UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2015

 

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

 

For the transition period from ______ to ______.

 

Commission file number: 001-34393

 

CHINA AUTO LOGISTICS INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada		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)

 

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  þ    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ   No  ☐

 

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

 

Large accelerated filer   ☐

Accelerated filer   ☐

Non-accelerated filer   ☐

Smaller reporting company   þ

 

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

 

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 November 10, 2015
Common Stock, $0.001 par value per share		4,034,394 shares

 

 

 

 TABLE OF CONTENTS

 

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)	2
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (Unaudited)	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	39
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Default Upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6.	Exhibits	42
SIGNATURES		43

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

CHINA AUTO LOGISTICS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 30, 2015 (Unaudited)				December 31, 2014
ASSETS
Current assets
Cash and cash equivalents		$	6,438,003			$	7,793,952
Restricted cash			40,295,766				12,171,490
Receivables related to financing services			77,019,685				101,764,549
Inventories			11,250,195				16,042,462
Advances to suppliers			109,216,294				68,670,928
Prepaid expenses			32,391				24,420
Value added tax refundable			219,580				470,663
Total current assets			244,471,914				206,938,464
Receivables related to financing services – non current			8,293,858				-
Property and equipment, net			63,152,900				67,126,002
Ownership interest in Car King Tianjin			-				-
Deferred rent			552,819				-
Goodwill			3,877,421				4,013,416
Intangible assets, net			338,905				433,874
Total Assets		$	320,687,817			$	278,511,756
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Bank overdraft		$	2,250,780			$	2,423,015
Lines of credit related to financing services			66,229,767				63,106,959
Short term borrowings			68,740,591				68,909,343
Accounts payable			1,606,341				99,710
Notes payable to suppliers			51,448,251				16,290,625
Accrued expenses			257,936				3,540,275
Customer deposits			49,642,768				38,372,704
Deferred revenue			440,809				634,979
Rental deposits			78,693				81,453
Payable related to the Zhonghe Acquisition – current portion, net			17,294,134				16,900,426
Due to former shareholder			-				2,213,280
Due to director			676,445				457,628
Other current payable			2,138,282				-
Income tax payable			683,072				677,092
Deferred tax liability			318,444				529,665
Total current liabilities			261,806,313				214,237,154
Payable related to the Zhonghe Acquisition, excluding current portion, net			18,651,962				18,244,177
Deferred tax liability			9,664,327				10,499,323
Total liabilities			290,122,602				242,980,654
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 September 30, 2015 and December 31, 2014			4,034				4,034
Additional paid-in capital			22,979,734				22,979,734
Accumulated other comprehensive income			6,212,956				7,330,995
Retained earnings			1,004,448				4,667,372
Total China Auto Logistics Inc. shareholders’ equity			30,201,172				34,982,135
Noncontrolling interests			364,043				548,967
Total equity			30,565,215				35,531,102
Total liabilities and shareholders’ equity		$	320,687,817			$	278,511,756

 

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

 

 

CHINA AUTO LOGISTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Net revenue		$	151,621,754			$	92,377,130			$	332,660,329			$	313,038,947
Cost of revenue			149,129,426				91,280,660				328,853,778				309,497,697
Gross profit			2,492,328				1,096,470				3,806,551				3,541,250
Operating expenses:
Selling and marketing			232,433				282,039				634,131				667,838
General and administrative			939,979				1,040,674				2,919,866				3,407,653
Recovery of reserve due from Car King Tianjin			(1,524,894	)			-				(1,524,894	)
Total operating expenses			(352,482	)			1,322,713				2,029,103				4,075,491
Income (loss) from operations			2,844,810				(226,243	)			1,777,448				(534,241	)
Other income (expenses)
Interest income			116,150				256,722				231,581				515,631
Interest expense			(1,727,801	)			(1,770,518	)			(5,540,821	)			(4,812,998	)
(Loss) gain on disposal of property and equipment			-				(203	)			(8,254	)			11,737
Recovery of Investment (equity in losses) in Car King Tianjin			73,878				(160,522	)			(422,126	)			(648,907	)
Loss on sale of equity interest in subsidiary			(209,638	)			-				(209,638	)			-
Foreign exchange loss			(29	)			(75,754	)			(50	)			(148,168	)
Miscellaneous			-				488				183				488
Total other expenses			(1,747,440	)			(1,749,787	)			(5,949,125	)			(5,082,217	)
Income (loss) before income tax benefit			1,097,370				(1,976,030	)			(4,171,677	)			(5,616,458	)
Income tax benefit			(151,387	)			(203,753	)			(507,653	)			(644,163	)
Net income (loss)			1,248,757				(1,772,277	)			(3,664,024	)			(4,972,295	)
Less: Net income (loss) attributable to noncontrolling interests			(123	)			(2,064	)			(1,100	)			(9,660	)
Net income (loss) attributable to shareholders of China Auto Logistics Inc.		$	1,248,880			$	(1,770,213	)		$	(3,662,924	)		$	(4,962,635	)
Earnings (loss) per share attributable to shareholders of China Auto Logistics Inc.
– basic and diluted		$	0.31			$	(0.44	)		$	(0.91	)		$	(1.23	)
Weighted average number of common shares
Outstanding
– basic and diluted			4,034,494				4,034,494				4,034,494				4,034,494

 

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

 

 

CHINA AUTO LOGISTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Net income (loss)		$	1,248,757			$	(1,772,277	)		$	(3,664,024	)		$	(4,972,295	)
Other comprehensive (loss) income
Foreign currency translation adjustments			(1,407,306	)			16,748				(1,117,777	)			(446,370	)
Comprehensive loss			(158,549	)			(1,755,529	)			(4,781,801	)			(5,418,665	)
Less: Comprehensive loss attributable to noncontrolling interests			(93	)			(2,010	)			(838	)			(9,943	)
Comprehensive loss attributable to shareholders of China Auto Logistics Inc.		$	(158,456	)		$	(1,753,519	)		$	(4,780,963	)		$	(5,408,722	)

 

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

 

 

CHINA AUTO LOGISTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		Nine Months Ended  September 30,
		2015				2014
Cash flows from operating activities
Net loss		$	(3,664,024	)		$	(4,972,295	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization			1,814,674				1,981,425
Loss (gain) on disposal of property and equipment			8,254				(11,737	)
Equity loss – share of investee company loss			-				648,907
Loss on sale of equity interest in subsidiary			209,638				-
Change in Inventory reserve			692				170,301
Change in reserve for advances to suppliers			104,719				-
Change in deferred tax assets			-				34,536
Change in deferred tax liabilities			(282,667	)			(266,380	)
Changes in operating assets and liabilities:
Restricted cash			(29,328,731	)			13,955,586
Accounts receivable			1,291				(326,722	)
Receivable related to auto mall management fees			-				255,494
Receivables related to financing services			12,822,334				(50,790,909	)
Inventories			(1,215,690	)			(2,741,798	)
Advances to suppliers			(42,899,839	)			(45,751,073	)
Prepaid expenses, other current assets and other assets			(8,933	)			(64,708	)
Value added tax receivable			226,351				(410,263	)
Accounts payable			1,553,900				436,892
Line of credit related to financing services			6,160,561				32,373,503
Notes payable to suppliers			36,809,837				(4,936,615	)
Accrued expenses			(59,694	)			356,764
Accrued interest			(1,570,313	)			2,364,975
Customer deposits			13,588,419				7,074,785
Deferred revenue			(724,987	)			310,165
Rental deposits			-				81,123
Income tax payable			29,376				223,612
Net cash used in operating activities			(6,424,832	)			(50,004,432	)
Cash flows from investing activities
Proceeds from disposal of property and equipment			9,275				19,578
Proceeds from sale of equity interest in Zhengji, net			3,030,303				-
Purchase of property and equipment			(2,318	)			(10,963	)
Advances to Car King Tianjin			-				(1,308,053	)
Net cash provided by (used in) investing activities			3,037,260				(1,299,438	)
Cash flows from financing activities
Bank overdraft			(91,222	)			1,564
Proceeds from short-term borrowings			88,339,880				88,216,840
Repayments of short-term borrowings			(86,160,953	)			(28,138,964	)
Decrease in restricted cash related to short-term borrowings			-				(20,253,537	)
Proceeds from director			599,120				450,942
Repayments to director			(455,373	)			(589,180	)
Net cash provided by financing activities			2,231,452				39,687,665
Effect of exchange rate change on cash			(199,829	)			(88,371	)
Net decrease in cash and cash equivalents			(1,355,949	)			(11,704,576	)
Cash and cash equivalents at the beginning of period			7,793,952				15,041,505
Cash and cash equivalents at the end of period		$	6,438,003			$	3,336,929
Supplemental disclosure of cash flow information
Interest paid		$	9,804,985			$	5,339,194
Income taxes paid		$	149,194			$	-
Non-cash activities:
Reclassification of the balance due to former shareholder to other payable after an assignment of the balance to an unrelated party		$	2,231,346			$	-
Increase in advances to Car King Tianjin for unpaid rent		$	246,354			$	-
Amount due to Zhengji to offset the sales price of equity interest in Zhengji		$	5,200,741				-

 

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

 

 

CHINA AUTO LOGISTICS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(1)           Summary of Significant Accounting Policies

 

Organization, Nature of Business and Basis of Presentation

 

China Auto Logistics Inc. (the “Company” or “China Auto”) operates through its wholly-owned subsidiary Ever Auspicious International Limited, a Hong Kong corporation (“HKCo.”), and its wholly-owned subsidiary Tianjin Seashore New District Shisheng Business Trading Group Co.  Ltd.  (“Shisheng”), a company established under the laws of the People’s Republic of China (“PRC”) and Shisheng’s wholly owned and majority owned subsidiaries, Tianjin Ganghui Information Technology Corp. (“Ganghui”), Tianjin Hengjia Port Logistics Corp. (“Hengjia”), Zhengji International Trading Corp. (“Zhengji”), and Tianjin Zhonghe Auto Sales Service Co., Ltd. (“Zhonghe”). The Company also has a 40% ownership interest in a joint venture between Zhonghe and Car King (China) Used Car Trading Co., Ltd. (“Car King Tianjin”).

 

On September 23, 2015, the Company sold its equity interest in Zhengji, which was engaged in automobile sales, to Mr. Wu Xiang Yang, an unrelated party, at a price of $3,030,303 (net of cash of $7,364 at Zhengji and amount due to Zhengji of $5,200,741). Zhengji’s assets consisted of automobile inventories of $3,402,248, other assets of $12,418 and other current liabilities of $2,316 on the disposal date resulting a loss on sale of equity interest in subsidiary in the amount of $209,638 after consideration of the non controlling interest of $172,409 in Zhengji. Zhengji had no material operations during 2015 through the disposal date.

The Company’s principal businesses include (i) sales of imported automobiles, (ii) financing services related to imported automobiles, (iii) automobile information websites and advertising services, (iv) logistics services related to the automobile importing process and other automobile value added services, such as assistance with customs clearance, storage and nationwide delivery services, (iv)management services to auto mall operators, and (v) airport auto mall automotive services including selling used cars through Car King Tianjin and leasing the Airport International Auto Mall facility in Tianjin, China (the “Airport International Auto Mall”) to Car King Tianjin and other tenants. 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, expired according to its terms on February 28, 2014, and was not renewed. Therefore, as of March 1, 2014, the Company no longer provides auto mall management services.

 

The accompanying condensed consolidated balance sheet as of December 31, 2014, which has been derived from the audited consolidated financial statements and the accompanying unaudited condensed consolidated financial statements, has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations and the Company believes that the disclosures made are adequate to make the information not misleading.

 

In the opinion of management, these condensed consolidated financial statements reflect all adjustments which are of a normal recurring nature and which are necessary to present fairly the financial position of China Auto as of September 30, 2015 and the results of its operations, and cash flows for the three-month and nine-month periods ended September 30, 2015 and 2014 and cash flows for the nine month periods ended September 30, 2015 and 2014.  These condensed consolidated financial statements and related notes should be read in conjunction with the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2014.  The results of operations for the three-month and nine-month periods ended September 30, 2015 are not necessarily indicative of the results which may be expected for the entire fiscal year.

 

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

 

Going Concern

 

The Company incurred operating losses and had negative operating cash flows and may continue to generate negative cash flows as the Company implements its business plan for 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 interim condensed consolidated financial statements have been prepared in conformity with US GAAP, which contemplates the Company’s continuation as a going concern. The Company’s net loss attributable to shareholders was $3,662,924 and $4,962,635 for the nine months ended September 30, 2015 and 2014, respectively.

 

As of September 30, 2015, the Company has a working capital deficit of $17,334,399, including $68,740,591 in current liabilities for short-term borrowings which are due during the period between January 2016 and August 2016, and $17,294,134 in current liabilities payable to Hezhong related to the Company’s acquisition of Zhonghe (the “Zhonghe Acquisition”), which is due in May 2016 (extended from November 2015), and for which the Company does not currently have the necessary capital to re-pay. Net cash used in operations during the nine months ended September 30, 2015 was $6,424,709. 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.

 

Principles of Consolidation

 

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

 

Currency Reporting

 

The Company’s operations in the PRC use the local currency, Renminbi (“RMB”), as their functional currency, whereas amounts reported in the accompanying condensed consolidated financial statements and disclosures are stated in U.S. dollars, the reporting currency of the Company, unless stated otherwise.  As such, the condensed consolidated balance sheets of the Company have been translated into U.S. dollars at the current rates as of September 30, 2015 and December 31, 2014 and the condensed consolidated statements of income have been translated into U.S. dollars at the weighted average rates during the periods the transactions were recognized.

 

The resulting foreign currency translation adjustments are recorded in determining other comprehensive income in the condensed consolidated statements of comprehensive income and as a separate component of equity in the condensed consolidated balance sheets.

 

Revenue Recognition

 

The Company’s main source of income was generated through (1) sales of automobiles, (2) service fees for assisting customers to get bank financing on purchases of automobiles, (3) web-based advertising 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 and (5) airport auto mall automotive services. As indicated above, as of March 1, 2014, the Company no longer performs auto mall management services, and therefore, it will no longer recognize revenue related to such services.

 

The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred upon shipment or services have been rendered, the seller’s price to the buyer is fixed or determinable, and 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.

 

Airport auto mall automotive services include (i) the rental of the Airport International Auto Mall, and (ii) equity in the income (loss) derived from the Company’s 40% equity interest in Car King Tianjin. Rental income from the Airport International Auto Mall is recognized over the lease term on a straight-line basis. The Company’s lease agreement, entered into with Car King Tianjin in January 2014 (the “Rental Agreement”), contains a contingent rental arrangement for fiscal years 2016, 2017 and 2018, under which rental income is determined based on a percentage of Car King Tianjin’s gross profit. Notwithstanding this arrangement, the Rental Agreement contains both a minimum and a maximum annual rental amount. Contingent rental income is recognized when the specified targets are met. The equity in income (loss) derived from Car King Tianjin is recognized based on the Company’s ownership share in Car King Tianjin’s net income (loss).

 

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

 

Receivables Related to Financing Services

 

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

 

The Company evaluates the 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 receivables related to financing services historically and accordingly did not record any allowance for credit losses as of September 30, 2015 and December 31, 2014.

 

Inventories

 

Inventory is stated at the lower of either cost (using the first-in, first-out method) or market. The Company continually evaluates the composition of our inventory, assessing slow-moving and ongoing products. The Company’s products are comprised of the purchase cost of automobiles, which declines in value over time. The Company continuously evaluates our inventory to determine the reserve amount for slow-moving inventory. During the three months ended September 30, 2105, the inventories with reserve were included in the sale of the subsidiary and others sold in the ordinary course of business. As of September 30, 2015 and December 31, 2014, the reserve for obsolescence amounted to $0 and $810,282, respectively.

 

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 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 September 30, 2015 and 2014, the Company did not have any common stock equivalents, therefore, the basic earnings (loss) per share is the same as the diluted earnings (loss) per share.

 

 

New Accounting Standards

 

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

 

(2)            Restricted Cash

 

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

 

		September 30,				December 31,
		2015				2014
Collateral for bank’s issuance of letters of credit to the Company’s customers		$	3,798,958			$	2,393,338
Collateral for notes payable to suppliers			36,496,808				9,778,152
		$	40,295,766			$	12,171,490

 

(3)           Property and Equipment

 

A summary of property and equipment is as follows:

 

		September 30,				December 31,
		2015				2014
Buildings and land use rights, net of impairment loss of $2,904,246 as of September 30, 2015 and $3,006,109 as of December 31, 2014		$	67,132,582			$	69,487,171
Computers			153,442				227,377
Office equipment, furniture and fixtures			68,453				109,818
Leasehold improvement			33,051				34,210
Automobiles			1,008,978				1,089,248
			68,396,506				70,947,824
Less: Accumulated depreciation and amortization			(5,243,606	)			(3,821,822	)
		$	63,152,900			$	67,126,002

 

Depreciation and amortization expenses for property and equipment amounted to $561,521 and $614,538 for the three months ended September 30, 2015 and 2014, respectively, and $1,731,875 and $1,898,437, for the nine months ended September 30, 2015 and 2014, respectively.

 

(4)           Goodwill

 

The changes in the carrying amount of goodwill for the nine months ended September 30, 2015 are as follows:

 

		Reporting Segments
		Sales of Automobiles				Airport Auto Mall Automotive Services				Total
Balance as of December 31, 2014			4,013,416				-				4,013,416
Translation adjustment			(135,995	)			-				(135,995	)
Balance as of September 30, 2015		$	3,877,421			$	-			$	3,877,421

 

  

(5)           Intangible Assets, Net

The Company acquired customer relations in connection with the Zhonghe Acquisition on November 30, 2013. As of September 30, 2015 and December 31, 2014, the customer relations 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 September 30, 2015		5 years		$	555,002			$	(19,889	)		$	-			$	(196,208	)		$	338,905
As of December 31, 2014		5 years		$	555,002			$	(1,120	)		$	-			$	(120,008	)		$	433,874

  

Amortization expense for intangible assets was $27,179 and $27,608 for the three months ended September 30, 2015 and 2014, respectively and $82,799 and $82,988 for the nine months ended September 30, 2015 and 2014, respectively.

 

(6)           Equity Investment in Car King Tianjin

 

The Company’s investment in Car King Tianjin is accounted for using the equity method of accounting. Car King Tianjin’s operations commenced on March 6, 2014. The results of operations and financial position of the Company’s equity basis investments are summarized below:

 

Condensed statements of operations information:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Net sales		$	1,904,293			$	1,169,322			$	6,444,394			$	2,620,375
Gross profit		$	542,757			$	527,515			$	1,699,052			$	1,140,562
Net loss		$	(794,077	)		$	(401,306	)		$	(2,034,087	)		$	(1,622,269	)
The Company’s equity in net loss of Car King Tianjin		$	(317,631	)		$	(160,522	)		$	(813,635	)		$	(648,907	)
Recovery of investment			73,878				-				73,878				-
Excess loss over investment			317,631				-				317,631				-
Adjusted Company’s equity in net loss of Car King Tianjin		$	73,878			$	(160,522	)		$	(422,126	)		$	(648,907	)

 

Condensed balance sheet information: 

 

		As of September 30, 2015				As of December 31, 2014
Current assets		$	1,173,855			$	1,462,036
Non current assets			901,513				1,039,338
Total assets		$	2,075,368			$	2,501,374
Current liabilities		$	4,258,633			$	2,716,389
Deficit			(2,183,265	)			(215,015	)
Current liabilities and deficit		$	2,075,368			$	2,501,374

 

 

The Company is entitled to 40% of Car King Tianjin’s net profit or loss. As of September 30, 2015 and December 31, 2014, the Company’s equity investment balance in Car King Tianjin was $0. The amount due from Car King Tianjin was reduced by $585,023 and $86,007 for the amount of shared cumulative loss in excess of the investment in Car King Tianjin as of June 30, 2015 and December 31, 2014, respectively. The net balance due from Car King Tianjin was $1,566,468 and $1,803,706 as of June 30, 2015 and December 31, 2014, respectively (net of the reduction of the Company’s share in net loss of Car King Tianjin). Due to the cumulative loss incurred by Car King Tianjin, the Company fully reserved the $1,566,468 and $1,803,706 due from Car King Tianjin as a result of the uncertainties of collecting these advances as of June 30, 2015 and December 31, 2014, respectively. In July 2015, Car King Tianjin remitted approximately $1.84 million (RMB11,500,000) of which unpaid rent of $270,000 (RMB1,500,000) was applied to rent receivable and repayment of an outstanding loan balance of $1.57 million (RMB10,000,000) to the Company. As a result, the previous reserve amount was reversed and recorded as recovery of reserve due from Car King Tianjin in the amount of $1,524,894 in the condensed consolidated statement of operations during the three months ended September 30, 2015. In addition, as the net balance due from Car King Tianjin decreased because of collection, the Company recorded a recovery in its investment in Car King Tianjin, in the amount of $73,878 during the three months ended September 30, 2015. Amount due from Car King Tianjin was $0, net of $487,897 shared cumulative loss of Car King Tianjin over the investment in Car King Tianjin as of September 30, 2015. The Company’s shared loss in Car King Tianjin was not recorded during the three months ended September 30, 2015 as the Investment balance and the amount due from Car King Tianjin have already been reduced to $0 for the previous periods’ shared loss in Car King Tianjin.

 

(7)           Bank Overdraft

 

In January 2014, the Company entered into an overdraft agreement with PuDong Development Bank.  Under the terms of the agreement, the Company can draw on its bank account up to $2,463,539 (RMB15,000,000) in excess of the funds on deposit.  The overdraft amount is subject to an annual interest rate of 6.72% and the maximum overdraft period cannot exceed 89 days.  The overdraft agreement is guaranteed by Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and a non-related entity which is a supplier of the Company, and matured in December 2014. The outstanding balance of the facility was $2,423,015 as of December 31, 2014.

 

In January 2015, the Company entered into an overdraft agreement with PuDong Development Bank.  Under the terms of the agreement, the Company can draw on its bank account up to $2,398,158 (RMB15,000,000) in excess of the funds on deposit.  The overdraft amount is subject to an annual interest rate of 6.72% and the maximum overdraft period cannot exceed 89 days.  The overdraft agreement is guaranteed by Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and a non-related entity which is a supplier of the Company, and matures in December 2015. The outstanding balance of the facility was $2,250,780 as of September 30, 2015.

 

(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 operations. Interest expense related to these lines of credit was $946,254 and $1,138,879 for the three months ended September 30, 2015 and 2014, respectively and $2,572,409 and $3,195,381 for the nine months ended September 30, 2015 and 2014, respectively.

 

A summary of the Company’s lines of credit related to financing services follows:

 

 

China Merchants Bank

 

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 $11,017,029 (RMB70,000,000). Borrowings under this facility line of credit bear interest at rates to be determined upon drawing. The borrowings under this facility were repayable within 3 months from the dates of drawing. As of September 30, 2015 and December 31, 2014, the Company had an outstanding balance of $0 and $3,661,523, 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.

 

In March 2015, the Company entered into a facility line of credit agreement with China Merchants Bank, pursuant to which the Company can borrow a maximum amount of $11,017,029 (RMB70,000,000). Borrowings under this facility line of credit bear interest at rates to be determined upon drawing. During three months ended September 30, 2015, interest was charged at rates ranging between 3.46% and 4.50% per annum, and borrowings under this facility were repayable within 3 months from the dates of drawing. As of September 30, 2015 and December 31, 2014, the Company had an outstanding balance of $6,670,563 and $0, respectively, under this facility line of credit. This facility line of credit is guaranteed by Mr. Tong Shiping, the Company’s Chairman, President and CEO, Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and a non-related entity which is a supplier of the Company, and matures in March 2016.

 

Agricultural Bank of China

 

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 $81,840,788 (RMB520,000,000). This facility line of credit is guaranteed by five non-related entities, which are customers, suppliers or both. During the three months ended September 30, 2015, borrowings under this facility line of credit bear interest at rates ranging from 4.20% to 5.79% per annum, and were repayable on the due dates, which were determined prior to each draw. As of September 30, 2015 and December 31, 2014, the Company had outstanding balances of $0 and $49,414,953, respectively, under this facility line of credit. This facility matured in September 2015.

 

In September 2015 the Company entered into a facility line of credit agreement with Agricultural Bank of China, pursuant to which the Company can borrow a maximum amount of $75,545,343 (RMB480,000,000). This facility line of credit is guaranteed by five non-related entities, which are customers, suppliers or both. During the three months ended September 30, 2015, borrowings under this facility line of credit bear interest at rates ranging from 4.20% to 5.79% per annum, and were repayable on the due dates, which were determined prior to each draw. As of September 30, 2015 and December 31, 2014, the Company had outstanding balances of $36,638,147 and $0, respectively, under this facility line of credit. This facility matures in September 2016.

 

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 $18,886,336 (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 September 30, 2015 and December 31, 2014, the Company had outstanding balances of $0 and $3,546,934, 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.

 

In January 2015, the Company entered into a facility line of credit agreement with PuDong Development Bank, pursuant to which the Company can borrow a maximum amount of $18,886,336 (RMB120,000,000). During the three months ended September 30, borrowings under this facility line of credit bear interest at rates ranging from 4.78% to 5.13% per annum. As of September 30, 2015 and December 31, 2014, the Company had outstanding balances of $5,952,352 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 matures in December 2015.

 

China Zheshang Bank

 

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 $28,329,504 (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 5.0% to 5.3% per annum, and are repayable within 3 months from the dates of drawing. As of September 30, 2015 and December 31, 2014, the Company had outstanding balances of $0 and $831,215, respectively, under this facility line of credit. This facility matured in August 2015.

 

 

In August 2015, the Company entered into a facility line of credit agreement with China Zheshang Bank, pursuant to which the Company can borrow a maximum amount of $28,329,504 (RMB180,000,000). This facility line of credit is guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, and (iv) Zhonghe, the Company’s subsidiary, (v) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. Borrowings under this facility line of credit bear interest at rates ranging from 5.0% to 5.3% per annum, and are repayable within 3 months from the dates of drawing. As of September 30, 2015 and December 31, 2014, the Company had outstanding balances of $3,996,213 and $0 respectively, under this facility line of credit. This facility matures in August 2016.

 

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 $15,738,613 (RMB100,000,000). This facility line of credit is guaranteed by Zhonghe, the Company’s subsidiary. The borrowings under this facility line of credit were repayable on the due dates, which were determined prior to each draw. As of September 30, 2015 and December 31, 2014, the Company had outstanding balances of $0 and $4,761,227, respectively, under this facility line of credit. This facility matured in February 2015.

 

In June 2015, 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 $15,738,613 (RMB100,000,000). This facility line of credit is guaranteed by Zhonghe, the Company’s subsidiary. Borrowings under this facility line of credit bear interest at rates ranging from 3.24% to 3.83% per annum, and are repayable within 3 months from the dates of drawing. As of September 30, 2015, the Company had outstanding balances of $288,103 under this facility line of credit. This facility matures in June 2016.

 

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 $12,590,890 (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 three months ended September 30, 2015, borrowings under this facility line of credit bear interest at a rate of 1.73% per annum, and were repayable on the due dates, which were determined prior to each draw. As of September 30, 2015 and December 31, 2014, the Company had outstanding balances of $0 and $891,107, respectively, under this facility line of credit. This facility matured in April 2015.

 

In April 2015, the Company entered into a facility line of credit agreement with China Minsheng Bank, pursuant to which the Company can borrow a maximum amount of $12,590,890 (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 three months ended September 30, 2015, borrowings under this facility line of credit bear interest at rates ranging from 0.99% to 1.55% per annum, and were repayable on the due dates, which were determined prior to each draw. As of September 30, 2015 and December 31, 2014, the Company had outstanding balances of $6,484,208 and $0, respectively, under this facility line of credit. This facility matures in April 2016.

 

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 $7,869,307 (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 September 30, 2015 and December 31, 2014, the Company had outstanding balances of $6,200,181 and $0 under this facility line of credit. During the three months ended September 30, 2015, borrowings under this facility line of credit bear interest at rates ranging from 4.23% to 5.2% per annum. This facility matures in November 2015.

 

 

(9)           Short Term Borrowings

Agricultural Bank of China

 

In March 2014, the Company entered into three 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 $9,443,168 (RMB60,000,000). The outstanding balance totaled $0 and $9,774,376 as of September 30, 2015 and December 31, 2014, respectively. 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 $4,721,584 (RMB30,000,000). The outstanding balance totaled $0 and $4,887,187 as of September 30, 2015 and December 31, 2014, respectively. 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 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 $7,869,307 (RMB50,000,000). The outstanding balance totaled $0 and $8,145,312 as of September 30, 2015 and December 31, 2014, respectively. This short term loan bears interest at a rate of 6.6% per annum, originally matured in July 2015 but was repaid early in June 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 $6,295,445 (RMB40,000,000). The outstanding balance totaled $0 and $6,516,250 as of September 30, 2015 and December 31, 2014, respectively. This short term loan bears interest at a rate of 6.6% per annum, matured 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 $10,230,099 (RMB65,000,000). The outstanding balances totaled $0 and $10,588,906 as of September 30, 2015 and December 31, 2014, respectively. These short term loans bear interest at a rate of 6.6% per annum, matured in September 2015, and are secured by the Airport International Auto Mall and related land use rights.

 

In February 2015, the Company entered into three working capital loan agreements with Agricultural Bank of China to obtain short term financing. Under the terms of these agreements, the Company can borrow up to $14,164,750 (RMB90,000,000). The outstanding balances totaled $14,164,750 and $0 as of September 30, 2015 and December 31, 2014, respectively. These short term loans bear interest at a rate of 6.16% per annum, mature in February 2016, and are secured by the Airport International Auto Mall and related land use rights.

 

In June 2015, the Company entered into a working capital loan agreement with Agricultural Bank of China to obtain short term financing. Under the terms of this agreement, the Company can borrow up to $7,082,376 (RMB45,000,000). The outstanding balance totaled $7,082,376 and $0 as of September 30, 2015 and December 31, 2014, respectively. This short term loan bears interest at a rate of 5.61% per annum, matures in June 2016, and is secured by the Airport International Auto Mall and related land use rights.

 

In July 2015, the Company entered into a working capital loan agreement with Agricultural Bank of China to obtain short term financing. Under the terms of this agreement, the Company can borrow up to $5,665,901 (RMB36,000,000). The outstanding balance totaled $5,665,901 and $0 as of September 30, 2015 and December 31, 2014, respectively. This short term loan bears interest at a rate of 5.34% per annum, matures in July 2016, and is secured by the Airport International Auto Mall and related land use rights.

 

In August 2015, the Company entered into a working capital loan agreement with Agricultural Bank of China to obtain short term financing. Under the terms of this agreement, the Company can borrow up to $5,665,901 (RMB36,000,000). The outstanding balance totaled $5,665,901 and $0 as of September 30, 2015 and December 31, 2014, respectively. This short term loan bears interest at a rate of 5.06% per annum, matures in August 2016, and is secured by the Airport International Auto Mall and related land use rights.

 

In September 2015, the Company entered into a working capital loan agreement with Agricultural Bank of China to obtain short term financing. Under the terms of this agreement, the Company can borrow up to $3,462,495 (RMB22,000,000). The outstanding balance totaled $3,462,495 and $0 as of September 30, 2015 and December 31, 2014, respectively. This short term loan bears interest at a rate of 5.06% per annum, matures in August 2016, and is secured by the Airport International Auto Mall and related land use rights.

 

 

China Zheshang Bank

 

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 $3,147,723 (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 $3,258,125 as of December 31, 2014. These loans matured in January and February 2015 and were repaid.

 

In January 2015, the Company entered into three loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $3,147,723 (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 September 30, 2015. These loans matured in July 2015 and were repaid.

 

In July 2015, the Company entered into three loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $3,147,723 (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 $3,147,723 as of September 30, 2015. These loans mature in January 2016.

 

In August and September 2015, the Company entered into five loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $4,684,436 (RMB29,763,970). Borrowings under these loan agreements bear interest at rates ranging from 4.6% to 4.85% for a borrowing period of six months and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO; (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company; (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Zhonghe, the Company’s subsidiary, and (v) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $4,684,436 as of September 30, 2015. These loans mature in February and March 2016.

 

Tianjin Binhai Rural Commercial Bank

 

In December 2014, the Company entered into a loan agreement with Tianjin Binhai Rural Commercial Bank. Under the terms of this agreement, the Company borrowed a maximum amount of $24,867,009 (RMB158,000,000). Borrowings under this loan agreement bear interest at a rate of 8.12% 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 $0 and $25,739,187 as of September 30, 2015 and December 31, 2014, respectively. This loan agreement matured in September 2015.

 

In July and August 2015, the Company entered into two loan agreements with Tianjin Binhai Rural Commercial Bank. Under the terms of this agreement, the Company borrowed a maximum amount of $24,867,009 (RMB158,000,000). Borrowings under this loan agreement bear interest at a rate of 7.03% and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO; (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company; (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Tianjin Binhai Shisheng Trading Group Co., Ltd., the Company’s subsidiary, (v) Xin Jiang Kai Li Xiang Kong Automobile Sales Service Co., Ltd., a potential customer, (vi) Xin Jiang Kai Yuan Heng Ji Real Estate Development Co., Ltd., a potential customer’s affiliate, (vii) Cheng Jun, shareholder of the Company’s supplier, (viii) Kai Li Xiang Kong Automobile Sales Service Co., Ltd., a customer, (ix) Tianjin Ying Zhi Jie International Logistics Co. , Ltd., a supplier. The total outstanding balance of these agreements was $24,867,009 and $0 as of September 30, 2015 and December 31, 2014, respectively. These loan agreements mature in July and August 2016.

 

 

(10)         Notes Payable to Suppliers

 

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

 

China Zheshang Bank

 

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 100% of the note amounts, or $3,258,125 (RMB20,000,000) as guaranteed funds, which was classified as restricted cash as of December 31, 2014.

 

Bank of Jinzhou

 

As of December 31, 2014, the Company had five outstanding notes payable to suppliers in an aggregate amount of $7,330,781 (RMB45,000,000), the payment of which was guaranteed by Bank of Jinzhou 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 note amounts, or $3,668,920 (RMB22,521,665) as guaranteed funds, which was classified as restricted cash as of December 31, 2014.

 

As of September 30, 2015 and December 31, 2014, the Company had four outstanding notes payable to suppliers, matured in June 2015, in an aggregate amount of $0 and $5,701,719, respectively (RMB35,000,000), the payment of which was guaranteed by Bank of Jinzhou for a period of six months. The Company was required to maintain approximately 50% of the note amounts, or $0 and $2,851,107 (RMB17,501,523) as guaranteed funds, which was classified as restricted cash as of September 30, 2015 and December 31, 2014, respectively.

 

As of September 30, 2015, the Company had four outstanding notes payable to suppliers, maturing in December 2015, in an aggregate amount of $5,508,515 respectively (RMB35,000,000), the payment of which was guaranteed by Bank of Jinzhou for a period of six months. The Company was required to maintain approximately 50% of the note amounts, or $2,754,496 (RMB17,501,523) as guaranteed funds, which was classified as restricted cash as of September 30, 2015.

 

As of September 30, 2015, the Company had five outstanding notes payable to suppliers, maturing in January and February 2016, in an aggregate amount of $7,082,376 respectively (RMB45,000,000), the payment of which was guaranteed by Bank of Jinzhou for a period of six months. The Company was required to maintain approximately 50% of the note amounts, or $3,541,188 (22,500,000) as guaranteed funds, which was classified as restricted cash as of September 30, 2015.

 

Tianjin Binhai Rural Commercial Bank

 

As of September 30, 2015, the Company had five outstanding notes payable to suppliers, maturing in November 2015, in an aggregate amount of $6,688,911 (RMB42,500,000), the payment of which was guaranteed by Tianjin Binhai Rural Commercial Bank for a period of six months. The Company was required to maintain 100% of the note amounts, or $6,688,911 (RMB42,500,000) as guaranteed funds, which was classified as restricted cash as of September 30, 2015.

 

As of September 30, 2015, the Company had three outstanding notes payable to suppliers, maturing in November 2015, in an aggregate amount of $10,527,857 (RMB66,891,900), the payment of which was guaranteed by Tianjin Binhai Rural Commercial Bank for a period of six months. The Company was required to maintain 100% of the note amounts, or $10,527,857 (RMB66,891,900) as guaranteed funds, which was classified as restricted cash as of September 30, 2015.

 

 

As of September 30, 2015, the Company had fifteen outstanding notes payable to suppliers, maturing in February 2016, in an aggregate amount of $21,640,592 (RMB137,500,000),, the payment of which was guaranteed by Tianjin Binhai Rural Commercial Bank for a period of six months. The Company was required to maintain approximately 60% of the note amounts, or $12,984,356 (RMB82,500,000) as guaranteed funds, which was classified as restricted cash as of September 30, 2015.

 

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

 

(11)         Long term debt

The Company has outstanding debt due to the seller of Zhonghe, which was acquired by the Company on November 30, 2013. The debt carries interest at a rate of 6% per annum. The debt is due in three installment payments of approximately $19.6 million (RMB120,000,000) each, including interest, and is secured by the real estate property where the Airport International Auto Mall is located.

 

A summary of this debt follows:

 

Outstanding debt balance		$	35,946,096
Less current portion			(17,294,134	)
Outstanding debt balance less current portion		$	18,651,962

 

(12)         Major Customers and Suppliers

Two customers accounted for an aggregate of 45% and 39% of the Company’s net revenue during the three months and nine months ended September 30, 2015, respectively. One customer accounted for 14% and 16% of the Company’s net revenue for the three months and nine months ended September 30, 2014, respectively.

 

Two suppliers accounted for an aggregate of 44% and 38% of the Company’s purchases during the three months and nine months ended September 30, 2015. One supplier accounted for 19% of the Company’s purchases during the three months ended September 30, 2014 and another supplier accounted for 10% of the Company’s purchases during the nine months ended September 30, 2014.

 

(13)         Retained earnings 

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

 

In addition to the general reserve, the Company’s PRC subsidiaries are required to obtain approval from the local PRC government prior to distributing any registered share capital.  Accordingly, both the appropriations to general reserve and the registered share capital of the Company’s PRC subsidiary are considered as restricted net assets and are not distributable as cash dividends.  As of September 30, 2015 and December 31, 2014, the Company’s statutory reserve fund was approximately $2,852,000 and $3,437,000, respectively.

 

 

(14)         Related Party Balances and Transactions

 

Ms. Cheng Weihong made non-interest bearing loans to the Company from time to time to meet working capital needs of the Company.  Ms. Cheng Weihong is a Director and Senior Vice President of the Company.  Ms. Cheng Weihong is the wife of the Company’s Chairman, President and Chief Executive Officer, Mr. Tong Shiping.  As of September 30, 2015 and December 31, 2014, the outstanding balances due to Ms. Cheng Weihong were $676,445 and $457,628, respectively.

 

The Company’s former shareholder, Sino Peace Limited, paid certain accrued expenses in the previous years on behalf of the Company. The amount of $2,213,280 was outstanding as payable related to prior years’ professional fees on the consolidated balance sheets as of December 31, 2014. On January 25, 2015, Sino Peace Limited assigned the outstanding loan balance to St. John’s International Limited, an unrelated party, which has not contacted the Company to establish the terms for repayments. As of September 30, 2015, the outstanding amount of $2,138,282 was classified as other current payable.

 

In January 2014, Zhonghe entered into an agreement with Car King Tianjin to rent approximately 9,927 square meters of the Airport International Auto Mall for a period of ten years through December 2023. Rent per the agreement was approximately $240,000 and $730,000 for the three months and nine months ended September 30, 2015. The Company recognized rental income of approximately $0 and $652,000 for the three months and nine months ended September 30, 2014 related to this lease. Due to the cumulative loss incurred by Car King Tianjin, the Company has not received any return on its investment in the Joint Venture (as defined below) since the inception of its operations. As a result, starting in the third quarter of 2014, the Company deferred recording the rental income related to the lease of the Airport International Auto Mall. In July 2015, Car King Tianjin remitted approximately $1.84 million (RMB11,500,000) of which unpaid rent of $270,000 (RMB1,500,000) was applied to rent receivable and repayment of an outstanding loan balance of $1.57 million (RMB10,000,000) to the Company. The Company recorded rent income of $1,462,877 for deferred rent for the period from third quarter of 2014 to the second quarter of 2015. Since Car King Tianjin continues not to generate sufficient cash to maintain its operations without relying on loans from its shareholders, the Company deferred recording the rental income for the three months ended September 30, 2015 until the cash collection is certain.

 

Net balance due from Car King Tianjin was $487,897 and $1,803,706 as of September 30, 2015 and December 31, 2014, respectively. The balances were reduced by the Company’s shared cumulative loss of Car King Tianjin.

 

The balances as discussed above as of September 30, 2015 and December 31, 2014 are interest-free, unsecured and have no fixed term of repayment.  During the three months and nine months ended September 30, 2015 and 2014, there was no imputed interest charged in relation to these balances.

 

  

(15)         Segment Information

 

The Company has five principal operating segments: (1) sales of automobiles, (2) financing services, (3) web-based advertising, (4) automobile value added services, and (5) airport auto mall automotive services. Effective March 1, 2014, the Company ceased providing auto mall management services due to the expiration on February 28, 2014 of 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. The Company’s operating segments are determined based on the nature of the services offered. Operating segments are defined as components of an enterprise about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief executive officer and chief operating officer have been identified as the chief operating decision makers. The Company's chief operating decision makers direct the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.

 

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

 

Three Months Ended September 30, 2015

 

		Sales of				Financing				Web-based Advertising				Automobile Value Added				Airport Auto Mall Automotive				Auto Mall Management
		Automobiles				Services				Services				Services				Services				Service				Corporate				Total
Net revenue		$	148,614,443			$	1,541,186			$	15,239			$	-			$	1,450,886			$	-			$	-			$	151,621,754
Cost of revenue			148,183,172				946,254				-				-				-				-				-				149,129,426
Operating expenses
Selling and marketing			92,974				92,973				23,243				-				23,243				-				-				232,433
General and administrative			46,997				46,999				28,199				18,800				563,987				-				234,997				939,979
Recovery of reserve due from Car King Tianjin			-				-				-				-				(1,524,894	)			-				-				(1,524,894	)
Total operating expenses			139,971				139,972				51,442				18,880				(937,664	)			-				234,997				(352,482	)
Income (loss) from operations		$	291,300			$	454,960			$	(36,203	)		$	(18,880	)		$	2,388,550			$	-			$	(234,997	)		$	2,844,810

 

 

Three Months Ended September 30, 2014

 

		Sales of				Financing				Web-based Advertising				Automobile Value Added				Airport Auto Mall Automotive				Auto Mall Management
		Automobiles				Services				Services				Services				Services				Service				Corporate				Total
Net revenue		$	90,341,713			$	2,009,704			$	25,713			$	-			$	-			$	-			$	-			$	92,377,130
Cost of revenue			90,127,323				1,148,456				4,881				-				-				-				-				91,280,660
Operating expenses
Selling and marketing			55,146				221,534				5,359				-				-				-				-				282,039
General and administrative			101,740				408,711				9,886				-				-				-				520,337				1,040,674
Total operating expenses			156,886				630,245				15,245				-				-				-				520,337				1,322,713
Income (loss) from operations		$	57,504			$	231,003			$	5,587			$	-			$	-			$	-			$	(520,337	)		$	(226,243	)

  

Nine Months Ended September 30, 2015

 

		Sales of				Financing				Web-based Advertising				Automobile Value Added				Airport Auto Mall Automotive				Auto Mall Management
		Automobiles				Services				Services				Services				Services				Service				Corporate				Total
Net revenue		$	326,924,561			$	4,235,307			$	49,575			$	-			$	1,450,886			$	-			$	-			$	332,660,329
Cost of revenue			326,118,391				2,735,387				-				-				-				-				-				328,853,778
Operating expenses
Selling and marketing			253,654				253,653				63,412				-				63,412				-				-				634,131
General and administrative			145,987				145,993				87,596				58,398				1,751,919				-				729,973				2,919,866
Recovery of reserve due from Car King Tianjin			-				-				-				-				(1,524,894	)			-				-				(1,524,894	)
Total operating expenses			399,641				399,646				151,008				58,398				290,437				-				729,973				2,029,103
Income (loss) from operations		$	406,529			$	1,100,274			$	(101,433	)		$	(58,398	)		$	1,160,449			$	-			$	(729,973	)		$	1,777,448

 

 

Nine Months Ended September 30, 2014

 

		Sales of				Financing				Web-based Advertising				Automobile Value Added				Airport Auto Mall Automotive				Auto Mall Management
		Automobiles				Services				Services				Services				Services				Service				Corporate				Total
Net revenue		$	306,569,435			$	5,345,797			$	188,105			$	125,110			$	645,529			$	164,971			$	-			$	313,038,947
Cost of revenue			306,249,384				3,222,186				15,694				8,097				-				2,336				-				309,497,697
Operating expenses
Selling and marketing			91,831				404,490				30,532				15,329				104,350				21,306				-				667,838
General and administrative			217,030				962,250				85,457				51,152				316,840				71,096				1,703,828				3,407,653
Total operating expenses			308,861				1,366,740				115,989				66,481				421,190				92,402				1,703,828				4,075,491
Income (loss) from operations		$	11,190			$	756,871			$	56,422			$	50,532			$	224,339			$	70,233			$	(1,703,828	)		$	(534,241	)

 

Following are total assets by segment:

 

Total Assets		Sales of Automobiles				Financing Services				Web-based Advertising Services				Automobile Value Added Services				Airport Auto Mall Automotive Services				Corporate				Total
As of September 30, 2015		$	166,143,064			$	93,836,149			$	213,743			$	377,486			$	48,735,895			$	11,381,480			$	320,687,817
As of December 31, 2014		$	113,248,213			$	111,720,132			$	399,463			$	979,003			$	51,287,018			$	877,927			$	278,511,756

 

(16)         Subsequent Event

 

On November 10, 2015, the Company entered into a Payment Extension Agreement with Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe to extend the due date for the $17 million installment payment from November 30, 2015 to May 31, 2016. The unpaid amount bears interest at a rate of 6% per annum.

 

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Except as otherwise indicated by the context, references in this Quarterly Report to “we,” “us,” “our” or the “Company” are to the consolidated businesses of China Auto Logistics Inc. and its wholly-owned direct and indirect subsidiaries and majority-owned subsidiaries, except that references to “our common stock” or “our capital stock” or similar terms refer to the common stock, par value $0.001 per share, of China Auto Logistics Inc., a Nevada corporation (the “Registrant”). “China” or “PRC” refers to the People’s Republic of China. References to “RMB” refer to the Chinese Renminbi, the currency of the primary economic environment in which the Company operates.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide information that is supplemental to, and should be read together with, the Company’s condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report.  Information in this Item 2 is intended to assist the reader in obtaining an understanding of the condensed consolidated financial statements, the changes in certain key items in those financial statements from quarter to quarter, the primary factors that accounted for those changes, and any known trends or uncertainties that the Company is aware of that may have a material effect on the Company’s future performance, as well as how certain accounting principles affect the condensed consolidated financial statements.  This includes discussion of (i) Liquidity, (ii) Capital Resources, (iii) Results of Operations, and (iv) Off-Balance Sheet Arrangements, and any other information that would be necessary to an understanding of the company’s financial condition, changes in financial condition and results of operations.

 

Forward Looking Statements

 

This periodic report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products, plans and objectives of management.  Statements in this periodic report that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Exchange Act and Section 27A of the Securities Act.  Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements.  Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the SEC from time to time, which could cause actual results or outcomes to differ materially from those projected.

 

Prospective shareholders should understand that several factors govern whether any forward-looking statements contained herein will be or can be achieved.  Any one of those factors could cause actual results to differ materially from those projected herein.  These forward-looking statements include plans and objectives of management for future operations, including plans and objectives relating to the products and the future economic performance of the Company.  Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, and the time and money required to successfully complete development projects, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company.  Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in any of the forward-looking statements contained herein will be realized.  Based on actual experience and business development, the Company may alter its marketing, capital expenditure plans or other budgets, which may in turn affect the Company’s results of operations.  In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of any such statement should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved.  Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to update these forward-looking statements.

 

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our condensed consolidated financial statements and their related notes included in this Quarterly Report and our Annual Report on Form 10-K as filed with the SEC for the year ended December 31, 2014.

 

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 a wholly-owned subsidiary, Community Alliance, Inc. (“Community Alliance”), an entity which markets 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 an Exchange Agreement (the “Exchange”) with Ever Auspicious International Limited, a Hong Kong corporation (“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 11,700,000 newly-issued shares of our common stock.  The closing of the Exchange (the “Closing”) occurred on the same day, immediately following the cancellation of an aggregate 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%, respectively, of the issued and outstanding common stock of Fresh Ideas Media, Inc.  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 are those of HKCo.  Shortly after the Closing, Fresh Ideas Media, Inc. changed its name to China Auto Logistics Inc.

 

In connection with the consummation of the Exchange, Fresh Ideas Media, Inc. agreed to complete 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.  As a result of the spin-off, the business and operations of HKCo are the sole business and operations of Fresh Ideas Media, Inc.

 

HKCo was incorporated in Hong Kong on October 17, 2007.  Prior to December 25, 2007, HKCo had minimal assets and no operations.  On December 25, 2007, Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd. (“Shisheng”), a company established under the laws of the People’s Republic of China, became a wholly-owned foreign enterprise of HKCo.  This arrangement was approved by the relevant ministries of the PRC government.

 

Upon the completion of the above-mentioned 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 were classified as a recapitalization of Shisheng and the historical financial statements of Shisheng were reported as the Company’s historical financial statements.

 

Shisheng’s businesses include sales of both domestically manufactured automobiles and imported automobiles, providing financing services related to imported automobiles, and providing logistic services relating to the automobile importing process and other automobile import value added services such as assistance with customs clearance, storage and nationwide delivery services.  Shisheng holds 98% equity ownership in Hengjia Port Logistics Corp. (“Hengjia”), Ganghui Information Technology Corp. (“Ganghui”) and Zhengji International Trading Corp. (“Zhengji”).  Hengjia’s business is to provide web-based advertising services and automobile import value added services to wholesalers and distributors in the imported vehicle trading industry.  Ganghui’s business is to provide web-based, real-time information on imported automobiles.  Zhengji is engaged in sales of both domestically manufactured automobiles and imported automobiles.

 

On November 1, 2010, Shisheng entered into a Share Transfer Agreement with the shareholders of Chongqing Qizhong Technology Development Co., Ltd. (“Goodcar”) to acquire all issued and outstanding stocks of Goodcar for a net purchase price of $4.47 million, net of acquired cash, and completed the acquisition simultaneously.  Goodcar was 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.

 

On March 15, 2011, the Company entered into a Memorandum of Understanding with the former owners of Goodcar 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 Goodcar 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 Goodcar, was $4.47 million for the acquisition of 100% of Goodcar’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 Goodcar) 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 Tianjin Zhonghe Auto Sales Service Co., Ltd. (“Zhonghe”), entered into a Cooperation Framework Agreement with Car King (China) Used Car Trading Co., Ltd. (“Car King China”) with respect to the establishment of a joint venture, Tianjin Car King Used Car Trading Company Ltd. (“Car King Tianjin”) which will own and operate a used car business. The establishment of Car King Tianjin was contingent upon the successful completion by the Company of the Zhonghe Acquisition, which owns and operates the Airport International Auto Mall, a 26,000 square meter automobile mall facility on a 68,000 square meter land parcel located in the Tianjin Airport Economic Area where the used car business is to be operated. Upon the Zhonghe Acquisition on November 30, 2013, described below, Car King Tianjin 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 RMB8,000,000 and RMB12,000,000, respectively, to Car King Tianjin, which will have total registered capital of RMB20,000,000. Prior to being acquired by the Company, Zhonghe made an initial capital contribution of 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. In January 2014, Zhonghe entered into an agreement with Car King Tianjin to rent approximately 9,927 square meters of the Airport International Auto Mall for a period of ten years through December 2023.

 

On November 30, 2013, Shisheng signed an agreement (the “Auto Mall Acquisition Agreement”) with Hezhong to purchase 100% of the equity of Zhonghe, which owned and operated the Airport International Auto Mall. Under the terms of the Auto Mall Acquisition Agreement, Shisheng will pay RMB559,768,000 (approximately $91.2 million, net of cash received) 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. 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.

 

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, expired according to its terms on February 28, 2014 and was not renewed. Therefore, as of March 1, 2014, the Company no longer provides auto mall management services.

 

On August 6, 2014, Shisheng signed a Strategic Cooperation Framework Agreement with Tianjin Binhai International Auto Mall Co., Ltd. (“Binhai”). Under the terms of this agreement, Shisheng and Binhai will act as strategic partners in the import vehicle sales service space, which cooperation shall include the development of a high-end import vehicle e-commerce sales platform and an online vehicle service platform. This agreement has a term of twenty (20) years, but may be terminated at any time without penalty by either party.

 

On September 23, 2015, the Company sold its equity interest in Zhengji, which was engaged in automobile sales, to Mr. Wu Xiang Yang, an unrelated party, at a price of $3,030,303 (net of cash of $7,364 at Zhengji and amount due to Zhengji of $5,200,741). Zhengji’s assets consisted of automobile inventories of $3,402,248, other assets of $12,418 and other current liabilities of $2,316 on the disposal date resulting a loss on sale of equity interest in subsidiary in the amount of $209,638 after consideration of the non controlling interest of $172,409 in Zhengji. Zhengji had no material operations during 2015 through the disposal date.

 

On November 10, 2015, the Company entered into a Payment Extension Agreement with Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe to extend the due date for the $17 million installment payment from November 30, 2015 to May 31, 2016. The unpaid amount bears interest at a rate of 6% per annum.

 

Current Business of the Company

 

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

 

 

Critical Accounting Policies, Estimates and Assumptions

 

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

 

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

 

Revenue Recognition

 

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

 

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

 

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

 

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

 

Airport auto mall automotive services include (i) the rental of the Airport International Auto Mall, and (ii) equity income (loss) derived from the Company’s 40% equity interest in Car King Tianjin. Rental income from the Airport International Auto Mall is recognized over the lease term on a straight-line basis. The Company’s lease agreement, entered into with Car King Tianjin in January 2014 (the “Rental Agreement”), contains a contingent rental arrangement for fiscal years 2016, 2017 and 2018, under which rental income is determined based on a percentage of Car King Tianjin’s gross profit. Notwithstanding this arrangement, the Rental Agreement contains both a minimum and a maximum annual rental amount. Contingent rental income is recognized when the specified targets are met. The equity income (loss) derived from Car King Tianjin is recognized based on the Company’s ownership share in Car King Tianjin’s net income (loss).

 

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

 

Receivables Related to Financing Services

 

We record a receivable related to financing services when cash is loaned to customers to finance their purchases of automobiles. Upon repayments by customers, we record the amounts as reductions of receivables related to financing services. Receivables related to financing services represent the aggregate outstanding balance of loans from customers related to their purchases of automobiles and are considered receivables held for investment. We charge a fee for providing loan services and such fee is prepaid by customers. We amortize these fees over the receivable terms, which range between three months and six months, using the straight-line method. We record such amortized amounts as financing fee income, and the unamortized amount is classified as deferred revenue on the Company’s condensed consolidated balance sheets.

 

We evaluate the collectibility of outstanding receivables at the end of each of the reporting periods and make estimates for potential credit losses. 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. As of September 30, 2015 and December 31, 2014, the reserve for obsolescence amounted to $0 and $810,282, respectively.

 

 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 September 30, 2015 and December 31, 2014, the deferred tax liabilities amounted to $9,982,771 and $11,028,988, respectively.

 

 The Company has not provided deferred taxes on unremitted earnings attributable to its international subsidiaries as they are to be reinvested indefinitely. These earnings relate to ongoing operations and are approximately $25.7 million as of September 30, 2015. 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 September 30, 2015 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 September 30, 2015, there are no interest or penalties related to uncertain tax positions. The Company does not anticipate any significant increases or decreases to its liability for unrecognized tax benefits within the next 12 months.

 

New Accounting Standards

 

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

 

RESULTS OF OPERATIONS

 

The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying condensed consolidated financial statements, as well as information relating to the plans of our current management and. The following should be read in conjunction with the accompanying condensed consolidated financial statements and their related notes included in this Quarterly Report on Form 10-Q.

 

Results of Operations for the Three Months Ended September 30, 2015 Compared to the Three Months Ended September 30, 2014

 

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

 

		Three Months Ended September  30, 2015				% of net revenue				Three Months Ended September 30, 2014				% of net revenue				Change in %
Net revenue		$	151,621,754				100.00	%		$	92,377,130				100.00	%			64.13	%
Cost of revenue			149,129,426				98.36	%			91,280,660				98.81	%			63.37	%
Gross profit			2,492,328				1.64	%			1,096,470				1.19	%			127.30	%
Operating expenses			(352,482	)			(0.23	)%			1,322,713				1.43	%			(126.65	)%
Income (loss) from operations			2,844,810				1.88	%			(226,243	)			(0.24	)%			(1,357.41	)%
Other expenses			(1,747,440	)			(1.15	)%			(1,749,787	)			(1.89	)%			(0.13	)%
Income (loss) before income taxes and noncontrolling interests			1,097,370				0.72	%			(1,976,030	)			(2.14	)%			(155.53	)%
Net income (loss)			1,248,757				0.82	%			(1,772,277	)			(1.92	)%			(170.46	)%
Net income (loss) attributable to shareholders of China Auto Logistics Inc.		$	1,248,880				0.82	%		$	(1,770,213	)			(1.92	)%			(170.55	)%

 

 

For the three months ended September 30, 2015, our net revenue increased 64.13% to $151,621,754, from $92,377,130 for the same period in 2014, and our cost of revenue increased 63.37% to $149,129,426 from $91,280,660 for the same period in 2014. Our gross profit margin increased 127.3% to 1.64% for the three months ended September 30, 2015 from 1.19% for the same period in 2014.  As compared to the same period in 2014, our gross profit, income from operations, net income and net income attributable to shareholders of China Auto Logistics Inc. for the three months ended September 30, 2015 increased 127.3% to $2,492,328, increased 1,357.41% to $2,844,810, increased 170.46% to $1,248,757, and increased 170.55% to $1,248,880, respectively, primarily due to the previously deferred rent income being recognized as revenue, reversal of the reserve for due from Car King Tianjin, and the increase in sales of automobiles which were partially offset by the decline in revenue generated from financing services. 

 

Net Revenue

 

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

 

		Three Months Ended September 30, 2015				% of net revenue				Three Months Ended September 30, 2014				% of net revenue				Change in %
Net revenue		$	151,621,754				100.00	%		$	92,377,130				100.00	%			64.13	%
- Sales of Automobiles			148,614,443				98.01	%			90,341,713				97.79	%			64.50	%
- Financing Services			1,514,186				1.02	%			2,009,704				2.18	%			(23.31	)%
- Web-based Advertising Services			15,239				0.01	%			25,713				0.03	%			(40.73	)%
- Automobile Value Added Services			-				0.00	%			-				0.00	%			-	%
- Airport Auto Mall Automotive Services			1,450,886				0.96	%			-				0.00	%			-	%
- Auto Mall Management Services			-				0.00	%			-				0.00	%			-	%

 

Sales of Automobiles

 

Net revenue from Sales of Automobiles increased 64.5% to $148,614,443 for the three months ended September 30, 2015 from $90,341,713 for the same period in 2014.  During the three months ended September 30, 2015 and 2014, the Company sold 1,418 automobiles and 881 automobiles, respectively, representing an increase of approximately 61% in volume. The average unit selling price per automobile increased to $105,000 for the three months ended September 30, 2015 from $103,000 for the same period in 2014.  Our sales increased substantially during the three months ended September 30, 2015 compared to the same period of 2014. In early August, China’s official currency “Renmenbi” (“RMB”) devalued by over 3% against U.S. dollars over a 5-day period. As most of the observers and economists expect RMB will continue to devalue against U.S. dollars and other major currencies, many of our customers expect the prices for imported automobiles will increase. As a result, some of our customers increased their orders in anticipation of increased prices. While we expect this trend to be short term, our sales increased substantially during the three months ended September 30, 2015.

 

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 maintain or expand our market share and maintain our market leader status.  During the three months ended September 30, 2015, sales for our top three selling brands, Mercedes Benz, Toyota, and Land Rover accounted for 74% of our total net automobile sales.  During the three months ended September 30, 2014, sales for our top three selling brands, Mercedes Benz, Land Rover, and Toyota accounted for 67% of our net automobile sales.  Our gross margin for Sales of Automobiles increased to 0.29% for the three months ended September 30, 2015 from 0.24% for the three months ended September 30, 2014 and increased from 0.02% for the full year of 2014.

 

 

Sales to the Company’s top three customers, each of which are car dealers, accounted for 46% and 25% of the Company’s sales during the three months ended September 30, 2015 and 2014, respectively.  The Company will continue to maintain close working relationships with its top customers while attempting to reduce the concentration of revenues among these top customers by actively looking for new customers to enlarge its customer base.

 

Financing Services

 

The Company provides Financing Services to its business customers using the Company’s bank facility lines of credit.  These business customers are typically not customers of other segments.  The Company earns a service fee from its customers 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. We continue to take advantage of the available credit lines granted by our banks to expand our Financing Services operations through increasing our service types and expanding our customer base.

 

Net revenue from Financing Services for the three months ended September 30, 2015 decreased 23.31% to $1,541,186 from $2,009,704 for the same period in 2014.  The Company had aggregate credit lines of approximately $170 million (RMB1.08 billion) and had approximately $66.2 million drawn on our lines as of September 30, 2015.  In addition to the facility lines of credit agreements with various banks, the Company had $68.7 million of short-term borrowings with Agricultural Bank of China, China Zheshang Bank, and Tianjin Binhai Rural Commercial Bank as of September 30, 2015. We had approximately $66.2 million drawn on our $174 million lines of credit as of September 30, 2014.   The gross margin for our Financing Services segment decreased to 38.6% for the three months ended September 30, 2015 from 42.85% for the three months ended September 30, 2014.  

 

Our Financing Services revenue consists of two portions: the interest income and fee income.  Revenue from the fee income portion of our Financing Services decreased during the three months ended September 30, 2015 as a result of lower fee income generated during the period.  Excluding revenue from the interest income portion of $946,254 and $1,138,879 in the three months ended September 30, 2015 and 2014, respectively, revenue from the fee income portion decreased 31.68% to $594,932 for the three months ended September 30, 2015 from $870,825 for the same period in 2014. Historically, a significant portion of our financing income has been related to fees that we charge to our customers for extending temporary credit beyond the financing terms for which these customers have contracted with banks. Because of a reutilization of our working capital following the Zhonghe Acquisition and the creation of Car King Tianjin, we had to limit our provision of this service starting in the beginning of 2014. With the acquisition installment payments made in November 2014 and January 2015, our working capital available to provide this temporary credit service, which had been a significant part of our Financing Services and a major contributor to our gross margin in recent years, was limited during the three months ended September 30, 2015. 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, 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 September 30, 2015 and December 31, 2014, we had approximately $170 million (RMB1.08 billion) and $182 million (RMB1.12 billion), respectively, lines of credit available to use in our Financing Services. As of September 30, 2015 and December 31, 2014, we had approximately $104 million and $119 million, respectively, lines of credit available to use in our Financing Services. As of November 10, 2015, the Company had aggregate credit lines of approximately $170 million (RMB1.08 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, the economic conditions of the market in the PRC and the interest rates charged by our banks on the lines of credit. 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.

 

 

In response to the economic slowdown in China, the Central Bank of China decreased the benchmark rate for borrowings by 0.25% to 4.35% in October 2015, which followed several interest rate cuts earlier 2015. We expect these interest reduction policies to increase the use of our Financing Services because of the lower cost of borrowing for our customers. 

 

Web-based Advertising Services

 

The Company operates two websites, www.at188.com and www.at160.com which serve a broad spectrum of China’s “auto living” public by providing information about automobiles and auto-related products and services.  We currently operate in one single city in Tianjin. In the three months ended September 30, 2015 and 2014, all of our revenue from our websites was generated by subscription fees and advertisements.  Revenues from our Web-based Advertising Services decreased 40.73% from $25,713 for the three months ended September 30, 2014 to $15,239 for the same period in 2015.   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.

 

Automobile Value Added Services

 

Revenue from our Automobile Value Added Services includes services such as assistance with customs clearance, storage and nationwide delivery services. We did not generate any revenue from Automobile Value Added Services during the three months ended September 30, 2015 and 2014. 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 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 lease a portion of the Airport International Auto Mall to Car King Tianjin to operate a used car business and are in discussions with Car King Tianjin to lease additional space of this facility as its operation size continues to grow. 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 June 30, 2015 and December 31, 2014, we had approximately $1.8 million due from Car King Tianjin. Due to the cumulative loss incurred by Car King Tianjin, the balance due from Car King Tianjin was reduced by the shared cumulative loss of the investment in Car King Tianjin Car King Tianjin and the remaining balance was fully reserved as a result of the uncertainties of collecting these advances. During the three months ended September 30, 2015, Car King Tianjin remitted approximately $1.84 million (RMB11,500,000) of which $270,000 (RMB1,500,000) was applied to rent receivable and repayment of an outstanding loan balance of $1.57 million (RMB10,000,000) to the Company. As a result, the previously reserve amount was reversed and such reversal was recorded as recovery of reserve due from Car King Tianjin in the amount of $1,524,894 in the condensed consolidated statement of operations during the three months ended September 30, 2015.

 

The Company recognized rental income of approximately $0 and $652,000 for the three months and nine months ended September 30, 2014 related to this lease. Due to the cumulative loss incurred by Car King Tianjin, the Company has not received any return on its investment in the Joint Venture (as defined below) since the inception of its operations. As a result, starting in the third quarter of 2014, the Company deferred recording the rental income related to the lease of the Airport International Auto Mall. The Company recorded rent income of $1,462,877 for deferred rent for the period from third quarter of 2014 to the second quarter of 2015. Rent per the agreement was approximately $240,000 for the three months ended September 30, 2015. Since Car King Tianjin cannot generate sufficient cash to maintain its operations without relying on loans from its shareholders, the Company will not report rent income until cash is collected.

 

 

Since we own less than 50% of Car King Tianjin and have no significant control over Car King Tianjin, the revenue generated from Car King Tianjin is not reported in our consolidated revenue. During the three months ended September 30, 2015 and 2014, Car King Tianjin generated revenue in the amount of $1,904,293 and $1,169,322, respectively, and incurred a loss of $794,077 and $401,306, respectively. Car King Tianjin’s revenue represented revenue from sales of used automobiles at the Airport International Auto Mall and agency commissions earned from selling automobiles owned by other Car King locations. The increase in revenue was a result of substantial increase in the number of automobiles sold through Car King Tianjin. During the three months ended September 30, 2015, 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 441 automobiles, including 46 automobile sales out of our own inventories and 395 automobiles for which we acted as sales agent. During the three months ended September 30, 2014, 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, was 278 automobiles, including 17 automobile sales out of our own inventories and 261 automobiles for which Car King Tianjin acted as sales agent. Car King Tianjin has reduced its mark-up for the used car sales or agency commission rates in order to increase the number of automobiles sold and to promote the “Car King” name in the Tianjin area. As a result, Car King Tianjin’s net loss increased during the three months ended September 30, 2015 compared to the same period of 2014 even though its revenue increased during the three months ended September 30, 2015 compared to the same period of 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. As of September 30, 2015 and December 31, 2014, the investment in Car King Tianjin amounted to $0 as the 40% share of the cumulative loss in Car King Tianjin exceeded our capital investment.

 

Cost of Revenue

 

		Three Months Ended September 30, 2015				% of net revenue				Three Months Ended September 30, 2014				% of net revenue				Change in %
Net revenue		$	151,621,754				100.00	%		$	92,377,130				100.00	%			64.13	%
Cost of revenue		$	149,129,426				98.36	%		$	91,280,660				98.81	%			63.37	%

 

Our cost of revenue consists primarily of the cost of automobiles paid to our suppliers, certain direct labor and overhead costs related to our Financing Services, Web-based Advertising Services, Value Added Services, and Airport Auto Mall Automotive Services.  Our cost of revenue increased 63.37% from $91,280,660 for the three months ended September 30, 2014 to $149,129,426 for the three months ended September 30, 2015. Our cost of revenue increased, less than the percentage increase in net revenue, primarily due to improved gross margin in Sales of Automobiles and previous deferred rental income being recognized during the three months ended September 30, 2015 which was partially offset by the lower fee income in the Financing Services. Sales of automobiles accounted for 98.01% of our total revenue for the three months ended September 30, 2015 as compared to 97.79% for the three months ended September 30, 2014.  Automobile sales traditionally generate high revenues but low gross margins. As the gross margin of our automobile sales has stabilized and shifted slightly higher compared to the full year of 2014, we expect that our overall gross margin will stabilize through the remainder of 2015.

 

We have limited control over the cost of automobiles, as the prices of imported automobiles are determined by suppliers and are dependent upon market conditions.  We will continue to work on obtaining more favorable terms and discounts by strengthening our relationships with suppliers and placing more batch orders.

 

Operating Expenses

 

		Three Months Ended September 30, 2015				% of total				Three Months Ended September 30, 2014				% of total				Change in %
Operating Expenses
- Selling and Marketing		$	232,433				(65.95	)%		$	282,039				21.32	%			(17.59	)%
- General and Administrative			939,979				(266.68	)%			1,040,674				78.68	%			(9.68	)%
- Recovery of reserve due from Car King Tianjin			(1,524,894	)			432.63	%			-				-				-	%
Total		$	(352,482	)			100.00	%		$	1,322,713				100.00	%			(126.65	)%

 

During the three months ended September 30, 2015, our total operating expenses decreased 126.65% to negative $352,482 from $1,322,713 for the same period in 2014.  This decrease was primarily a result of the recovery of reserve due from Car King Tianjin in the amount of $1,524,894 which was partially offset by 17.59% decrease in selling and marketing expenses and 9.68% decrease in general and administrative expenses for the three months ended September 30, 2015 compared to the same period in 2014.

 

 

The following table sets forth a breakdown of the primary selling and marketing expenses of the Company:

 

		Three Months Ended September 30,								Change in
		2015				2014				%
Primary selling and marketing expenses
- Payroll		$	48,030			$	44,805				7.20	%
- Staff-related costs			43,798				25,754				70.06	%
- Advertising and promotion			1,864				8,808				(78.84	)%
- Entertainment			26,663				17,711				50.54	%
- Rent			16,329				44,662				(63.44	)%

 

Payroll expenses increased 7.2% during the three months ended September 30, 2015 primarily due to the general pay rate increase for our employees. Staff-related costs increased 70.06% primarily due to more employee welfare costs incurred during the current period. We incur advertising and promotion expenses from to time in our normal business operations.  Entertainment expenses increased by 50.54% for the three months ended September 30, 2015.  Entertainment expenses fluctuate from time to time depending on the needs of our sales department personnel.  Rent expenses decreased primarily due to the reduced exhibition spaces rented in the Airport International Auto Mall.

 

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

 

		Three Months Ended September 30,								Change in
		2015				2014				%
Primary general and administrative expenses
- Payroll		$	65,933			$	75,988				(13.23	)%
- Staff- related costs			11,438				34,871				(67.20	)%
- Entertainment			16,755				29,599				(43.39	)%
- Depreciation			561,521				614,533				(8.63	)%
- Legal and professional fees			102,254				155,114				(34.08	)%

 

Payroll expenses decreased 13.23% during the three months ended September 30, 2015 primarily due to the decrease in the number of administration employees to reduce our cost which was partially offset by the impact of general pay rate increase for our employees.  Staff-related costs decreased 67.2% during the three months ended September 30, 2015, as a result of less welfare costs incurred during the current period.  Entertainment expenses fluctuate from time to time depending on the needs of our management personnel.  Depreciation expenses decreased 8.63% due to reduced depreciation expense on the Airport International Auto Mall as a result of reduced cost basis at December 31, 2014.  Legal and professional fees decreased 34.08% for the three months ended September 30, 2015 primarily due to higher costs incurred related to certain regulatory matters during the same period of 2014. 

 

Recovery of reserve due from Car King Tianjin

 

In July 2015, Car King Tianjin repaid approximately $1.84 million (RMB11,500,000) to the Company. As a result, the previously reserve amount was reversed and recorded as recovery of reserve due from Car King Tianjin in the amount of $1,524,894 in the condensed consolidated statement of operations during the three months ended September 30, 2015.

 

Income (loss) from Operations

 

Income from operations increased 1,357.41% for the three months ended September 30, 2015 to $2,844,810 from loss from operations of $226,243 in the same period in 2014.  Our gross profit increased 127.3% to $2,492,328 for the three months ended September 30, 2015 from $1,096,470 for the same period in 2014.   During the three months ended September 30, 2015, Car King Tianjin remitted approximately $1.84 million (RMB11,500,000) of which unpaid rent of $270,000 (RMB1,500,000) was applied to rent receivable and repayment of an outstanding loan balance of $1.57 million (RMB10,000,000) to the Company. The Company recorded rent income of $1,462,877 for deferred rent for the period from third quarter of 2014 to the second quarter of 2015. In addition, the gross profit increased as a result of higher sales generated from the Sales of Automobiles segment and higher gross margin generated from this segment compared to the same period of 2014, which was partially offset by the decline in Financing Services segment.

 

 

Other Income and Expenses

 

The Company’s interest income is generated by interest earned through bank deposits.

 

Interest expense was $1,727,801 during the three months ended September 30, 2015 compared to $1,770,518 during the same period of 2014. The decrease of $42,717 or 2.41% was primarily due to the less interest incurred on lower balance of outstanding payables related to the Zhonghe Acquisition which was partially offset by higher interest expense on increased balances of our short-term borrowings.

 

Loss on disposal of property and equipment was $0 during the three months ended September 30, 2015 compared to $203 during the same period of 2014. We dispose property and equipment from time to time as needed.

 

Loss on sale of equity interest in subsidiary in the amount of $209,638 was incurred related to the sale of 98% interest in Zhengji on September 23, 2015. The Company sold its equity interest in Zhengji to Mr. Wu Xiang Yang, an unrelated party, at a price of $3,030,303 (net of cash of $7,364 at Zhengji and amount due to Zhengji of $5,200,741). Zhengji’s assets consisted of automobile inventories of $3,402,248, other assets of $12,418 and other current liabilities of $2,316 on the disposal date resulting a loss on sale of equity interest in subsidiary in the amount of $209,638 after consideration of the non controlling interest of $172,409 in Zhengji. Zhengji had no material operations during 2015 through the disposal date.

 

Foreign exchange gain (loss) represented foreign currency changes related to our foreign currency short-term borrowings. Our foreign currency gain (loss) fluctuates from time to time depending on the exchange rate fluctuations between RMB and currencies of certain major countries.

 

As of June 30, 2015, the amount due from Car King Tianjin was reduced by approximately $585,000 for the amount of shared cumulative loss in excess of the investment in Car King Tianjin (“Reduction Amount”). As the net balance due from Car King Tianjin decreased to approximately $488,000 as a result of the collection on the amount due from Car King Tianjin in July 2015, we reduced the Reduction Amount by $73,878 during the three months ended September 30, 2015 and recorded approximately $23,000 for foreign currency translation adjustments under other comprehensive income (loss). Equity loss – share of investee company of $160,522 represented the share of loss on the operating results of Car King Tianjin in which we have a 40% interest during the three months ended September 30, 2014.

 

Results of Operations for the Nine Months Ended September 30, 2015 Compared to the Nine Months Ended September 30, 2014

 

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

 

		Nine Months Ended September 30, 2015				% of net revenue				Nine Months Ended September 30, 2014				% of net revenue				Change in %
Net revenue		$	332,660,329				100.00	%		$	313,038,947				100.00	%			6.27	%
Cost of revenue			328,853,778				98.86	%			309,497,697				98.87	%			6.25	%
Gross profit			3,806,551				1.14	%			3,541,250				1.13	%			7.49	%
Operating expenses			2,029,103				0.61	%			4,075,491				1.30	%			(50.21	)%
Income (loss) from operations			1,777,448				0.53	%			(534,241	)			(0.17	)%			(432.71	)%
Other expenses			(5,949,125	)			(1.79	)%			(5,082,217	)			(1.62	)%			17.06	%
Loss before income taxes and noncontrolling interests			(4,171,677	)			(1.25	)%			(5,616,458	)			(1.79	)%			(25.72	)%
Net loss			(3,664,024	)			(1.10	)%			(4,972,295	)			(1.59	)%			(26.31	)%
Net loss attributable to shareholders of China Auto Logistics Inc.		$	(3,662,924	)			(1.10	)%		$	(4,962,635	)			(1.59	)%			(26.19	)%

 

 

For the nine months ended September 30, 2015, our net revenue increased 6.27% to $332,660,329, from $313,038,947 for the same period in 2014, and our cost of revenue increased 6.25% to $328,853,778 from $309,497,697 for the same period in 2014.  Gross profit margin increased 7.49% to 1.14% for the nine months ended September 30, 2015 from 1.13% for the same period in 2014.  As compared to the same period in 2014, our gross profit, income (loss) from operations, net loss and net loss attributable to shareholders of China Auto Logistics Inc. for the nine months ended September 30, 2015 increased 7.49% to $3,806,551, increased 432.71% to $1,777,448, decreased 26.31% to $(3,664,024) and decreased 26.19% to $(3,662,924), respectively, primarily due to the previously deferred rent income being recognized as revenue and the reversal of a reserve due from Car King Tianjin during the nine months ended September 30, 2015 and increase in sales of automobiles which were partially offset by the decline in revenue generated from financing services.  In addition, the previously reversed amount due from Car King Tianjin was reversed and recorded as recovery of reserve due from Car King Tianjin in the amount of $1,524,894 during the nine months ended September 30, 2015.

 

Net Revenue

 

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

 

		Nine Months Ended September 30, 2015				% of net revenue				Nine Months Ended September 30, 2014				% of net revenue				Change in %
Net revenue		$	332,660,329				100.00	%		$	313,038,947				100.00	%			6.27	%
- Sales of Automobiles			326,924,561				98.28	%			306,569,435				97.93	%			6.64	%
- Financing Services			4,235,307				1.27	%			5,345,797				1.71	%			(20.77	)%
- Web-based Advertising Services			49,575				0.01	%			188,105				0.06	%			(73.65	)%
- Automobile Value Added Services			-				0.00	%			125,110				0.04	%			(100.00	)%
- Automobile Mall Automotive Services			1,450,886				0.44	%			645,529				0.21	%			124.76	%
- Auto Mall Management Services			-				0.00	%			164,971				0.05	%			(100.00	)%

 

Sales of Automobiles

 

Net revenue from Sales of Automobiles increased 6.64% to $326,924,561 for the nine months ended September 30, 2015 from $306,569,435 for the same period in 2014.  During the nine months ended September 30, 2015 and 2014, the Company sold 3,060 automobiles and 2,910 automobiles, respectively, representing an increase of approximately 5% in volume. The average unit selling price per automobile for the nine months ended September 30, 2015 and 2014 was $107,000.and 105,000, respectively.

 

During the nine months ended September 30, 2015, sales for our top three selling brands, Land Rover, Mercedes Benz and Toyota accounted for 74% of our total net automobile sales.  During the nine months ended September 30, 2014, sales for our top three selling brands, Land Rover, BMW, and Mercedes Benz accounted for 66% of our net automobile sales.  Our gross margin for Sales of Automobiles increased to 0.25% for the nine months ended September 30, 2015 from 0.10% for the nine months ended September 30, 2014 and from 0.02% for the full year of 2014.

 

Sales to the Company’s top three customers, each of which are car dealers, accounted for 41% and 26% of the Company’s sales during the nine months ended September 30, 2015 and 2014, respectively.  The Company will continue to maintain close working relationships with its top customers while attempting to reduce the concentration of revenues among these top customers by actively looking for new customers to enlarge its customer base.

 

 

Financing Services

 

The Company provides Financing Services to its business customers using the Company’s bank facility lines of credit.  These business customers are typically not customers of other segments.  The Company earns a service fee from its customers 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. We continue to take advantage of the available credit lines granted by our banks to expand our Financing Services operations through increasing our service types and expanding our customer base.

 

Net revenue from Financing Services for the nine months ended September 30, 2015 decreased 20.77% to $4,235,307 from $5,345,797 for the same period in 2014.   The gross margin for our Financing Services segment decreased to 35.41% for the nine months ended September 30, 2015 from 39.72% for the nine months ended September 30, 2014.   We paid a maintenance fee on our line of credit with Agricultural Bank of China in the amount of $163,000 during the three months ended March 31, 2015 which was included in the cost of revenue. Excluding this fee, our gross margin for Financing Services would have been 39.26% for the nine months ended September 30, 2015.

 

Excluding revenue from the interest income portion of $2,572,409 and $3,195,381 in the nine months ended September 30, 2015 and 2014, respectively, revenue from the fee income portion decreased 22.67% to $1,662,898 for the nine months ended September 30, 2015 from $2,150,416 for the same period in 2014. Historically, a significant portion of our financing income has been related to fees that we charge to our customers for extending temporary credit beyond the financing terms for which these customers have contracted with banks. Because of a reutilization of our working capital following the Zhonghe Acquisition and the creation of Car King Tianjin, we had to limit our provision of this service starting in the beginning of 2014. With the acquisition installment payments made in November 2014 and January 2015, our working capital available to provide this temporary credit service, which had been a significant part of our Financing Services and a major contributor to our gross margin in recent years, was limited during the nine months ended September 30, 2015. We will seek to continue to better manage the use of our cash flow in order to generate additional fee income in the future.

 

Web-based Advertising Services

 

Revenues from our Web-based Advertising Services decreased 73.65% to $49,575 for the nine months ended September 30, 2015 from $188,105 for the same period in 2015.  

 

Automobile Value Added Services

 

Revenue from our Automobile Value Added Services includes services such as assistance with customs clearance, storage and nationwide delivery services. We did not generate any revenue from Automobile Value Added Services during the nine months ended September 30, 2015. Revenue from this segment was $125,110 for the nine months ended September 30, 2014.. We expect our Automobile Value Added Services revenue to fluctuate from time to time depending on our customers’ needs.

 

Airport Auto Mall Automotive Services

 

Due to the cumulative loss incurred by Car King Tianjin, the Company has not received any return on its investment in the Joint Venture since the inception of its operations. As a result, starting in the third quarter of 2014, the Company deferred recording the rental income related to the lease of the Airport International Auto Mall. In July 2015, Car King Tianjin repaid approximately $1.84 million (RMB11,500,000) for past unpaid rent and loans to the Company. During the nine months ended September 30, 2015, the Company recorded rent income of $1,462,877 for deferred rent for the period from third quarter of 2014 to the second quarter of 2015. Rent per the agreement was approximately $240,000 for the three months ended September 30, 2015. Since Car King Tianjin cannot generate sufficient cash to maintain its operations without relying on loans from its shareholders, the Company defers recording the rental income for the three months ended September 30, 20105 until the cash collection is certain. The Company recognized rental income of approximately $0 and $652,000 for the three months and nine months ended September 30, 2014 related to this lease.

 

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 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. As a result, we did not recognize any Auto Mall Management Services revenue for the nine months ended September 30, 2015. We recognized $164,971 for the nine months ended September 30, 2014.

 

 

Cost of Revenue

 

		Nine Months Ended September 30, 2015				% of net revenue				Nine Months Ended September 30, 2014				% of net revenue				Change in %
Net revenue		$	332,660,329				100.00	%		$	313,038,947				100.00	%			6.27	%
Cost of revenue		$	328,853,778				98.86	%		$	309,497,697				98.87	%			6.25	%

 

Our cost of revenue consists primarily of the cost of automobiles paid to our suppliers, certain direct labor and overhead costs related to our Financing Services, Web-based Advertising Services, Value Added Services, and Airport Auto Mall Automotive Services.  Our cost of revenue increased 6.25% from $309,497,697 for the nine months ended September 30, 2014 to $328,853,778 for the nine months ended September 30, 2015. Our cost of revenue increased, less than the percentage increase in net revenue, primarily due to improved gross margin in Sales of Automobiles and previously deferred rental income being recognized during the three months ended September 30, 2015 which was partially offset by the lower fee income in the Financing Services and a maintenance fee on our line of credit with Agricultural Bank of China in the amount of $163,000 which was included in the cost of revenue during the three months ended March 31, 2015. Sales of automobiles accounted for 98.28% of our total revenue for the nine months ended September 30, 2015 as compared to 97.93% for the nine months ended September 30, 2014.  Automobile sales traditionally generate high revenues but low gross margins. As the gross margin of our automobile sales has stabilized and shifted slightly higher compared to the same period of 2014 and the full year of 2014, we expect that our overall gross margin will stabilize through the remainder of 2015.

 

We have limited control over the cost of automobiles, as the prices of imported automobiles are determined by suppliers and are dependent upon market conditions.  We will continue to work on obtaining more favorable terms and discounts by strengthening our relationships with suppliers and placing more batch orders.

 

Operating Expenses

 

		Nine Months Ended September 30, 2015				% of total				Nine Months Ended September 30, 2014				% of total				Change in %
Operating Expenses
- Selling and Marketing		$	634,131				31.26	%		$	667,838				16.38	%			(5.05	)%
- General and Administrative			2,919,866				143.90	%			3,407,653				83.62	%			(14.31	)%
- Recovery of reserve due from Car King Tianjin			(1,524,894	)			(75.16	)%			-				-				-	%
Total		$	2,029,103				100.00	%		$	4,075,491				100.00	%			(50.21	)%

 

During the nine months ended September 30, 2015, our total operating expenses decreased 50.21% to $2,029,103 from $4,075,491 for the same period in 2014.  This decrease was primarily a result of the recovery of reserve due from Car King Tianjin in the amount of $1,524,894 which was partially offset by 5.05% decrease in selling and marketing expenses and 14.31% decrease in general and administrative expenses for the nine months ended September 30, 2015 compared to the same period in 2014.

 

The following table sets forth a breakdown of the primary selling and marketing expenses of the Company:

 

		Nine Months Ended September 30,								Change in
		2015				2014				%
Primary selling and marketing expenses
- Payroll		$	146,996			$	129,353				13.64	%
- Staff-related costs			109,639				82,159				33.45	%
- Advertising and promotion			7,745				28,489				(66.00	)%
- Entertainment			51,664				49,648				4.06	%
- Rent			49,746				111,963				(55.57	)%

 

 

Payroll expenses increased 13.64% during the nine months ended September 30, 2015 primarily due to the decrease in the number of administration employees to reduce our cost which was partially offset by the impact of general pay rate increase for our employees.  Staff-related costs increased 33.45% during the nine months ended September 30, 2015, as a result of more welfare costs incurred during the current period.   We incur advertising and promotion expenses from to time in our normal business operations.  Entertainment expenses decreased by 21.72% for the nine months ended September 30, 2015.  Entertainment expenses fluctuate from time to time depending on the needs of our sales department personnel.  Rent expenses decreased primarily due to the reduced exhibition spaces rented in the Airport International Auto Mall.

 

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

 

		Nine Months Ended September 30,								Change in
		2015				2014				%
Primary general and administrative expenses
- Payroll		$	211,998			$	237,911				(10.89	)%
- Staff- related costs			46,008				76,474				(39.84	)%
- Entertainment			97,963				113,525				(13.71	)%
- Depreciation			1,725,847				1,898,514				(9.09	)%
- Legal and professional fees			505,277				581,944				(13.17	)%

 

Payroll expenses decreased 10.89% during the nine months ended September 30, 2015 primarily due to the decrease in the number of administration employees to reduce our cost.  Staff-related costs decreased 39.84% primarily due to lower employee welfare costs incurred during the current period. Entertainment expenses fluctuate from time to time depending on the needs of our management personnel.  Depreciation expenses decreased 9.09% due to reduced depreciation expense on the Airport International Auto Mall as a result of reduced cost basis at December 31, 2014.  Legal and professional fees decreased 13.17% for the nine months ended September 30, 2015 primarily due to higher auditing and legal expenses incurred related to the Zhonghe acquisition during the same period of 2014.

 

Recovery of reserve due from Car King Tianjin

 

In July 2015, Car King Tianjin repaid approximately $1.84 million (RMB11,500,000) to the Company. As a result, the previously reserve amount was reversed and recorded as recovery of reserve due from Car King Tainjing in the amount of $1,524,894 in the condensed consolidated statement of operations during the nine months ended September 30, 2015.

 

Income (loss) from Operations

 

Income from operations increased 432.71% for the nine months ended September 30, 2015 to $1,777,448 from loss from operations of $534,241 in the same period in 2014.  Our gross profit increased 7.49% to $3,806,551 for the nine months ended September 30, 2015 from $3,541,250 for the same period in 2014.   In July 2015, Car King Tianjin repaid approximately $1.84 million (RMB11,500,000) for past unpaid rent and loans to the Company. The Company recorded rent income of $1,462,877 for deferred rent for the period from third quarter of 2014 to the second quarter of 2015. In addition, the gross profit increased as a result of higher sales generated from the Sales of Automobiles segment and higher gross margin generated from this segment compared to the same period of 2014, which was partially offset by the decline in Financing Services segment.

 

Other Income and Expenses

 

The Company’s interest income is generated by interest earned through bank deposits.

 

Interest expense was $5,540,821 during the nine months ended September 30, 2015 compared to $4,812,998 during the same period of 2014. The increase of $727,823 or 15.12% was primarily due to higher interest expense on increased balances of our short-term borrowings which was partially offset by less interest incurred on lower balance of outstanding payables related to the Zhonghe Acquisition.

 

 

Loss on disposal of property and equipment was $8,254 during the nine months ended September 30, 2015 compared to gain on disposal of property and equipment in the amount of $11,737 during the same period of 2014. We dispose property and equipment from time to time as needed.

 

Loss on sale of equity interest in subsidiary in the amount of $209,638 was incurred related to the sale of 98% interest in Zhengji on September 23, 2015. The Company sold its equity interest in Zhengji to Mr. Wu Xiang Yang, an unrelated party, at a price of $3,030,303 (net of cash of $7,364 at Zhengji and amount due to Zhengji of $5,200,741). Zhengji’s assets consisted primarily automobile inventories in the amount of $3,349,237 on the disposal date. The loss related to this sale represented the excess of carrying value of the net assets over the sales price.

 

Foreign exchange gain (loss) represented foreign currency changes related to our foreign currency short-term borrowings. Our foreign currency gain (loss) fluctuates from time to time depending on the exchange rate fluctuations between RMB and currencies of certain major countries.

 

Equity loss – share of investee company loss of $422,126 and $648,907 during the nine months ended September 30, 2015 and 2014, respectively, represented the share of loss on the operating results of Car King Tianjin in which we have a 40% interest.

 

Inflation

 

We believe that inflation has had a negligible effect on operations for the nine month period ended September 30, 2015.  However, overall commodity inflation is an ongoing concern for our business and has been a considerable operational and financial focus for the Company.  We continue to monitor commodity costs and work with our suppliers and customers to manage changes in commodity costs.

 

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

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

 

Borrowings on certain of our lines of credit related to Financing Services and short term borrowings are guaranteed by a list of individuals and entities including Mr. Tong Shiping, the Company’s Chairman, President and CEO, Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and our long term customers and suppliers. If these executives, customers and suppliers elect not to guarantee our lines of credit and short term borrowings, we may not be able to obtain these financings from the banks in the future and our business will be significantly impacted.

 

 The following table sets forth a summary of our cash flows for the nine months ended September 30, 2015 and 2014.

  

		Nine Months Ended September 30,
		2015				2014
Net cash used in operating activities		$	(6,424,709	)		$	(50,004,432	)
Net cash provided by (used in) investing activities			3,037,260				(1,299,438	)
Net cash provided by financing activities			2,231,452				39,687,665
Effect on exchange rate change on cash			(199,952	)			(88,371	)
Cash and cash equivalents at beginning of period			7,793,952				15,041,505
Cash and cash equivalents at end of period			6,438,003				3,336,929

 

 

Going Concern

 

The Company incurred operating losses and had negative operating cash flows and may continue to generate negative cash flows as the Company implements its business plan for 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 interim condensed consolidated financial statements have been prepared in conformity with US GAAP, which contemplates the Company’s continuation as a going concern. The Company’s net loss attributable to shareholders was $3,662,924 and $4,962,635 for the nine months ended September 30, 2015 and 2014, respectively.

 

As of September 30, 2015, the Company has a working capital deficit of $17,334,399, including $68,740,591 in current liabilities for short-term borrowings which are due during the period between January 2016 and August 2016, and $17,294,134 in current liabilities payable to Hezhong related to the Company’s acquisition of Zhonghe (the “Zhonghe Acquisition”), which is due in May 2016 (extended from November 2015), and for which the Company does not currently have the necessary capital to re-pay. Net cash used in operations during the nine months ended September 30, 2015 was $6,424,709. 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.

 

Operating Activities

 

During the nine months ended September 30, 2015, we had net cash used in operating activities of $6,424,709 as compared to $50,004,432 during the same period of 2014.   Net cash used in operating activities during the nine months ended September 30, 2015 primarily consisted of a net loss of $3,664,024, an increase in restricted cash due to larger balance of restricted cash required for notes payable of $29,328,731, an increase in advances to suppliers of $42,899,839 due to the building up of our inventory orders in order to increase our inventory selections for our customers and certain purchase orders being subsequently canceled as a result of our change of assessment in the market demands. The net amount of cash used in operating activities was partially offset by an increase in notes payable to suppliers of $36,809,837, and an increase in customer deposits of $13,588,419 due to increased advanced payments from our customers for future sales.

 

During the nine months ended September 30, 2014, we had net cash used in operating activities of $50,004,432 as compared to net cash provided by operating activities of $11,216,153 during the same period of 2013. Net cash used in operating activities during the nine months ended September 30, 2014 primarily consisted of a net loss of $4,972,295, a $50,790,909 increase in receivables in lines of credit related to Financing Services due to a larger outstanding receivables balance at September 30, 2014, an increase in advances to suppliers of $45,751,073 due to the building up of our inventory orders in order to increase our inventory selections for our customers, and a decrease in notes payable to suppliers of $4,936,615 due to repayments made in the period to settle certain payables when they became due. The net amount of cash used in operating activities was partially offset by an decrease in restricted cash of $13,955,586 due to fewer banks requiring restricted cash to grant lines of credit and issue letters of credit, an increase in payables related to Financing Services of $32,373,503 due to larger outstanding balances on the draws on lines of credit related to Financing Services and an increase in customer deposits of $7,074,785 due to an increase in deposits by our customers to secure our inventories.

 

Investing Activities

 

We received cash proceeds of $9,275 and $19,578 related to the disposal of an automobile used by the Company during the nine months ended September 30, 2015 and 2014, respectively.

 

 

We had net purchases of property and equipment in the amount of $2,318 and $10,963, respectively, during the nine months ended September 30, 2015 and 2014, respectively.  

 

On September 23, 2015, the Company sold its equity interest in Zhengji, which was engaged in automobile sales, to Mr. Wu Xiang Yang, an unrelated party, at a price of $3,030,303 (net of cash of $7,364 at Zhengji and amount due to Zhengji of $5,200,741). Zhengji’s assets consisted of automobile inventories of $3,402,248, other assets of $12,418 and other current liabilities of $2,316 on the disposal date resulting a loss on sale of equity interest in subsidiary in the amount of $209,638 after consideration of the non controlling interest of $172,409 in Zhengji. Zhengji had no material operations during 2015 through the disposal date.

 

We loaned $0 and $1,308,053 to Car King Tianjin for its working capital needs during the nine months ended September 30, 2015 and 2014, respectively.

 

Financing Activities

 

During the nine months ended September 30, 2015, net cash used by financing activities was $2,231,452 as compared to net cash provided by financing activities of $39,687,665 during the same period in 2014.  The net cash (used for) provided by financing activities during the nine months ended September 30, 2015 and 2014 included net borrowings of $2,178,927 and $60,077,876, respectively, on short-term loans from banks. In addition, cash payments related to the increase in restricted cash required by these short-term borrowings were $0 and $20,253,537 during the nine months ended September 30, 2015 and 2014, respectively. Furthermore, during the nine months ended September 30, 2015 and 2014, we received non-interest bearing short-term advances from our Director and Senior Vice President, Ms. Cheng Weihong, in the amount of $599,120 and $450,942, respectively, and repaid $455,373 and $589,180, respectively.

 

Our total cash and cash equivalents increased to $6,438,003 as of September 30, 2015, as compared to $3,336,929 as of September 30, 2014.

 

Working Capital

 

As of September 30, 2015, the Company had a working capital deficit of $17,334,399 compared to $7,298,690 as of December 31, 2014.

 

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 Services operation, 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 $66,229,767 and $63,106,959 as of September 30, 2015 and December 31, 2014, respectively, and outstanding balances of short-term borrowings of $68,740,591 and $68,909,343 as of September 30, 2015 and December 31, 2014, respectively. In addition, we had a bank overdraft with a balance of $2,250,780 and $2,423,015 as of September 30, 2015 and December 31, 2014, respectively.

 

As of September 30, 2015, we have the following payable related to the Zhonghe Acquisition:

 

Outstanding debt balance		$	35,946,096
Less current portion			(17,294,134	)
Outstanding debt balance less current portion		$	18,651,962

 

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 $19.6 million each, including principal and interest in November of 2015 and 2016. On November 10, 2015, the Company entered into a Payment Extension Agreement with Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe to extend the due date for the $17 million installment payment from November 30, 2015 to May 31, 2016. The unpaid amount bears interest at a rate of 6% per annum. We have been financing these installment payments through our operating cash flows and bank loans. We expect that we will not have sufficient cash flow to remit these payments without obtaining outside financing. We believe we will be able to obtain sufficient bank loans at reasonable terms to finance our operations and these payment installments. However no assurance can be given that we will be successful in obtaining any loans on terms acceptable to us.

 

 

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

 

Indebtedness

 

We entered into several banking facilities with Agricultural Bank of China, China Merchants Bank, PuDong Development Bank, Industrial and Commercial Bank of China, China ZheShang Bank, China Minsheng Bank, Shengjing Bank and Tianjin Binhai Rural Commercial Bank. As of September 30, 2015 and December 31, 2014, the Company had aggregate credit lines of $170 million (RMB1.08 billion) and $182 million (RMB1.12 billion), respectively, and had outstanding balances under these credit lines amounted to $66 million and $63 million, respectively. As of September 30, 2015 and December 31, 2014, we had approximately $104 million and $119 million, respectively, lines of credit available to use in our Financing Services. As of November 10, 2015, the Company had aggregate credit lines of $170 million (RMB1.08 billion) with its banks.

 

As of September 30, 2015 and December 31, 2014, we had an aggregate outstanding loan balance of $68,740,591 and $68,909,343, 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 4.6% to 7.03% 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 $2,250,780 and $2,423,015 with Pudong Development Bank as of September 30, 2015 and December 31, 2014, respectively.

 

Under the terms of the Auto Mall Acquisition Agreement, Shisheng will pay approximately $91.4 million (RMB559,768,000) 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 $19.6 million each, including principal and interest in November of 2015 and 2016. As of September 30, 2015, we had an outstanding debt balance of $35,946,096.

 

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

 

OFF-BALANCE SHEET ARRANGEMENTS

 

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

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4.

Controls and Procedures

 

A.	Material Weaknesses

 

As discussed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2014, we identified a material weakness in the design and operation of our internal controls.  The material weakness is: the Company’s accounting department personnel have limited knowledge and experience in US GAAP.

 

 

To remediate the material weakness identified in internal control over financial reporting of the Company, we have commenced to: (a) continue our efforts to recruit additional personnel with sufficient knowledge and experience in US GAAP; and (b) continue our efforts to provide ongoing training courses in US GAAP to existing personnel, including our Chief Financial Officer and the Financial Controller.

 

We will continue to monitor and assess our remediation initiatives to ensure that the aforementioned material weakness stated is remediated.

 

B.	Evaluation of Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in the Company’s filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  The Company’s management, with the participation of its principal executive and financial officers, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based upon that evaluation and solely due to the unremediated material weakness described above, the Company’s principal executive and financial officers have concluded that such disclosure controls and procedures were not effective for the purpose for which they were designed as of the end of such period.  As a result of this conclusion, the financial statements for the period covered by this report were prepared with particular attention to the unremediated material weaknesses previously disclosed.  Accordingly, management believes that the condensed consolidated financial statements included in this report fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows as of and for the periods presented, in accordance with accounting principles generally accepted in the U.S, notwithstanding the unremediated weaknesses.

   

C.	Changes in Internal Control over Financial Reporting

 

There was no change in the Company’s internal control over financial reporting that was identified in connection with such evaluation that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 

 

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings.

 

There have been no material developments in any legal proceedings since the disclosures contained in the Registrant’s Form 10-K for the year ended December 31, 2014.

 

Item 1A.

Risk Factors.

 

We could be delisted from the Nasdaq Capital Market.

 

On November 3, 2015, the Company received notification from the Nasdaq Listings Qualification Department that for the previous 30 consecutive business days, the bid price of the Company's common stock (the "Common Stock") had closed below the minimum $1.00 per share requirement for continued inclusion on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2).

 

The letter states that the Company will be provided 180 calendar days, or until May 2, 2016, to regain compliance with the minimum bid price requirement. In accordance with Rule 5810(c)(3)(A), the Company can regain compliance if at any time during the 180-day period the closing bid price of the Common Stock is at least $1.00 for a minimum of 10 consecutive business days.

 

If by May 2, 2016 the Company has not regained compliance with the minimum bid price requirement, it may be eligible to have an additional period of 180 days to regain compliance. To qualify for additional time, the Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice of its intention to cure the deficiency during the second compliance period. If the Company is not eligible for the second compliance period, then the Nasdaq Staff will provide notice that the Company's securities will be subject to delisting. At such time, the Company may appeal the delisting determination to a Hearings Panel.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.

Defaults Upon Senior Securities.

 

None.

 

Item 4.

Mine Safety Disclosures.

 

Not applicable.

 

Item 5.

Other Information.

 

(a)   On September 23, 2015, China Auto Logistics Inc. (the “Company”), via its subsidiary Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd., entered into an Equity Transfer Agreement (the “Agreement”) with Mr. Wu Xiang Yang, an unrelated party, pursuant to which the Company agreed to transfer its ownership interest in Tianjin Zhengji International Trading Corporation (“Zhengji”) in exchange for $8,238,408 (RMB 51,749,594.74). The consideration amount received was $3,030,303 ($8,238,408 less $7,364 in cash at Zhengji and $5,200,741 in net amount due to Zhengji)., Zhengji’s assets consisted primarily automobile inventories with a carrying value of $3,402,248 on the disposal date.

 

The foregoing description of the Agreement is not complete and is qualified in its entirety by reference to the full text of such Agreement, a copy of which is filed herewith as Exhibit 10.1 and is incorporated herein by reference.

 

(b)   There were no material changes to the procedures by which security holders may recommend nominees to the Registrant’s board of directors during the quarter ended September 30, 2015.

 

 

Item 6.

Exhibits.

 

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

 

Exhibit Number		Exhibit Description
3.1 (1)		Amended Articles of Incorporation of the Company
3.2 (2)		Amended and Restated Bylaws of the Company
10.1*		Equity Transfer Agreement, dated as of September 23, 2015, by and between Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd. and Mr. Wu Xiang Yang
31.1*		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**		XBRL Instance Document.
101.SCH**		XBRL Taxonomy Extension Schema Document.
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document
101.INS**		XBRL Instance Document.

 

* Filed herewith

** Furnished herewith

 

(1)	Incorporated by reference to the Company’s Form SB-2 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.

 

  

SIGNATURES

 

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

 

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

 

Date:  November 16, 2015

 

 

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*		Equity Transfer Agreement, dated as of September 23, 2015, by and between Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd. and Mr. Wu Xiang Yang
31.1*		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**		XBRL Instance Document.
101.SCH**		XBRL Taxonomy Extension Schema Document.
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith

** Furnished herewith

 

(1)	Incorporated by reference to the Company’s Form SB-2 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.

 

  

44