China Auto Logistics Inc - FORM 10-Q

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EX-31.2 - CERTIFICATION - China Auto Logistics Inc	f10q0317ex31ii_chinaauto.htm
EX-32.2 - CERTIFICATION - China Auto Logistics Inc	f10q0317ex32ii_chinaauto.htm
EX-32.1 - CERTIFICATION - China Auto Logistics Inc	f10q0317ex32i_chinaauto.htm
EX-31.1 - CERTIFICATION - China Auto Logistics Inc	f10q0317ex31i_chinaauto.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2017

☐ 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		98-0657597
(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 R 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 R No ☐

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

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	R

Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

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 May 10, 2017
Common Stock, $.001 par value per share		4,034,394 shares

TABLE OF CONTENTS

	PAGE
PART I FINANCIAL INFORMATION	1
Item 1. Financial Statements	1
CONDENSED CONSOLIDATED BALANCE SHEETS	1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)	2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)	3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)	4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosures About Market Risk	29
Item 4. Controls and Procedures	30
PART II OTHER INFORMATION	31
Item 1. Legal Proceedings.	31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	31
Item 3. Defaults Upon Senior Securities.	31
Item 4. Mine Safety Disclosures.	31
Item 5. Other Information.	31
Item 6. Exhibits.	31

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

CHINA AUTO LOGISTICS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2017 (Unaudited)			December 31, 2016
ASSETS:
Current assets:
Cash and cash equivalents	$	3,003,497		$	3,004,932
Restricted cash		10,074,978			22,703,835
Accounts receivable		1,451,267			-
Receivable related to financing services, net		41,544,212			48,549,972
Inventories		12,013,616			13,049,065
Advances to suppliers, net		66,914,400			71,921,388
Prepaid expenses		34,967			376,581
Value added tax receivable		350,956			615,555
Total current assets		135,387,893			160,221,328

Property, plant, and equipment, net		299,136			317,282
Other assets		30,563			30,329
Total assets	$	135,717,592		$	160,568,939

LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Lines of credit related to financing services	$	39,787,152		$	47,081,763
Short term borrowings		13,061,405			12,961,389
Accounts payable		1,358,132			365,120
Notes payable to suppliers		11,610,137			25,922,779
Accrued expenses		149,987			131,128
Customer deposits		41,599,221			46,047,515
Deferred revenue		54,854			48,171
Due to former shareholder		1,971,723			1,956,625
Due to director		1,634,987			1,550,745
Income tax payable		489,987			580,058
Total current liabilities		111,717,585			136,645,293

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 March 31, 2017 and December 31, 2016, respectively		4,034			4,034
Additional paid-in capital		22,979,734			22,979,734
Accumulated other comprehensive income		4,151,790			3,939,898
Accumulated deficit		(3,498,812	)		(3,363,566	)
Total China Auto Logistics Inc. shareholders’ equity		23,636,746			23,560,100
Noncontrolling interests		363,261			363,546
Total equity		24,000,007			23,923,646

Total liabilities and shareholders’ equity	$	135,717,592		$	160,568,939

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 March 31
	2017			2016

Net revenue	$	110,533,781		$	137,064,018
Cost of revenue		110,069,887			136,112,906
Gross profit		463,894			951,112

Operating expenses:
Selling and marketing		182,598			184,081
General and administrative		612,623			556,009
Recovery from reserve for uncollectible account on receivable related to financing services		(290,353	)		(68,813	)
Total operating expenses		504,868			671,277

(Loss) income from operations		(40,974	)		279,835

Other income (expenses):
Interest income		16,269			196,350
Interest expense		(206,344	)		(602,039	)
Gain on disposal of property and equipment		-			2,707
Foreign exchange gain		1,143			-
Miscellaneous		-			1,569
Total other expenses		(188,932	)		(401,413	)

Loss from continuing operations before income tax expense		(229,906	)		(121,578	)

Income tax (benefit) expense		(94,579	)		65,969

Net loss from continuing operations		(135,327	)		(187,547	)

Discontinued operations:
Loss from operations of discontinued Airport Automall Automotive Services		-			(1,021,108	)
Income tax benefit		-			(147,713	)
Net loss from discontinued operations		-			(873,395	)

Net loss		(135,327	)		(1,060,942	)
Less: Net loss attributable to noncontrolling interests		(81	)		(25	)
Net loss attributable to shareholders of China Auto Logistics Inc.	$	(135,246	)		(1,060,917	)

Net loss attributable to shareholders of China Auto Logistics Inc.
– continuing operations	$	(135,246	)		(187,522	)
– discontinued operations		-			(873,395	)
	$	(135,246	)		(1,060,917	)
Loss per share attributable to shareholders of China Auto Logistics Inc. from
– continuing operations - basic and diluted	$	(0.03	)		(0.05	)
– discontinued operations - basic and diluted	$	-			(0.21	)
Total loss per share attributable to shareholders of China Auto Logistics Inc.	$	(0.03	)	$	(0.26	)

Weighted average number of common shares outstanding
- basic and diluted		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 INCOME (LOSS) (UNAUDITED)

	Three Months Ended March 31,
	2017			2016

Net loss	$	(135,327	)	$	(1,060,942	)

Other comprehensive income
Foreign currency translation adjustments		211,688			152,494

Comprehensive income (loss)		76,361			(908,448	)

Add: Comprehensive loss attributable to noncontrolling interests		(285	)		(9	)

Comprehensive income (loss) attributable to shareholders of China Auto Logistics Inc.	$	76,646		$	(908,439	)

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

CHINA AUTO LOGISTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Three Months Ended March 31,
	2017			2016
Cash flows from operating activities
Net loss	$	(135,327	)	$	(1,060,942	)
Add: loss from discontinued operations		-			873,395

Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Recovery on reserve for uncollectible account on receivable related to financing services		(290,353	)		(68,813	)
Depreciation on property, plant and equipment		21,879			9,234
Gain on sale of property and equipment		-			(5,702	)

Changes in operating assets and liabilities:
Restricted cash		12,808,420			(15,046,585	)
Accounts receivable - trade		(1,451,763	)		-
Receivables related to financing services		7,673,264			18,706,213
Inventories		1,136,529			(10,321,688	)
Advances to suppliers		5,563,861			(79,577	)
Prepaid expenses, other current assets and other assets		344,638			3,142
Value added tax receivable		269,441			(1,707,930	)
Accounts payable		990,532			1,983,994
Line of credit related to financing services		(7,660,527	)		(12,176,165	)
Notes payable to suppliers		(14,517,627	)		15,291,689
Accrued expenses		18,193			(26,560	)
Customer deposits		(4,805,254	)		6,461,553
Deferred revenue		6,315			(8,140	)
Income tax payable		(94,579	)		3,503
Cash (used in) provided by operating activities from continuing operations		(122,358	)		2,830,621
Cash used in operating activities from discontinued operations		-			(17,589	)
Net cash (used in) provided by operating activities		(122,358	)		2,813,032

Cash flows from investing activities
Proceeds from sale of property and equipment		-			8,563
Purchase of property and equipment		(1,278	)		(120,436	)
Cash provided by investing activities from continuing operations		(1,278	)		(111,873	)
Cash provided by investing activities from discontinued operations		-			-
Net cash used in investing activities		(1,278	)		(111,873	)

Cash flows from financing activities
Bank overdraft		-			168,552
Proceeds from short-term borrowings		4,355,288			28,442,541
Repayments of short-term borrowings		(4,355,288	)		(33,452,706	)
Proceeds from director		99,998			161,486
Cash provided by (used in) financing activities from continuing operations		99,998			(4,680,127	)
Cash provided by financing activities from discontinued operations		-			-
Net cash provided by (used in) financing activities		99,998			(4,680,127	)

Effect of exchange rate change on cash		22,203			19,719

Net decrease in cash and cash equivalents		(1,435	)		(1,959,249	)

Cash and cash equivalents at the beginning of period		3,004,932			7,119,686
Cash and cash equivalents at the end of period	$	3,003,497		$	5,160,437

Supplemental disclosure of cash flow information
Interest paid	$	667,892		$	1,554,729
Income taxes paid	$	-		$	62,466

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) Organization, Nature of Business and Basis of Presentation, Going Concern, and 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”), and Tianjin Hengjia Port Logistics Corp. (“Hengjia”).

The accompanying condensed consolidated balance sheet as of December 31, 2016, 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 March 31, 2017 and the results of its operations, and cash flows for the three-month periods ended March 31, 2017 and 2016. 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, 2016. The results of operations for the three-month period ended March 31, 2017 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 2017. There can be no assurance that our continuing efforts to execute our business plan will be successful and that the Company will be able to continue as a going concern. Our net loss from continuing operations attributable to shareholders for the three months ended March 31, 2017 was $135,246 as compared to $187,522 for the three months ended March 31, 2016.

Net cash used in operations from continuing operations during the three months ended March 31, 2017 was $122,358 and net cash provided by operations from continuing operations during the three months ended March 31, 2016 was $2,830,621.

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. These factors raise substantial doubt about the Company's ability to continue as a going concern. These condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Use of Estimates

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

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 March 31, 2017 and December 31, 2016 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 services 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, and (4) automobile value added 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.

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 sale 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 collectability of outstanding receivables at the end of each of the reporting periods and makes estimates for potential credit losses. Prior to 2015, the Company did not experience any losses on its receivable related to financing services. During the year ended December 31, 2016 and 2015, the Company experienced difficulties in collecting the receivable from a financing service customer, but the receivable was secured by certain imported automobiles. The Company took possession of these secured automobiles and sold them during the years ended December 31, 2016 and 2015. The sales proceeds were used to offset the outstanding receivable from this customer. During the three months ended March 31, 2017 and 2016, the Company recovered $290,353 and $68,813, respectively, from the reserve made in the previous periods. The Company will continue to pursue collecting the remaining receivable balance. As of March 31, 2017 and December 31, 2016, the Company recorded an allowance for uncollectible account on receivable related to financing services in the amount of $2,764,694 and $3,031,554, respectively.

Inventories

Inventory is stated at the lower of cost (using the specific identification method) or market (net realizable). 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 March 31, 2017 and December 31, 2016, there was no reserve for obsolescence.

Basic and Diluted Loss Per Share

Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted 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 March 31, 2017 and 2016, the Company did not have any common stock equivalents, therefore, the basic loss per share is the same as the diluted loss per share.

New Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update No. 2014-09 (ASU 2014-09) “Revenue from Contracts with Customers.” The standard’s core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will become effective for the Company beginning in the first quarter of 2018. Early adoption is permitted in 2017. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. The FASB issued supplemental adoption guidance and clarification to ASU 2014-09 in March 2016, April 2016, May 2016, and December 2016 within ASU 2016-08 “Revenue from Contracts with Customers: Principal vs. Agent Considerations,” ASU 2016-10 “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” ASU 2016-12 “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients,” and ASU 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” respectively. The Company expects to adopt this standard using the modified retrospective approach beginning in the first quarter of 2018. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements. The Company will continue to monitor additional modifications, clarifications or interpretations undertaken by the FASB that may impact our assessments.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Under ASU 2015-17, a reporting entity is required to classify deferred tax assets and liabilities as noncurrent in a classified statement of financial position. Current guidance requiring the offsetting of deferred tax assets and liabilities of a tax-paying component of an entity and presentation as a single noncurrent amount is not affected. The standard is effective for public entities for the annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for financial statements as of the beginning of an interim or annual reporting period. Entities may apply the update prospectively to all deferred tax assets and liabilities, or retrospectively for all periods presented. The Company adopted this standard during the quarter ended March 31, 2017. The adoption of this ASU did not have a material effect on the Company’s consolidated financial statements.

The FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted for all public business entities and all nonpublic business entities upon issuance. The Company has not yet determined the effect of the adoption of this standard on the Company’s consolidated financial position and results of operations.

In March 2016, the FASB issued Accounting Standard Update No. 2016-09 (ASU 2016-09) “Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies several aspects of employee share-based payment accounting, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance will become effective for us beginning in the first quarter of 2017. Early adoption is permitted. The Company adopted this standard during the quarter ended March 31, 2017. The adoption of this ASU did not have a material effect on the Company’s consolidated financial statements.

In June 2016, the FASB issued Accounting Standard Update No. 2016-13 (ASU 2016-13) “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets held. This guidance will become effective for us beginning in the first quarter of 2020 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted beginning in the first quarter of 2019. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued Accounting Standards Update 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This update addresses whether to present certain specific cash flow items as operating, investing or financing activities. The amendments in this update are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company is currently assessing the impact of the future adoption of this standard on its consolidated Statements of Cash Flows.

In October 2016, the FASB issued Accounting Standards Update 2016-16 Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This update removes the current exception in US GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The amendments in this update are effective for public entities for annual reporting periods beginning after December 15, 2017. Early adoption is permitted and should be in the first interim period if an entity issues interim financial statements. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

In November 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230), to require entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. Entities will also have to disclose the nature of restricted cash and restricted cash equivalent balances. The new guidance will be effective for fiscal years beginning after December 15, 2017, including the interim periods within those years. Early adoption is permitted and the new guidance is applied retrospectively. The Company is in the process of evaluating the impact of adoption on its consolidated statement of cash flows and disclosures.

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:

	March 31,		December 31,
	2017		2016

Collateral for bank’s issuance of letters of credit to the Company’s customers	$	4,269,909	$	2,541,674
Collateral for notes payable to suppliers		5,805,069		20,162,161
	$	10,074,978	$	22,703,835

(3) Property and Equipment

A summary of property and equipment is as follows:

	March 31,			December 31,
	2017			2016

Computers		73,968			72,134
Office equipment, furniture and fixtures		45,112			44,766
Leasehold improvements		150,490			149,338
Automobiles		1,046,701			1,038,686
		1,316,271			1,304,924
Less: Accumulated depreciation and amortization		(1,017,135	)		(987,642	)
	$	299,136		$	317,282

Depreciation and amortization expenses for property and equipment amounted to approximately $21,879 and $9,234 for the three months ended March 31, 2017 and 2016, respectively.

(4) Bank Overdraft

In December 2016, 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 $2,176,901 (RMB15,000,000) in excess of the funds on deposit. The overdraft amount is subject to an annual interest rate of 6% and the maximum overdraft period cannot exceed 89 days. The overdraft agreement 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 December 2017. There were no outstanding overdraft balances as of March 31, 2017 or December 31, 2016.

(5) 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 $465,040 and $676,867 for the three months ended March 31, 2017 and 2016, respectively.

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

Agricultural Bank of China

In September 2016 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 $69,660,824 (RMB480,000,000). This facility line of credit is guaranteed by five non-related entities, which are customers, suppliers or both. Borrowings under this facility line of credit bore interest at rates ranging from 3.90% to 6.13% per annum, and were repayable within 3 months to 4 months from the date of the drawing. As of March 31, 2017 and December 31, 2016, the Company had outstanding balances of $32,634,693 and $28,926,623, respectively, under this facility line of credit. This facility matures in September 2017.

PuDong Development Bank

In December 2016, 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 $17,415,206 (RMB120,000,000). Borrowings under this facility line of credit bear interest at rates ranging from 4.47% to 5.95% per annum, and are repayable within 3 months from the dates of drawing. As of March 31, 2017 and December 31, 2016, the Company had outstanding balances of $2,059,925 and $7,156,970, 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 two non-related entity, which are suppliers of the Company, and matures in December 2017.

China Zheshang Bank

In August 2016, 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 $31,927,878 (RMB220,000,000). This facility line of credit is guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Kai Li Xing Kong Real Property Ltd., Co., an entity majorly owned by Ms. Cheng Weihong (v) Zhonghe, the Company’s former subsidiary, and (vi) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. Borrowings under this facility line of credit bear interest at a rate of 4.5% per annum, and are repayable within 3 months to 6 months from the dates of drawing. As of March 31, 2017 and December 31, 2016, the Company had outstanding balances of $1,566,312 and $7,045,426, respectively, under this facility line of credit. This facility matures in August 2017.

Shengjing Bank

In November 2016, the Company entered into a facility line of credit agreement with Shengjing Bank, pursuant to which the Company can borrow a maximum amount of $7,256,336 (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, and (iii) Tianjin Ning Chuan International Trading co., Ltd., a supplier. 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 to 6 months from the dates of drawing. As of March 31, 2017 and December 31, 2016, the Company had outstanding balances of $3,526,222 and $3,952,744 under this facility line of credit. This facility matures in November 2017.

Bank of Heibei

In March 2017, the Company entered into a facility line of credit agreement with Bank of Heibei, pursuant to which the Company can borrow a maximum amount of $7,256,336 (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, and (iii) Tianjin Binhai International Automall Ltd. Co., a customer. As of March 31, 2017, there was no outstanding balance under this facility line of credit. This facility matures in March 2018.

(6) Short Term Borrowings

Agricultural Bank of China

In June 2016, 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 $6,336,679 (RMB44,000,000). One of the loan agreements in the amount of $576,062 (RMB4,000,000) expired in September 2016 and the outstanding balance was repaid. The other loan agreement had an outstanding balance of $5,805,068 and $5,760,618 (RMB 40,000,000) as of March 31, 2017 and December 31, 2016, respectively. The other loan agreement bears interest at a rate of 4.785% per annum, matures in June 2017, and is guaranteed by (i) Tianjin Binhai International Automall Ltd. Co., a customer, and (ii) Tianjin Ning Chuan International Trading Ltd. Co., a supplier, (iii) Tianjin Jing Dian Automobile Sales Information Ltd. Co., a supplier, (iv) Tianjin Shi Mao International Trading Ltd. Co., a supplier, and (v) Tianjin Ying Zhi Jie International Logistics Ltd. Co., a supplier.

China Zheshang Bank

In July and August 2016, the Company entered into five loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $4,320,463 (RMB30,000,000). Borrowings under these loan agreements bore interest at a rate of 5.655% 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) Kai Li Xing Kong Real Property Ltd., Co., an entity majorly owned by Ms. Cheng Weihong (v) Zhonghe, the Company’s former subsidiary, and (vi) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $0 and $4,320,463 as of March 31, 2017 and December 31, 2016, respectively. These loans matured in January and February 2017.

In November and December 2016, the Company entered into three loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $2,902,534 (RMB20,000,000). Borrowings under these loan agreements bear interest at a rate of 5.81% 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) Kai Li Xing Kong Real Property Ltd., Co., an entity majorly owned by Ms. Cheng Weihong (v) Zhonghe, the Company’s former subsidiary, and (vi) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $2,902,534 and $2,880,308 as of March 31, 2017 and December 31, 2016, respectively. These loans mature in May and June 2017.

In January and February 2017, the Company entered into five loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $4,353,802 (RMB30,000,000). Borrowings under these loan agreements bear interest at rates ranging between 5.655% and 5.81% 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) Kai Li Xing Kong Real Property Ltd., Co., an entity majorly owned by Ms. Cheng Weihong (v) Zhonghe, the Company’s former subsidiary, and (vi) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $4,353,803 and $0 as of March 31, 2017 and December 31, 2016, respectively. These loans mature in July and August 2017.

(7) 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.

Bank of Jinzhou

As of March 31, 2017, the Company had four outstanding notes payable to suppliers, which matured in May 2017, in an aggregate amount of $5,079,435 (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 $2,539,718 (RMB17,500,000) as guaranteed funds, which was classified as restricted cash as of March 31, 2017.

As of March 31, 2017, the Company had nine outstanding notes payable to suppliers, which mature in July 2017, in an aggregate amount of $6,530,702 (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 $3,265,351 (RMB22,500,000) as guaranteed funds, which was classified as restricted cash as of March 31, 2017.

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.

(8) Major Customers and Suppliers

The following table sets out our major customers who individually accounted for over 10% of our total net sales during the three months ended March 31, 2017 and 2016, respectively:

	As a Percentage of Our Total Net Revenues
	Three Months Ended March 31,
	2017			2016
Tianjin Jing Dian Automobile Sales Information Ltd. Co.		13	%		32	%
Tianjin Binhai International Automall Ltd. Co.		20	%		13	%

The following table sets out our major suppliers who individually accounted for more than 10% of our total net purchases during the three months ended March 31, 2017 and 2016, respectively:

	As a Percentage of Our Total Net Purchases
	Three Months Ended March 31,
	2017			2016
Tianjin Shi Mao International International Trading Ltd. Co.,		**	%		22	%
Tianjin Ying Zhi Jie International Logistics Ltd. Co.,		10	%		17	%

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

(9) Retained earnings

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

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 March 31, 2017 and December 31, 2016, the Company’s statutory reserve fund was approximately $2,325,000 and $2,317,000, respectively.

(10) Related Party Balances and Transactions

Ms. Cheng Weihong (the Senior Vice President and Chairwoman of Shisheng and wife of China Auto’s President and Chief Executive Officer, Mr. Tong Shiping) made non-interest bearing loans to the Company from time to time to meet working capital needs of the Company. For the three months ended March 31, 2017 and 2016, the Company made aggregate borrowings from Ms. Cheng Weihong of $99,998 and $161,486, respectively, and made repayments of $0 and $0 to Ms. Cheng Weihong. As of March 31, 2017 and December 31, 2016, the outstanding balances due to Ms. Cheng Weihong were $1,634,987 and $1,550,745, respectively.

The Company’s former shareholder, Sino Peace Limited, paid certain accrued expenses in the previous years on behalf of the Company. The amounts of $1,971,723 and $1,956,625 were outstanding as payable related to prior years’ professional fees on the consolidated balance sheets as of March 31, 2017 and December 31, 2016, respectively. In January 2015, December 2016, and February 2017, the Company received notification from an individual who claimed to be the owner of St. George International Limited ("St. George") and made a claim that the debt owed to Sino Peace by the Company had been transferred to St. George. However, the Company neither received any evidence to support such assignment nor any notification from the owner of Sino Peace that Sino Peace was transferring its legal right of collecting the receivable from the Company to St. George. The Company has been unable to locate the owner of Sino Peace to confirm such transfer and therefore considers such claim by St. George legally unbinding at this time.

The balances as discussed above as of March 31, 2017 and December 31, 2016 are interest-free, unsecured and have no fixed term of repayment. During the three months ended March 31, 2017 and 2016, there was no imputed interest charged in relation to these balances.

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

(11) Segment Information

The Company has three principal operating segments: (1) sales of automobiles, (2) financing services, and, (3) other services. These operating segments were determined based on the nature of the services offered. Operating segments are defined as components of an enterprise about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief executive officer and chief operating officer have been identified as the chief operating decision makers. The Company’s chief operating decision makers direct the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.

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 continuing operations of the Company’s operating segments:

Three Months Ended March 31, 2017

	Sales of		Financing			Other
	Automobiles		Services			Services			Corporate			Total

Net revenue	$	109,795,054	$	737,932		$	795		$	-		$	110,533,781
Cost of revenue		109,604,847		465,040			-			-			110,069,887

Operating expenses
Selling and marketing		86,734		86,734			9,130			-			182,598
General and administrative		73,515		73,515			6,126			459,467			612,623
Recovery on reserve for uncollectible account on receivable related to financing services		-		(290,353	)		-			-			(290,353	)
Total operating expenses		160,249		(130,104	)		15,256			459,467			504,868
Income (loss) from operations	$	29,958	$	402,996		$	(14,461	)	$	(459,467	)	$	(40,974	)
Depreciation and Amortization	$	7,618	$	7,618		$	2,290		$	4,353		$	21,879

Three Months Ended March 31, 2016

	Sales of		Financing			Other
	Automobiles		Services			Services			Corporate			Total

Net revenue	$	135,835,492	$	1,220,602		$	7,924		$	-		$	137,064,018
Cost of revenue		135,436,039		676,867			-			-			136,112,906

Operating expenses
Selling and marketing		78,235		78,234			9,204			18,408			184,081
General and administrative		71,435		140,247			10,205			334,122			556,009
Recovery from reserve for uncollectible account on receivable related to financing services		-		(68,813	)		-			-			(68,813	)
Total operating expenses		149,670		149,668			19,409			352,530			671,277
Income (loss) from operations	$	249,783	$	394,067		$	(11,485	)	$	(352,530	)	$	279,835
Depreciation and Amortization	$	5,346	$	1,420		$	1,657		$	811		$	9,234

Following are total assets by segment:

Total Assets

	Sales of		Financing		Other
	Automobiles		Services		Services		Corporate		Total

As of March 31, 2017	$	87,886,840	$	47,570,988	$	39,689	$	220,075	$	135,717,592
As of December 31, 2016	$	107,042,952	$	53,135,295	$	57,501	$	333,191	$	160,568,939

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.

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,” “expects,” “intends,” “estimates,” “continues” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the SEC from time to time, which could cause actual results or outcomes to differ materially from those projected.

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, 2016.

Business Overview

The Company’s principal businesses include (i) sales of imported automobiles, (ii) financing services related to imported automobiles, and (iii) other services including automobile information websites, advertising services, 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. Shisheng provides financing services (“Financing Services”) while our other majority owned subsidiaries Hengjia and Ganghui provide other services (“Other Services”) such as (i) web-based advertising services through two websites (ii) nationwide delivery services, and (iii) customs clearance. The websites provide subscribers with up to date sales and trading information for imported and domestically manufactured automobiles and information about automobiles and auto-related products and service. The nationwide delivery services provide information on discounted automobile services to imported automobile distributors, and agents and individual customers located in China. We are currently the only one-stop service provider in Tianjin for Financing Services and Other Services and our mission is to be a one-stop shop for our customers in providing valuable pre- and post-sale services and information for imported and domestically manufactured automobiles.

The two websites, (a) www.at160.com (formerly www.1365car.com), which focuses on domestically manufactured automobiles in Tianjin and (b) www.at188.com, which focuses on imported automobiles, provide subscribers (both industry subscribers and individual subscribers) with up to date sales and trading information for imported and domestically manufactured automobiles and information about automobiles and auto-related products and service. We charge a membership fee for certain exclusive premium information to automobile dealers and agents in Tianjin.

On September 23, 2015, the Company sold its 98% equity interest in Zhengji, which was engaged in automobile sales, to Mr. Wu Xiang Yang, an unrelated party, at a price of $3,048,483 (net of cash of $7,408 at Zhengji and amount due to Zhengji of $5,231,941). Zhengji’s assets consisted of automobile inventories of $3,422,658, other assets of $12,493 and other current liabilities of $2,329 on the disposal date resulting a loss on sale of equity interest in subsidiary in the amount of $210,895 after consideration of the non controlling interest of $173,444 in Zhengji. Zhengji had no material operations during 2015 through the disposal date.

On June 1, 2016, Shisheng entered into (i) an Equity Transfer Agreement (“Equity Transfer Agreement”) with Wuxi Huitong Automobile Sales and Service Co., Ltd. (“Huitong”) to sell 100% of the equity of Zhonghe, and (ii) a Debt Transfer Agreement, by and among Shisheng, Huitong, and Hezhong (the “Debt Transfer Agreement”). At the time, Zhonghe was the owner and operator of the Airport International Automall located in the Tianjin Airport Economic Area and the 40%owner of Car King Tianjin. Under the terms of the Zhonghe Equity Transfer Agreement, the sale price for the Zhonghe equity was approximately $61.7 million (RMB 410,000,000). The sale price was payable in two parts: (i) Huitong paid Shisheng approximately $25.6 million (RMB 169,938,192) in cash and (ii) under the terms of the Debt Transfer Agreement, Huitong assumed Shisheng’s outstanding payment obligations to Hezhong of $36.1 million (RMB 240,061,808) under the Equity Transfer Agreement, dated November 30, 2013, by and between Hezhong and Shisheng. Upon signing, Shisheng transferred control of Zhonghe to Huitong. Upon the completion of this transaction, the Company relinquished ownership of the Airport International Automall property and its 40% ownership of Car King Tianjin. Zhonghe operated in two segments, Sales of Automobiles and Airport Automall Automotive Services. As a result of the sale of Zhonghe, the airport automall automotive services unit has been discontinued.

Critical Accounting Policies, Estimates and Assumptions

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These consolidated financial statements are prepared in accordance with US GAAP, which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenues and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. The most significant estimates and assumptions include the valuation of accounts receivable, and the useful lives and impairment of property and equipment, 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 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.

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

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

Receivables Related to Financing Services

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

The Company evaluates the collectibility of outstanding receivables at the end of each of the reporting periods and makes estimates for potential credit losses. Prior to 2015, the Company did not experience any losses on its receivable related to financing services. During the years ended December 31, 2016 and 2015, the Company has been experiencing difficulties in collecting the receivable from a financing service customer, which is secured by certain imported automobile. The Company took possession of these secured automobiles and sold them during the year ended December 31, 2015. The sales proceeds are used to offset the outstanding receivable from this customer. The Company will continue to pursue collecting the remaining receivable balance. As of March 31, 2017 and December 31, 2016, the Company recorded an allowance for uncollectible account on receivable related to financing services in the amount of $2,764,694 and $3,031,554, respectively.

Inventories

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 March 31, 2017 and December 31, 2016, deferred tax liabilities from continuing operations was $0.

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 $17.2 million as of March 31, 2017. 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 March 31, 2017 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 March 31, 2017, 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 Pronouncements

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

RESULTS OF OPERATIONS

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 March 31, 2017 Compared to the Three Months Ended March 31, 2016

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,										Change in
	2017					2016					%
Net revenue	$	110,533,781		100.00	%	$	137,064,018		100.00	%		(19.36	)%
Cost of revenue		110,069,887		99.58	%		136,112,906		99.31	%		(19.13	)%
Gross profit		463,894		0.42	%		951,112		0.69	%		(51.23	)%
Operating expenses		504,868		0.46	%		671,277		0.49	%		(24.79	)%
(Loss) income from operations		(40,974	)	(0.04	)%		279,835		0.20	%		(114.64	)%
Other expenses		(188,932	)	(0.17	)%		(401,413	)	(0.29	)%		(52.93	)%
Loss from continuing operations before income taxes and non controlling interests		(229,906	)	(0.21	)%		(121,578	)	(0.09	)%		89.10	%
Net loss from continuing operations		(135,327	)	(0.12	)%		(187,547	)	(0.14	)%		(27.84	)%
Net loss from continuing operations attributable to shareholders of China Auto Logistics Inc.	$	(135,246	)	(0.12	)%	$	(187,522	)	(0.14	)%		(27.88	)%

Our net revenue from our continuing operations for the three months ended March 31, 2017 decreased 19.36% to $110,533,781 for 2017 from $137,064,018 for the three months ended March 31, 2016 and our cost of revenue for the three months ended March 31, 2017 decreased 19.13% to $110,069,887 for the three months ended March 31, 2017 from $136,112,906 for the three months ended March 31, 2016. Gross profit margin for our continuing operations decreased from 0.69% for the three months ended March 31, 2016 to 0.42% for the three months ended March 31, 2017. As compared to the three months ended March 31, 2016, our gross profit, (loss) income from operations, net loss from continuing operations, and net loss from continuing operating operations attributable to shareholders of China Auto Logistics Inc. for the three months ended March 31, 2017 decreased 51.23% to $463,894, decreased 114.64% to a loss of $(40,974), increased 27.84% to a loss of $(135,327), and increased 27.88% to a loss of $(135,246), respectively, primarily due to reduced gross margins in the Sales of Automobiles and decreased revenue from Financing Services which was partially offset by the recovery from reserve for uncollectible accounts on receivable related to Financing Services and a reduction in interest expense in the three months ended March 31, 2017.

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 March 31,								Change in
	2017				2016				%
Net revenue	$	110,533,781	100.00	%	$	137,064,018	100.00	%		(19.36	)%
- Sales of Automobiles		109,795,054	99.33	%		135,835,492	99.10	%		(19.17	)%
- Financing Services		737,932	0.67	%		1,220,602	0.89	%		(39.54	)%
- Other Services		795	0.00	%		7,924	0.01	%		(89.97	)%

Sales of Automobiles

Net revenue from Sales of Automobiles decreased 19.17% to $109,795,054 for the three months ended March 31, 2017 from $135,835,492 for the same period in 2016. During the three months ended March 31, 2017 and 2016, the Company sold 1,104 automobiles and 1,304 automobiles, respectively, representing a decrease of approximately 15% in volume. The average unit selling price per automobile decreased to $99,000 for the three months ended March 31, 2017 from $104,000 for the same period in 2016. In early August 2015, China’s official currency “Renmenbi” (“RMB”) devalued by over 3% against the U.S. dollar over a 5-day period. During the year ended December 31, 2016 and 2015, the RMB devaluated 6.7% and 5.5%, respectively, against the U.S. dollar. Some of our customers increased their orders in the second half of 2015 potentially in anticipation of increased prices due to the RMB devaluation; this trend continued until the first quarter of 2016. We witnessed strong sales in the fourth quarter of 2016 reaching approximately $138.8 million after a substantial decline in the second and third quarters of 2016 which may be the result of customers depleting the inventories built up in the second half of 2015 and the first quarter of 2016. The first quarter of each year historically is the slowest quarter of the year for automobile sales due to the Chinese New Year holidays. We believe sales for the three months ended March 31, 2016 were unusually high due to the impact of the RMB devaluation, as stated above. Despite the decline in sales during the three months ended March 31, 2017 compared to the same period of the prior year, sales during the three months ended March 31, 2017 remained approximately 27% higher than the sales during the three months ended March 31, 2015.

Our automobile sales decreased in both dollars and in quantities during the three months ended March 31, 2017 while our gross margin dropped to 0.17% during the period compared to 0.29% during the same period in the prior year. In December 2016, the PRC government imposed an additional 10% tax on any automobile sales price above approximately $190,000 (RMB1,300,000). This new tax on so-call “super luxury cars” put an immediate reduction on demands for high-end luxury automobiles. As a result, the average unit selling price per automobile declined to $99,000 during the three months ended March 31, 2017 from $104,000 during the same period in 2016. Sales for our high-end luxury automobiles declined, a segment that generally has higher profit margins, which contributed to a further decline to our gross margin for the three months ended March 31, 2017 compared to the same period in 2016. We do not expect our gross margin to be significantly higher than the current level based on our outlook for the Sales of Automobiles segment and increased competition that has resulted from more companies in the imported automobile business entering the market.

In August 2014, the China Commerce and Industry Bureau authorized the “Parallel Imported Vehicles” scheme. The “Parallel Imported Vehicles” scheme permits foreign made automobiles to be imported by importers in addition to authorized automobile dealers. This policy officially opened the imported automobile market to importers like us, so that we can now be in direct competition with the authorized dealers. This is an antitrust effort by the Chinese government to address complaints about the authorized automobile dealers overcharging for foreign-made automobiles. These new rules will also officially allow imported automobiles sold by parties other than authorized dealers to be treated the same as those sold through authorized dealers (i.e., with respect to insurance coverage and the registration process). As of March 31, 2017, the PRC government has selected Guangzhou, Shanghai, Shenzhen and Tianjin as four experimental cities to implement “Parallel Imported Vehicles” scheme.

According to an article, “With parallel import scheme, China aims to rein in luxury car prices - sources” published by Reuters on February 4, 2015, “China has had a grey market in auto sales for some time, centered around the northern port city of Tianjin where about half of China's total car import deals are done. But buyers have been cautious given the lack of quality guarantee and after-sales service on unauthorized cars. That will change under the new scheme. ’The main significance (of the pilot scheme) is that buyers will now be legally entitled to warranty packages,’ whether their imported car comes through an authorized or unauthorized channel, said IHS Automotive analyst Namrita Chow.” According to the data published by CAAM on February 9, 2017, the number of imported automobiles sold through Parallel Imported Vehicles scheme totaled approximately 130,290 units, which represented 12.8% of total imported automobiles sold in 2016, a 16.3% increase from 2015. We expect this Parallel Imported Vehicles scheme provide us great long term advantages to compete with the official authorized automobile dealers.

During the three months ended March 31, 2017 and 2016, sales of our top three selling brands, Land Rover, Mercedes Benz, and Toyota accounted for 73% and 79%, respectively, of our total net automobile sales. Sales to the Company’s top five customers, each of which is a car dealer, accounted for 41% and 46% of the Company’s sales during the three months ended March 31, 2017 and 2016, respectively. The Company will continue to maintain close working relationships with its top customers while attempting to reduce the concentration of revenues among these top customers actively looking for new customers to enlarge its customer base.

Financing Services

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

Net revenue from Financing Services during the three months ended March 31, 2017 decreased 39.54% to $737,932 from $1,220,602 for the same period in the prior year. The Company had an aggregate amount of credit lines of approximately $134 million (RMB920 million) as of March 31, 2017. Our Financing Services income and related cost of revenue are affected by the interest rate charged by banks. Our Financing Services revenue consists of two portions: interest income and fee income. The revenue from the fee income portion of our Financing Services decreased during the three months ended March 31, 2017. Excluding revenue from the interest income portion of $465,040 and $676,867 for the periods ended March 31, 2017 and 2016, respectively, the revenue from the fee income portion of our Financing Services decreased 49.81% to $272,892 for the period ended March 31, 2017 from $543,735 for the period ended March 31, 2016. The gross margin for our Financing Services segment decreased to 36.98% for the period ended March 31, 2017 from 44.55% for the period ended March 31, 2016.

We provide Financing Services to our customers with our lines of credit with major commercial banks in the PRC, including Agricultural Bank of China, Pudong Development Bank, China Zheshang Bank, Industrial and Commercial Bank of China, Shengjing Bank, and Bank of Heibei. 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 March 31, 2017, we had approximately $94 million lines of credit available to use in our Financing Services. As of May 10, 2017, the Company had aggregate credit lines of approximately $134 million (RMB920 million). Although all of our lines of credit have maturities of less than one year and may not be renewed on the same terms, if at all, we do not expect that the expiration of our lines of credit with any one of our existing banks will have a material adverse effect on our ability to provide Financing Services. However, if the automobile market in the PRC, and in particular the market for imported automobiles, slows down in the future, our revenue from Financing Services would be materially and adversely affected by a decreased number of transactions.

Our revenue growth from Financing Services is heavily dependent on overall industry growth and the economic conditions of the market in the PRC. It has become more competitive in the Financing Service industry in the recent years as more companies are providing services similar to ours at lower prices. We have lost some customers in the recent quarters which drove down our revenue in this segment. While we believe we are still one of the market leaders in the Financing Services, we continue to lose market share to the new players in this market.

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.

Other Services

Other services includes revenue generated from Web-based Advertising. We did not generate any revenue from the Automobile Value Added service during the periods ended March 31, 2017 and 2016. We have revised our business plan and moved away from Web-based Advertising Services and automobile value added services to focus on Automobile Sales and Financing Services. We expect that the revenue generated from this segment will continue to be low compared to other segments.

Our Web-based Advertising Services revenue decreased 89.97% to $795 for the period ended March 31, 2017 from $7,924 for the same period in the prior year. Revenue from Web-based Advertising Services was generated by subscription fees and advertisements.

Cost of Revenue

	Three Months ended March 31,								Change in
	2017				2016				%
Net revenue	$	110,533,781	100.00	%	$	137,064,018	100.00	%		(19.36	)%
Cost of revenue		110,069,897	99.58	%		136,112,906	99.31	%		(19.13	)%
Gross profit		463,894	0.42	%		951,112	0.69	%		(51.23	)%

Our cost of revenue during the period ended March 31, 2017 consisted primarily of the cost of automobiles purchased and certain direct labor costs for the Sales of Automobiles and interest expense related to our Financing Services. Our cost of revenue decreased 19.13%, from $136,112,906 during the same period in the prior year to $110,069,897 in 2017. The decrease was primarily due to the decrease in the sales volume of imported automobiles and a decrease in interest costs related to the Financing Services.

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

Gross profit decreased 51.23% from $951,112 during the three months ended March 31, 2016 to $463,894 during the three months ended March 31, 2017, primarily due to lower gross margins in the sales of automobiles and a decrease of financing service fee revenue.

Operating Expenses

	Three Months ended March 31,										Change in
	2017					2016					%
Operating expenses
- Selling and marketing	$	182,598		36.17	%	$	184,081		27.42	%		(0.81	)%
- General and administrative		612,623		121,34	%		556,009		82.83	%		10.18	%
- Recovery from reserve for uncollectible account on receivable related to financing services		(290,353	)	(57.51	)%		(68,813	)	(10.25	)%		321.94	%
Total	$	504,868		100.00	%	$	671,277		100.00	%		(24.79	)%

Operating expenses decreased 24.79%, from $671,277 during the three months ended March 31, 2016 to $504,868 during the three months ended March 31, 2017. The decrease in operating expenses was primarily the result of a $290,353 recovery from the reserve for uncollectible accounts on receivables related to financing services during the three months ended March 31, 2017 which was partially offset by an increase in rent expense for the additional office space acquired in April 2016.

Selling and Marketing Expenses

Selling and marketing expenses decreased 0.81% in during the three months ended March 31, 2017. The following table sets forth a breakdown of the primary selling and marketing expenses of the Company:

	Three Months Ended March, 31				Change in
	2017		2016		%
Primary selling and marketing expenses
- Payroll	$	38,438	$	45,950		(16.35	)%
- Staff related costs		24,852		23,551		5.52	%
- Advertising and promotion		25,781		3,058		743.07	%
- Entertainment		4,826		39,658		(87.83	)%
- Rent		10,044		3,670		173.68	%

Payroll costs decreased 16.35% to $38,438 during the three months ended March 31, 2017 from $45,950 during the same period in the prior year. Staff related costs increased 5,52% to $24,852 during the three months ended March 31, 2017 from $23,551 during the same period in the prior year. The Company’s staff related costs increased slightly due to the overall pay and benefit increases during the period. Advertising and promotion expenses increased 743.07% during the period as we incurred more advertising costs during the three months ended March 31, 2017 on promotion materials and we had a low budget and spend on advertising during 2016. Entertainment expenses decreased 87.83% to $4,826 during the three months ended March 31, 2017 from $39,658 during the same period in the prior year as they fluctuate from time to time depending on activities we conduct. Rent expenses increased 173.68% to $10,044 during the three months ended March 31, 2017 compared to $3,670 during the same period of 2016 as we allocated a designated section in our leased office space for our sales personnel.

General and Administrative Expenses

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

	Three Months Ended March, 31				Change in
	2017		2016		%
Primary general and administrative expenses
- Payroll	$	52,046	$	55,098		(5.54	)%
- Staff related costs		30,398		17,149		77.26	%
- Entertainment		83,420		32,504		156.65	%
- Depreciation		21,879		9,234		136.94	%
- Rent		49,305		15,618		215.69	%
- Legal and professional fees		219,833		271,184		(18.94	)%

Payroll expenses decreased 5.54% during the period ended March 31, 2017 primarily due to our reductions to the number of administration employees in order to reduce our cost. Staff-related costs increased 77.26% primarily due to higher employee welfare costs incurred during the period ended March 31, 2017. Entertainment expenses increased 156.65% to $83,420 during the three months ended March 31, 2017 from $32,504 during the same period in the prior year as our executive management team allocated more resources on customer relationships and new customer developments. Depreciation expenses increased 136.94% to $21,879 during the three months ended March 31, 2017 from $9,234 during the same period in the prior year primarily due to the depreciation on the leasehold improvements incurred on the additional leased office during 2016. Rent expenses increased 215.69% to $49,305 during the three months ended March 31, 2017 compared to $15,618 during the same period of 2016 as we leased additional office space under the new lease entered in April 2016. Legal and professional fees for the period ended March 31, 2017 decreased 18.94% to $219,833 during the three months ended March 31, 2017 from $271,184 during the same period of the prior year due to less professional fees incurred after the sale of Zhonghe.

Reserve for Uncollectible Account on Receivable Related to Financing Services

During the three months ended March 31, 2017 and 2016, the Company recovered $290,353 and $68,813, respectively, from reserve for uncollectible account on receivable related to financing services.

Income (Loss) from Operations

Income from operations decreased 114.64% to a loss of $(40,974) in the quarter ended March 31, 2017 from an income from operations of $279,835 in the same quarter of the prior year. The switch to an operating loss from an operating income was primarily due to lower gross margins in the sales of automobiles and a decrease in financing service fee revenue during the three months ended March 31, 2017 compared to the same period of prior year, which was partially offset by the $290,353 recovery from a previous reserve for uncollectible accounts on receivables related to financing services during the three months ended March 31, 2017.

Other Income (Expenses), Net

Other income (expenses) primarily consist of interest income related to bank deposits, interest expense related to bank borrowings, foreign exchange gain (loss), and (loss) gain on disposal of property.

We recorded net other expenses of $188,932 for the three months ended March 31, 2017 and $401,413 for the same period of the prior year. The decrease in other expenses was primarily due to decrease in interest expense as a result of lower balances of short-term borrowings after the disposal of Zhonghe in June 2016.

Discontinued Airport Automall Automotive Services Business Unit

On June 1, 2016, Shisheng entered into (i) an Equity Transfer Agreement (“Equity Transfer Agreement”) with Wuxi Huitong Automobile Sales and Service Co., Ltd. (“Huitong”) to sell 100% of the equity of Tianjin Zhonghe Auto Sales Service Co., Ltd. (“Zhonghe”), our former wholly owned subsidiary acquired in November 2013, and (ii) a Debt Transfer Agreement, by and among Shisheng, Huitong, and Hezhong (Tianjin) International Development Co., Ltd. (“Hezhong”) (the “Debt Transfer Agreement”). At the time, Zhonghe was the owner and operator of the Airport International Automall located in the Tianjin Airport Economic Area and the 40% owner of Car King Tianjin. Under the terms of the Equity Transfer Agreement, the sale price for the Zhonghe equity was approximately $61.7 million (RMB 410,000,000). The sale price was payable in two parts: (i) Huitong paid Shisheng approximately $25.6 million (RMB 169,938,192) in cash and (ii) under the terms of the Debt Transfer Agreement, Huitong assumed Shisheng’s outstanding payment obligations to Hezhong of $36.1 million (RMB 240,061,808) under the Equity Transfer Agreement, dated November 30, 2013, by and between Hezhong and Shisheng. Upon signing, Shisheng transferred control of Zhonghe to Huitong. Upon the completion of this transaction, the Company relinquished ownership of the Airport International Automall property and its 40% ownership of Car King Tianjin. Zhonghe operated in two segments, Sales of Automobiles and Airport Automall Automotive Services. As a result of the sale of Zhonghe, the airport automall automotive services unit has been discontinued.

Liquidity and Capital Resources

We generally finance our operations through a combination of operating profit and short-term borrowings from banks. We incurred significant operating losses and generated negative operating cash flow in recent years. As a result, our liquidity is negatively impacted. 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 normal course of business and repaying our bank loans when they come due.

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

The following table sets forth a summary of our cash flows for the three months ended March 31, 2017 and 2016

	Three Months Ended March 31,
	2017			2016
Net cash (used in) provided by operating activities	$	(122,358	)	$	2,813,032
Net cash used in investing activities		(1,278	)		(111,873	)
Net cash provided by (used in) financing activities		99,998			(4,680,127	)
Effect on exchange rate change on cash		22,203			19,719
Cash and cash equivalents at beginning of the period		3,004,932			7,119,686
Cash and cash equivalents at end of the period		3,003,497			5,160,437

Going Concern

We incurred operating losses and had negative operating cash flows and may continue to generate negative cash flows as we implement our business plan for 2017. There can be no assurance that our continuing efforts to execute our business plan will be successful and that we will be able to continue as a going concern. Our net loss from continuing operations attributable to shareholders for the three months ended March 31, 2017 and 2016 was $135,246 and $187,522, respectively.

Net cash used in operations from continuing operations during the three months ended March 31, 2017 was $122,358 and net cash provided by operating activities during the three months ended three months ended March 31, 2016 was $2,830,621.

On June 1, 2016, the Company sold 100% of the equity interest in Zhonghe to Huitong for approximately $61.7 million and entered into an agreement to transfer the outstanding payable balance related to the Zhonghe acquisition of approximately $36.1 million to Huitong. We received a net cash proceeds of approximately $21.4 million ($25.6 million cash proceeds net of cash at Zhonghe of approximately $173,000 and amount owed to Zhonghe of approximately $4 million.) The proceeds of this sale have been used for our working capital.

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. These factors raise substantial doubt as to the Company’s ability to continue as a going concern within one year from the date of this filing. The ability of the Company to continue as a going concern is dependent upon the Company’s successful efforts to execute its business plan for 2017. These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Operating Activities

During the three months ended March 31, 2017, we had net cash used in operating activities of $122,358 (including net cash used in operating activities of $0 from discontinued operations) as compared to net cash provided by operating activities of $2,813,032 (including net cash used in operating activities of $17,589 from discontinued operations) during the same period of the prior year.

Net cash used in operating activities of $122,358 during the three months ended March 31, 2017 was primarily attributable to a decrease in notes payable to suppliers of $14,517,627 as prior outstanding notes became due during the current period, and a decrease in customer deposits of $4,805,254, which was partially offset by a decrease in restricted cash of $12,808,420 due to a lower balance of notes payable to suppliers, and a decrease in advances to suppliers of $5,563,861 primarily due to slightly lower customer orders outstanding at March 31, 2017.

Net cash provided by operating activities of $2,813,032 during the three months ended March 31, 2016 primarily consisted of an increase in notes payable to suppliers of $15,291,689 due to our efforts in reserving our cash flows by deferring payments to our suppliers, and an increase in customer deposits of $6,461,553 due to increased advanced payments from our customers for future sales, which was partially offset by an increase in restricted cash due to larger balance of restricted cash required for notes payable of $15,046,585 and an increase in inventories of $10,321,688 due to anticipation of strong sales in the coming quarters as we expect many of our customers will increase their orders in anticipation of increased prices.

Investing Activities

During the three months ended March 31, 2017 and 2016, net cash used in investing activities was $1,278 (including net cash used in investing activities of $0 from discontinued operations) and $111,873 (including net cash used in investing activities of $0 from discontinued operations), respectively. We received cash proceeds of $0 and $8,563 related to the disposal of an automobile used by the Company during the three months ended March 31, 2017 and 2016, respectively. We paid $1,278 and $120,436 to purchases property, equipment and leasehold improvements during the three months ended March 31, 2017 and 2016, respectively.

Financing Activities

During the three months ended March 31, 2017 and 2016, net cash provided by financing activities was $99,998 (including net cash provided by financing activities of $0 from discontinued operations) and net cash used in financing activities of $4,680,127 (including net cash provided by financing activities of $0 from discontinued operations), respectively. The net cash provided by financing activities during the three months ended March 31, 2017 and 2016 included mainly net repayments of $0 and $5,010,165, respectively, on short-term loans from banks. Bank overdrafts were $0 and $168,552 during the three months ended March 31, 2017 and 2016, respectively. In addition, during the years ended the three months ended March 31, 2017 and 2016, we received non-interest bearing short-term advances from our Director and Senior Vice President, Ms. Cheng Weihong, in the amount of $99,998 and $161,486, respectively.

Our total cash and cash equivalents decreased to $3,003,497 from $3,004,932 as of March 31, 2017 and December 31, 2016, respectively.

Working Capital

As of March 31, 2017, the Company had working capital of $23,670,308 compared to working capital of $23,576,035 as of December 31, 2016.

The Company’s cash is used to finance the purchases of inventory, payments for advances from suppliers, and restricted cash as requirements for our financing service operations, lines of credit related to financing services and short-term borrowings. The working capital balance as of March 31, 2017 was not significantly different from that as of December 31, 2016.

The Company has aggregate outstanding balance of lines of credit related to financing services of $39,787,152 and $47,081,763 as of March 31, 2017 and December 31, 2016, respectively, and outstanding balances of short-term borrowings of $13,061,405 and $12,961,389 as of March 31, 2017 and December 31, 2016, respectively.

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

Capital Expenditures

We had property and equipment from continuing operations of $299,136 and $317,282 as of March 31, 2017 and December 31, 2016, respectively. We did not have any significant purchases of property and equipment during the three months ended March 31, 2017. The decrease in in the property and equipment balance was primarily a result of depreciation incurred during the three month period ended March 31, 2017.

The following table sets forth a summary of our property and equipment for the three months years ended March 31, 2017 and December 31, 2016:

	March 31, 2017			December 31, 2016			%
Computers	$	73,968		$	72,134			(2.54	)%
Office equipment, furniture and fixtures		45,112			44,766			0.77	%
Leasehold improvements		150,490			149,338			0.77	%
Automobiles		1,046,701			1,038,686			0.77	%
Total		1,316,271			1,304,924			1.64	%
Accumulated depreciation and amortization		(1,017,135	)		(987,642	)		2.99	%
Property and equipment, net	$	299,136		$	317,282			(5.72	)%

Foreign Cash

The Company’s deposits in banks located in the PRC and Hong Kong which are not fully protected by insurance. Such uninsured amounts totaled $2,877,384 and $2,853,274 as of March 31, 2017 and December 31, 2016, respectively. If the foreign cash and cash equivalents are expatriated to finance any needs of our operations in the U.S., we may need to accrue and pay U.S. taxes. Currently, we have not provided for U.S. income and foreign withholding taxes on undistributed earnings of our PRC subsidiaries since we intend to reinvest our earnings to further expand our businesses in mainland China and do not intend to declare dividends to our U.S. holding company in the foreseeable future.

Indebtedness

We entered into several banking facilities with Agricultural Bank of China, PuDong Development Bank, Industrial and Commercial Bank of China, China ZheShang Bank, Shengjing Bank and Bank of Heibei. As of March 31, 2017 and December 31, 2016, the Company had aggregate credit lines of $134 million (RMB920 million) and $125 million (RMB870 million), respectively, had outstanding balances under these credit lines amounted to $40 million and $47 million, respectively. As of May 10, 2017, the Company had aggregate credit lines of $134 million (RMB920 million) with its banks.

As of March 31, 2017 and December 31, 2016, we had an aggregate outstanding loan balance of $13,061,405 and $12,961,389, 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 4.79% to 5.81% 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 agreement with PuDong Development Bank which allows us to draw on our bank account an amount up to $2,176,901 (RMB15,000,000). We had no outstanding overdraft balance as of March 31, 2017 and December 31, 2016, respectively.

Trend Information

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

Off-Balance Sheet Arrangements

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

Item 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, 2016, 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, 2016.

Item 1A. Risk Factors.

Not required.

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) There is no information required to be disclosed on Form 8-K during the period covered by this Form 10-Q that was not so reported.

(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 March 31, 2017.

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)		Articles of Incorporation of the Company, as amended
3.2 (2)		Amended and Restated Bylaws of the Company
10.1(3)		Office Tenancy Contract, dated January 1, 2017, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd.
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 Labels Linkbase Document
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith

** Furnished herewith

(1) Incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on April 7, 2016

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

(3) Incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 28, 2016

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: May 15, 2017

Index to Exhibits

Exhibit Number		Exhibit Description
3.1(1)		Articles of Incorporation of the Company, as amended
3.2 (2)		Amended and Restated Bylaws of the Company
10.1(3)		Office Tenancy Contract, dated January 1, 2017, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd.
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 Labels Linkbase Document
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith

** Furnished herewith

(1) Incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on April 7, 2016

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

(3) Incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 28, 2016

China Auto Logistics Inc - FORM 10-Q - May 15, 2017

Attached files

China Auto Logistics Inc Reports