572 for 2013. The increase was primarily due to the interest expense incurred related to the Zhonghe Acquisition and the increase of short-term borrowings to finance our operations totaling $6,657,368 for 2014 compared to $999,360 for 2013.

 

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Income Tax

 

Income tax provision (benefit) for the year ended December 31, 2014 was $(1,385,103), a decrease of $3,019,621 from $1,634,518 for the year ended December 31, 2013. During the year ended December 31, 2014, we amortized the deferred tax liabilities for the basis difference on the real estate and intangible assets in the Zhonghe Acquisition in the amount of approximately $403,000, amortization of deferred tax liabilities related to the amortization of debt discount in the amount of $782,000, and the tax effect on the impairment on the Airport International Auto Mall in the amount of $751,000 during the year ended December 31, 2014.

 

Acquisition of Zhonghe

 

On November 30, 2013, Shisheng signed the Auto Mall Acquisition Agreement with Hezhong to purchase 100% of the equity of Zhonghe, which owns and operates the Airport International Auto Mall.

 

Under the terms of the Auto Mall Acquisition Agreement, Shisheng will pay RMB559,768,000 (approximately $91.4 million) to Hezhong, in four annual installments with an annualized rate of interest of 6%. A substantial portion of the purchase price was related to the acquisition of the Airport International Auto Mall which was valued at $72,640,016. Apart from the other identified net assets in the amount of $10,075,231 and deferred tax liabilities related to the book and tax basis differences on the real estate and intangible assets in the amount of $11,448,664, the excess of purchase price over the identified assets and liabilities was allocated to goodwill in the amount of $20,107,700. We believe the goodwill valuation represents: (i) expected appreciation in the value of the Airport International Auto Mall, (ii) expected synergies and economies of scale from the integration of our business with Zhonghe and the newly formed Car King China used car business, (iii) the expectation that owning the Airport International Auto Mall will create other business opportunities in the future and will provide more resources to capture these potential opportunities, (iv) a defensive strategy to prevent our competitors from acquiring the Airport International Auto Mall, and (v) Zhonghe’s historical business. We believe that the purchase price paid represents the fair value of the assets acquired.

 

The fair market value of the Airport International Auto Mall is affected by the condition of the real estate market in China, especially in Tianjin. Even though the real estate market has been on an upward trend in recent years, it is uncertain that this trend will continue. During the course of the impairment evaluation for the Airport Auto Mall Automotive Service reporting unit at December 31, 2014, the Company determined that the carrying value of the Airport International Auto Mall exceeded its fair value. The fair value is determined using the income approach of valuation, which is based on the estimated future discounted cash flow generated from this property. Consequently, the Company recorded an impairment loss of $3,003,809 during the year ended December 31, 2014, which represents the excess of the carrying value of this property over its fair value.

 

Inflation

 

We believe that inflation has had a negligible effect on operations for the fiscal years 2014 and 2013. However, overall commodity inflation is an ongoing concern for our business and has been a considerable operational and financial focus for the Company. We continue to monitor commodity costs and work with our suppliers and customers to manage changes in commodity costs.

 

Liquidity and Capital Resources

 

We generally finance our operations through a combination of operating profit and short-term borrowings from banks. During the reporting periods, we arranged a number of bank loans to satisfy our financing needs. As of the date of this Form 10-K, we have not experienced any difficulty in raising funds through bank loans, and we have not experienced any liquidity problems in settling our payables in the normal course of business and repaying our bank loans when they come due.

 

We believe that the level of financial resources is a significant factor for our future development and accordingly, we may determine from time to time to raise capital through private debt or equity financings to strengthen the Company’s financial position, to expand our facilities and to provide us with additional flexibility to take advantage of business opportunities. No assurances can be given that we will be successful in raising such additional capital on terms acceptable to us.

 

The following table sets forth a summary of our cash flows for the fiscal years ended December 31, 2014 and 2013.

 

   Year Ended December, 31 
   2014   2013 
Net cash (used in) provided by operating activities  $(54,440,890)  $35,479,835 
Net cash used in investing activities   (18,203,209)   (31,478,219)
Net cash provided by financing activities   65,469,776    1,948,299 
Effect on exchange rate change on cash   (73,230)   202,841 
Cash and cash equivalents at beginning of year   15,041,505    8,888,749 
Cash and cash equivalents at end of year   7,793,952    15,041,505 

 

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Going Concern

 

We incurred operating losses and had negative operating cash flows and may continue to generate negative cash flows as we implement our business plan for 2015. There can be no assurance that our continuing efforts to execute our business plan will be successful and that we will be able to continue as a going concern as our Independent Registered Public Accounting Firm has indicated these factors raised substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared in conformity with US GAAP, which contemplates our continuation as a going concern. Our net loss attributable to shareholders for the year ended December 31, 2014 was $26,863,297 as compared to net income attributable to shareholders of $524,260 for the year ended December 31, 2013. The operating results for the year ended December 31, 2014 included $3,003,809 and $16,041,383 of net losses related to an impairment loss recorded on the Airport International Auto Mall property and goodwill, respectively.

 

As of December 31, 2014, we had a working capital deficit of $7,298,690, including $68,909,343 in current liabilities for short-term borrowings which are due during the period between January and September 2015, and $16,900,426 in current liabilities payable to Hezhong related to the Zhonghe Acquisition, which is due in November in 2015, and for which we do not currently have the necessary capital to re-pay.

 

Net cash used in operations during the year ended December 31, 2014 was $54,440,890.

 

We invested heavily in Car King Tianjin through cash investment, advances, and leasing a portion of the Airport International Auto Mall to Car King Tianjin to operate a used car business. We believe that there is a strong market for used car sales in China and Car King Tianjin will provide us with opportunities for long-term growth. However we cannot precisely predict the extent of the growth and whether such growth will convert into substantial profits in the future.

 

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

 

Operating Activities

 

During the fiscal year 2014, we had net cash used in operating activities of $54,440,890 as compared to net cash provided by operating activities of $35,479,835 in fiscal year 2013.

 

During the year ended December 31, 2014, the increase in net cash used in operating activities was primarily a result of a net loss of $26,883,648, an increase in receivables related to Financing Services of $33,484,233 due to a larger outstanding receivables balance, an increase in advances to suppliers of $30,747,581 due to the building up of our inventory orders in order to increase our inventory selections for our customers which was partially offset by the impairment loss on the Airport International Auto Mall property of $3,003,809, the impairment loss on goodwill of $16,041,383, and the decrease in restricted cash of $14,356,013 due to fewer banks requiring restricted cash to grant lines of credit and issue letters of credit.

 

During the year ended December 31, 2013, the increase in net cash provided by operating activities was primarily a result of a decrease in inventories in the amount of $13,708,851, a decrease in advances to suppliers in the amount of $9,450,667, and an increase in customer deposits in the amount of $15,266,991, which was partially offset by the increase in restricted cash in the amount of $13,792,120.

 

Investing Activities

 

During fiscal years 2014 and 2013, we used net cash flows in investing activities of $18,203,209 and $31,478,219, respectively. Under the terms of the Auto Mall Acquisition Agreement, entered into on November 30, 2013, Shisheng will pay RMB559,768,000 (approximately $91.4 million) to Hezhong, in four annual installments with an annualized rate of interest of 6%. We paid approximately $38.8 million initial payment related to this acquisition in fiscal year 2013. During the year ended December 31, 2014, we made $16.3 million of installment principal payments.

 

We purchased property and equipment in the amount of $11,072 in 2014 as compared to $14,842 in 2013. We received cash proceeds from disposal of property and equipment in the amount of $19,448 in 2014.

 

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We advanced $1,888,267 to Car King Tianjin for working capital in 2014, which we fully reserved due to the uncertainties of collecting from Car King Tianjin. We received a repayment of a loan receivable in the amount of $7,111,260 from the former owner of Zhonghe in 2013.

 

Financing Activities

 

During fiscal years 2014 and 2013, net cash provided by financing activities was $65,469,776 and $1,948,299, respectively. Drawdowns from bank overdraft agreements increased $5,244 and $2,407,865 during the years ended December 31, 2014 and 2013. Financing activities also included a $2,988,953 net decrease in restricted cash, and a $13,462,283 net increase in restricted cash related to short-term borrowings during the years ended December 31, 2014 and 2013, respectively. We had net short-term borrowings of $62,630,446 in 2014 compared to net short-term borrowing repayments of $14,028,128 in 2013. We received loans from a director in the amount of $581,942 in 2014 and $862,200 in 2013, and repaid $726,321 in 2014 and $755,921 in 2013.

 

Our total cash and cash equivalents decreased to $7,793,952 as of December 31, 2014 from $15,041,505 as of December 31, 2013.

 

Working Capital

 

As of December 31, 2014, the Company had working deficit of $7,298,690 as of December 31, 2014 compared to working capital of $16,012,695 as of December 31, 2013.

 

The Company’s cash is used to finance the purchases of inventory, payments for advances from suppliers, and restricted cash as requirements for our financing service operations, lines of credit related to financing services and short-term borrowings. As of December 31, 2014, the decrease of working capital was primarily attributable to the second payments made related to the Zhonghe Acquisition in the amount of $16.3 million.

 

The Company has aggregate outstanding balance of lines of credit related to financing services of $63,106,959 and $66,173,312 as of December 31, 2014 and 2013, respectively, and outstanding balances of short-term borrowings of $68,909,343 and $6,259,598 as of December 31, 2014 and 2013, respectively. In addition, we had a bank overdraft with a balance of $2,423,015 and $2,439,429 as of December 31, 2014 and 2013, respectively.

 

As of December 31, 2014, we have the following payable related to the Zhonghe Acquisition:

 

Outstanding debt balance  $35,144,603 
Less current portion   (16,900,426)
Outstanding debt balance less current portion  $18,244,177 

 

Under the terms of the Auto Mall Acquisition Agreement, we made an installment payment of approximately $16.3 million in November 2014 and $3.2 million in January 2015, and have to remit two more installments at approximately $19.5 million each, including principal and interest in November of 2015 and 2016. We plan to finance these installment payments through our operating cash flows and bank loans. We expect that we will not have sufficient cash flow to remit these payments without obtaining outside financing. We believe we will be able to obtain sufficient bank loans at reasonable terms to finance our operations and these payment installments. However no assurance can be given that we will be successful in obtaining any loans on terms acceptable to us.

 

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

 

Capital Expenditures

 

We had property and equipment, net of $67,126,002 as of December 31, 2014 and $72,977,985 as of December 31, 2013. Our property and equipment was substantially increased in fiscal year 2013 as a result of the properties acquired through the acquisition of Zhonghe in the amount of $72,640,016in 2013. We did not have any significant purchases of property and equipment during the year ended December 31, 2014. The decrease in in the property and equipment balance was primarily a result of the depreciation expense of $2,513,134 and an impairment loss of $3,003,809 for 2014

 

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The following table sets forth a summary of our property and equipment for the fiscal years ended December 31, 2014 and 2013

 

    Year Ended December, 31    Change in 
    2014       2013   % 
Buildings and land use rights, net of impairment loss of $3,006,109 as of December 31, 2014  $69,487,171   $72,826,656    (4.58)%
Computers   227,377    217,717    4.44%
Office equipment, furniture and fixtures   109,818    109,898    (0.07)%
Leasehold improvements   34,210    34,368    (0.46)%
Automobiles   1,089,248    1,117,383    (2.52)%
Total   70,947,824    74,306,022    (4.51)%
Accumulated depreciation and amortization   (3,821,822)   (1,328,037)   187.78%
Property and equipment, net  $67,126,002   $72,977,985    (8.01)%

 

Foreign Cash

 

As of December 31, 2014 and 2013, the Company had cash deposits of $7,724,280 and $14,997,279 placed with several banks and a financial institution in the People’s Republic of China, where there is currently no rule or regulation in place for obligatory insurance of accounts with banks and financial institutions.

 

If the foreign cash and cash equivalents are expatriated to finance any needs of our operations in the U.S., we may need to accrue and pay U.S. taxes. Currently, we have not provided for U.S. income and foreign withholding taxes on undistributed earnings of our PRC subsidiaries since we intend to reinvest our earnings to further expand our businesses in mainland China and do not intend to declare dividends to our U.S. holding company in the foreseeable future.

 

Indebtedness

 

We entered into several banking facilities with Agricultural Bank of China, China Merchants Bank, PuDong Development Bank, Industrial and Commercial Bank of China, China ZheShang Bank, China Minsheng Bank, Shengjing Bank and Tianjin Binhai Rural Commercial Bank. As of December 31, 2014 and 2013, the Company had aggregate credit lines of $182 million (RMB1.12 billion) and $142 million (RMB870 million), respectively, had outstanding balances under these credit lines amounted to $63 million and $66 million, respectively. As of April 10, 2015, the Company had aggregate credit lines of $166 million (RMB1.02 billion) with its banks.

 

As of December 31, 2014 and 2013, we had an aggregate outstanding loan balance of $68,909,343 and $6,259,598, respectively, related to certain short-term loan agreements with Agricultural Bank of China, China Zheshang Bank, and Tianjin Binhai Rural Commercial Bank. These loans carried interest at rates ranging from 1.73% to 8.2% per annum and maturity dates between six months to one year from the original loan agreement dates. These loans were used for our working capital. We continue to take advantage of the low interest rate environment and our excellent relationships with the major banks to secure loans at attractive terms. In order to expand our revenues on Sales of Automobiles, we are required to have a significant amount of working capital since our suppliers require deposits for orders. As we continue to see growth in our automobile sales business, we expect to continue to use short term loans to finance our business expansion.

 

We had an overdraft of $2,423,015 and $2,439,429 with Pudong Development Bank as of December 31, 2014 and 2013, respectively.

 

Under the terms of the Auto Mall Acquisition Agreement, Shisheng will pay RMB559,768,000 (approximately $91.4 million) to Hezhong, in four annual installments with an annualized rate of interest of 6%. The initial payment of approximately $39.2 million (RMB240,000,000) was paid within 5 business days after the signing of the Agreement. We made an installment payment of approximately $16.3 million in November 2014 and $3.2 million in January 2015, and have to remit two more installments at approximately $19.5 million each, including principal and interest in November of 2015 and 2016. As of December 31, 2014, we had an outstanding debt balance of $35,144,603.

 

We believe that the level of financial resources is a significant factor for our future development and accordingly, we may determine from time to time to raise capital through private debt or equity financings to strengthen the Company’s financial position, to expand our facilities and to provide us with additional flexibility to take advantage of business opportunities. No assurances can be given that we will be successful in raising such additional capital on terms acceptable to us.

 

38
 

 

Trend Information

 

Other than as disclosed elsewhere in this Form 10-K, we are not aware of any trends, uncertainties, demands, commitments or events for the periods discussed in this section that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, nor any that caused the disclosed financial information to not necessarily be indicative of future operating results or financial conditions.

 

Off-Balance Sheet Arrangements

 

We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Reference is made to pages F-1 through F-30 comprising a portion of this annual report on Form 10-K.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls or procedures 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 benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues are instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2014, the end of the annual period covered by this report. The evaluation of our disclosure controls and procedures included a review of the disclosure controls’ and procedures’ objectives, design, implementation and the effect of the controls and procedures on the information generated for use in this report. In the course of our evaluation, we sought to identify errors, control problems or acts of fraud and to confirm the appropriate corrective actions, including process improvements, were being undertaken. Our Chief Executive Officer and Chief Financial Officer have concluded that the Company had a material weakness in its internal control over financial reporting as of December 31, 2014 because the Company’s accounting department personnel had limited knowledge and experience in U.S. GAAP and SEC reporting requirements as of December 31, 2014.

 

Based on the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective as of December 31, 2014.

 

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Internal Control Over Financial Reporting

 

(a) Management’s Annual Report on Internal Control Over Financial Reporting.

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2014, based on the 1992 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

During this evaluation, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, has identified one material weakness in the control environment of the Company. The material weaknesses are related to

 

the Company’s accounting department personnel have limited knowledge and experience in US GAAP and SEC Reporting.

 

A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result of the material weakness identified above, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2014.

 

To remediate the material weakness identified in internal control over financial reporting of the Company, we have done the following:

 

continued our efforts to recruit additional personnel with sufficient knowledge and experience in US GAAP; and
continued our efforts to provide ongoing training courses in US GAAP to existing personnel, including our Chief Financial Officer and the Financial Controller.

 

The Company believes that the consolidated financial statements fairly present, in all material respects, the Company’s consolidated balance sheets as of December 31, 2014 and 2013 and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years ended December 31, 2014 and 2013, in conformity with accounting principles generally accepted in the US, notwithstanding the material weakness we identified.

 

This Annual Report on Form 10-K does not include an attestation report of the Registrant's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Registrant's registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permit the Registrant to provide only management's report in this Annual Report.

 

(b) Changes in Internal Control Over Financial Reporting.

 

During the fiscal year 2014, except for the integration of the internal controls over financial reporting for Zhonghe, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

 

ITEM 9B. OTHER INFORMATION.

 

None.

 

40
 

  

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

Our current directors were elected at the last annual meeting, which occurred on November 19, 2014, and will serve until the next annual meeting. As of December 31, 2014, our current directors and executive officers were as follows:

 

Name   Age   Position Held   Experience
Tong, Shiping   55   Chief Executive Officer, President and Chairman of the Board  

Mr. Tong has served as President and Chief Executive Officer of the Company since 1995, when the Company’s wholly owned operating subsidiary Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd. (formerly Tianjin Shisheng Investment Group Co. Ltd.) was founded. He earned his Bachelor degree in computer science from the China Air Force Engineering University. Mr. Tong is also a director of the Tianjin Car Logistics Association.

             
Jin, Yan   49  

Chief Operating Officer

 

 

Mr. Jin has served as Chief Operating Officer of the Company since July of 2012. From 2007 to 2010, he served as Managing Director of Madeleine Gourmet Restaurant which operated a series of chain restaurants. Prior to his appointment as COO, he served as General Manager of Sales for the Company since 2011. He also earned an MBA from Tianjin Nankai University.

             
Cheng, Weihong   53  

Senior Vice President (Head of Human Resources and General Administration) and Director

 

Ms. Cheng has served as Senior Vice President (Head of Human Resources and General Administration) of the Company since 1995. She earned her Bachelor degree from Shijazhuang Military Medical University. Ms. Cheng is also a co-founder of Shisheng and has served as the Chairwoman of Shisheng since 1995.

             
Wang, Xinwei   58   Chief Financial Officer, Treasurer, Vice President and Director   Ms. Wang has served as the Chief Financial Officer, Treasurer and Vice President of the Company since joining Shisheng in 2001. She earned her Bachelor degree in industry accounting from Tianjin Radio and TV University. Ms. Wang is a qualified Chinese certified public accountant.
             
Barth, Howard S.   63   Director  

Mr. Barth has operated his own public accounting firm in Toronto, Canada since 1985, and has over 29 years of experience as a certified accountant. He is a former director and chairman of the audit committees of New Oriental Energy & Chemical Corp. (formerly listed on NASDAQ), Orsus Xelent Technologies, Inc. (formerly an AMEX-listed company), and Nuinsco Resources Limited (a TSX listed exploration corporation). He has served as a director of Yukon Gold Corporation, Inc. (dual listed on OTCBB and TSX) since May 2005 (and served previously as chairman of its Audit Committee until May 2008) and was its chief executive officer and president in 2006. He also formerly served as a director for Uranium Hunter Corporation (an OTC BB company). He is a member of the Canadian Institute of Chartered Accountants and the Ontario Institute of Chartered Accountants. He earned his B.A. and M.B.A. at York University.

 

41
 

 

Name   Age   Position Held   Experience
Wang, Wei   37   Director   Mr. Wang has served as the General Manager of Sales of Vcanland Holding Group since 2007, where he has successfully operated a number of real estate development projects and has dealt with accounting issues. He also received a bachelor degree from the Tianjin Institute of Urban Construction.
             
Yang, Lili   56   Director   Ms. Yang has served as the accounting director of Tianbao International Trade & Exhibition Ltd. since 2007, where she obtained years of experience in providing customers with commercial financing services.
             
Zou, Baoying   71   Director   Mr. Zou retired in 2004 from a long career in the education sector. He has been a member of the China Association for Promoting Democracy since 1984, a highly respected and influential organization. Due to such membership, Mr. Zou has established a wide network with local governmental authorities, which will be very helpful in furthering the Company’s business development.

 

Certain Significant Employees

 

None.

 

Family Relationships

 

Ms. Cheng Weihong, our Senior Vice President (Head of Human Resources and General Administration) and a director, is the wife of Mr. Tong Shiping, our President, Chief Executive Officer and Chairman of the Board.

 

Involvement in Legal Proceedings

 

None of our directors, persons nominated to become a director, executive officers or control persons have been involved in any of the following events during the past 10 years:

 

Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of bankruptcy or within two years prior to that time; or

 

Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); or

 

Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or

 

Being found by a court of competent jurisdiction (in a civil violation), the SEC or the Commodity Future Trading Commission to have violated a federal or state securities or commodity law, and the judgment has not been reversed, suspended, or vacated; or

 

Being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: any Federal or State securities or commodities law or regulation; or any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity. This violation does not apply to any settlement of a civil proceeding among private litigants; or

 

Being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

42
 

 

Board of Directors Meetings and Committees

 

The Board held one meeting during the fiscal year ended December 31, 2014. Each Director attended, either in person or telephonically, at least 75% of the aggregate Board of Directors meetings and meetings of committees on which he served during his tenure as a director or committee member.

 

On December 12, 2008, the Board approved and authorized the establishment of three new committees: the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee. Howard S. Barth (Chair, Financial Expert), Wang Wei and Yang Lili were appointed to the Audit Committee. Yang Lili (Chair), Wang Wei and Zou Baoying were appointed to the Compensation Committee. Wang Wei (Chair), Yang Lili and Zou Baoying were appointed to the Nominating and Corporate Governance Committee. The charter of each committee is also available in print to any stockholder who requests it.

 

Audit Committee

 

The Audit Committee is currently comprised of Howard S. Barth (Chair), Wang Wei and Yang Lili, each of whom are “independent” as independence is currently defined in applicable Securities and Exchange Commission’s (the “SEC”) rules. The Board has determined that Howard S. Barth qualifies as an “Audit Committee financial expert,” as defined in applicable SEC rules implementing Section 407 of the Sarbanes-Oxley Act of 2002. The Board made a qualitative assessment of Mr. Barth’s level of knowledge and experience based on a number of factors, including his formal education and experience.

 

The Audit Committee is responsible for overseeing the Company’s corporate accounting, financial reporting practices, audits of financial statements and the quality and integrity of the Company’s financial statements and reports. In addition, the Audit Committee oversees the qualifications, independence and performance of the Company’s independent auditors. In furtherance of these responsibilities, the Audit Committee’s duties include the following: evaluating the performance of and assessing the qualifications of the independent auditors; determining and approving the engagement of the independent auditors to perform audit, reviewing and attesting to services and performing any proposed permissible non-audit services; evaluating employment by the Company of individuals formerly employed by the independent auditors and engaged on the Company’s account and any conflicts or disagreements between the independent auditors and management regarding financial reporting, accounting practices or policies; discussing with management and the independent auditors the results of the annual audit; reviewing the financial statements proposed to be included in the Company’s annual report on Form 10-K; discussing with management and the independent auditors the results of the auditors’ review of the Company’s quarterly financial statements; conferring with management and the independent auditors regarding the scope, adequacy and effectiveness of internal auditing and financial reporting controls and procedures; and establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting control and auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Audit Committee operates under the written Audit Committee Charter adopted by the Board in December of 2007, a copy of which may be obtained by writing the Secretary of the Company at Floor 1 FTZ International Auto Mall, 86 Tianbao Avenue, Free Trade Zone, Tianjin Province, The People’s Republic of China 300461 and is available on the Company’s website at http://www.chinaautologisticsinc.com.

 

Nominating/Corporate Governance Committee

 

The Nominating and Corporate Governance Committee (the “Nominating Committee”) is responsible for preparing a list of candidates to fill the expiring terms of directors serving on our Board. The Nominating Committee submits the list of candidates to the Board who determines which candidates will be nominated to serve on the Board. The names of nominees are then submitted for election at our Annual Meeting of Stockholders. The Nominating Committee also submits to the entire Board a list of nominees to fill any interim vacancies on the Board resulting from the departure of a member of the Board for any reason prior to the expiration of his term. In recommending nominees to the Board, the Nominating Committee keeps in mind the functions of this body. The Nominating Committee considers various criteria, including general business experience, general financial experience, knowledge of the Company’s industry (including past industry experience), education, and demonstrated character and judgment. The Nominating Committee will consider director nominees recommended by a stockholder if the stockholder mails timely notice to the Secretary of the Company at its principal offices, which notice includes (i) the name, age and business address of such nominee, (ii) the principal occupation of such nominee, (iii) a brief statement as to such nominee’s qualifications, (iv) a statement that such nominee consents to his or her nomination and will serve as a director if elected, (v) whether such nominee meets the definition of an “independent” director under the applicable SEC rules and (vi) the name, address, class and number of shares of capital stock of the Company held by the nominating stockholder. Any person nominated by a stockholder for election to the Board will be evaluated based on the same criteria as all other nominees. The Nominating Committee also oversees our adherence to our corporate governance standards. Although not part of any formal policy, the goal of the Nominating Committee is a balanced and diverse Board, with members whose skills, viewpoint, background and experience complement each other and, together, contribute to the Board’s effectiveness as a whole. The members of the Nominating Committee are Wang Wei (Chair), Yang Lili and Zou Baoying, each of whom is “independent” as defined by the Company Guide of the American Stock Exchange. The Nominating Committee operates under the written Nominating Committee Charter adopted by the Board in December of 2008, a copy of which may be obtained by writing the Secretary of the Company at Floor 1 FTZ International Auto Mall, 86 Tianbao Avenue, Free Trade Zone, Tianjin Province, The People’s Republic of China 300461 and is available on the Company’s website at http://www.chinaautologisticsinc.com.

 

43
 

 

During the fiscal year ended December 31, 2014, there were no changes to the procedures by which holders of our common stock may recommend nominees to the Board.

 

Compensation Committee

 

The Compensation Committee is currently comprised of the following Directors of the Company: Yang Lili (Chair), Wang Wei and Zou Baoying, each of whom is “independent” as defined by the applicable SEC rules. The Compensation Committee reviews and, as it deems appropriate, recommends to the Board’s policies, practices and procedures relating to the compensation of the officers and other managerial employees and the establishment and administration of employee benefit plans. It advises and consults with the officers of the Company as may be requested regarding managerial personnel policies. The Compensation Committee also has such additional powers as may be conferred upon it from time to time by the Board. The Compensation Committee operates under the written Compensation Committee Charter adopted by the Board in December of 2008, a copy of which may be obtained by writing the Secretary of the Company at Floor 1 FTZ International Auto Mall, 86 Tianbao Avenue, Free Trade Zone, Tianjin Province, The People’s Republic of China 300461 and is available on the Company’s website at http://www.chinaautologisticsinc.com.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors, executive officers and persons who own more than 10% of a registered class of the Company’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Directors, officers and greater than 10% shareholders are required to furnish the Company with copies of all Section 16(a) forms they file.

 

To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company, with respect to the fiscal year ended December 31, 2014, the officers, directors and beneficial owners of more than 10% of our common stock have filed their initial statements of ownership on Form 3 on a timely basis, and the officers, directors and beneficial owners of more than 10% of our common stock have also filed the required Forms 4 or 5 on a timely basis.

 

Code of Ethics

 

On December 12, 2008, the Board approved a Code of Business Conduct and Ethics (the “Code”). This Code applies to all directors, officers and employees. A copy of the Code may be obtained by writing the Secretary of the Company at Floor 1 FTZ International Auto Mall 86 Tianbao Avenue, Free Trade Zone Tianjin Province, the People’s Republic of China, 300461.

 

ITEM 11. EXECUTIVE COMPENSATION.

 

Name and Principal Position  Year   Salary
($)
   Bonus
($)
   Stock Awards
($)
   Option Awards
($)
   Non-Equity
Incentive Plan
Compensation
($)
   Nonqualified
Deferred
Compensation
Earnings
($)
   All Other
Compensation
($)
   Total
($)
 
Tong, Shiping,   2014   $58,601  -0-   -0-   -0-   -0-   -0-   -0-(1)  $58,601 
CEO and President   2013   $58,154    -0-    -0-    -0-    -0-    -0-    -0-   $58,154 
                                              
Wang, Xinwei,   2014   $39,068    -0-    -0-    -0-    -0-    -0-    -0-(2)  $39,068 
CFO, Treasurer and VP   2013   $38,769    -0-    -0-    -0-    -0-    -0-    -0-   $38,769 
                                              
Cheng, Weihong,   2014   $39,068    -0-    -0-    -0-    -0-    -0-    -0-(3)  $39,068 
Senior VP (Head of HR and Admin)   2013   $38,769    -0-    -0-    -0-    -0-    -0-    -0-   $38,769 
                                              
Jin, Yan   2014   $9,767    -0-    -0-    -0-    -0-    -0-    -0-(4)  $9,767 
COO   2013    9,692    -0-    -0-    -0-    -0-    -0-    -0-   $9,692 

 

44
 

 

(1) Mr. Tong Shiping’s total compensation for the fiscal year ended December 31, 2014 is $58,601 (RMB360,000) (based on the weighted average rate of RMB to U.S. dollars during the year 2014).
(2) Ms. Wang Xinwei’s total compensation for the fiscal year ended December 31, 2014 is $39,068 (RMB240,000) (based on the weighted average rate of RMB to U.S. dollars during the year 2014).
(3) Ms. Cheng Weihong’s total compensation for the fiscal year ended December 31, 2014 is $38,068 (RMB240,000) (based on the weighted average rate of RMB to U.S. dollars during the year 2014).
(4) Mr. Jin Yan’s total compensation for the fiscal year ending December 31, 2014 is $9,767 (RMB60,000) (based on the weighted average rate of RMB to U.S. dollars during the year 2014).

 

As of December 31, 2014, the Company did not have any “Grants of Plan-Based Awards”, “Outstanding Equity Awards”, “Option Exercises and Stock Vested”, “Pension Benefits”, “Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans”, or “Potential Payments Upon Termination or Change in Control” to report.

 

Each of the executive officers of the Company have entered into standard employment contracts with Shisheng, a form of which is attached as an exhibit to this Report. The contracts have one-year terms and are otherwise consistent with the standard form prescribed by the Tianjin Labor and Social Security Administration. None of the employment contracts provide for annual total compensation payments in excess of $100,000. The amounts listed in the table above were paid by Shisheng.

 

The 2010 Omnibus Long-Term Incentive Plan (the “Plan”) assists the Company in attracting, retaining, and rewarding high-quality executives, employees, directors and other persons who provide services to the Company, enabling such persons to acquire or increase a proprietary interest in the Company, strengthening the mutuality of interests between such persons and the Company, and providing annual and long-term incentives for such persons expend maximum efforts in the creation of stockholder value. The Plan is administered by the Compensation Committee, such other committee as determined by the Board of Directors, or a subcommittee consisting solely of non-employee, outside directors. The Plan does not limit the availability of awards to any particular class or classes of eligible employees. Awards granted under the Plan are not transferable, except in the event of the participant's death. Under the Plan, 362,000 shares (reflected a one-for-six reverse split of the Company’s issued and outstanding shares of common stock on October 6, 2012) are currently reserved and available for delivery in connection with awards under the Plan.

 

The Plan was approved by our stockholders at the Annual Meeting on November 18, 2010. As of April 10, 2015, no awards have been granted under the Plan.

 

Compensation Discussion and Analysis

 

The Company’s compensation program is designed to provide our executive officers with competitive remuneration and to reward their efforts and contributions to the Company. Elements of compensation for our executive officers include base salary and cash bonuses.

 

Before we set the base salary for our executive officers each year, we research the market compensation in Tianjin for executives in similar positions with similar qualifications and relevant experience, and add a 10%-15% premium as an incentive to attract high-level employees. Company performance does not play a significant role in the determination of base salary.

 

Cash bonuses may also be awarded to our executives on a discretionary basis at any time. Cash bonuses are also awarded to executive officers upon the achievement of specified performance targets, including annual revenue targets for the Company.

 

Director Compensation

 

Name  Fees earned or
paid in cash ($)
   Stock awards
($)
   Option awards
($)
   Non-equity incentive plan compensation ($)   All other
compensation ($)
   Total
($)
 
Howard S. Barth  $24,000    -0-    -0-    -0-    -0-   $24,000 
Yang Lili   -0-    -0-    -0-    -0-    -0-    -0- 
Wang Wei   -0-    -0-    -0-    -0-    -0-    -0- 
Zou Baoying   -0-    -0-    -0-    -0-    -0-    -0- 

 

45
 

 

In fiscal year 2014 the Company paid an annual compensation of $24,000 to Howard S. Barth, our audit committee chair/director. Other than these payments to Mr. Barth, the Company did not provide any compensation to its directors in the fiscal year ended December 31, 2014. The Company may establish certain other compensation plans (e.g. options, cash for attending meetings, etc.) with respect to directors in the future.

 

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

 

During the last fiscal year, none of the Company’s executive officers served on the board of directors or compensation committee of any other entity whose executive officers served either the Company’s Board or Compensation Committee.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The following table sets forth information regarding the beneficial ownership of our common stock as of April 10, 2015 for each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.

 

Name and Address of Beneficial Owner*  Amount of Beneficial Ownership   Percentage of Class 
Bright Praise Enterprises Limited   1,648,140    40.85%
Choi Chun Leung Robert**   1,648,140    40.85%

 

* Unless otherwise noted, the address is that of the Company’s.

** Choi Chun Leung Robert is the beneficial owner of 1,648,140 shares of our common stock through his 100% ownership of Bright Praise Enterprises Limited and through his position as the sole director of Bright Praise Enterprises Limited.

 

Security Ownership of Management Directors and Officers

 

The following table sets forth the ownership interest in our common stock of all directors and officers individually and as a group as of April 10, 2015. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.

 

Name and Address of Beneficial Owner*  Amount of Beneficial
 Ownership
   Percentage of
 Class
 
Tong Shiping, Chief Executive Officer, President and Chairman of the Board**   -0-    0%
Jin Yan, Chief Operating Officer   -0-    0%
Wang Xinwei, Chief Financial Officer, Treasurer, Vice President and Director   -0-    0%
Cheng Weihong, Senior Vice President (Head of Human Resources and General Administration) and Director**   -0-    0%
Howard S. Barth, Director   -0-    0%
Wang Wei, Director   -0-    0%
Yang Lili, Director   -0-    0%
Zou Baoying, Director   -0-    0%
All Directors and Officers as a Group (8 persons)   -0-    0%

 

* Unless otherwise noted, the address is that of the Company’s.

** Choi Chun Leung Robert holds 100% ownership of Bright Praise Enterprises Limited as trustee for the benefit of Tong Shiping and Cheng Weihong

 

46
 

  

Securities Authorized for Issuance Under Equity Compensation Plans.

 

As of the fiscal year ended December 31, 2014:

 

Plan category   Number of  securities to be issued upon  exercise  of outstanding  options,  warrants and  rights       Weighted-average  exercise  price of outstanding  options,  warrants  and rights   Number of  securities  remaining  available for  future issuance under equity  compensation  plans  (excluding  securities  reflected at  left) 
Equity compensation plans approved by security holders   None(1)   None    362,000 
Equity compensation plans not approved by security holders   None    None    None 
Total             362,000 

 

(1) As of April 10, 2015, no options, warrants or rights to purchase securities had been issued under the 2010 Omnibus Long-Term Incentive Plan.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

Ms. Cheng Weihong (the Senior Vice President and Chairwoman of Shisheng and wife of China Auto’s President and Chief Executive Officer, Mr. Tong Shiping) made non-interest bearing loans to the Company from time to time to meet working capital needs of the Company. For the years ended December 31, 2014 and 2013, the Company made aggregate borrowings from Ms. Cheng Weihong of $581,942 and $862,200, respectively, and made repayments of $726,321 and $755,921 to Ms. Cheng Weihong. As of December 31, 2014 and 2013, the outstanding balances due to Ms. Cheng Weihong were $457,628 and $597,393, respectively.

 

The Company’s former shareholder, Sino Peace Limited, paid certain accrued expenses in the previous years on behalf of the Company. The amounts of $2,213,280 and $2,223,458 were outstanding as payable related to prior years’ professional fees on the consolidated balance sheets as of December 31, 2014 and 2013, respectively. On January 25, 2015, Sino Peace Limited assigned the outstanding loan balance to St. John’s International Limited, an unrelated party.

 

The balances as discussed above as of December 31, 2014 and 2013 are interest-free, unsecured and have no fixed term of repayment. During the years ended December 31, 2014 and 2013, there was no imputed interest charged in relation to these balances.

 

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

 

Director Independence

 

All members of the Company’s Board, excluding Tong Shiping, Cheng Weihong and Wang Xinwei, are independent directors of the Company, and as such, they satisfy the definition of independence in accordance with SEC rules and NASDAQ listing standards. 

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

 

Our independent accountant is Marcum LLP. Set forth below are aggregate fees billed by Marcum LLP for professional services rendered for the audit of the Company’s annual financial statements for the year ended December 31, 2014 and 2013.

 

47
 

 

Audit Fees

 

During the fiscal year ended December 31, 2014 and 2013, the fees for Marcum LLP were $298,219 and $348,330, respectively. The fees for the years ended December 31, 2014 and 2013 included $21,545 and $88,344, respectively, related to the audit and review of the financial statements of Zhonghe, which were attached as an exhibit to the Form 8K/A filed by the Company on February 13, 2014.

 

Audit Related Fees

 

During the fiscal years ended December 31, 2014 and December 31, 2013, our principal accountants did not render assurance and related services reasonably related to the performance of the audit or review of financial statements.

 

Tax Fees

 

During the fiscal year ended December 31, 2014 and December 31, 2013, our principal accountant did not render services to us for tax compliance, tax advice and tax planning.

 

All Other Fees

 

During the fiscal years ended December 31, 2014 and December 31, 2013, there were no fees billed for products and services provided by the principal accountants other than those set forth above.

 

The Audit Committee has reviewed the above fees for non-audit services and believes such fees are compatible with the independent registered public accountants’ independence.

 

Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Accountant

 

The policy of the Audit Committee, and the Board acting as a whole prior to the establishment of the Audit Committee, is to pre-approve all audit and non-audit services provided by the independent accountants. These services may include audit services, audit-related services, tax fees, and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is subject to a specific budget. The Audit Committee, and the Board acting as a whole prior to the establishment of the Audit Committee, has delegated pre-approval authority to certain committee members when expedition of services is necessary. The independent accountants and management are required to periodically report to the full Audit Committee, and the Board acting as a whole prior to the establishment of the Audit Committee, regarding the extent of services provided by the independent accountants in accordance with this pre-approval delegation, and the fees for the services performed to date. None of the fees paid to the independent accountants during fiscal years ended December 31, 2014 and 2013, under the categories Audit-Related and All Other fees described above were approved by the Audit Committee, and the Board acting as a whole prior to the establishment of the Audit Committee, after services were rendered pursuant to the de minimis exception established by the SEC. All work is preapproved.

 

48
 

 

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 

(a) Financial Statements.

 

Our financial statements as set forth in the Index to Financial Statements attached hereto commencing on page F-1 are hereby incorporated by reference.

 

(b) Exhibits.

 

The following exhibits, which are numbered in accordance with Item 601 of Regulation S-K, are filed herewith or, as noted, incorporated by reference herein:

 

Exhibit

Number

  Exhibit Description
3.1 (1)   Amended Articles of Incorporation of the Company
3.2 (2)   Amended and Restated Bylaws of the Company
10.1*   Maximum Amount Guarantee Contract, dated as of September 29, 2014, by and between Tianjin Binhai Shisheng Trading Group Co., Ltd., Tianjin Classical Auto Sales Information Co., Ltd., Tianjin Shimao International Trade Co, Ltd., Tianjin Prominent Hero Import & Export Trading Co., Ltd. and Agricultural Bank of China Tianjin Heping Sub-branch
10.2*   Maximum Amount Guarantee Contract, dated as of September 29, 2014, by and between Tianjin Binhai Shisheng Trading Group Co., Ltd., Tianjin Binhai International Automall Co., Ltd., Tianjin Ningchuan International Trade Co, Ltd. and Agricultural Bank of China Tianjin Heping Sub-branch
10.3*   Primary Credit Facility Agreement dated as of October 9, 2014, by and between Tianjin Binhai Rural Commercial Bank Corporation and Tianjin Zhonghe Automobile Sales Co., Ltd.
10.4*   Office Tenancy Contract, dated effective as of December 1, 2014, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd.
10.5*   Office Tenancy Contract, dated as December 31, 2014, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd.
14.1 (3)   Code of Business Conduct and Ethics
31.1*   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

(1) Incorporated by reference to the Company’s Form SB2 filed with the Securities and Exchange Commission on March 7, 2006, Definitive Schedule 14C Information Statement filed on December 5, 2008 and Form 8-K filed on October 9, 2012.

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

(3) Incorporated by reference to the Company’s Form 8-K, filed with the Securities and Exchange Commission on December 24, 2008.

 

    *Filed herewith

 

49
 

 

CHINA AUTO LOGISTICS INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 2014

 

  Page
   
Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets F-3 - F-4
   
Consolidated Statements of Income F-5
   
Consolidated Statements of Comprehensive Income F-6
   
Consolidated Statements of Shareholders’ Equity F-7
   
Consolidated Statements of Cash Flows F-8 - F-9
   
Notes to Consolidated Financial Statements F-10 - F-30

 

F-1
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To The Board of Directors and Shareholders

China Auto Logistics Inc.

 

We have audited the accompanying consolidated balance sheets of China Auto Logistics Inc. and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive (loss) income, shareholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of China Auto Logistics Inc. and subsidiaries, as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred a net loss attributable to shareholders of $26,863,297, an impairment loss on the long lived assets of $3,003,809, an impairment loss on the goodwill of $16,041,383, and has net cash used in operating activities of $54,440,890 for the year ended December 31, 2014 and has a working capital deficit of $7,298,690 as of December 31, 2014 and may have ongoing requirements for additional loan borrowings or capital investment. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 2. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Marcum LLP

Irvine, CA

April 15, 2015

 

F-2
 

 

CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   December 31, 
   2014   2013 
ASSETS:        
Current assets:        
Cash and cash equivalents  $7,793,952   $15,041,505 
Restricted cash   12,171,490    29,665,536 
Receivable related to auto mall management fees   -    255,712 
Receivable related to financing services   101,764,549    68,568,562 
Inventories   16,042,462    15,343,671 
Advances to suppliers   68,670,928    38,074,096 
Prepaid expenses   24,420    12,311 
Value added tax receivable   470,663    283,478 
Deferred tax assets   -    48,345 
Total current assets   206,938,464    167,293,216 
           
Property, plant, and equipment, net   67,126,002    72,977,985 
Ownership interest in Car King Tianjin   -    577,904 
Goodwill   4,013,416    20,159,365 
Intangible assets, net   433,874    547,155 
Total assets  $278,511,756   $261,555,625 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY:          
Current liabilities:          
Bank overdraft  $2,423,015   $2,439,429 
Lines of credit related to financing services   63,106,959    66,173,312 
Short term borrowings   68,909,343    6,259,598 
Accounts payable   99,710    - 
Notes payable to suppliers   16,290,625    21,275,203 
Accrued expenses   3,540,275    236,599 
Customer deposits   38,372,704    35,205,567 
Deferred revenue   634,979    202,428 
Rental deposits   81,453    - 
Payable related to acquisition of Zhonghe – current portion, net   16,900,426    15,706,581 
Due to former shareholder   2,213,280    2,223,458 
Due to director   457,628    597,393 
Income tax payable   677,092    174,540 
Deferred tax liability   529,665    786,413 
Total current liabilities   214,237,154    151,280,521 
           
Payable related to acquisition of Zhonghe, excluding current portion, net   18,244,177    35,306,223 
Deferred tax liability   10,499,323    12,239,842 
Total liabilities   242,980,654    198,826,586 
           
Commitments and contingencies (Note 15)          

 

F-3
 

 

CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Continued)

 

   December 31, 
   2014   2013 
         
Equity:        
China Auto Logistics Inc. shareholders’ equity:        
Preferred stock, $0.001 par value, 5,000,000 shares authorized,none issued and outstanding   -    - 
Common stock, $0.001 par value, 95,000,000 shares authorized, 4,034,394 shares issued and outstanding as of December 31, 2014 and 2013, respectively   4,034    4,034 
Additional paid-in capital   22,979,734    22,979,734 
Accumulated other comprehensive income   7,330,995    7,642,886 
Retained earnings   4,667,372    31,530,669 
Total China Auto Logistics Inc. shareholders’ equity   34,982,135    62,157,323 
Noncontrolling interests   548,967    571,716 
Total equity   35,531,102    62,729,039 
           
Total liabilities and shareholders’ equity  $278,511,756   $261,555,625 

 

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

 

F-4
 

 

CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Year Ended December 31, 
   2014   2013 
         
Net revenue  $402,269,611   $459,235,057 
Cost of revenue   397,829,464    452,379,416 
Gross profit   4,440,147    6,855,641 
           
Operating expenses:          
Selling and marketing   855,088    751,114 
General and administrative   6,283,145    3,174,780 
Impairment loss on Airport International Auto Mall property   3,003,809    - 
Impairment loss on goodwill   16,041,383    - 
Total operating expenses   26,183,425    3,925,894 
           
(Loss) income from operations   (21,743,278)   2,929,747 
           
Other income (expenses):          
Interest income   909,897    515,212 
Interest expense   (6,657,368)   (999,360)
Gain on disposal of property and equipment   11,626    - 
Foreign exchange loss   (146,392)   (217,764)
Equity loss – share of investee company loss   (660,759)   (76,660)
Miscellaneous   17,523    - 
Total other expenses   (6,525,473)   (778,572)
           
(Loss) income before income taxes   (28,268,751)   2,151,175 
           
Provision (benefit) for income taxes   (1,385,103)   1,634,518 
           
Net (loss) income   (26,883,648)   516,657 
           
Add: Net loss attributable to noncontrolling interests   (20,351)   (7,603)
           
Net (loss) income attributable to shareholders of China Auto Logistics Inc.  $(26,863,297)  $524,260 
           
(Loss) earnings per share attributable to shareholders of China Auto Logistics Inc.          
- basic and diluted  $(6.66)  $0.14 
           
Weighted average number of common shares outstanding          
- basic and diluted   4,034,494    3,723,271 

 

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

 

F-5
 

 

CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

   Year Ended December 31, 
   2014   2013 
         
Net (loss) income  $(26,883,648)  $516,657 
           
Other comprehensive (loss) income          
- Foreign currency translation adjustments   (314,289)   1,726,261 
           
Comprehensive (loss) income   (27,197,937)   2,242,918 
           
Less: Comprehensive (loss) attributable to noncontrolling Interests   (22,749)   (830)
           
Comprehensive (loss) income attributable to shareholders of China Auto Logistics Inc.  $(27,175,188)  $2,243,748 

 

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

 

F-6
 

 

CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

   Common Stock   Additional
 Paid-in
   Accumulated
 Other Comprehensive
   Retained   Non- controlling   Total 
   Shares   Amount   Capital   Income   Earnings   Interests   Equity 
                             
Balance as of
December 31, 2012
   3,694,394    3,694    21,994,074    5,923,398    31,006,409    572,546    59,500,121 
Issuance of shares for services   340,000    340    985,660    -    -    -    986,000 
Foreign currency translation adjustments   -    -    -    1,719,488    -    6,773    1,726,261 
Net income   -    -    -    -    524,260    (7,603)   516,657 
Balance as of
December 31, 2013
   4,034,394   $4,034   $22,979,734   $7,642,886   $31,530,669   $571,716   $62,729,039 
                                    
Foreign currency translation adjustments   -    -    -    (311,891)   -    (2,398)   (314,289)
Net loss   -    -    -    -    (26,863,297)   (20,351)   (26,883,648)
Balance as of December 31, 2014   4,034,394   $4,034   $22,979,734   $7,330,995   $4,667,372   $548,967   $35,531,102 

 

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

 

F-7
 

 

CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Year Ended December 31, 
   2014   2013 
         
Cash flows from operating activities:        
Net (loss) income  $(26,883,648)  $516,657 
           
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities          
Depreciation and amortization   2,623,825    314,126 
(Gain) loss on disposal of property and equipment   (11,626)   5,816 
Impairment loss on the Airport International Auto Mall property   3,003,809    - 
Impairment loss on goodwill   16,041,383    - 
Equity loss – share of investee company loss   660,759    76,660 
Stock issuance related to the Zhonghe Acquisition   -    986,000 
Change of deferred tax assets   48,087    679,201 
Change of deferred tax liabilities   (1,414,202)   (32,418)
Inventory reserve   617,316    190,877 
Allowance for uncollectible advances to suppliers   103,814    - 
Reserve for due from Car King Tianjin   1,802,326    - 
           
Changes in operating assets and liabilities:          
Restricted cash   14,356,013    (13,792,120)
Receivable related to auto mall management fees   254,346    (252,403)
Receivables related to financing services   (33,484,233)   (9,955,175)
Notes receivable   -    1,615,378 
Inventories   (1,385,757)   13,708,851 
Advances to suppliers   (30,851,395)   9,450,667 
Prepaid expenses, other current assets and other assets   (12,156)   33,003 
Value added tax receivable   (188,338)   305,993 
Accounts payable   99,064    - 
Lines of credit related to financing services   (2,761,320)   13,297,886 
Notes payable   (4,883,448)   3,230,757 
Accrued expenses   92,117    (137,505)
Accrued interest on payable related to the Zhonghe Acquisition   3,389,120    258,273 
Customer deposits   3,325,750    15,266,991 
Deferred revenue   433,147    (51,867)
Rental deposits   81,391    - 
Income tax payable   502,966    (235,813)
Net cash (used in) provided by operating activities   (54,440,890)   35,479,835 
           
Cash flows from investing activities:          
Acquisition of Zhonghe, net of cash received of $194,445   -    (38,574,637)
Repayments of receivable from former owner of Zhonghe   -    7,111,260 
Repayments on payable related to the Zhonghe Acquisition   (16,323,318)   - 
Advances to Car King Tianjin   (1,888,267)   - 
Proceeds from sales of property and equipment   19,448    - 
Purchase of property and equipment   (11,072)   (14,842)
Net cash used in investing activities   (18,203,209)   (31,478,219)
           
Cash flows from financing activities:          
Bank overdraft   (5,244)   2,407,865 
Proceeds from short-term borrowings   113,952,010    28,444,740 
Repayments of short-term borrowings   (51,321,564)   (42,472,868)
Decrease of restricted cash related to short-term borrowings   2,988,953    13,462,283 
Proceeds from a director   581,942    862,200 
Repayment of amount due to director   (726,321)   (755,921)
Net cash flows provided by financing activities   65,469,776    1,948,299 

 

F-8
 

 

CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Continued)

 

   Year Ended December 31, 
   2014   2013 
         
Effect of exchange rate change on cash   (73,230)   202,841 
           
Net (decrease) increase in cash and cash equivalents   (7,247,553)   6,152,756 
           
Cash and cash equivalents at the beginning of year   15,041,505    8,888,749 
Cash and cash equivalents at the end of year  $7,793,952   $15,041,505 
           
Supplemental disclosure of cash flow information:          
Interest paid  $7,645,386   $3,650,929 
Income taxes paid  $-   $1,062,331 
           
Non cash investing activities:          
Payable related to the Zhonghe Acquisition  $-   $52,197,645 

 

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

 

F-9
 

 

CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(1) Organization and Nature of Business

 

The consolidated financial statements consist of the financial statements of China Auto Logistics Inc., and the following wholly owned and majority owned subsidiaries of the Company:

 

Ever Auspicious International Limited,

 

Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.,

 

Tianjin Ganghui Information Technology Corp.,

 

Tianjin Hengjia Port Logistics Corp.,

 

Zhengji International Trading Corp.,

 

Tianjin Zhonghe Auto Sales Service Co., Ltd.

 

On November 10, 2008, China Auto, formerly Fresh Ideas Media, Inc., incorporated on February 22, 2005 in the State of Nevada, entered into a Share Exchange Agreement with HKCo. Under the Share Exchange Agreement, China Auto issued 1,950,000 (pre reverse split of 11,700,000) shares of its common stock to acquire all the issued and outstanding capital stock of HKCo. The closing of the Share Exchange Agreement occurred on the same day, immediately following the cancellation of an aggregate of 189,167 (pre reverse split of 1,135,000) shares of the Company’s common stock held by Phillip E. Ray and Ruth Daily, the Company’s principal stockholders immediately prior to the Closing, which was a condition of the Closing. Prior to the closing of the Share Exchange and the cancellation of shares stated above, the Company had a total of 1,255,833 (pre reverse split of 7,535,000) shares of common stock issued and outstanding. As a result of the Exchange, HKCo became the Company’s wholly-owned subsidiary. Upon the closing of this transaction, the Company’s primary business operations are those of HKCo. Shortly after the closing, Fresh Ideas changed its name to China Auto Logistics Inc.

 

HKCo was incorporated in Hong Kong on October 17, 2007. Prior to December 25, 2007, HKCo had minimal assets and no operations. On November 1, 2007, HKCo entered into a share exchange agreement with Cheng Weihong, Xia Qiming and Qian Yuxi (the “Seller”), pursuant to which the Sellers transferred their interests in Shisheng to HKCo for an aggregate purchase price of $12,067,254 (RMB95,000,000) which was paid via issuance of equity interests of HKCo. Upon the completion of this transaction on December 25, 2007, Shisheng became a wholly-owned foreign enterprise (“WFOE”) of HKCo and this arrangement was approved by the relevant ministries of the PRC government. As a result of this transaction, the owners and management of Shisheng end up controlling HKCo and thus this transaction was classified as a recapitalization of Shisheng using the purchase method of accounting.

 

Upon the completion of the transactions on December 25, 2007 and November 10, 2008, the Company owned 100% of HKCo which owned 100% of Shisheng, the operating entity of the Company. For financial reporting purposes, these transactions are classified as a recapitalization of Shisheng and the historical financial statements of Shisheng are reported as China Auto’s historical financial statements.

 

Shisheng was incorporated in the People’s Republic of Chinaon September 1, 1995. Shisheng’s business includes Sales of Automobiles, providing financing services related to imported automobiles Financing Services, and providing logistic services relating to the automobile importing process and other Automobile Value Added Services.

 

In August 2001, Shisheng formed Ganghui to provide web-based, real-time information on imported automobiles. Ganghui was 80% owned by Shisheng.

 

In September 2003, Shisheng formed Hengjia to provide automobile value added services to wholesalers and distributors in the imported vehicle trading industry. Hengjia was 80% owned by Shisheng.

 

In February 2005, Shisheng and three other founders formed Zhengji to enhance the imported automobile trading industry. Zhengji was 32% owned by Shisheng since 2005. In January 2007, Shisheng injected additional capital of $1,024,498 (equivalent to RMB8,000,000) into Zhengji. Consequently, Shisheng's equity interest in Zhengji increased from 32% to 86.4%.

 

F-10
 

 

On July 23, 2009, Shisheng entered into Share Transfer Agreements to acquire additional ownership interests from other noncontrolling interest shareholders to increase its ownership interests in its Ganghui, Hengjia and Zhengji to 98% each for an aggregate amount of $444,120.

 

On November 1, 2010, Shisheng entered into a Share Transfer Agreement with the owners of Qizhong to acquire all issued and outstanding stocks of Qizhong and completed the acquisition simultaneously. Qizhong is engaged in the development and operation of the website www.goodcar.cn and the business of providing customers with information and discounted services relating to automobiles, including discounted gas, car washes, and body-shop repair and car maintenance. These services provided by Goodcar were then included in the Company’s segments of Web-based Advertising Services and Automobile Value Added Services.

 

During 2013 and 2012, the Company deregistered Qizhong and its the wholly owned subsidiaries, including Beijing Goodcar, Xiamen Goodcar, Wuhan Youlu, Chengdu Haoche, Tianjin Goodcar and Kaizhi. All of these subsidiaries’ operations have been assumed by their parent company, Qizhong. The Company has disposed of the majority of the assets of these subsidiaries and transferred the remaining net assets to the Company’s other subsidiaries.

 

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

 

On November 30, 2013, Shisheng signed the Auto Mall Acquisition Agreement with Hezhong to purchase 100% of the equity of Zhonghe, which owns and operates the Airport International Auto Mall. Under the terms of the Auto Mall Acquisition Agreement, Shisheng will pay RMB559,768,000 (approximately $91.4 million) to Hezhong, in four annual installments with an annualized rate of interest of 6%. The initial payment of RMB240,000,000 (approximately $38.8 million) was paid within 5 business days after the signing of the Agreement. Upon the payment by Shisheng of this first installment, Hezhong transferred control of Zhonghe to Shisheng. The Company made an installment payment of approximately $16.3 million in November 2014 and $3.2 million in January 2015, and has to remit two more installments at approximately $19.5 million each, including principal and interest in November of 2015 and 2016. Failure by Shisheng to pay the remaining installments may result in the termination of the Auto Mall Acquisition Agreement, as well as a penalty of 10% of the total transfer price.

 

(2) Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

 

Principles of Consolidation

 

The consolidated financial statements include the financial statements of China Auto and its wholly-owned and majority-owned subsidiaries. All inter-company transactions and balances have been eliminated in preparation of the consolidated financial statements.

 

Use of Estimates

 

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

 

F-11
 

 

Going Concern

 

The Company incurred operating losses and had negative operating cash flows and may continue to generate negative cash flows as the Company implements our business plan for 2015. There can be no assurance that the Company’s continuing efforts to execute its business plan will be successful and that the Company will be able to continue as a going concern. The accompanying consolidated financial statements have been prepared in conformity with US GAAP, which contemplates the Company’s continuation as a going concern. The Company’s net loss attributable to the shareholders for the year ended December 31, 2014 was $26,863,297 as compared to net income attributable to the shareholders of $524,260 for the year ended December 31, 2013. The operating results for the year ended December 31, 2014 included $3,003,809 of net losses related to impairment loss on the Airport International Auto Mall property.

 

As of December 31, 2014, the Company has a working capital deficit of $7,298,690, including $68,909,343 in current liabilities for short-term borrowings which are due during the period between January and September 2015, and $16,900,426 in current liabilities payable to Hezhong related to the Zhonghe Acquisition, which is due in November in 2015, and for which the Company does not currently have the necessary capital to re-pay. Net cash used in operations during the year ended December 31, 2014 was $54,440,890. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company invested heavily in Car King Tianjin through cash investment, advances, and leasing a portion of the Airport International Auto Mall to Car King Tianjin to operate a used car business. The Company believes that there is a strong market for used car sales in China and Car King Tianjin will provide us with opportunities for long-term growth. However the Company cannot precisely predict the extent of the growth and whether such growth will convert into substantial profits in the future.

 

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

 

Currency Reporting

 

Amounts reported in the consolidated financial statements are stated in US Dollars, unless stated otherwise. Our functional currency is the RMB. Foreign currency transactions (outside the PRC) are translated into RMB according to the prevailing exchange rate at the transaction dates. Assets and liabilities denominated in foreign currencies at the balance sheet dates are translated into RMB at period-end exchange rates. For the purpose of preparing the consolidated financial statements, the consolidated balance sheets of our Company have been translated into US dollars at the current rates as of the end of the respective periods and the consolidated statements of income have been translated into US dollars at the weighted average rates during the periods the transactions were recognized. The resulting translation gain adjustments are recorded as other comprehensive income in the consolidated statements of comprehensive income and as a separate component of the consolidated statements of shareholders’ equity.

 

Fair Value Disclosures of Financial Instruments

 

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact its business, and it considers assumptions that market participants would use when pricing the asset or liability.

 

F-12
 

  

As a basis for considering such assumptions, a three-tier fair value hierarchy prioritizes the inputs utilized in measuring fair value as follows:

 

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

The hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company has estimated the fair value amounts of its financial instruments using the available market information and valuation methodologies considered to be appropriate and has determined that the carrying value of the Company’s accounts receivable, receivables related to financing services, notes receivable, value added tax receivable, inventories, prepaid expenses, accounts payable, advances to suppliers, bank overdraft, lines of credit related to financing services, short-term borrowings, notes payable to suppliers, accrued expenses, customer deposits, deferred revenue, due to shareholders, due to director, and income tax payable as of December 31, 2014 and 2013 approximate fair value.

 

Other Comprehensive Income

 

Other comprehensive income consists of other gains and losses affecting shareholders’ equity that, under US GAAP, are excluded from net income. The changes in other comprehensive income of $(311,891) and $1,719,488 for the years ended December 31, 2014 and 2013, respectively, are foreign currency translation adjustments.

 

Concentrations of Credit Risk

 

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, accounts receivable, notes receivable and receivables related to financing services. The Company places its cash and cash equivalents with reputable financial institutions with high credit ratings.

 

The Company conducts credit evaluations of customers and generally does not require collateral or other security from customers. The Company establishes an allowance for doubtful accounts primarily based upon the age of the receivables and factors relevant to determining the credit risk of specific customers. The amount of receivables ultimately not collected by the Company has generally been consistent with management's expectations and the allowance established for doubtful accounts.

 

Major Customers

 

During the year ended December 31, 2104, one customer accounted for 15% of the Company’s net revenue. During the year ended December 31, 2013, one customer accounted for 15% of the Company’s net revenue. Sales to these customers were related to the Sales of Automobiles segment. 

 

Major Suppliers

 

One supplier accounted for 11% of the Company’s purchases during the year ended December 31, 2014. One supplier accounted for 16% of the Company’s purchases during the year ended December 31, 2013. Purchases from these suppliers were related the Sales of Automobiles segment.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of cash at banks and on hand and highly liquid investments which are unrestricted as to withdrawal or use, and which have remaining maturities of three months or less when purchased. The Company’s deposits in banks located in the PRC are not protected by any insurance and such uninsured amounts totaled $7,724,280 and $14,997,279 as of December 31, 2014 and 2013, respectively.

 

Restricted Cash

 

The Company is required to maintain certain amounts of cash in its banks to secure certain banks’ letters of credit issued to its customers, certain draws on its lines of credit, short-term borrowings and notes payable to suppliers. Restricted cash to secure these bank lines is not protected by any insurance and such restricted cash totaled $12,171,490 and $29,665,536 as of December 31, 2014 and 2013, respectively.

 

F-13
 

  

Accounts and Notes Receivable

 

Accounts and notes receivable are stated at the amount the Company expects to collect. The allowance for doubtful accounts is based on management’s assessment of the collectability of specific customer accounts, the aging of the accounts receivable, historical experience and other currently available evidence. Accounts and notes receivable are charged off against the allowance when collectability is determined to be permanently impaired. As of December 31, 2014 and 2013, the Company had no allowance for doubtful accounts in respect of its accounts receivable; and had no allowance for doubtful accounts in respect of its notes receivable. 

 

Receivables Related to Financing Services

 

The Company records a receivable related to financing services when cash is loaned to the customers to finance their purchases of automobiles. Upon repayments by the customers, the Company records the amounts as reductions of receivables related to financing services. Receivables related to financing services represent the aggregate outstanding balance of loans from customers related to their purchases of automobiles. The Company charges a fee for providing loan services and such fee is prepaid by the customers. The Company amortizes these fees over the receivable term, which is typically 90 days, using the straight-line method. The Company records such amortized amounts as financing fee income and the unamortized amount is classified as deferred revenue on the Company’s consolidated balance sheets.

 

The Company evaluates the collectibility of outstanding receivables at the end of each of the reporting periods and makes estimates for potential credit losses. The Company has not experienced any losses on its receivable related to financing services historically and accordingly did not record any allowance of credit losses as of December 31, 2014 and 2013.

 

Inventories

 

Inventories consist primarily of the purchase cost of automobiles valued at the lower of cost (first-in, first-out) or market. As of December 31, 2014 and 2013, the reserve for obsolescence amounted to $810,282 and $193,379, respectively.

 

Advances to suppliers

 

Advances to suppliers consist primarily of advance payments to suppliers for automobile purchases. As of December 31, 2014 and 2013, the reserve for potential uncollectible accounts amounted to $103,893 and $0, respectively.

 

Due from Car King Tianjin

 

Due from Car King Tianjin consist of advances for its working capital. Due to the cumulative loss incurred by Car King Tianjin, the Company fully reserved the $1,803,706 due from Car King Tianjin as a result of the uncertainties of collecting these advances. 

 

Property and Equipment, net

 

Property and equipment, net are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line basis method over the following estimated useful lives:

 

Buildings and land use rights  31 years
Computers  3 to 5 years
Office equipment, furniture and fixtures  3 to 5 years
Leasehold improvements  5 years
Automobiles  5 years

 

Long-Lived Assets

 

Long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related assets or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value of asset less disposal costs. During the course of the impairment evaluation for the Airport Auto Mall Automotive Service reporting unit at December 31, 2014, the Company determined that the carrying value of Airport International Auto Mall property exceeded its fair value. The fair value is determined using the income approach of valuation, which is based on the estimated future discounted cash flow generated from this property. Consequently, the Company recorded an impairment loss of $3,003,809 during the year ended December 31, 2014, which represents the excess of the carrying value of this property over its fair value.

 

F-14
 

  

Goodwill

 

Goodwill arising from business combinations represents the excess of the purchase price over the estimated fair value of the net assets of the businesses acquired.

 

Goodwill is tested annually for impairment, during the fourth quarter of our fiscal year, or more frequently if circumstances indicate the possibility of impairment. Significant judgments required to estimate fair value include estimating future cash flows, and determining appropriate discount rates, growth rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value which could trigger impairment.

 

In evaluating goodwill for impairment using the two-step test to identify any potential impairment and to measure any amount of impairment, the first step is based upon a comparison of the fair value of each of the Company’s reporting units and the carrying value of the reporting unit’s net assets, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not to be impaired; otherwise, step two is required. Under step two, the implied fair value of goodwill, calculated as the difference between the fair value of the reporting unit and the fair value of the reporting unit’s net assets, is compared with the carrying value of the goodwill. The excess of the carrying value of goodwill over the implied fair value represents the amount impaired.

 

The Company uses a combination of valuation techniques, primarily using discounted cash flows to determine the fair values of its reporting units and market based multiples as supporting evidence. The variables and assumptions used, all of which are level 3 fair value inputs, including the projections of future revenues and expenses, working capital, terminal values, discount rates and long term growth rates. The market multiples observed in sale transactions are determined separately for each reporting unit are based on the weighted average cost of capital determined for each of the Company’s reporting units. In addition we make certain judgments about the selection of comparable companies used in determining market multiples in valuing our reporting units, as well as certain assumptions to allocate shared assets and liabilities to calculate values for each of our reporting units. The underlying assumptions used are based on historical actual experience and future expectations that are consistent with those used in the Company’s strategic plan. The Company compares the fair value of each of its reporting units to their respective carrying values, including related goodwill. We also compare our book value and the estimates of fair value of the reporting units to our market capitalization as of and at dates near the annual testing date. Management uses this comparison as additional evidence of the fair value of the Company, as our market capitalization may be suppressed by other factors such as the control premium associated with a controlling shareholder, our leverage or general expectations regarding future operating results and cash flows. In situations where the implied value of the Company under the Income or Market Approach is significantly different than our market capitalization, we re-evaluate and adjust, if necessary, the assumptions underlying our Income and Market Approach models. Our estimates of the fair values of these reporting units, and the related goodwill, could change over time based on a variety of factors, including the aggregate market value of the Company’s common stock, actual operating performance of the underlying businesses or the impact of future events on the cost of capital and the related discount rates used.

 

As of December 31, 2014, the Company performed an impairment test on our goodwill for the Sales of Automobiles and Airport Auto Mall Automotive units. Due to the significant vacant space not being rented out at the Airport International Auto Mall property, the continued loss from Car King Tianjin, the Company’s actual operating profits and cash flows being lower than expected during fiscal year 2014, and the estimated fair value being less than the carrying value for the Airport Auto Mall Automotive unit, the Company concluded that an impairment existed at December 31, 2014. The fair values were estimated based on the future discounted cash flow generated from these reporting units. As a result, the Company recorded an impairment loss on goodwill of $16,041,383 related to the Airport Auto Mall Automotive unit for the fiscal year 2014. As of December 31, 2013, no indication of goodwill impairment existed.

 

Intangible Assets

 

As of December 31, 2014 and 2013, intangible assets consist of customer relations arose from the Zhonghe Acquisition. Amortization is calculated using the straight-line method over five years. Intangible assets are carried at cost less accumulated amortization.

 

F-15
 

 

Noncontrolling Interests

 

Noncontrolling interests represent the noncontrolling interest stockholders’ proportionate share of the equity of Hengjia, Zhengji and Ganghui. The noncontrolling interests in 2014 and 2013 are summarized as below:

 

   As of December 31, 
   2014   2013 
         
Hengjia   2.0%   2.0%
Ganghui   2.0%   2.0%
Zhengji   2.0%   2.0%

 

The noncontrolling interests in Hengjia, Zhengji and Ganghui that are not owned by the Company are shown as “noncontrolling interests” in the consolidated balance sheets as of December 31, 2014 and 2013 and “net income attributable to noncontrolling interests” in the consolidated statements of income for the years ended December 31, 2014 and 2013.

 

Long Term Investment

 

Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an Investee depends on an evaluation of several factors including, among others, representation on the Investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the Investee company. Under the equity method of accounting, an Investee company’s accounts are not reflected within the Company’s consolidated balance sheets and statements of operations; however, the Company’s share of the earnings or losses of the investee company is reflected in the caption ‘‘equity loss—share of investee company losses’’ in the consolidated statements of income. The Company’s carrying value in an equity method investee company is reflected in the caption ‘‘ownership interests in investee company’’ in the Company’s consolidated balance sheets.

When the Company’s carrying value in an equity method Investee company is reduced to zero, no further losses are recorded in the Company’s consolidated financial statements unless the Company guaranteed obligations of the Investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.

Deferred Revenue

 

Deferred revenue includes amounts received from customers for which services revenue recognition is not yet appropriate. All deferred revenue is anticipated to be recognized within the next 12 months from the balance sheet dates.

 

Revenue Recognition

 

The Company’s main source of income was generated through (1) sales of automobiles, (2) service fees for assisting customers to get bank financing on purchases of automobiles, (3) web-based advertising service fees, including fees from (i) displaying graphical advertisements on the Company websites and (ii) web-based listing services that allow customers to place automobile related information on the Company’s websites, (4) automobile value added services, (5) airport auto mall automotive services, and (6) auto mall management services. The financing services are provided to customers on automobiles not sold by the Company. The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred upon shipment or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectibility is reasonably assured.

 

The Company recognizes the sales of automobiles upon delivery and acceptance by the customers and where collectibility is reasonably assured.

 

Service revenue related to financing services is recognized ratably over the financing period.

 

Service fees for graphical advertisements on the Company’s websites are charged on a fixed fee basis. The Company recognizes the advertising revenue when the service is performed over the service term. The Company charges a monthly fee for listing services and recognizes the revenue when services are performed. The Company offers sales incentives to its customers in the form of (i) subscription exemption; (ii) discounted prices and (iii) free advertisements. The Company classifies sales incentives as a reduction of net revenues. Revenues, net of discounts and allowances, are recognized ratably over the service periods.

 

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

 

Rental income from the Airport International Auto Mall is recognized over the lease term on a straight-line basis. The Company’s lease agreement, entered into with Car King Tianjin in January 2014 (the “Rental Agreement”), contains a contingent rental arrangement for fiscal years 2016, 2017 and 2018, under which rental income is determined based on a percentage of Car King Tianjin’s gross profit. Notwithstanding this arrangement, the Rental Agreement contains both a minimum and a maximum annual rental amount. Contingent rental income is recognized when the specified targets are met.

 

F-16
 

 

Value Added Taxes represent amounts collected on behalf of specific regulatory agencies that require remittance by a specified date. These amounts are collected at the time of sale and are detailed on invoices provided to customers. The Company accounts for value added taxes on a net basis. The Company recorded and paid business taxes based on a percentage of the net service revenues and reported the service revenue net of the business taxes and other sales related taxes.

 

Cost of Revenue

 

Cost of revenue includes the purchase cost of the automobiles, inventory obsolescence, freight-in and all the direct costs related to the sales of the automobiles. All costs related to the Company’s distribution network are included in the cost of revenue.

 

Operating Expenses

 

Selling and marketing expenses include salaries and employee benefits, rent, advertising, travel and entertainment and insurance.

 

General and administrative expenses include management and office salaries and employee benefits, depreciation for office facilities, office equipment and automobiles, travel and entertainment, insurance, legal and accounting, consulting fees, workers’ compensation insurance, and other office expenses.

 

Advertising

 

The Company expenses advertising costs when incurred. The Company incurred approximately $86,000 and $35,000 of advertising expenses for the years ended December 31, 2014 and 2013, respectively. Advertising expense is included in the caption “Selling and Marketing” within operating expenses on the consolidated statements of income.

 

Income taxes

 

Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, net operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

 

The Company recognizes tax benefits that satisfy a greater than 50% probability threshold and provides for the estimated impact of interest and penalties for such tax benefits. The Company did not incur any interest or penalties related to potential underpaid income tax expenses during the years ended December 31, 2014 and 2013.

 

Basic and Diluted Earnings (Loss) Per Share

 

Basic earnings (loss) per common share is computed by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per common share is computed similarly to basic earnings (loss) per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of December 31, 2014 and 2013, the Company did not have any common stock equivalents, therefore, the basic earnings per share is the same as the diluted earnings per share.

 

New Accounting Standards

 

In August 2014, FASB issued Accounting Standards Update (ASU) No. 2014-15 Preparation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern.    Under US GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity's liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity's liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements—Liquidation Basis of Accounting. Even when an entity's liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this Update should be followed to determine whether to disclose information about the relevant conditions and events.  The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.  The adoption of this guidance did not have a significant effect on the Company’s consolidated financial statements.

 

F-17
 

 

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

 

(3) Restricted Cash

 

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

 

   As of December 31, 
   2014   2013 
         
Collateral for bank’s issuance of letters of credit to the Company’s customers  $2,393,338   $6,630,313 
Collateral for borrowings on the lines of credit related to Financing Services   -    8,733,869 
Collateral for short-term borrowings   -    3,004,998 
Collateral for notes payable to suppliers   9,778,152    11,296,356 
   $12,171,490   $29,665,536 

 

(4) Property and Equipment, Net

 

A summary of property and equipment is as follows:

 

   As of December 31, 
   2014   2013 
         
Buildings and land use rights before impairment  $72,493,280   $72,826,656 
Less: Impairment   (3,006,109)   - 
Buildings and land use rights   69,487,171    72,826,656 
Computers   227,377    217,717 
Office equipment, furniture and fixtures   109,818    109,898 
Leasehold improvements   34,210    34,368 
Automobiles   1,089,248    1,117,383 
    70,947,824    74,306,022 
Less: Accumulated depreciation and amortization   (3,821,822)   (1,328,037)
   $67,126,002   $72,977,985 

 

Depreciation and amortization expense for property and equipment amounted to $2,513,134 and $304,859 for the years ended December 31, 2014 and 2013, respectively.

 

Airport International Auto Mall property with a carrying value of $66,953,804 was used as collateral to secure various short term bank borrowings as of December 31, 2014.

 

F-18
 

 

(5) Goodwill

 

The changes in the carrying amount of goodwill for the years ended December 31, 2014 and 2013 are as follows:

 

   Reporting Segments     
   Sales of Automobiles   Airport Auto Mall Automotive Services   Total 
             
Balance as of January 1, 2013  $-   $-   $- 
Zhonghe Acquisition   4,021,540    16,086,160    20,107,700 
Translation adjustment   10,333    41,332    51,665 
Balance as of December 31, 2013   4,031,873    16,127,492    20,159,365 
Impairment loss   -    (16,041,383)   (16,041,383)
Translation adjustment   (18,457)   ((86,109)   (104,566)
Balance as of December 31, 2014  $4,013,416   $-   $4,013,416 

 

During the year ended December 31, 2013, the Company acquired Zhonghe. We recorded a total of $20,107,700 goodwill related to this acquisition. The Company allocated 20% of the goodwill to the Sales of Automobiles segment and 80% of the goodwill to the Airport Auto Mall Automotive Services based on the Company’s estimated expected present value of future cash flows for each of these segments.

 

As of December 31, 2014, the Company performed an impairment test on our goodwill for the Sales of Automobiles and Airport Auto Mall Automotive units. Due to the significant vacant space not being rented out at the Airport International Auto Mall property, the continued loss from Car King Tianjin, the Company’s actual operating profits and cash flows being lower than expected during fiscal year 2014, and the estimated fair value being less than the carrying value for the Airport Auto Mall Automotive unit, the Company concluded that an impairment existed at December 31, 2014. The fair values were estimated based on the future discounted cash flow generated from these reporting units. As a result, the Company recorded an impairment loss on goodwill of $16,041,383 related to the Airport Auto Mall Automotive unit for the fiscal year 2014. As of December 31, 2013, no indication of goodwill impairment existed.

 

(6) Intangible Assets, Net

 

The Company’s acquired customer relationship in connection with Zhonghe on November 30, 2013. As of December 31, 2013, the customer relationship is summarized as follows:

 

   Life   Cost   Foreign currency translation adjustments   Less: Accumulated Impairment   Less: Accumulated Amortization   Net Carrying  Amount 
Intangible assets subject to amortization – Customer Relations                        
As of December 31, 2014   5 years     $555,002   $(1,120)  $-   $(120,008)  $433,874 
                               
As of December 31, 2013   5 years     $555,002   $1,426   $-   $(9,273)  $547,155 

 

Amortization expense for intangible assets was $110,691 and $9,267 for the year ended December 31, 2014 and 2013, respectively.

 

Estimated amortization of the intangible assets for the five succeeding years follows:

 

2015  $110,776 
2016   110,776 
2017   110,776 
2018   101,546 
2019   - 
   $433,874 

  

F-19
 

 

(7)

Equity Investment in Car King Tianjin

 

On November 22, 2013, Zhonghe entered into a Cooperation Framework Agreement with Car King China with respect to the establishment of the Joint Venture, whichwill own and operate a used car business. The establishment of the Joint Venture was contingent upon the successful completion by the Company of the acquisition of Zhonghe, which owns the Airport International Auto Mall, where the used car business was to be operated. Following the Zhonghe Acquisition, on November 30, 2013, the Joint Venture was established in accordance with the terms of the Cooperation Framework Agreement. Pursuant to the terms of the Articles of Association of Car King Tianjin, Zhonghe and Car King China can make capital contributions totaling up to approximately $1,303,000 (RMB8,000,000) and $1,955,000 (RMB12,000,000), respectively, to Car King Tianjin, which will have total registered capital of approximately $3,258,000 (RMB20,000,000). Prior to being acquired by the Company, Zhonghe made an initial capital contribution of approximately $652,000 (RMB4,000,000) to Car King Tianjin in November 2013. The Company is entitled to 40% of Car King Tianjin’s net profit or loss. As of December 31, 2014 and December 31, 2013, the Company’s equity investment balance in Car King Tianjin was $0 and $577,904. The amount due from Car King Tianjin was reduced by $86,007 for the amount of shared cumulative loss in excess of the investment in Car King Tianjin as of December 31, 2014. Net balance of due from Car King Tianjin was $1,803,706. Due to the cumulative loss incurred by Car King Tianjin, the Company fully reserved the $1,803,706 due from Car King Tianjin as a result of the uncertainties of collecting these advances.

 

The Company’s investments in Car King Tianjin are accounted for using the equity method of accounting. The results of operations and financial position of the Company’s equity basis investments are summarized below:

 

   Year Ended December 31, 
Condensed income statement information:  2014   2013 
         
Net sales  $3,430,914   $- 
           
Gross profit   1,740,204    - 
           
Net loss   (1,651,898)   (191,651)
           
Company’s share in net loss of investee (included in the net loss of the Airport Auto Mall Automotive Service Segment)  $(660,759)   (76,660)

 

   As of December 31, 
Condensed balance sheet information:  2014   2013 
         
Current assets  $1,462,036   $1,554,709 
           
Non current assets   1,039,338    31,244 
           
Total assets  $2,501,374   $1,585,953 
           
Current liabilities, including amount due to the Company of $1,889,713  $2,716,389   $141,193 
           
(Deficit) equity   (215,015)   1,444,760 
           
Liabilities and (deficit) equity  $2,501,374   $1,585,953 

 

(8) Lines of Credit Related to Financing Services

 

The Company provides Financing Services to its customers using the Company’s bank facility lines of credit. The Company earns a service fee for drawing its facility lines related to its customers’ purchases of automobiles and payment of import taxes. Customers bear all the interest and fees charged by the banks and prepay those fees upon the execution of their service contracts with the Company. Customers are also required to make a deposit in the range of 10% to 15% of the purchase price of the automobiles. If customers default on payment, the banks take custody of the automobiles until the borrowings are fully repaid.

 

Interest charged by the banks for draws on these facility lines of credit is classified as cost of revenue in the consolidated statements of income. Interest expense related to these lines of credit was $4,130,301 and $2,537,905 for the years ended December 31, 2014 and 2013, respectively.

 

F-20
 

 

A summary of the Company’s line of credit related to Financing Services follows:

 

China Merchants Bank

 

In June 2012, the Company entered into a facility line of credit agreement with China Merchants Bank, pursuant to which the Company could borrow a maximum amount of $13,032,500 (RMB80,000,000). Borrowings under this facility line of credit bear interest at rates to be determined upon drawing. During the year ended December 31, 2014, interest was charged at rates ranging between 3.73% and 5.07% per annum, and borrowings under this facility were repayable within 3 months from the dates of drawing. As of December 31, 2014 and December 31, 2013, the Company had an outstanding balance of $0 and $3,930,068, respectively, under this facility line of credit. This facility line of credit, which is guaranteed by Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and a non-related entity which is a supplier of the Company, matured in June 2013, was renewed for one year through June 2014 with substantially the same terms and matured in June 2014.

 

In June 2014, the Company entered into a facility line of credit agreement with China Merchants Bank, pursuant to which the Company can borrow a maximum amount of $11,403,437 (RMB70,000,000). Borrowings under this facility line of credit bear interest at rates to be determined upon drawing. During the year ended December 31, 2014, interest was charged at rates ranging between 3.73% and 5.07% per annum, and borrowings under this facility were repayable within 3 months from the dates of drawing. As of December 31, 2014 and December 31, 2013, the Company had an outstanding balance of $3,661,523 and $0, respectively, under this facility line of credit. This facility line of credit is guaranteed by Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and a non-related entity which is a supplier of the Company, and matured in February 2015 and was renewed.

 

Agricultural Bank of China

 

In September 2013, the Company entered into a facility line of credit agreement with Agricultural Bank of China, pursuant to which the Company could borrow a maximum amount of $84,711,249 (RMB520,000,000). This facility line of credit is guaranteed by five non-related entities, which are customers, suppliers or both. During the year ended December 31, 2014, borrowings under this facility line of credit bore interest at rates ranging from 4.53% to 6.29% per annum, and were repayable on the due dates, which were determined prior to each draw. As of December 31, 2014 and December 31, 2013, the Company had outstanding balances of $0 and $55,298,731, respectively, under this facility line of credit. The outstanding balance was secured by the amount of $0 and $8,733,869 deposited to the bank, which was presented as restricted cash on the consolidated balance sheets as of December 31, 2014 and December 31, 2013, respectively. This facility matured in September 2014.

 

In September 2014 the Company entered into a facility line of credit agreement with Agricultural Bank of China, pursuant to which the Company can borrow a maximum amount of $84,711,249 (RMB520,000,000). This facility line of credit is guaranteed by five non-related entities, which are customers, suppliers or both. During the year ended December 31, 2014, borrowings under this facility line of credit bore interest at rates ranging from 4.24% to 6.29% per annum, and were repayable on the due dates, which were determined prior to each draw. As of December 31, 2014 and December 31, 2013, the Company had outstanding balances of $49,414,953 and $0, respectively, under this facility line of credit. The outstanding balance was secured by the amount of $0 and $8,733,869 deposited to the bank, which is presented as restricted cash on the consolidated balance sheets as of December 31, 2014 and December 31, 2013, respectively. The facility matures in September 2015.

 

PuDong Development Bank

 

In December 2013, the Company entered into a facility line of credit agreement with PuDong Development Bank, pursuant to which the Company can borrow a maximum amount of $19,548,750 (RMB120,000,000). During the year ended December 31, 2014, borrowings under this facility line of credit bore interest at rates ranging from 5.03% to 5.43% per annum. As of December 31, 2014 and December 31, 2013, the Company had outstanding balances of $3,546,934 and $553,865, respectively, under this facility line of credit. This facility line of credit is guaranteed by Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and a non-related entity, which is a supplier of the Company, and matured in December 2014 and was renewed in January 2015.

 

China Zheshang Bank

 

In September 2013, the Company entered into a facility line of credit agreement with China Zheshang Bank, pursuant to which the Company can borrow a maximum amount of $24,435,937 (RMB150,000,000). This facility line of credit is guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Zhonghe, the Company’s subsidiary, and (v) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. Borrowings under this facility line of credit bear interest at rates ranging from 5.3% to 5.5% per annum, and are repayable within 3 months from the dates of drawing. As of December 31, 2014 and December 31, 2013 the Company had outstanding balances of $0 and $6,390,648, respectively, under this facility line of credit. This facility matured in September 2014.

 

F-21
 

 

In August 2014, the Company entered into a facility line of credit agreement with China Zheshang Bank, pursuant to which the Company can borrow a maximum amount of $29,323,125 (RMB180,000,000). This facility line of credit is guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, and (iv) Zhonghe, the Company’s subsidiary. Borrowings under this facility line of credit bear interest at rates ranging from 5.3% to 5.5% per annum, and are repayable within 3 months from the dates of drawing. As of December 31, 2014 and December 31, 2013 the Company had outstanding balances of $831,215 and $0, respectively, under this facility line of credit. This facility matures in August 2015.

 

Industrial and Commercial Bank of China

 

In February 2014, the Company entered into a facility line of credit agreement with Industrial and Commercial Bank of China, pursuant to which the Company can borrow a maximum amount of $16,290,625 (RMB100,000,000). This facility line of credit is guaranteed by Zhonghe, the Company’s subsidiary. During the three months ended September 30, 2014, borrowings under this facility line of credit bore interest at rates ranging from 3.65% to 3.89% per annum and were repayable on the due dates, which were determined prior to each draw. As of December 31, 2014 and December 31, 2013, the Company had outstanding balances of $4,761,227 and $0, respectively, under this facility line of credit. This facility matured in February 2015 and was not renewed.

 

China Minsheng Bank

 

In April 2014, the Company entered into a facility line of credit agreement with China Minsheng Bank, pursuant to which the Company can borrow a maximum amount of $13,032,500 (RMB80,000,000). This facility line of credit is guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, and (iv) Zhonghe, the Company’s subsidiary. During the year ended December 31, 2014, borrowings under this facility line of credit bore interest at rates ranging from 1.94% to 3.23% per annum, and were repayable on the due dates, which were determined prior to each draw. As of December 31, 2014 and December 31, 2013, the Company had outstanding balances of $891,107 and $0, respectively, under this facility line of credit. This facility matures in April 2015.

 

Shengjing Bank

 

In December 2014, the Company entered into a facility line of credit agreement with Shengjing Bank, pursuant to which the Company can borrow a maximum amount of $8,145,312 (RMB50,000,000). This facility line of credit is guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Ning Chuan International Trading co., Ltd., a supplier. As of December 31, 2014 and December 31, 2013, the Company had outstanding balances of $0 under this facility line of credit. This facility matures in November 2015.

 

(9) Short Term Borrowings

 

Agricultural Bank of China

 

In order to obtain short term financing, in December 2013 the Company entered into a term loan agreement with Agricultural Bank of China, which is settled in US dollars. The outstanding balance totaled $0 and $3,002,182 of short term foreign currency borrowings as of December 31, 2014 and of December 31, 2013, respectively. These short term foreign currency borrowings bear interest at rates ranging between 1.73% and 3.34% per annum. These short-term foreign currency borrowings matured during the year ended December 31, 2014.

 

In order to obtain short term financing, during the year ended December 31, 2014 the Company entered into thirteen term loan agreements with Agricultural Bank of China, which are settled in US dollars. All of these loans were repaid during the year ended December 31, 2014. The outstanding balance of the remaining loans totaled $0 of short term foreign currency borrowings with Agricultural Bank of China as of December 31, 2014. These short term foreign currency borrowings bear interest at rates ranging between 1.73% and 3.33% per annum and generally matured within six months from the dates of borrowing.

 

In March 2014, the Company entered into a working capital loan agreement with Agricultural Bank of China to obtain short term financing. Under the terms of this agreement, the Company can borrow up to $9,774,376 (RMB60,000,000). The outstanding balance totaled $9,774,376 as of December 31, 2014. This short term loan bears interest at a rate of 6.6% per annum, matured in March 2015 and was repaid, and is secured by the Airport International Auto Mall and related land use rights.

 

In April 2014, the Company entered into a working capital loan agreement with Agricultural Bank of China to obtain short term financing. Under the terms of this agreement, the Company can borrow up to $4,887,187 (RMB30,000,000). The outstanding balance totaled $4,887,187 as of December 31, 2014. This short term loan bears interest at a rate of 6.6% per annum, matured in March 2015 and was repaid, and is secured by the Airport International Auto Mall and related land use rights.

 

F-22
 

 

In July 2014, the Company entered into a working capital loan agreement with Agricultural Bank of China to obtain short term financing. Under the terms of this agreement, the Company can borrow up to $8,145,312 (RMB50,000,000). The outstanding balance totaled $8,145,312 as of December 31, 2014. This short term loan bears interest at a rate of 6.6% per annum, matures in July 2015, and is secured by the Airport International Auto Mall and related land use rights.

 

In August 2014, the Company entered into a working capital loan agreement with Agricultural Bank of China to obtain short term financing. Under the terms of this agreement, the Company could borrow up to $6,516,250 (RMB40,000,000). The outstanding balance totaled $6,516,250 as of December 31, 2014. This short term loan bears interest at a rate of 6.6% per annum, matures in August 2015, and is secured by the Airport International Auto Mall and related land use rights.

 

In September 2014, the Company entered into two working capital loan agreements with Agricultural Bank of China to obtain short term financing. Under the terms of these agreements, the Company can borrow up to $10,588,906 (RMB65,000,000). The outstanding balances totaled $10,588,906 as of December 31, 2014. These short term loans bear interest at a rate of 6.6% per annum, mature in September 2015, and are secured by the Airport International Auto Mall and related land use rights.

 

China Zheshang Bank

 

In August 2013 and September 2013, the Company entered into four loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $3,242,505 (RMB19,904,114). Borrowings under these loan agreements bear interest at a rate of 5.6% per annum for a borrowing period of six months and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO; (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company; (iii) an unrelated party who is a personal friend of Mr. Tong Shiping; and (iv) two unrelated parties, who are also customers of the Company. The total outstanding balance of these agreements was $3,257,416 as of December 31, 2013. This loan was repaid in March 2014.

 

In February 2014, the Company entered into two loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $3,258,125 (RMB20,000,000). Borrowings under these loan agreements bear interest at a rate of 5.6% for a borrowing period of six months and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO; (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company; (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Zhonghe, the Company’s subsidiary, and (v) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe . The total outstanding balance of these agreements was $0 as of December 31, 2014. These loans were repaid in August 2014.

 

In July and August 2014, the Company entered into four loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $3,258,125 (RMB20,000,000). Borrowings under these loan agreements bear interest at a rate of 5.6% for a borrowing period of six months and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO; (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company; (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Zhonghe, the Company’s subsidiary, (iv) Zhonghe, the Company’s subsidiary, and (v) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $3,258,125 as of December 31, 2014. These loans matured in January and February 2015 and were repaid.

 

Tianjin Binhai Rural Commercial Bank

 

In December 2014, the Company entered into a agreement with Tianjin Binhai Rural Commercial Bank. Under the terms of this agreement, the Company borrowed a maximum amount of $25,739,187 (RMB158,000,000). Borrowings under this loan agreement bear interest at a rate of 8.2% and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO; (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company; (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Mr. Zhou Xiao Guang, the former owner of the seller of Zhonghe (v) the wife of Mr. Zhou Xiao Guang, the former owner of the seller of Zhonghe, (vi) Tianjin Binhai Shisheng Trading Group Co., Ltd., the Company’s subsidiary, (vii) Xin Jiang Kai Li Xiang Kong Automobile Sales Service Co., Ltd., a potential customer, (viii) Xin Jiang Kai Yuan Heng Ji Real Estate Development Co., Ltd., a potential customer’s affiliate, (ix) Cheng Jun, shareholder of the Company’s supplier. The total outstanding balance of these agreements was $25,739,187 as of December 31, 2014. This facility matures in September 2015.

 

F-23
 

 

(10) Notes Payable to Suppliers

 

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

 

As of December 31, 2013, the Company had outstanding notes payable to suppliers in an aggregate amount of $13,092,433 (RMB80,000,000), of which Bank of Jinzhou will guarantee payments to suppliers within the term of these notes for a period of six months. The Company was required to maintain 50% of the notes amounts, or $6,550,349 as guaranteed funds, which was classified as restricted cash as of December 31, 2013.

 

As of December 31, 2013, the Company had outstanding notes payable to suppliers in an aggregate amount of $3,273,108 (RMB20,000,000), of which China Zheshang Bank will guarantee payments to suppliers within the term of these notes for a period of six months. The Company was required to maintain 100% of the notes amounts, or $3,273,108 (RMB20,000,000) as guaranteed funds, which was classified as restricted cash as of December 31, 2013.

 

As of December 31, 2013, the Company had outstanding notes payable to suppliers in an aggregate amount of $4,909,662 (RMB30,000,000), of which Agricultural Bank of China will guarantee payments to suppliers within the term of these notes for a period of six months. The Company was required to maintain 30% of the notes amounts, or $1,472,899 (RMB10,000,000) as guaranteed funds, which was classified as restricted cash as of December 31, 2013.

 

As of December 31, 2014, the Company had two outstanding notes payable to suppliers in an aggregate amount of $3,258,125 (RMB20,000,000), the payment of which was guaranteed by China Zheshang Bank for a period of six months. The notes matured in February 2015 and were not renewed. The Company was required to maintain approximately 100% of the notes amounts, or $3,258,125 (RMB20,000,000) as guaranteed funds, which was classified as restricted cash as of December 31, 2014.

 

As of December 31, 2014, the Company had five outstanding notes payable to suppliersin an aggregate amount of $7,330,781 (RMB45,000,000), the payment of which was guaranteed by China Zheshang Bank for a period of six months. The notes matured in January and February 2015 and were not renewed. The Company was required to maintain approximately 50% of the notes amounts, or $3,668,920 (RMB22,521,665) as guaranteed funds, which was classified as restricted cash as of December 31, 2014.

 

As of December 31, 2014, the Company had four outstanding notes payable to suppliers, maturing in June 2015, in an aggregate amount of $5,701,719 (RMB35,000,000), the payment of which was guaranteed by China Zheshang Bank for a period of six months. The Company was required to maintain approximately 50% of the notes amounts, or $2,851,107 (RMB17,501,523) as guaranteed funds, which was classified as restricted cash as of December 31, 2014.

 

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

 

(11) Long term debt

 

The Company has an outstanding debt due to Hezhong, the seller of Zhonghe. The debt carries an interest at a rate of 6% per annum. The debt is due in three installment payments of approximately $19.5 million (RMB120,000,000) each including interest and is secured by the real estate property where the Airport International Auto Mall is located.

 

Summary of this debt follows:

 

Outstanding debt balance  $35,144,603 
Less current portion   (16,900,426)
Outstanding debt balance less current portion  $18,244,177 

 

The Company paid approximately $16.3 million principal payments in November 2014, and approximately $3.2 million interest payments in January 2015, which was included in accrued expense as of December 31, 2014.

 

Future maturities of long-term debt, net of discount, are as follows:

 

2015  $16,900,426 
2016   18,244,177 
   $35,144,603 

 

F-24
 

 

(12) Income Taxes

 

China Auto and HKCo do not generate any income and therefore are not subject to US or Hong Kong income taxes. The Company conducts substantially all of its business through its PRC operating subsidiaries and they are subject to PRC income taxes. The Company’s subsidiaries in the PRC are subject to the standard 25% tax rate in 2013 and 2012.

 

The Company’s income tax provision (benefit) amounted to $(1,385,103) and $1,634,518 for the years ended December 31, 2014 and 2013, respectively, (an effective rate of 4.9% and 75.98% for 2013 and 2012, respectively). A reconciliation of the provision (benefit) for income taxes, with amounts determined by applying the statutory US federal income tax rate to income before income taxes, is as follows:

 

   Year ended December 31, 
   2014   2013 
         
Computed tax (benefit) at US federal statutory rate of 34%  $(9,611,375)  $731,583 
           
Permanent differences:          
Meals and entertainment (non-deductible portion)   23,439    29,581 
Legal and professional fees (non-deductible portion)   241,340    226,520 
Stock issuance in conjunction with the Zhonghe Acquisition   -    335,240 
Gain on forgiveness of loan payable to Qizhong   -    545,396 
Impairment loss on goodwill   5,454,070    - 
Debt discount amortization, net of tax effect   (782,215)   - 
Non-deductible interest   977,772    - 
Prior year’s write off of long term investment in Qizhong deductible in current year   (449,884)   - 
Tax rate difference between US and PRC on foreign earnings   1,451,328    (342,306)
Change in valuation allowance   1,382,969    155,190 
Other   (72,547)   (46,686)
   $(1,385,103)  $1,634,518 

 

   Year ended December 31, 
  2014   2013 
Details of income taxes        
Current        
US Federal  $-   $- 
PRC   (247,987)   1,779,224 
Total current provision (benefit)   (247,987)   1,779,224 
           
Deferred          
US Federal   -    - 
PRC   (1,137,116)   (144,706)
Total deferral benefit   (1,137,116)   (144,706)
           
Total income tax provision (benefit)  $(1,385,103)  $1,634,518 

 

F-25
 

 

   As of December 31, 
   2014   2013 
Details of deferred taxes        
Deferred tax assets:        
Net operating losses carryforwards  $858,689   $155,190 
Allowance for doubtful accounts – advances to suppliers   25,973    - 
Inventory reserve   202,571    48,345 
Reserve for due from Car King Tianjin   450,926    - 
    1,538,159    203,535 
Valuation allowance   (1,538,159)   (155,190)
Total deferred tax asset   -    48,345 
           
Deferred tax liability:          
Debt discount   790,567    1,580,616 
Excess of book basis over tax basis – Airport International Auto Mall property   10,129,952    11,308,850 
Intangible asset   108,469    136,789 
Total deferred tax liability   11,028,988    13,026,255 
           
Net deferred tax liability  $11,028,988   $12,977,910 
           
Classification on consolidated balance sheets          
Deferred tax assets          
-   Current  $-   $48,345 
           
Deferred tax liability          
-   Current  $529,665   $786,413 
-   Non-current   10,499,323    12,239,842 
Total deferred tax liabilities  $11,028,988   $13,026,255 

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible or are utilized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon an assessment of the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are tested whether they are deductible or can be utilized, management believes that the deferred tax assets amounting to $1,538,159and $155,190 as of December 31, 2014 and 2013, respectively, are not more likely than not to be realized. Accordingly the Company provided a valuation allowance amounting to $1,538,159 and $155,190 against the deferred tax assets as of December 31, 2014 and 2013, respectively. As of December 31, 2014, the Company had unused net operating loss carryforward from its PRC subsidiaries in the amount of approximately $3.4 million which may be applied against future taxable income and begins to expire after the year of 2019.

 

The Company has not provided deferred taxes on unremitted earnings attributable to its international subsidiaries as they are to be reinvested indefinitely. These earnings relate to ongoing operations and are approximately $28.7 million as of December 31, 2014. Because of the availability of US foreign tax credits, it is not practicable to determine the US income tax liability that would be payable if such earnings were not indefinitely reinvested.

 

The Company is subject to income taxes in the PRC. Tax regulations are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. All tax positions taken, or expected to be taken, continue to be more likely than not ultimately settled at the full amount claimed. The Company’s tax filings are subject to the PRC tax bureau’s examination for a period up to 5 years. The Company is not currently under any examination by the PRC tax bureau.

 

(13) Retained Earnings

 

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

 

F-26
 

  

In addition to the general reserve, the Company’s PRC subsidiaries are required to obtain approval from the local PRC government prior to distributing any registered share capital. Accordingly, both the appropriations to general reserve and the registered share capital of the Company’s PRC subsidiary are considered as restricted net assets and are not distributable as cash dividends. As of December 31, 2014 and December 31, 2013, the Company’s statutory reserve fund was approximately $3,437,000 and $3,790,000, respectively.

 

(14) Related Party Balances and Transactions

 

Ms. Cheng Weihong (the Senior Vice President and Chairwoman of Shisheng and wife of China Auto’s President and Chief Executive Officer, Mr. Tong Shiping) made non-interest bearing loans to the Company from time to time to meet working capital needs of the Company. For the years ended December 31, 2014 and 2013, the Company made aggregate borrowings from Ms. Cheng Weihong of $581,942 and $862,200, respectively, and made repayments of $726,321 and $755,921 to Ms. Cheng Weihong. As of December 31, 2014 and 2013, the outstanding balances due to Ms. Cheng Weihong were $457,628 and $597,393, respectively.

 

The Company’s former shareholder, Sino Peace Limited, paid certain accrued expenses in the previous years on behalf of the Company. The amounts of $2,213,280 and $2,223,458 were outstanding as payable related to prior years’ professional fees on the consolidated balance sheets as of December 31, 2014 and 2013, respectively. On January 25, 2015, Sino Peace Limited assigned the outstanding loan balance to St. John’s International Limited, an unrelated party.

 

The balances as discussed above as of December 31, 2014 and 2013 are interest-free, unsecured and have no fixed term of repayment. During the years ended December 31, 2014 and 2013, there was no imputed interest charged in relation to these balances.

  

(15) Commitments

 

The Company leases certain office and marketing premises under non-cancelable leases. These office leases begin to expire in 2015. Rent expenses under operating leases were $160,030 for 2014 and $122,691 for 2013. The leases expire at various dates through 2015. In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties.

 

Future minimum lease payments under non-cancelable operating leases were as follows:

 

2015  $56,290 
Thereafter   - 
   $56,290 

 

(16) Rental Income

 

Operating lease arises from the leasing of the Company's Airport International Auto Mall property to Car King Tianjin, to operate the used car business. The lease term is for a period of 10 years from January 2014 to December 2023. Depreciation expense for assets subject to operating lease is provided on the straight-line method over the term of the lease. Depreciation expense relating to Airport International Auto Mall property was $2,336,704 for 2014 and $120,401 for 2013.

 

The cost and accumulated depreciation for the Airport International Auto Mall Property are as follows:

 

   As of December 31, 
   2014   2013 
         
Buildings and land use rights, net of impairment loss of $3,006,109 at December 31, 2014  $69,487,171   $72,826,656 
Less: Accumulated depreciation and amortization   (2,533,367)   (194,874)
   $66,953,804   $72,631,782 

 

Due to the cumulative loss incurred by Car King Tianjin, the Company has not received any return on our investment in the Joint Venture since the inception of its operations. As a result, starting in the third quarter of 2014, the Company deferred $745,296 rental income related to the lease of the Airport International Auto Mall. The Company recorded rental income of $665,693 for the fiscal year 2014 representing the rental revenue for the six months ended June 30, 2014. The Company expects to record rental income revenue when Car King Tianjin’s liquidity improves and it can demonstrate an ability to remit its rental payments under the lease.

 

F-27
 

 

Future minimum rental income to be received under non-cancelable operating lease is as follows at December 31, 2014:

 

2015  $977,437 
2016   1,303,250 
2017   1,303,250 
2018   1,303,250 
2019   1,710,516 
Thereafter   7,004,969 
   $13,602,672 

 

Future minimum rental payments to be received do not include contingent rentals that may be received under the lease.

 

(17) Segment Information

 

The Company has six principal operating segments: (1) sales of automobiles, (2) financing services, (3) web-based advertising, and, (4) automobile value added services, (5) airport auto mall automotive services, and (6) auto mall management services. These operating segments were determined based on the nature of the services offered. Operating segments are defined as components of an enterprise about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief executive officer and chief operating officer have been identified as the chief operating decision makers. The Company's chief operating decision makers direct the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.

 

F-28
 

The Company evaluates performance based on several factors, including net revenue, cost of revenue, operating expenses, and income from operations. The following tables show the operations of the Company's operating segments:

 

Year Ended December 31, 2014

 

           Web-based   Automobile Value   Airport Auto Mall   Auto Mall         
   Sales of    Financing   Advertising   Added   Automotive   Management         
   Automobiles    Services   Services   Services   Services   Service   Corporate   Total 
                                 
Net revenue  $393,669,010   $7,403,202   $242,250   $124,840   $665,693   $164,616   $-   $402,269,611 
Cost of revenue   393,600,739    4,197,638    20,701    8,060    -    2,326    -    397,829,464 
                                         
Operating expenses                                        
Selling and marketing   13,147    617,331    42,666    22,490    128,200    31,254    -    855,088 
General and administrative   314,156    314,157    188,494    125,663    3,769,887    62,831    1,507,957    6,283,145 
Impairment loss on Airport International Auto Mall property   -    -    -    -    3,003,809    -    -    3,003,809 
Impairment on goodwill   -    -    -    -    16,041,383    -    -    16,041,383 
Total operating expenses   327,303    931,488    231,160    148,153    22,943,279    94,085    1,507,957    26,183,425 
Income (loss) from operations  $(259,032)  $2,274,076   $(9,611)  $(31,373)  $(22,277,586)  $68,205   $(1,507,957)  $(21,743,278)
Depreciation and Amortization  $188,631   $25,117   $20,052   $3,588   $1,936,396   $-   $450,041   $2,623,825 

  

Year Ended December 31, 2013

 

           Web-based   Automobile Value   Airport Auto Mall   Auto Mall         
   Sales of   Financing   Advertising   Added   Automotive   Management         
   Automobiles   Services   Services   Services   Services   Service   Corporate   Total 
                                 
Net revenue   $450,143,413   $6,893,986   $471,277   $740,338   $15,788   $970,255   $-   $459,235,057 
Cost of revenue    449,748,338    2,560,052    38,201    22,150    -    10,675    -    452,379,416 
                                         
Operating expenses                                         
Selling and marketing    43,285    474,832    47,448    78,686    1,730    105,133    -    751,114 
General and administrative    91,478    1,003,500    100,277    166,293    3,656    222,186    1,587,390    3,174,780 
Total operating expenses    134,763    1,478,332    147,725    244,979    5,386    327,319    1,587,390    3,925,894 
Income (loss) from  operations   $260,312   $2,855,602   $285,351   $473,209   $10,402   $632,261   $(1,587,390)  $2,929,747 
Depreciation and Amortization   $45,642   $28,084   $28,629   $4,012   $-   $-   $207,759   $314,126 

  

F-29
 

  

Total Assets

 

          Web-based   Automobile Value   Airport Auto Mall   Auto Mall         
   Sales of   Financing   Advertising   Added   Automotive   Management         
   Automobiles   Services   Services   Services   Services   Service   Corporate   Total 
                                 
As of December 31, 2014  $113,248,213   $111,720,132   $399,463   $979,003   $51,287,018   $-   $877,927   $278,511,756 
As of December 31, 2013  $93,650,624   $96,122,720   $1,820,264   $2,815,434   $65,077,390   $376,146   $1,693,047   $261,555,625 

 

F-30
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  CHINA AUTO LOGISTICS INC.
     
  By: /s/ Tong Shiping
  Name: Tong Shiping
  Title: Chief Executive Officer
     
  By: /s/ Wang Xinwei
  Name: Wang Xinwei
  Title Chief Financial Officer

 

Dated: April 15, 2015

 

POWER OF ATTORNEY

 

The registrant and each person whose signature appears below hereby appoint Tong Shiping as attorney-in-fact with full power of substitution, severally, to execute in the name and on behalf of the registrant and each such person, individually and in each capacity stated below, one or more amendments to the annual report which amendments may make such changes in the report as the attorney-in-fact acting deems appropriate and to file any such amendment to the report with the US Securities and Exchange Commission.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Tong Shiping   Chief Executive Officer and Director   April 15, 2015
Tong Shiping   (Principal Executive Officer)    
         
/s/ Wang Xinwei   Chief Financial Officer, Treasurer, Vice President and Director   April 15, 2015
 Wang Xinwei   (Principal Accounting Officer)    
         
/s/ Cheng Weihong   Senior Vice President (Head of Human Resources and General   April 15, 2015
Cheng Weihong    Administration) and Director    
         
/s/ Howard S. Barth   Director   April 15, 2015
Howard S. Barth        
         
/s/ Wang Wei   Director   April 15, 2015
Wang Wei        
         
/s/ Yang Lili   Director   April 15, 2015
Yang Lili        
         
/s/ Zou Baoying   Director   April 15, 2015
Zou Baoying        

 

50
 

 

Index to Exhibits

 

Exhibit

Number

  Exhibit Description
3.1 (1)   Amended Articles of Incorporation of the Company
3.2 (2)   Amended and Restated Bylaws of the Company
10.1*   Maximum Amount Guarantee Contract, dated as of September 29, 2014, by and between Tianjin Binhai Shisheng Trading Group Co., Ltd., Tianjin Classical Auto Sales Information Co., Ltd., Tianjin Shimao International Trade Co, Ltd., Tianjin Prominent Hero Import & Export Trading Co., Ltd. and Agricultural Bank of China Tianjin Heping Sub-branch
10.2*   Maximum Amount Guarantee Contract, dated as of September 29, 2014, by and between Tianjin Binhai Shisheng Trading Group Co., Ltd., Tianjin Binhai International Automall Co., Ltd., Tianjin Ningchuan International Trade Co, Ltd. and Agricultural Bank of China Tianjin Heping Sub-branch
10.3*   Primary Credit Facility Agreement dated as of October 9, 2014, by and between Tianjin Binhai Rural Commercial Bank Corporation and Tianjin Zhonghe Automobile Sales Co., Ltd.
10.4*   Office Tenancy Contract, dated effective as of December 1, 2014, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd.
10.5*   Office Tenancy Contract, dated as December 31, 2014, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd.
14.1 (3)   Code of Business Conduct and Ethics
31.1*   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

(1) Incorporated by reference to the Company’s Form SB2 filed with the Securities and Exchange Commission on March 7, 2006, Definitive Schedule 14C Information Statement filed on December 5, 2008 and Form 8-K filed on October 9, 2012.

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

(3) Incorporated by reference to the Company’s Form 8-K, filed with the Securities and Exchange Commission on December 24, 2008.

 

    * Filed herewith

 

 

51