PART
I
General
China
Auto Logistics Inc. (the “
Company
”) and its subsidiaries’ principal businesses include (i) sales of imported
automobiles, (ii) financing services related to imported automobiles, and (iii) other services including automobile information
websites and advertising services, and 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. Tianjin Seashore New District
Shisheng Business Trading Group Co. Ltd. (“Shisheng”) provides financing services (“
Financing Services
”)
while our other majority owned subsidiaries Tianjin Hengjia Port Logistics Corp. (“Hengjia”) and Tianjin Ganghui Information
Technology Corp. (« 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 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 services. We charge a membership fee for certain exclusive premium information to automobile dealers
and agents in Tianjin.
Except
as otherwise indicated by the context, references in this report to “we,” “us,” “our,” or
the “Company” are to the consolidated business of the Company, Shisheng, Hengjia, and Ganghui, except such terms,
when used with reference to the audited consolidated financial statements and related notes contained elsewhere in this report
or “
Management’s Discussion and Analysis of Financial Condition and Results of Operations
” Section, are
to the consolidated business of Shisheng, Hengjia, and Ganghui,.
History
and Organizational Structure
China
Auto Logistics Inc. was incorporated on February 22, 2005 in the State of Nevada.
On
November 10, 2008, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”) with Ever Auspicious
International Limited, a Hong Kong company (“HKCo”) and Bright Praise Enterprises Limited, a British Virgin Islands
company and the sole shareholder of HKCo, pursuant to which the Company acquired all of the issued and outstanding capital stock
of HKCo, from Bright Praise Enterprises Limited in exchange for approximately 64.64% of the Company’s issued and outstanding
common stock (the “Exchange”). As a result of the Exchange, HKCo became the Company’s wholly owned subsidiary.
The Company’s primary business operations became those of HKCo.
On
October 17, 2007, Ever Auspicious International Limited, a Hong Kong company (“HKCo”) was incorporated in Hong Kong
to act as a holding company for Shisheng. On November 1, 2007, HKCo entered into a Share Exchange Agreement with Cheng Weihong,
Xia Qiming, and Qian Yuxi (collectively, the “Sellers”), pursuant to which the Sellers transferred their interest
in Shisheng to HKCo for an aggregate purchase price of $12,067,254 (RMB95,000,000). As a result of this transaction, HKCo owns
all of the capital stock of Shisheng.
In
September 1995, Shisheng was founded by Mr. Tong Shiping and his family as a private company under the name “Tianjin Tariff-Free
Zone Shisheng Property Management Corp.”, which was subsequently renamed as Tianjin Seashore New District Shisheng Business
Trading Group Co. Ltd. Its core business was selling the domestically manufactured automobile model CHARADE, which had 10% of
the automobile market share in China between 1995 and 2000. With the increased popularity of imported cars and the maturation
of the internet, Shisheng switched its core business to the sale of imported automobiles. Shisheng owns 98% of Tianjin Ganghui
Information Technology Corp., which is currently inactive, and 98% of Tianjin Hengjia Port Logistics Corp., which provides web-based,
real-time information on imported automobiles and automobile value added services to wholesalers and distributors in the imported
vehicle sales and trading industry, such as customs clearance and arrangement for import good storage.
On
September 23, 2015, the Company sold its 98% equity interest in Zhengji International Trading Corp. (“Zhengji”), which
was owned by Shisheng and 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 in 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 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.
As
of December 31, 2016, the Company conducts its business through the following wholly owned and majority owned subsidiaries of
the Company:
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Ever
Auspicious International Limited,
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Tianjin
Seashore New District Shisheng Business Trading Group Co. Ltd.
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Tianjin
Ganghui Information Technology Corp.
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Tianjin
Hengjia Port Logistics Corp.
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Industry
Overview
China’s
auto industry growth has been driven by rising domestic demand stemming from rising incomes and expanding middle and upper-middle
classes. For the middle and upper-middle classes, automobiles serve not only as modes of transportation but also as status symbols.
As a result, imported automobiles, particularly luxury automobiles like Audi, Mercedes Benz, BMW, Lexus and Land Rover, are in
high demand. The expansion of China’s roads and highway network, coupled with the expanding middle and upper-middle classes,
are expected to lead to robust auto sales in the years to come.
In
November 2001, China became a member of the World Trade Organization (the “
WTO
”). Due to the Chinese government’s
trade restrictions, imported automobiles did not flood into the Chinese market, thereby creating an opportunity for the development
and growth of the domestic automobile manufacturing industry. The result has been a steady increase in the sales of Chinese manufactured
automobiles, not only to the domestic market, but also into the international market.
In
August 2014, the China Commerce and Industry Bureau authorized the “Parallel Imported Vehicles” scheme. “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). So far, Shanghai and Beijing have implemented this “Parallel Imported
Vehicles” scheme. There are three major advantages of the Parallel Imported Vehicles over the imported vehicles sold by
the authorized automobiles dealers. First, there is a price advantage for Parallel Imported Vehicles as there are several layers
of distributorships for vehicles sold through authorized dealers. Second, due to the process time needed to approve new models
of imported vehicles, the Parallel Imported Vehicles scheme allows the new models of imported vehicles become available earlier
than those sold through the authorized dealers. Third, the Parallel Imported Vehicles scheme allows the importers to import limited
edition vehicles, which are generally unavailable from the authorized dealers and provided more selections of vehicles to the
consumers. According to data issued by the China Association of Automobile Manufacturers (“CAAM”) on February 9, 2017,
approximately 1.04 million automobiles were imported to China in 2016, a decline of 3.4% compared to 2015. Such decline was much
smaller than the 2015 decline of 24.2% compared to 2014. In addition, according to the data published by CAAM, the number of imported
automobiles sold through Parallel Imported Vehicles scheme totaled approximately 130,290 units, which represents 12.8% of total
imported automobiles sold in 2016, an 16.3% increase from 2015. We expect the “Parallel Imported Vehicles” scheme
will continue to create long term benefits for our business.
China
experienced significant economic growth and overtook the US as the world’s largest automobile market. According to the article
“2016 Chinese Automobile Sales ranked No. 1 in eight Consecutive Years” published by Xinhuanet.com, “Chinese
automobile production and sales show accelerated growth and hit record high again in 2016. Automobile production and sales reached
28.1 million units and 28 million units, respectively, in 2016, a growth of 14.5% and 13.7%, respectively, compared to 2015.”
As
of December 31, 2016, eight cities in China, including Beijing, Shanghai, Guangzhou, Guiyang, Shenzhen, Shijiazhuang, Tianjin
and Hangzhou, are subject to restrictions on automobile purchases. The restrictions vary from city to city, however most of these
cities set an annual limit on the maximum number of vehicles in each category that may be licensed, in order to limit the number
of new vehicles added to the roads each year. Some cities, such as Beijing, have adopted a lottery system wherein only potential
buyers who win the lottery draw will be able to purchase vehicles. As more cities become subject to these and similar purchase
restrictions, the future growth in the automobile market in China will be negatively impacted.
Our
Competitive Strengths
We
are committed to keeping our competitive edge by constantly evaluating and responding to market demand and providing new products
and services. Our goals are to establish successful and long-term partnerships with our customers, employees and suppliers and
to provide high quality services and products. In particular, we believe the following strengths differentiate our business:
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We
are headquartered in Tianjin, which is the largest port city among the top 5 port cities in China for imported automobiles.
Tianjin has a strong established presence in the imported automobile market in China, which provides us with first-hand knowledge
of product information and developing industry trends.
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We
have a unique business model that combines Sales of Automobiles, Financing Services, and other automotive related services
which enhances our ability to be a one-stop service provider for most of our customers’ needs with respect to imported
automobiles and used automobiles in the PRC.
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We
are one of the leaders in the “parallel import automobiles” industry in Tianjin which allows us to maintain competitive
advantages by offering substantially more automobile models for our customers to choose from and best available prices.
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We
have continued to grow and maintain a referral network with all major automobile distributors and agents in the PRC.
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We
maintain close relationships with many major commercial banks in the PRC, including the Agricultural Bank of China, China
Merchants Bank, PuDong Development Bank, Industrial and Commercial Bank of China, China ZheShang Bank, China Minsheng Bank,
and Shengjing Bank, which gives us a competitive advantage over our competitors in providing Financing Services. As of March
22, 2017, the Company had aggregate credit lines of $125 million (RMB870 million) with its banks.
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Our
key personnel each have more than fifteen years of Chinese automobile industry experience.
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Our
Growth Strategy
We
intend to pursue the following key elements to our growth strategy:
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Create
New Services
. We are looking into developing an internet based platform which matches the buyers and the sellers for various
automobile related services. If successful, we expect this platform will change the way imported automobiles are sold and
related services are provided in China.
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Emphasize
Service and Support
. We will continue to build on our menu of established business offerings as a clear and viable alternative
to price-only selling. We will also aim to expand our existing banking relationships and explore other cooperative relationships
with major commercial banks to increase our lines of credit to provide additional Financing Services to our customers.
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Build
a Relationship-Oriented Business
. We have a history of building long-term relationships with clients rather than focusing
on single-transactions. To that end, we aim to capitalize on our existing client base by establishing a national automobile
dealer network for faster information exchange and closer coordination. We will also continue to place an emphasis on obtaining
authorized agent licenses with large international automobile manufacturers.
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Build
Brand Recognition
. We will build brand name recognition through diverse marketing channels such as online advertising,
public relations and trade-show participation.
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Our
Business Lines and Products
Sale
of Automobiles
We
conduct our sales operations of imported automobiles through Shisheng. We are a general agent and wholesaler authorized by the
Chinese government to import vehicles into the PRC. We sell our vehicles to authorized dealers like Ford or Lexus, as they are
not able to import all models directly, free traders or wholesalers located in inland China or non-port cities, and individual
customers. We have the core competencies within our network to sell all makes and models of imported vehicles. Our sales network
penetrates to agents and dealers in more than 100 cities. We have close working relationships with some of the largest automobile
dealers in China.
Our
revenues from the sale of imported automobiles and related activities were $581.2 million for fiscal year 2012 (98.30% of all
revenues), $450.1 for the fiscal year 2013 (98.03%), $393.7 million for fiscal year 2014 (97.86% of all revenues), $440.7 million
for fiscal year 2015 (98.74% of all revenues), and $462.7 million for fiscal 2016 (99.07% of all revenues) representing a 5% increase
from the prior fiscal year.
Financing
Services
Many
of our customers, including both authorized agents and general dealers, contend with a shortage of working capital. The imported
automobile service industry has developed to address these barriers by providing short-term financing services in connection with
the importation of automobiles. These service providers are located in the port cities of Dalin, Tianjin, Shanghai and Guangzhou.
Our
Financing Services include letter of credit issuance services, purchase deposit financing, and import duty advance services. Our
competitive advantage comes from relationships with major Chinese commercial banks, including China Merchants Bank, Agricultural
Bank of China, PuDong Development Bank, China ZheShang Bank, Industrial and Commercial Bank of China, China Minsheng Bank, and
Shengjing Bank. As of March 22, 2017, the Company had aggregate credit lines of $125 million (RMB870 million) with its banks.
We are currently negotiating a number of new credit lines with various banks and the Company is optimistic that it will be able
to obtain financing on an as-needed basis that will be sufficient for us to provide Financing Services to our customers.
The
Company provides Financing Services to its customers using its facility lines of credit with its banks. The Company earns a service
fee for the customers drawing its facility lines related to their purchases of automobiles and payment of import taxes. The customers
bear all the interest and fees charged by the banks and prepay such amounts upon the execution of their service contracts with
the Company. The customers are also required to make a deposit in the range of 10% to 15% of the purchase price of the automobile
with the Company. The banks are granted a security interest in automobiles until the borrowings are fully paid.
Our
revenues from Financing Services were $7,085,357 for fiscal year 2012 (1.20% of total revenues), $6,893,985 for fiscal year 2013
(1.50% of total revenues), and $7,403,202 for fiscal year 2014 (1.84% of total revenues), $5,567,208 for fiscal year 2015 (1.25%),
and $4,314,291 for fiscal year 2016 (0.92%), representing a decrease of 22.51% from the prior fiscal year.
Other
Services
Web-based
Advertising Services
We
have experienced strong competition in the web-based advertising arena which continues to drive the pricing of advertising revenue
down. Starting in 2012, we began to shift our focus of our websites from generating advertising revenue to providing automotive
information to our website visitors. We are targeting to create a platform which allows our customers and potential customers
to have access to our products including automobile sales, Automobile Valued Added Services and Financing Services. Through offering
extensive automotive information and news, we hope to attract more potential customers to visit our websites. We believe our business
strategy of using our websites as a platform to expand our reach to our customers and potential customers will benefit us in the
long term.
www.at188.com
- Imported Automobiles Under the “Parallel Imported Vehicles” scheme
With
the continuous development of network technology and the growing popularization of the Internet, value-added Internet-based businesses
are experiencing rapid growth in China. Accompanying the growth of the automobile markets in China, there is a strong demand for
timely information regarding demand changes, market status and competitors’ quotations. www.at188.com was established by
the Company in August 2000 to provide subscribers easily accessible and accurate sales and trading information about imported
automobiles. In addition to imported automobile sales and trading and new model information, www.at188.com also provides parts
and components information. After years of development and operation, www.at188.com has linked automobile wholesalers and retailers
in China and also cooperates with major media outlets such as newspapers and television and radio stations in major cities in
China.
www.at188.com
charges subscribers an annual membership fee and generates revenue from on-line advertisements and web-based listing services,
in addition to subscription revenues.
www.at160.com
(formerly www.1365car.tj.cn) - Domestic and Imported Automobiles Through “4S” Shops
To
provide real-time price comparison and sales and trading information directly to the domestic automobile market, we launched the
website www.at160.com, formerly www.1365car.tj.cn, in 2005. This website is a platform that connects manufacturers, regional distributors
and end users of domestically manufactured cars, providing them with a compelling source of information about domestic vehicles
and serving as a timelier alternative to traditional magazines and television. www.at160.com currently provides real-time price
comparison and sales and trading information in the PRC markets with respect to domestically manufactured automobiles.
www.at160.com
targets customers interested in purchasing vehicles, and it generates revenues from subscriptions and advertisements. Most domestic
and imported automobile purchases are made from “4S” shops which offer sales, service, spare parts and survey.
Since
2012, due to our revised business plan focusing on imported automobiles and related services, we gradually moved away from promoting
this website which provides information on the domestic automobile market. As a result, revenue generated from this website declined
substantially starting in 2012, which decline has continued in 2016.
Our
revenues from our websites were $819,344 for fiscal year 2012 (0.14% of all revenues), $471,277 for fiscal year 2013 (0.10% of
all revenues), $242,250 for fiscal year 2014 (0.06% of all revenues), $48,755 for fiscal year 2015 (0.01% of all revenues) and
$33,660 (0.01% of all revenues) representing a decrease of 31% from the prior fiscal year.
Other
Services also include automobile value added services which generated no revenue during the years ended December 31, 2016 and
2015.
Discontinued
Operations - Airport Auto Mall Automotive Services
On
June 1, 2016, Shisheng entered into (i) Equity Transfer Agreement with Huitong to sell 100% of the equity of Zhonghe, and (ii)
Debt Transfer Agreement, by and among Shisheng, Huitong, and Hezhong. 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.
Products
Under Development
The
further development of our websites may be an attractive means for us to develop our business due to the relatively low cost of
operation, the global reach of the medium, and the security enhancements that have been and will be put in place. The business
model could be expanded to combine Internet commerce and traditional sales. The success of the Internet business can help us build
brand name recognition and awareness in the automobile sales and trading industry and increase our automobile sales volume. We
continue to look into developing an internet based platform which matches the buyers and the sellers for various automobile related
services. If successful, we expect this platform will change the way imported automobiles are sold and related services are provided
in China.
We
operate our domestic automobile website in the city of Tianjin. In response to the intensified competition in the online advertising
markets in China and our revised plan of focusing our business on imported automobiles and related services, we continue to focus
our website portals’ geographical coverage on the city of Tianjin.
In
the coming years, we will continue our attempt to shift the business focus of the Company from a traditional automobile trader
to a more diversified automotive service provider. Although we expect sales of imported automobile to continue to represent a
considerable percentage of our revenues, we expect the percentage of our net profit generated from imported automobile sales to
be low. While we intend to maintain our position as one of the leading imported automobile traders in Tianjin, we do not anticipate
that revenues generated by automobile sales will maintain the same growth rate as in the past. We expect the percentage of our
net profits generated from Financing Services will continue to be a significant contributor to our gross profit.
Major
Suppliers and Customers
We
have stable relationships with both Chinese domestic and foreign automobile manufacturers. We derive a significant portion of
our revenues on an aggregate basis from our top five customers, and we make a significant portion of our purchases from our top
five suppliers. Sales to the Company’s top five customers, each of which is a car dealer, accounted for 42% and 34% of the
Company’s net revenues during 2016 and 2015, respectively. Purchases from the Company’s top five suppliers accounted
for 41% and 40% of the Company’s total net purchases during 2016 and 2015, respectively.
The
following table sets out our major customers who individually accounted for over 10% of our total net sales for the years ended
December 31, 2016 and 2015:
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As a Percentage of Our
Total Net Revenues
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Fiscal Year Ended
December 31,
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2016
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2015
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Tianjin Jing Dian Automobile Sales Information Ltd. Co.
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23
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%
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25
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%
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Tianjin Binhai International Automall Ltd. Co.
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15
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%
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**
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The
following table sets out our major suppliers who individually accounted for more than 10% of our total net purchases for the years
ended December 31, 2016 and 2015:
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As a Percentage of Our
Total Net Purchases
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Fiscal Year Ended
December 31,
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2016
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2015
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Tianjin Shi Mao International International Trading Ltd. Co.,
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16
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%
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18
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%
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Tianjin Ying Zhi Jie International Logistics Ltd. Co.,
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12
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%
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12
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%
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**
Accounted for less than 10% of our total net purchases.
Some
of our clients are both our customers and suppliers. None of the activities transacted between the Company and clients who are
both customers and suppliers involved any commitments between the parties to repurchase identical automobiles. We maintain close
working relationships with our top customers and suppliers, although we also continue to diversify our customers and suppliers.
We do not believe that the loss of any one major customer or supplier in and of itself would have a material adverse effect on
our financial condition or results of operations. We have long-term relationship with our major suppliers. Even though we do not
foresee any interruption in our relationship with our suppliers in the near future, we believe that there are other suppliers
available to supply automobiles to us at reasonable terms if we lose any of our major suppliers. The major customers and suppliers
stated above guarantee certain of our borrowings with the banks.
Intellectual
Property
Our
websites, www.at188.com and www.at160.com, have registered domain names expiring in November 2021 and July 2019, respectively.
These registrations, together with registrations for other sub-websites of the Company, will be renewed in the ordinary course
of our business. The geographic focus of our website portals continues to be the city of Tianjin.
Competition
and Pricing
Tianjin
is a major entry port in China. Many of the vehicles imported into Tianjin are imported by general dealers such as Audi, Toyota,
BMW, Land Rover and Mercedes-Benz. We purchase our inventory through our suppliers, who import vehicles directly from the foreign
countries in which they are manufactured. Competition has increased in recent years due to an increase in the number of smaller
shops entering this market. For the specialized services market related to Automobile Value Added Services and Financing Services,
we believe we have secured a substantial share of the market for such services in Tianjin.
Competitive
threats may come from any company that is able to provide the services offered by us at a lower price and better quality. We charge
appropriately for the high-end, high-quality services and products we offer, and we do not aspire to be the lowest cost provider
of our services. Rather, we aim to distinguish ourselves from our competitors by providing the highest value to our customers.
However in recent years, due to strong competition from other importers and other authorized dealers, we have been forced to lower
our prices in order to maintain our leadership position. Consequently our gross margin continues to decline, but we believe that
our gross margin is at its lowest level, and we expect it to stay at the current level in the future quarters.
Costs
and Effects of Compliance with Environmental Laws; Government Regulation
Our
products and operations are currently in compliance with all Chinese laws and environmental standards. We are not aware of any
other governmental approvals required for any of our products or operations.
Research
and Development
We
spent $0 and $0 on research and development activities for fiscal year 2016 and fiscal year 2015, respectively. None of these
costs were borne directly by our customers.
Employees
We
currently employ 40 employees, of which all are full-time employees. None of our employees are unionized.
Geographical
Area of the Company’s Business
All
of our revenue is derived from operations within the PRC, and all of our assets are located in the PRC. For risks relating to
our operations in the PRC, see discussions in the section entitled “
Risk Factors
” below.
You
should carefully consider the following risks and the other information set forth elsewhere in this current report
.
If
any of these risks occur, our business, financial condition and results of operations could be adversely affected
.
As a
result, the trading price of our common stock could decline, perhaps significantly
.
RISKS
RELATING TO OUR COMPANY
We
may be unable to continue as a going concern based on our recent performance
,
which has included significant losses
and negative operating cash flow
.
We may continue to generate losses and be unable to service our outstanding liabilities
in the future
.
We
incurred operating losses and had negative operating cash flows and may continue to generate negative cash flows as we implement
our business plan for 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. The accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States (“US GAAP”), which contemplates our
continuation as a going concern. Our net loss from continuing operations attributable to shareholders for the year ended December
31, 2016 was $741,176 as compared to $9,554,918 for the year ended December 31, 2015. The operating results for the years ended
December 31, 2016 and 2015 included $0 and $4,281,414, respectively, of net losses related to impairment loss on goodwill and
intangible asset.
Net
cash used in operations from continuing operations during the years ended December 31, 2016 and 2015 was $49,991,945 and $3,453,031,
respectively.
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 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.
We
do not currently have sufficient cash or commitments for financing to sustain our operations for the next twelve months. Our plan
continues to be to develop new client and customer relationships and to substantially increase our cash flow and revenue derived
from our products/services. If our revenues do not reach the level anticipated in our plan, we may require additional financing
in order to execute our operating plan. If additional financing is required, we cannot predict whether this additional financing
will be in the form of equity, debt, or another form, and we may not be able to obtain the necessary additional capital on a timely
basis, on acceptable terms, or at all. In the event that financing sources are not available, or that we are unsuccessful in increasing
our revenues and profits, we may be unable to implement our current plans for expansion, repay our debt obligations or respond
to competitive pressures, any of which would have a material adverse effect on our business, prospects, financial condition and
results of operations. 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.
Our
business may adversely change due to the cyclical nature of the automotive industry
.
If the Chinese luxury automotive
market does not grow as anticipated or grows at a slower rate than we expect
,
our sales and profitability may be
materially and adversely affected
.
Our
financial performance depends, in large part, on the varying conditions in the automotive markets, specifically the market for
imported luxury automobiles in China. The volume of automobile production in Asia, North America, Europe and the rest of the world
has fluctuated, sometimes significantly, from year to year, and such fluctuations often are in response to overall economic conditions
and factors such as changes in interest rate levels, vehicle manufacturer incentive programs, fuel costs, consumer spending and
confidence, and environmental issues. If the automotive market experiences a downturn, our results of operations and business
will suffer.
We
derive most of our sales revenue from sales of imported automobiles and related services in China. The continued development of
our business depends, in large part, on continued growth in the luxury automotive market in China under the “Parallel Imported
Vehicles” scheme and the increase in disposable income among the Chinese population. Although China’s luxury automotive
market has grown rapidly in the past, it may not continue to grow at the same rate in the future or at all. However, the developments
in our market are, to a large extent, outside of our control and any reduced demand for imported automobiles or related services,
or any other downturn or other adverse changes in China’s economy that impacts the disposable income of ultimate luxury
car purchasers could severely harm our business.
Our
business may adversely be affected due to the government policy on restrictions on automobile purchases
.
The
local governments of various cities in China imposed restrictions on automobile purchases. Through December 31, 2016, Beijing,
Shanghai, Guangzhou, Guiyang, Shijiazhuang, Tianjin, Hangzhou and Shenzhen had adopted such restrictions. The restrictions vary
from city to city, however most of these cities set an annual limit on the maximum number of vehicles in each category that may
be licensed, in order to limit the number of new vehicles added to the roads each year. Some cities, such as Beijing, have adopted
a lottery system wherein only potential buyers who win the lottery draw will be able to purchase vehicles. As more cities become
subject to these and similar purchase restrictions, the future growth in the automobile market in China will be negatively impacted.
As a result, our future growth may be negatively impacted.
A
disproportionate amount of our income
(
loss
)
from operations is derived from the sale of imported
automobiles and related services
,
and a disruption in
,
or compromise of
,
our sale operations or our
ability to provide Financing Services could adversely impact our financial condition and results of operations
.
In
2016, our operating income (loss) from continuing operations is allocated to each segment in percentage as follows:
Sales of Automobiles
|
|
|
112.06
|
%
|
Financing Services
|
|
|
500.72
|
%
|
Other
|
|
|
(12.63
|
)%
|
Corporate overhead
|
|
|
(500.15
|
)%
|
|
|
|
100.00
|
%
|
We
view our Sales of Automobiles and Financing services to be our core segments. A disruption in providing such sales and services
to our customers could have a material adverse effect on our financial condition and results of operations. On June 1, 2016, we
sold our equity interest in Zhonghe and accordingly discontinued our operations in the Airport Auto Mall Automotive Services segment.
We
derive a significant amount of our revenue from a limited number of customers and purchase a significant portion of our inventories
from a limited number of suppliers
.
Certain of our major customers are also major suppliers
,
and therefore
the loss of such customers or suppliers could adversely impact our financial condition and results of operations
.
We
derived a significant portion of our revenues on an aggregate basis from our top five customers, and a significant portion of
our purchases comes from our top five suppliers. Some of our customers are also our suppliers. We maintain close working relationships
with our top customers and suppliers and continue to reduce the business concentration of our revenues and purchases among our
top customers and suppliers. While we do not believe that the loss of any one major customer or supplier in and of itself would
have a material adverse effect on our financial condition or results of operation, the loss of more than one such major customer
or supplier, or our failure to replace such customer or supplier with other customers and suppliers, could have a material adverse
effect on our financial condition and our results of operations.
The
imported automobile sales and services market in Tianjin is competitive; failure to maintain our current relationships with various
Chinese banks or to renew existing credit lines or enter into new credit lines may hamper our growth and negatively affect our
results
.
As
a one-stop service provider in Tianjin, our market share in Financing Services has maintained its leading position in Tianjin.
However, in the future we anticipate increasing pressure on our business from competitors, and failure to maintain our relationships
with various Chinese banks in Tianjin may adversely affect our ability to provide Financing Services and other automotive related
services to our customers. In addition, if our competitors are able to establish similar relationships with these banks or other
financial institutions in Tianjin or our future markets, we will no longer enjoy our current competitive advantage. Furthermore,
in order to obtain and maintain the lines of credit with various banks, certain of our executives, long term customers, suppliers
and business partners act as guarantors for these lines of credit, loss of supports from any of these parties will negatively
impact our ability to continue competing in the Financing Services market.
As
of March 22, 2017, the Company had aggregate credit lines of $125 million (RMB870 million) with its banks. We are currently negotiating
a number of new credit lines with various banks, although there can be no guarantee that we will be successful in doing so. If
we are unable to renew existing credit lines or enter into new credit lines on a consistent basis that allows us to meet the requirements
of our business or the demand of our customers for Financing Services, our business, operating margins, financial condition, cash
flows and profitability could be adversely affected.
We
face competition from other companies
,
which could force us to lower our prices
,
thereby adversely affecting
our operating margins
,
financial condition
,
cash flows and profitability
.
The
markets in which we operate are highly competitive, and this competition could harm our business, results of operations, cash
flow and financial condition. We believe that one significant competitive factor for our products is selling price. Although we
do not aspire to be the lowest cost provider but rather the highest value provider to our customers, we could be subject to adverse
results caused by our competitors’ pricing decisions. The average selling prices for our automobiles have been on a downward
trend in recent years and our gross margins have continued to decline due to stiff competition in the automobile industry which
has resulted in lower net profits. If we do not compete successfully, our business, operating margins, financial condition, cash
flows and profitability could be adversely affected.
Concerns
about security of e-commerce transactions and confidentiality of information on the Internet may reduce the use of our websites
and impede our growth
,
and our Internet operations may be vulnerable to hacking
,
viruses and other disruptions
.
A
significant barrier to e-commerce and confidential communications over the Internet has been the need for security. Internet usage
could decline if any well-publicized compromise of security occurred. We may incur significant costs to protect against the threat
of security breaches or to alleviate problems caused by these breaches. If unauthorized persons are able to penetrate our network
security, they could misappropriate proprietary information or cause interruptions in our services. As a result, we may be required
to expend capital and resources to protect against or to alleviate these problems. Security breaches could have a material adverse
effect on our business, financial condition and results of operations.
We
cannot assure you that our organic growth strategy will be successful
.
One
of our growth strategies is to grow organically through increasing the distribution and sales of our products, increasing our
market share and entering new geographical markets in the PRC. However, many obstacles to increasing our market share and entering
such new markets exist, including but not limited to, costs associated with entering into such markets and attendant marketing
efforts. We cannot therefore assure you that we will be able to successfully overcome such obstacles and establish our products
in any additional markets. Our inability to implement this organic growth strategy successfully may have a negative impact on
our ability to grow and on our future financial condition, results of operations or cash flows.
If
we are not able to implement our strategies in achieving our business objectives
,
our business operations and financial
performance may be adversely affected
.
Our
business plan is based on circumstances currently prevailing and the bases and assumptions that certain circumstances will or
will not occur, as well as the inherent risks and uncertainties involved in various stages of development. However, there is no
assurance that we will be successful in implementing our strategies or that our strategies, even if implemented, will lead to
the successful achievement of our objectives. If we are not able to successfully implement our strategies, our business operations
and financial performance may be adversely affected.
We
may not be able to manage our expanding operations effectively
,
which could harm our business
.
We
anticipate expanding our business as we address growth in our customer base and market opportunities. In addition, the geographic
dispersion of our operations as a result of overall internal growth requires significant management resources that our locally-based
competitors do not need to devote to their operations. In order to manage the expected growth of our operations and personnel,
we will be required to improve and implement operational and financial systems, procedures and controls, and expand, train and
manage our growing employee base. Further, our management will be required to maintain and expand our strategic relationships
necessary to our business. We cannot assure you that our current and planned personnel, systems, procedures and controls will
be adequate to support our future operations. If we are not successful in establishing, maintaining and managing our personnel,
systems, procedures and controls, our business will be materially and adversely affected.
Our
business and growth could suffer if we are unable to retain our key executives
.
We
depend upon the continued contributions of our senior management and other key executives, many of whom are difficult to replace.
In particular, our future success is heavily dependent upon the continued service of Mr. Tong Shiping, Ms. Wang Xinwei, and Ms.
Cheng Weihong. If one or more of our key executives are unable or unwilling to continue in their present positions, we may not
be able to easily replace them, and our business, financial condition and results of operations may be materially and adversely
affected. In addition, if any of these key executives joins a competitor or forms a competing company, we may lose customers and
suppliers and incur additional expenses to recruit and train personnel. Each of our executive officers has entered into standard
employment agreements with us (in accordance with the format issued by the Labor and Social Security Administration in Tianjin
and Chongqing) but is not subject to specific non-competition or non-solicitation agreements, as such agreements are not standard
in China. We also do not maintain key-man life insurance for any of our key executives.
We
face a competitive labor market in China for skilled personnel and therefore are highly dependent on the skills and services of
our existing key skilled personnel and our ability to hire additional skilled employees
.
Competition
for highly-skilled software design, technical, managerial, finance, marketing, sales and customer service personnel is intense
in China. Failure to attract, assimilate or retain qualified personnel to fulfill our current or future needs could impair our
growth. Limitations on our ability to hire and train a sufficient number of personnel at all levels would limit our ability to
undertake projects in the future and could cause us to lose market share. We may need to increase the levels of our employee compensation
more rapidly than in the past in order to remain competitive. These additional costs could reduce our profitability and cause
losses.
If
we need additional capital to fund our growing operations
,
we may not be able to obtain sufficient capital and may
be forced to limit the scope of our operations
.
As
we implement our growth strategies, we may experience increased capital needs and we may not have enough capital to fund our future
operations without additional capital investments. Our capital needs will depend on numerous factors, including: (i) our profitability;
(ii) the release of competitive products by our competition; (iii) the level of our investment in research and development; and
(iv) the amount of our capital expenditures. We cannot assure you that we will be able to obtain capital in the future to meet
our needs.
If
we cannot obtain additional funding, we may be required to limit our marketing efforts and decrease or eliminate capital expenditures.
Such
reductions could materially and adversely affect our business and our ability to compete. Even if we do find a source of additional
capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are acceptable to us.
Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of investors in
our common stock. We cannot give you any assurance that any additional financing will be available to us, or if available, will
be on terms favorable to us.
We
have limited insurance coverage and do not carry any business interruption or third party liability insurance or insurance that
covers the risk of loss of automobiles in shipment
.
Operation
of our facilities involves many risks, including natural disasters, power outages, labor disturbances and other business interruptions.
We do not carry any business interruption insurance or third-party liability insurance for accidents on our property or damage
relating to our operations. In addition, our existing insurance coverage may not be sufficient to cover all risks associated with
our business. As a result, we may be required to pay for financial and other losses, damages and liabilities, including those
caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect
on our business, financial condition and results of operations.
Our
efforts in protecting our intellectual property rights from infringement may not be sufficient
,
and our failure
to adequately protect our intellectual property rights may undermine our competitive position
.
We
regard our domain name registrations and other intellectual property as critical to our success. Our domain names for our websites
are currently registered domain names. However, no assurance can be given that such registrations and licenses will not be challenged,
invalidated, infringed or circumvented or that such intellectual property rights will provide a competitive advantage to us.
Currently
we sell our products only in China. China will remain our primary market for the foreseeable future. To date, no trademark filings
have been made. Therefore, the measures we take to protect our proprietary rights may be inadequate and we cannot give you any
assurance that our competitors will not independently develop formulations and processes (including websites similar to www.at188.com
and www.at160.com) that are substantially equivalent or superior to our own or copy our products.
Intellectual
property related laws in China may not be effective in protecting our intellectual property rights
,
and litigation
to protect our intellectual property rights may be costly
.
We
strive to strengthen and differentiate our product portfolio by developing new and innovative products and product improvements.
As a result, we believe that the protection of our intellectual property will become increasingly important to our business. Implementation
and enforcement of intellectual property-related laws in China has historically been lacking due primarily to ambiguities in PRC
intellectual property law. Accordingly, protection of intellectual property and proprietary rights in China may not be as effective
as in the United States or other countries. As a result, third parties may use the technologies and proprietary processes that
we have developed and compete with us, which could negatively affect any competitive advantage we enjoy, dilute our brand and
harm our operating results.
In
addition, policing the unauthorized use of our proprietary technology can be difficult and expensive. Litigation may be necessary
to enforce our intellectual property rights, and given the relative unpredictability of China’s legal system and potential
difficulties enforcing a court judgment in China, there is no guarantee litigation would result in an outcome favorable to us.
Furthermore, any such litigation may be costly and may divert management attention away from our core business. An adverse determination
in any lawsuit involving our intellectual property is likely to jeopardize our business prospects and reputation. We have no insurance
coverage against litigation costs so we would be forced to bear all litigation costs if we cannot recover them from other parties.
All of the foregoing factors could harm our business and financial condition.
We
may be exposed to infringement claims by third parties
,
which
,
if successful
,
could cause us to pay
significant damage awards
.
Third
parties may initiate litigation against us alleging infringement of their proprietary rights. In the event of a successful claim
of infringement and our failure or inability to develop non-infringing technology or license the infringed or similar technology
on a timely basis, our business could be harmed. In addition, even if we are able to license the infringed or similar technology,
license fees could be substantial and may adversely affect our results of operations.
Unexpected
network interruptions caused by system failures may result in reduced visitor traffic
,
reduced revenue and harm
to our reputation
.
As
the number of Chinese websites and the amount of Chinese Internet traffic increases, we cannot assure you that we will be able
to increase the scale of our systems proportionately. We are also dependent upon web browsers, Internet service providers, content
providers and other website operators in China, which have experienced significant system failures and system outages in the past.
Any system failure or inadequacy that causes interruptions in the availability of our services, or increases the response time
of our services, as a result of increased traffic or otherwise, could reduce our user satisfaction, future traffic and our attractiveness
to users and advertisers.
In
addition, we have limited backup systems and redundancy and we have experienced system failures and electrical outages from time
to time in the past which have disrupted our operations. We do not have a disaster recovery plan in the event of damage from fire,
floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins and similar events. If any of the foregoing
occurs, we may experience a complete system shut-down. We do not carry any business interruption insurance. To improve the performance
and to prevent disruption of our services, we may have to make substantial investments to deploy additional servers or one or
more copies of our websites to mirror our online resources. To the extent we do not address the capacity restraints and redundancy
described above, such constraints could have a material adverse effect on our business, financial condition and results of operations.
We
may require additional capital in the future
,
which may not be available on favorable terms or at all
.
Our
future capital requirements will depend on many factors, including industry and market conditions, our ability to successfully
implement new business plan and marketing initiatives. On June 1, 2016, we sold our equity interest in Zhonghe to Huitong for
a sale price of $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) Huitong assumed Shisheng’s outstanding payment obligations to Hezhong of
$36.1 million (RMB 240,061,808). We received cash 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.
We
anticipate that we may need to raise additional funds in order to grow our business and implement our business strategy. We anticipate
that any such additional funds may be raised through equity or debt financings. Any equity or debt financing, if available at
all, may be on terms that are not favorable to us. Even if we are able to raise capital through equity or debt financings, as
to which there can be no assurance, the interest of existing shareholders in our company may be diluted, and the securities we
issue may have rights, preferences and privileges that are senior to those of our common stock or may otherwise materially and
adversely affect the holdings or rights of our existing shareholders. If we cannot obtain adequate capital, we may not be able
to fully implement our business strategy and operate our business, which could adversely affect our results of operations and
financial condition. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity
and Capital Resources.”
We
incur significant costs ensuring compliance with US corporate governance and accounting requirements
.
As
a public company, we are subject to the requirements of the Securities Exchange Act of 1934, as amended, the Sarbanes-Oxley Act,
the Dodd-Frank Act and other applicable securities rules and regulations. Compliance with these rules and regulations require
us to incur significant additional legal, accounting and other expenses that we would not incur if we were not a public company.
The
Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and
operating results. The Sarbanes-Oxley Act and the rules subsequently implemented by the SEC and the national securities exchanges,
establish certain requirements for the corporate governance practices of public companies. For example, as a result of becoming
a public company, we have additional board committees and are required to maintain effective disclosure controls and procedures
and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures
and internal control over financial reporting to meet this standard, significant resources and management oversight are
We
also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director
and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals
to serve on our Board of Directors (the “Board”) or as executive officers. We are currently evaluating and monitoring
developments with respect to these applicable rules, and we cannot predict or estimate the amount of additional costs we may incur
or the timing of such costs.
The
staff of our accounting department lack training and experience in U
.
S
.
accounting principles
,
which may result in accounting errors in the financial statements that we file with the Securities and Exchange Commission
(
the
“
SEC
”).
Our
executive offices are located in Tianjin in the PRC. Our entire bookkeeping and accounting staff is located there. Our books and
records are maintained in Chinese, using Chinese accounting principles. Chinese accounting principles vary in many important respects
from US accounting principles. To file our Company’s financial statements with the SEC, our accounting staff must convert
the financial statements from Chinese accounting principles to US accounting principles. However, none of the members of our accounting
staff has extensive experience or training in the preparation of financial statements in conformity with US GAAP. Neither do we
have any employee who has previous experience in accounting for a US public company. This situation creates a risk that the financial
statements we file with the SEC will fail to present our financial condition and/or results of operations as required by SEC rules
and the principles of accounting generally applied in the United States.
RISKS
RELATING TO THE PEOPLE
’
S REPUBLIC OF CHINA
Political
and economic policies of the PRC government could affect our business; PRC economic reform policies or nationalization could result
in a total investment loss in our common stock
.
All
of our business, assets and operations are located in China, and all of our revenues are derived from our operations in China.
Accordingly, our business, financial condition and results of operations are affected to a significant degree by economic, political
and legal developments in China. Changes in political, economic and social conditions in China, adjustments in PRC government
policies or changes in laws and regulations could adversely affect our business, financial condition and results of operations.
The economy of China differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development
in a number of respects, including:
|
●
|
level
of government involvement;
|
|
●
|
level
of capital reinvestment;
|
|
●
|
control
of foreign exchange; and
|
|
●
|
methods
of allocating resources.
|
Since
1949, China has primarily been a planned economy subject to a system of macroeconomic management. Although the Chinese government
still owns the majority of productive assets in China, economic reform policies since the late 1970s have emphasized decentralization,
autonomous enterprises and the utilization of market mechanisms. Because many reforms are unprecedented or experimental, they
are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the
rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China,
could lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect our operations.
If
the PRC imposes restrictions to reduce inflation
,
future economic growth in the PRC could be severely affected
.
China’s
economy registered a high rate of growth in the decade ending in 2010. Even though the growth rate began to slow starting in 2011,
it has continued to grow at a rate in the high single digits since 2011. However, China’s growth rate has not been evenly
spread among all sectors of the economy, nor have all geographical regions of the country experienced the same levels of growth.
Furthermore, the type of rapid growth that China is currently experiencing is often related to an increased risk of inflation.
If the need arises to control inflation, the Chinese government may take similar measures as it has done in the past, including
restrictions on the availability of domestic credit, reductions of the purchasing capability of certain of our customers, and
limited re-centralization of the approval process for purchases of some foreign products. If similar restrictions are imposed,
it may lead to a slowing of economic growth and reduce credit to finance the purchase of vehicles.
The
PRC government exerts substantial influence over the manner in which we must conduct our business activities
.
The
PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations,
including those relating to taxation, import and export tariffs, land use rights, property and other matters. We believe that
our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central
or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing
regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations
or interpretations.
Accordingly,
government actions in the future, including any decision not to continue to support recent economic reforms and to return to a
more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant
effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest
we then hold in Chinese properties or joint ventures.
The
recent nature and uncertain application of many PRC laws applicable to us create an uncertain environment for business operations
and they could have a negative effect on us
.
The
PRC legal system is a civil law system. Unlike the common law system, the civil law system is based on written statutes in which
decided legal cases have little value as precedent. Furthermore, although China has made considerable progress in introducing
new laws and regulations concerning foreign investment, corporate organization and governance, commerce and trade and taxation,
these laws and regulations are relatively new, and the interpretation and enforcement of these laws involve significant uncertainties.
Furthermore, the promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could
have a negative impact on our business and business prospects. In addition, as these laws, regulations and legal requirements
are relatively recent, their interpretation and enforcement involve significant uncertainty.
Our
revenue and net income (loss) may be materially and adversely affected by any economic slowdown in China as well as globally.
The
success of our business ultimately depends on consumer spending. We derive substantially all of our revenue from China. As a result,
our revenue and net income are impacted to a significant extent by economic conditions in China and globally. The global economy,
markets and levels of consumer spending are influenced by many factors beyond our control, including consumer perception of current
and future economic conditions, political uncertainty, levels of employment, inflation or deflation, real disposable income, interest
rates, taxation and currency exchange rates.
The
PRC government has in recent years implemented a number of measures to control the rate of economic growth, including by raising
interest rates and adjusting deposit reserve ratios for commercial banks as well as by implementing other measures designed to
tighten credit and liquidity. These measures have contributed to a slowdown of the PRC economy. According to the National Bureau
of Statistics of China, China's GDP growth rate was 6.7% in 2016, a decrease of 20 basis points from 6.9% in 2015. China’s
GDP growth rate has been on a decline in the past several years. Any continuing or worsening slowdown could significantly reduce
domestic commerce in China, including the spending on luxury automobiles. An economic downturn, whether actual or perceived, a
further decrease in economic growth rates or an otherwise uncertain economic outlook in China or any other market in which we
may operate could have a material adverse effect on our business, financial condition and results of operations.
Currency
conversion and exchange rate volatility could adversely affect our financial condition
.
The
PRC government imposes control over the conversion of Renminbi (“RMB”) into foreign currencies. Under the current
unified floating exchange rate system, the People’s Bank of China publishes an exchange rate (the “PBOC exchange rate”),
based on the previous day’s dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal
in foreign currency may enter into foreign exchange transactions at exchange rates within an authorized range above or below the
PBOC exchange rate according to market conditions.
Enterprises
in the PRC that require foreign exchange for transactions relating to current account items, may, without approval of the State
Administration of Foreign Exchange (“SAFE”), effect payment from their foreign exchange account or convert and pay
at the designated foreign exchange banks by providing valid receipts and proofs.
Convertibility
of foreign exchange in respect of capital account items, such as direct investment and capital contribution, is still subject
to certain restrictions, and prior approval from the SAFE or its relevant branches must be sought.
The
value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in
political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC
government changed its policy of pegging the value of the RMB to the U.S. dollar. Following the removal of the U.S. dollar peg,
the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this
appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010,
the PRC government has allowed the RMB to appreciate slowly against the U.S. dollar again, and it has appreciated more than 10%
since June 2010. In April 2012, the PRC government announced that it would allow more RMB exchange rate fluctuation. On August 11,
2015, the PRC government set the central parity rate for the RMB nearly 2% lower than that of the previous day and announced that
it will begin taking into account previous day's trading in setting the central parity rate. During the years ended December 31,
2016 and 2015, the RMB devalued approximately 6.7% and 5.5%, respectively, against the U.S. dollars. It is difficult to predict
how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result
in greater fluctuation of the RMB against the U.S. dollar. As substantially all of our financial assets and operations are located
in China and are denominated in RMB, any significant revaluation of the RMB may materially and adversely affect our cash flows,
revenues and financial condition. For example, to the extent that we need to convert United States dollars into RMB for our operations,
appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive. Conversely, if
we decide to convert RMB into the U.S. dollar for other business purposes and the U.S. dollar appreciates against the RMB, the
U.S. dollar equivalent of the RMB we convert would be reduced.
Laws
and regulations applicable to the Internet in China remain unsettled and could have a material adverse effect on Internet
’
s
growth and thereby have a material adverse effect on our business
.
Growth
of the Internet in China could be materially and adversely affected by governmental regulation of the industry. Due to the increasing
popularity and use of the Internet and other online services, it is possible that regulations may be adopted with respect to the
Internet or other services covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust and characteristics
and quality of products and services. Furthermore, the growth and development of the market for electronic commerce may prompt
calls for more stringent consumer protection laws that may impose additional burdens on companies conducting business online.
The adoption of additional laws or regulations may slow the growth of the Internet or other services, which could in turn lead
to reduced Internet traffic and increase our cost of doing business. While we are not aware of any existing or proposed regulations
that have a significant direct adverse effect on our business, a restrictive regulatory policy regarding the Chinese Internet
industry would have a material adverse effect on us by slowing the industry’s growth in China.
We
may experience difficulties in effecting service of legal process
,
enforcing foreign judgments or bringing original
actions in China based on United States or other foreign laws against us
.
We
conduct our operations in China and all of our assets are located in China. In addition, most of our directors and executive officers
reside within China, and substantially all of the assets of these persons are located within China. As a result, it may not be
possible to effect service of process within the United States or elsewhere outside China upon those directors or executive officers,
including with respect to matters arising under US federal securities laws or applicable state securities laws. Moreover, our
Chinese counsel has advised us that China does not have treaties with the US and many other countries that provide for the reciprocal
recognition and enforcement of judgment of courts. As a result, recognition and enforcement in China of judgments of a court of
the US or any other jurisdiction in relation to any matter may be difficult or impossible.
Restrictions
on paying dividends or making other payments to us bind our subsidiaries in China
.
We
are a holding company and do not have any assets or conduct any business operations in China other than our investments in our
subsidiaries in China. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid
by our PRC subsidiaries. If our PRC subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future,
the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our PRC subsidiaries are
permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting
standards and regulations. Under PRC laws and regulations, our PRC subsidiaries are required to allocate at least 10% of their
after-tax profits each year, if any, to PRC statutory reserves before distributing dividends until the balance of such fund has
reached 50% of its registered capital. Our PRC subsidiaries with foreign investment are also required to further set aside a portion
of its after-tax profits to fund the employee welfare fund at the discretion of the board. Although PRC statutory reserves can
be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of our
PRC subsidiaries, the reserve funds are not distributable as cash dividends except in the event of liquidation of any of our PRC
subsidiaries.
The
Chinese government also imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance
of currency out of China. We may experience difficulties in completing the administrative procedures necessary to obtain and remit
foreign currency. If we or any of our subsidiaries are unable to receive all of the revenues from our operations through these
arrangements, we may be unable to effectively finance our operations or pay dividends on our common stock.
Our
significant amount of deposits in certain banks in China may be at risk if these banks go bankrupt during our deposit period
,
and the risk of bankruptcy of the banks with which we have lines of credit may adversely affect our ability to provide financial
services to our customers
.
As
of December 31, 2016, we had approximately $3 million of cash deposited in banks, such as time deposits and bank notes, and $22.7
million of restricted cash, which constitute substantially all of our total cash and cash equivalents (both unrestricted and restricted)
as of December 31, 2016. The terms of these deposits are, in general, up to twelve months. Historically, deposits in Chinese banks
are secure due to the state policy on protecting depositors’ interests. However, China promulgated a new Bankruptcy Law
in August 2006, which came into effect on June 1, 2007, and which contains a separate article expressly stating that the State
Council may promulgate implementation measures for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the new
Bankruptcy Law, a Chinese bank may go bankrupt. In addition, since China’s accession to the WTO, foreign banks have been
gradually permitted to operate in China and have been competitors against Chinese banks in many aspects, especially since the
opening of Chinese business to foreign banks in late 2006. Therefore, the risk of bankruptcy of those banks in which we have deposits
has increased. In the event of bankruptcy of one of the banks which holds our deposits, we are unlikely to claim our deposits
back in full since we are unlikely to be classified as a secured creditor based on PRC laws. In the event that one or more of
our banks files for bankruptcy protection, our ability to offer Financing Services to our customers may be materially and adversely
impacted, thereby having a material adverse effect on our operations and profitability.
PRC
regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could restrict
or limit our ability to operate
On
August 8, 2006, six PRC regulatory agencies namely, the PRC Ministry of Commerce, the State Assets Supervision and Administration
Commission (“
SASAC
”), the State Administration for Taxation, the State Administration for Industry and Commerce,
the China Securities Regulatory Commission (“
CSRC
”), and SAFE, jointly adopted the Regulations on Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors (the “
M&A Rules
”), which became effective on
September 8, 2006, as amended on June 22, 2009. The M&A Rules significantly revised China’s regulatory framework governing
onshore-to-offshore restructurings and foreign acquisitions of domestic enterprises. The M&A Rules signify greater PRC government
attention to cross-border merger, acquisition and other investment activities, by confirming MOFCOM as a key regulator for issues
related to mergers and acquisitions in China and requiring MOFCOM approval of a broad range of merger, acquisition and investment
transactions. Further, the M&A Rules establish reporting requirements for acquisition of control by foreigners of companies
in key industries, and reinforce the ability of the Chinese government to monitor and prohibit foreign control transactions in
key industries. Among other things, the M&A Rules include new provisions that purport to require that an offshore special
purpose vehicle, or SPV, formed for listing purposes and controlled directly or indirectly by PRC companies or individuals must
obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange.
However, the application of this PRC regulation remains unclear regarding the scope and applicability of the CSRC approval requirement.
We
are committed to complying with and to ensuring that our beneficial owners who are subject to the M&A Rules will comply with
the relevant rules. However, we cannot assure you that all of our current or future beneficial owners who are PRC residents will
comply with our request to make or obtain any applicable registrations or comply with these rules. Any failure by any of our current
or future beneficial owners to comply with relevant requirements under this regulation could subject us to fines or sanctions
imposed by the PRC government, including restrictions on our PRC subsidiaries’ ability to pay dividends or make distributions
to us and our ability to increase our investment in our PRC subsidiaries.
RISKS
RELATING TO OUR COMMON STOCK
The
market price for shares of our common stock could be volatile; the sale of material amounts of our common stock could reduce the
price of our common stock and encourage short sales
.
The
market price for the shares of our common stock may fluctuate in response to a number of factors, many of which are beyond our
control. Such factors may include, without limitation, the general economic and monetary environment, quarter-to-quarter variations
in our anticipated and actual operating results, future financing activities and the open-market trading of our shares in particular.
From
time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary
brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act of 1933, as amended, subject
to certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who has
satisfied a six month holding period may, under certain circumstances, sell within any three-month period a number of securities
which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of
the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities,
without any limitations, by a non-affiliate of our Company that has satisfied a one year holding period. Any substantial sale
of common stock pursuant to Rule 144 may have an adverse effect on the market price of our common stock.
One
stockholder exercises significant control over matters requiring stockholder approval
.
Bright
Praise Enterprises Limited has voting power equal to approximately 40.85% of our voting securities. As a result, Bright Praise
Enterprises Limited, through such stock ownership, exercises significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate transactions. This concentration of ownership in Bright
Praise Enterprises Limited may also have the effect of delaying or preventing a change in control of us that may be otherwise
viewed as beneficial by stockholders other than Bright Praise Enterprises Limited.
If
we fail to develop or maintain an effective system of internal controls
,
we may not be able to accurately report
our financial results and prevent fraud
.
As a result
,
current and potential stockholders could lose
confidence in our financial statements
,
which would harm the trading price of our common stock
.
Companies
that file reports with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002,
or SOX 404. SOX 404 requires management to establish and maintain a system of internal control over financial reporting and annual
reports on Form 10-K filed under the Exchange Act to contain a report from management assessing the effectiveness of a company’s
internal control over financial reporting. Separately, under SOX 404, as amended by the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010, public companies that are large accelerated or accelerated filers must include in their annual reports
on Form 10-K an attestation report of their regular auditors attesting to and reporting on management’s assessment of internal
control over financial reporting. Non-accelerated filers and smaller reporting companies are not required to include an attestation
report of their auditors in annual reports.
A
report of our management is included under Item 9A “Controls and Procedures” of this report. We are a smaller reporting
company and, consequently, are not required to include an attestation report of our auditor in this annual report. However, if
and when we become subject to the auditor attestation requirements under SOX 404, we can provide no assurance that we will receive
an unqualified report from our independent auditors.
During
its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2016, management identified
a material weakness relating to our lack of sufficient accounting personnel with an appropriate understanding of US GAAP and SEC
reporting requirements.
We
are undertaking remedial measures, which measures will take time to implement and test, to address this material weakness. There
can be no assurance that such measures will be sufficient to remedy the material weakness identified or that additional material
weaknesses or other control or significant deficiencies will not be identified in the future. If we continue to experience material
weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could
cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or
adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Each of
the foregoing results could cause investors to lose confidence in our reported financial information and lead to a decline in
our stock price. See Item 9A “Controls and Procedures” for more information.
We
do not foresee paying cash dividends in the foreseeable future
.
We
have not paid cash dividends on our stock, and we do not plan to pay cash dividends on our stock in the foreseeable future.
We
may be required to raise additional financing by issuing new securities with terms or rights superior to those of our shares of
common stock
,
which could adversely affect the market price of our shares of common stock
.
We
may require additional financing to fund future operations, including expansion in current and new markets, programming development
and acquisition, capital costs and the costs of any necessary implementation of technological innovations or alternative technologies.
We may not be able to obtain financing on favorable terms, if at all. If we raise additional funds by issuing equity securities,
the percentage ownership of our current stockholders will be reduced, and the holders of the new equity securities may have rights
superior to those of the holders of shares of our common stock, which could adversely affect the market price and the voting power
of shares of our common stock. If we raise additional funds by issuing debt securities, the holders of these debt securities would
similarly have some rights senior to those of the holders of shares of common stock, and the terms of these debt securities could
impose restrictions on operations and create a significant interest expense for us.
We
may have difficulty raising necessary capital to fund operations as a result of market price volatility for our shares of common
stock
.
In
recent years, the securities markets in the United States have experienced a high level of price and volume volatility, and the
market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the
operations, performances, underlying asset values or prospects of such companies. For these reasons, our shares of common stock
can also be expected to be subject to volatility resulting from purely market forces over which we will have no control. If our
business development plans are successful, we may require additional financing to continue to develop and exploit existing and
new technologies and to expand into new markets. The exploitation of our technologies may, therefore, be dependent upon our ability
to obtain financing through debt and equity or other means.
We
are responsible for the indemnification of our officers and directors which could result in substantial expenditures
,
which we may be unable to recoup
.
Our
Articles of Incorporation and Bylaws provide for the indemnification of our directors and officers, under certain circumstances,
against attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from
their association with or activities on behalf of us. This indemnification policy could result in substantial expenditures, which
we may be unable to recoup.
We
rely on our PRC subsidiaries for the distribution of any dividends to our shareholders
.
We
are a company incorporated in the United States and our cash flow depends on dividends from our PRC subsidiaries. In order for
us to distribute any dividends to our shareholders, we will rely on dividends distributed by our PRC subsidiaries. PRC regulations
currently permit payment of dividends only out of accumulated profits, if any, as determined in accordance with PRC accounting
standards and regulations. Under current PRC laws and regulations, our PRC subsidiaries are required, where applicable, to allocate
a portion of their net profits to PRC statutory reserves before distributing dividends, including at least 10% of their net profit
to PRC statutory reserves until the balance of such fund has reached 50% of their registered capital. These reserves can only
be used for specific purposes, including making-up cumulative losses of previous years, conversion to our equity capital, and
application to business expansion, and are not distributable as dividends. Further, if our PRC subsidiaries incur debt in the
future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Our PRC
subsidiaries’ restricted net assets as of December 31, 2016 amounted to approximately $2,317,000.
Techniques
employed by short sellers may drive down the market price of the Company
’
s common stock
.
Short
selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the
intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a
decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares,
as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s best
interests for the price of the stock to decline, many short sellers publish, or arrange for the publication of, negative opinions
regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for
themselves after selling a stock short. These short attacks have, in the past, led to selling of shares in the market.
Public
companies that have substantially all of their operations in China have been the subject of short selling. Much of the scrutiny
and negative publicity has centered around allegations of a lack of effective internal control over financial reporting resulting
in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto
and, in many cases, allegations of fraud. As a result, many of these companies are now conducting internal and external investigations
into the allegations and, in the interim, are subject to shareholder lawsuits and/or SEC enforcement actions.
It
is not clear what effect such negative publicity would have on the Company, if any. If the Company were to become the subject
of any unfavorable allegations, whether such allegations are proven to be true or untrue, the Company could have to expend a significant
amount of resources to investigate such allegations and/or defend itself. While the Company would strongly defend against any
such short seller attacks, the Company may be constrained in the manner in which it can proceed against the relevant short seller
by principles of freedom of speech, applicable state law or issues of commercial confidentiality. Such a situation could be costly
and time-consuming, and could distract the Company’s management from growing the Company. Even if such allegations are ultimately
proven to be groundless, allegations against the Company could severely impact its business operations and stockholders equity,
and any investment in the Company’s stock could be greatly reduced or rendered worthless.
A
DTC
“
Global Lock
”
on the electronic clearing of trades in our securities in the future
may affect the liquidity of our stock and our ability to raise capital
On
July 16, 2014, the Company received a letter from the Depository Trust Company (“
DTC
”), notifying the Company
of DTC’s intention to suspend all book-entry services provided to its participants with respect to the common shares of
the Company (a “
Global Lock
”). On October 13, 2014, the Company received notice from DTC that it was suspending
the notice of Global Lock contained in this letter. DTC reserved its right to proceed with the institution of a Global Lock in
the future, but noted that no Global Lock would be instituted without first providing to the Company notice and an opportunity
to object. If a Global Lock were to be imposed, the Company’s common shares would not be eligible for delivery, transfer
or withdrawal through DTC until the Global Lock was removed, if ever.
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS.
|
Not
applicable.
Our
main offices are located at Floor 1 FTZ International Auto Mall, 86 Tianbao, Tianjin Province, PRC. The lease relating to our
main offices has a 1-year term which expired on December 31, 2016, was renewed in January 2017 for a one year term through December
2017. The annual rent for the office is approximately $17,000 (RMB120,000).
Additional
office and show room space is located at Floor 1 FTZ International Auto Mall, 86 Tianbao, Tianjin Province, PRC. The lease relating
to our main offices has a 1-year term which expired on November 30, 2016, was renewed in November 2016 through November 2017.
The annual rent and management fees is approximately $26,000 (RMB180,540).
Additional
office space is located at 21th and 22
nd
Floor of Kai Li Building, No. 188 Tianboa Avenue, Tianjin Free Trade Zone,
Tianjin Province, PRC. The lease relating to this office has a 3-year term which expires in March 2019. The annual rent and management
fee is approximately $182,000 (RMB1,263,708).
We
believe that all our properties and equipment have been adequately maintained, are generally in good condition, and are suitable
and adequate for our business.
The
leased properties used by our segments in percentage are summarized as follows:
Sales of Automobiles
|
|
|
32
|
%
|
Financing Services
|
|
|
28
|
%
|
Other Services
|
|
|
4
|
%
|
Corporate
|
|
|
36
|
%
|
|
|
|
100
|
%
|
|
ITEM
3.
|
LEGAL
PROCEEDINGS.
|
As
of the date of this filing, neither the Registrant nor any of its subsidiaries are a party to any legal proceeding that could
reasonably be expected to have a material impact on its operations or finances.
|
ITEM
4.
|
MINE
SAFETY DISCLOSURES.
|
Not
applicable.
CHINA
AUTO LOGISTICS INC
.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS:
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,004,932
|
|
|
$
|
7,119,686
|
|
Restricted cash
|
|
|
22,703,835
|
|
|
|
23,799,346
|
|
Receivable related to financing services, net
|
|
|
48,549,972
|
|
|
|
82,105,826
|
|
Inventories, net
|
|
|
13,049,065
|
|
|
|
12,163,511
|
|
Advances to suppliers, net
|
|
|
71,921,388
|
|
|
|
100,807,121
|
|
Prepaid expenses
|
|
|
376,581
|
|
|
|
29,372
|
|
Value added tax receivable
|
|
|
615,555
|
|
|
|
369,940
|
|
Total current assets
|
|
|
160,221,328
|
|
|
|
226,394,802
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
|
317,282
|
|
|
|
72,742
|
|
Other assets
|
|
|
30,329
|
|
|
|
-
|
|
Non current assets of discontinued operations
|
|
|
-
|
|
|
|
61,755,609
|
|
Total assets
|
|
$
|
160,568,939
|
|
|
$
|
288,223,153
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Bank overdraft
|
|
$
|
-
|
|
|
$
|
2,131,009
|
|
Lines of credit related to financing services
|
|
|
47,081,763
|
|
|
|
73,004,179
|
|
Short term borrowings
|
|
|
12,961,389
|
|
|
|
67,290,734
|
|
Accounts payable
|
|
|
365,120
|
|
|
|
1,334,829
|
|
Notes payable to suppliers
|
|
|
25,922,779
|
|
|
|
33,509,483
|
|
Accrued expenses
|
|
|
131,128
|
|
|
|
273,497
|
|
Customer deposits
|
|
|
46,047,515
|
|
|
|
39,901,621
|
|
Deferred revenue
|
|
|
48,171
|
|
|
|
121,456
|
|
Due to former shareholder
|
|
|
1,956,625
|
|
|
|
2,093,182
|
|
Due to director
|
|
|
1,550,745
|
|
|
|
722,028
|
|
Income tax payable
|
|
|
580,058
|
|
|
|
656,098
|
|
Current liabilities of discontinued operations
|
|
|
-
|
|
|
|
36,158,416
|
|
Total current liabilities
|
|
|
136,645,293
|
|
|
|
257,196,532
|
|
|
|
|
|
|
|
|
|
|
Non current liability of discontinued operations
|
|
|
-
|
|
|
|
9,248,814
|
|
Total liabilities
|
|
|
136,645,293
|
|
|
|
266,445,346
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
CHINA
AUTO LOGISTICS INC
.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(
Continued
)
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
China Auto Logistics Inc. shareholders’ equity:
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 5,000,000 shares authorized,none issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001 par value, 95,000,000 shares authorized, 4,034,394 shares issued and outstanding as of December 31, 2016 and 2015, respectively
|
|
|
4,034
|
|
|
|
4,034
|
|
Additional paid-in capital
|
|
|
22,979,734
|
|
|
|
22,979,734
|
|
Accumulated other comprehensive income
|
|
|
3,939,898
|
|
|
|
5,776,306
|
|
Accumulated deficit
|
|
|
(3,363,566
|
)
|
|
|
(7,347,222
|
)
|
Total China Auto Logistics Inc. shareholders’ equity
|
|
|
23,560,100
|
|
|
|
21,412,852
|
|
Noncontrolling interests
|
|
|
363,546
|
|
|
|
364,955
|
|
Total equity
|
|
|
23,923,646
|
|
|
|
21,777,807
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
160,568,939
|
|
|
$
|
288,223,153
|
|
The
accompanying notes form an integral part of these consolidated financial statements
CHINA
AUTO LOGISTICS INC
.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
467,060,769
|
|
|
$
|
446,344,447
|
|
Cost of revenue
|
|
|
464,099,247
|
|
|
|
442,944,716
|
|
Gross profit
|
|
|
2,961,522
|
|
|
|
3,399,731
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
700,928
|
|
|
|
761,307
|
|
General and administrative
|
|
|
1,869,156
|
|
|
|
1,649,559
|
|
Reserve for uncollectible account on receivable related to financing services
|
|
|
158,092
|
|
|
|
3,216,727
|
|
Impairment loss on goodwill and intangible asset
|
|
|
-
|
|
|
|
4,281,414
|
|
Total operating expenses
|
|
|
2,728,176
|
|
|
|
9,909,007
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
233,346
|
|
|
|
(6,509,276
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
541,070
|
|
|
|
278,392
|
|
Interest expense
|
|
|
(1,519,016
|
)
|
|
|
(2,858,299
|
)
|
Gain (loss) on disposal of property and equipment
|
|
|
5,613
|
|
|
|
(8,085
|
)
|
Loss on sale of equity interest in subsidiary
|
|
|
-
|
|
|
|
(210,895
|
)
|
Foreign exchange gain
|
|
|
109,670
|
|
|
|
-
|
|
Miscellaneous
|
|
|
-
|
|
|
|
1,879
|
|
Total other expenses
|
|
|
(862,663
|
)
|
|
|
(2,797,008
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax expense
|
|
|
(629,317
|
)
|
|
|
(9,306,284
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
113,163
|
|
|
|
249,988
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(742,480
|
)
|
|
|
(9,556,272
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
Income (loss) from operations of discontinued Airport Automall Automotive Services (including gain on disposal of $6,629,243 for 2016)
|
|
|
4,479,736
|
|
|
|
(3,435,730
|
)
|
Income tax benefit
|
|
|
245,096
|
|
|
|
976,054
|
|
Net income (loss) from discontinued operations
|
|
|
4,724,832
|
|
|
|
(2,459,676
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
3,982,352
|
|
|
|
(12,015,948
|
)
|
Less: Net loss attributable to noncontrolling interests
|
|
|
(1,304
|
)
|
|
|
(1,354
|
)
|
Net income (loss) attributable to shareholders of China Auto Logistics Inc.
|
|
$
|
3,983,656
|
|
|
|
(12,014,594
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to shareholders of China Auto Logistics Inc.
|
|
|
|
|
|
|
|
|
– continuing operations
|
|
$
|
(741,176
|
)
|
|
|
(9,554,918
|
)
|
– discontinued operations
|
|
|
4,724,832
|
|
|
|
(2,459,676
|
)
|
|
|
$
|
3,983,656
|
|
|
|
(12,014,594
|
)
|
income (loss) per share attributable to shareholders of China Auto Logistics Inc. from
|
|
|
|
|
|
|
|
|
– continuing operations - basic and diluted
|
|
$
|
(0.18
|
)
|
|
|
(2.37
|
)
|
– discontinued operations - basic and diluted
|
|
$
|
1.17
|
|
|
|
(0.61
|
)
|
Total income (loss) per share attributable to shareholders of China Auto Logistics Inc.
|
|
$
|
0.99
|
|
|
$
|
(2.98
|
)
|
|
|
|
|
|
|
|
|
|
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 consolidated financial statements
CHINA
AUTO LOGISTICS INC
.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,982,352
|
|
|
$
|
(12,015,948
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
- Foreign currency translation adjustments
|
|
|
(1,836,513
|
)
|
|
|
(1,553,261
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
2,145,839
|
|
|
|
(13,569,209
|
)
|
|
|
|
|
|
|
|
|
|
Less: Comprehensive (loss) income attributable to noncontrolling Interests
|
|
|
(1,409
|
)
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to shareholders of China Auto Logistics Inc.
|
|
$
|
2,147,248
|
|
|
$
|
(13,569,283
|
)
|
The
accompanying notes form an integral part of these consolidated financial statements
CHINA
AUTO LOGISTICS INC
.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS
’
EQUITY
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
Other Comprehensive
|
|
|
Retained
Earnings
(Accumulated
|
|
|
Non- controlling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit)
|
|
|
Interests
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2014
|
|
|
4,034,394
|
|
|
$
|
4,034
|
|
|
$
|
22,979,734
|
|
|
$
|
7,330,995
|
|
|
$
|
4,667,372
|
|
|
$
|
548,967
|
|
|
$
|
35,531,102
|
|
Sale of Zhengji
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(184,086
|
)
|
|
|
(184,086
|
)
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,554,689
|
)
|
|
|
-
|
|
|
|
1,428
|
|
|
|
(1,553,261
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,014,594
|
)
|
|
|
(1,354
|
)
|
|
|
(12,015,948
|
)
|
Balance as of
December 31, 2015
|
|
|
4,034,394
|
|
|
|
4,034
|
|
|
|
22,979,734
|
|
|
$
|
5,776,306
|
|
|
$
|
(7,347,222
|
)
|
|
|
364,955
|
|
|
|
21,777,807
|
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,836,408
|
)
|
|
|
-
|
|
|
|
(105
|
)
|
|
|
(1,836,513
|
)
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,983,656
|
|
|
|
(1,304
|
)
|
|
|
3,982,352
|
|
Balance as of December 31, 2016
|
|
|
4,034,394
|
|
|
$
|
4,034
|
|
|
$
|
22,979,734
|
|
|
$
|
3,939,898
|
|
|
$
|
(3,363,566
|
)
|
|
$
|
363,546
|
|
|
$
|
23,923,646
|
|
The
accompanying notes form an integral part of these consolidated financial statements
CHINA
AUTO LOGISTICS INC
.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Year
Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,982,352
|
|
|
$
|
(12,015,948
|
)
|
Add: loss from discontinued operations
|
|
|
1,904,411
|
|
|
|
2,459,676
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile
net income (loss) to net cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
80,709
|
|
|
|
165,950
|
|
(Gain) loss on disposal of property and equipment
|
|
|
(5,613
|
)
|
|
|
8,085
|
|
Impairment loss on goodwill and intangible asset
|
|
|
-
|
|
|
|
4,281,414
|
|
Reserve for uncollectible account on receivable related to financing
services
|
|
|
158,092
|
|
|
|
3,216,727
|
|
(Recovery) allowance for uncollectible advances to suppliers
|
|
|
(75,267
|
)
|
|
|
102,573
|
|
Gain on sale of Zhonghe
|
|
|
(6,629,243
|
)
|
|
|
-
|
|
Loss on sale of equity interest in subsidiary
|
|
|
-
|
|
|
|
210,895
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(33,595,344
|
)
|
|
|
(12,828,262
|
)
|
Receivables related to financing services
|
|
|
29,317,679
|
|
|
|
11,541,198
|
|
Inventories
|
|
|
(2,009,455
|
)
|
|
|
(282,015
|
)
|
Advances to suppliers
|
|
|
(65,408,469
|
)
|
|
|
(37,540,818
|
)
|
Prepaid expenses, other current assets and other assets
|
|
|
(365,559
|
)
|
|
|
(6,936
|
)
|
Value added tax receivable
|
|
|
(284,980
|
)
|
|
|
71,697
|
|
Other assets
|
|
|
(31,702
|
)
|
|
|
-
|
|
Accounts payable
|
|
|
(922,577
|
)
|
|
|
1,295,039
|
|
Lines of credit related to financing services
|
|
|
(22,117,471
|
)
|
|
|
13,906,901
|
|
Notes payable
|
|
|
35,751,865
|
|
|
|
18,898,271
|
|
Accrued expenses
|
|
|
247,112
|
|
|
|
(38,617
|
)
|
Customer deposits
|
|
|
10,114,574
|
|
|
|
3,769,780
|
|
Deferred revenue
|
|
|
(68,318
|
)
|
|
|
(685,079
|
)
|
Income tax payable
|
|
|
(34,741
|
)
|
|
|
16,438
|
|
Cash used in operating activities from continuing operations
|
|
|
(49,991,945
|
)
|
|
|
(3,453,031
|
)
|
Cash used in operating activities from discontinued
operations
|
|
|
(322,172
|
)
|
|
|
(3,927,010
|
)
|
Net cash used in operating
activities
|
|
|
(50,314,117
|
)
|
|
|
(7,380,041
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Cash proceeds from sale
of Zhonghe, net of cash at Zhonghe of $172,812 and amount owed to Zhonghe of $4,023,656
|
|
|
21,385,037
|
|
|
|
-
|
|
Sale of equity interest in subsidiary
|
|
|
-
|
|
|
|
3,048,483
|
|
Proceeds from sales of property and equipment
|
|
|
8,430
|
|
|
|
11,197
|
|
Purchase of property and equipment
|
|
|
(336,949
|
)
|
|
|
(3,603
|
)
|
Cash provided by investing activities from continuing operations
|
|
|
21,056,518
|
|
|
|
3,056,077
|
|
Cash provided by investing activities from
discontinued operations
|
|
|
-
|
|
|
|
1,865,702
|
|
Net cash provided by investing
activities
|
|
|
21,056,518
|
|
|
|
4,921,779
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Bank overdraft
|
|
|
(2,082,149
|
)
|
|
|
(167,582
|
)
|
Proceeds from short-term borrowings
|
|
|
86,557,148
|
|
|
|
73,464,249
|
|
Repayments of short-term borrowings
|
|
|
(59,726,535
|
)
|
|
|
(71,250,503
|
)
|
Proceeds from a director
|
|
|
686,185
|
|
|
|
599,120
|
|
Repayment of amount due to director
|
|
|
-
|
|
|
|
(454,280
|
)
|
Cash provided by financing activities from continuing operations
|
|
|
25,434,649
|
|
|
|
2,191,004
|
|
Cash provided by financing activities from
discontinued operations
|
|
|
-
|
|
|
|
-
|
|
Net cash provided by financing
activities
|
|
|
25,434,649
|
|
|
|
2,191,004
|
|
Effect of exchange rate change on cash
|
|
|
(291,804
|
)
|
|
|
(407,008
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(4,114,754
|
)
|
|
|
(674,266
|
)
|
Cash and cash equivalents at the beginning
of year
|
|
|
7,119,686
|
|
|
|
7,793,952
|
|
Cash and cash equivalents at the end of year
|
|
$
|
3,004,932
|
|
|
$
|
7,119,686
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
6,148,825
|
|
|
$
|
11,525,429
|
|
Income taxes paid
|
|
$
|
147,905
|
|
|
$
|
193,615
|
|
|
|
|
|
|
|
|
|
|
Non cash investing activities:
|
|
|
|
|
|
|
|
|
Amount due to Zhengji to offset the sales price
of equity interest in Zhengji
|
|
$
|
-
|
|
|
$
|
5,231,941
|
|
Assumption of outstanding
payable to former owner of Zhonghe by Huitong to offset the sale price of Zhonghe
|
|
$
|
36,137,505
|
|
|
$
|
-
|
|
The
accompanying notes form an integral part of these consolidated financial statements
CHINA
AUTO LOGISTICS INC
.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(
1
)
|
Organization and Nature of Business
|
The
consolidated financial statements consist of the financial statements of China Auto Logistics Inc. (the “Company”
or “China Auto”), and the following wholly owned and majority owned subsidiaries of the Company:
|
●
|
Ever
Auspicious International Limited,
|
|
●
|
Tianjin
Seashore New District Shisheng Business Trading Group Co. Ltd. (“Shisheng”),
|
|
●
|
Tianjin
Ganghui Information Technology Corp. (« Ganghui »),
|
|
●
|
Tianjin
Hengjia Port Logistics Corp. (“Hengjia”),
|
China
Auto Logistics Inc. was incorporated on February 22, 2005 in the State of Nevada.
On
November 10, 2008, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”) with Ever Auspicious
International Limited, a Hong Kong company (“HKCo”) and Bright Praise Enterprises Limited, a British Virgin Islands
company and the sole shareholder of HKCo, pursuant to which the Company acquired all of the issued and outstanding capital stock
of HKCo, from Bright Praise Enterprises Limited in exchange for approximately 64.64% of the Company’s issued and outstanding
common stock (the “Exchange”). As a result of the Exchange, HKCo became the Company’s wholly owned subsidiary.
The Company’s primary business operations became those of HKCo.
On
October 17, 2007, Ever Auspicious International Limited, a Hong Kong company (“HKCo”) was incorporated in Hong Kong
to act as a holding company for Shisheng. On November 1, 2007, HKCo entered into a Share Exchange Agreement with Cheng Weihong,
Xia Qiming, and Qian Yuxi (collectively, the “
Sellers
”), pursuant to which the Sellers transferred their interest
in Shisheng to HKCo for an aggregate purchase price of $12,067,254 (RMB95,000,000). As a result of this transaction, HKCo owns
all of the capital stock of Shisheng.
In
September 1995, Shisheng was founded by Mr. Tong Shiping and his family as a private company under the name “Tianjin Tariff-Free
Zone Shisheng Property Management Corp.”, which was subsequently renamed as Tianjin Seashore New District Shisheng Business
Trading Group Co. Ltd. Its core business was selling the domestically manufactured automobile model CHARADE, which had 10% of
the automobile market share in China between 1995 and 2000. With the increased popularity of imported cars and the maturation
of the Internet, Shisheng switched its core business to the sale of imported automobiles. Shisheng owns 98% of Tianjin Ganghui
Information Technology Corp., which is currently inactive, and 98% of Tianjin Hengjia Port Logistics Corp., which provides web-based,
real-time information on imported automobiles and Automobile Value Added Services to wholesalers and distributors in the imported
vehicle sales and trading industry.
On
September 23, 2015, the Company sold its 98% equity interest in Zhengji International Trading Corp. (“
Zhengji
”),
which was owned by Shisheng and 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 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 (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.
(
2
)
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Going Concern and Summary of Significant Accounting
Policies
|
Basis
of Presentation
The
consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”).
Principles
of Consolidation
The
consolidated financial statements include the financial statements of China Auto and its wholly-owned and majority-owned subsidiaries.
All inter-company transactions and balances have been eliminated in preparation of the consolidated financial statements.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, revenue and expenses in the consolidated financial statements and
accompanying notes. Significant accounting estimates reflected in the Company’s consolidated financial statements include
the collectibility of accounts receivable, the useful lives and impairment of property and equipment, goodwill and intangible
assets, the valuation of deferred tax assets and inventories and the provisions for income taxes. Actual results could differ
from those estimates.
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 its 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 year ended December 31, 2016 was $741,176 as compared to $9,554,918 for the year ended December 31, 2015.
The operating results for the years ended December 31, 2016 and 2015 included $0 and $4,281,414, respectively, of net losses related
to impairment loss on goodwill and intangible asset.
Net
cash used in operations from continuing operations during the years ended December 31, 2016 and 2015 was $49,991,945 and $3,453,031,
respectively.
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. The accompanying consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Currency
Reporting
Amounts
reported in the consolidated financial statements are stated in US Dollars, unless stated otherwise. Our functional currency is
the RMB. Foreign currency transactions (outside the PRC) are translated into RMB according to the prevailing exchange rate at
the transaction dates. Assets and liabilities denominated in foreign currencies at the balance sheet dates are translated into
RMB at period-end exchange rates. For the purpose of preparing the consolidated financial statements, the consolidated balance
sheets of our Company have been translated into US dollars at the current rates as of the end of the respective periods and the
consolidated statements of income have been translated into US dollars at the weighted average rates during the periods the transactions
were recognized. The resulting translation gain adjustments are recorded as other comprehensive income in the consolidated statements
of comprehensive income and as a separate component of the consolidated statements of shareholders’ equity.
Fair
Value Disclosures of Financial Instruments
Fair
value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required
or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact
its business, and it considers assumptions that market participants would use when pricing the asset or liability.
As
a basis for considering such assumptions, a three-tier fair value hierarchy prioritizes the inputs utilized in measuring fair
value as follows:
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●
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Level
1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
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●
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Level
2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable
for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical
assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived
valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market
data.
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|
●
|
Level
3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant
to the measurement of the fair value of the assets or liabilities.
|
The
hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input
that is significant to the fair value measurement. The Company has estimated the fair value amounts of its financial instruments
using the available market information and valuation methodologies considered to be appropriate and has determined that the carrying
value of the Company’s receivables related to financing services, value added tax receivable, inventories, prepaid expenses,
deferred rent, accounts payable, advances to suppliers, bank overdraft, lines of credit related to financing services, short-term
borrowings, notes payable to suppliers, accrued expenses, customer deposits, deferred revenue, due to director, other current
payable, and income tax payable as of December 31, 2016 and 2015 approximate fair value.
Other
Comprehensive Income
Other
comprehensive income consists of other gains and losses affecting shareholders’ equity that, under US GAAP, are excluded
from net income. The changes in other comprehensive income of $(1,836,408) and $(1,554,689) for the years ended December 31, 2016
and 2015, respectively, are foreign currency translation adjustments.
Concentrations
of Credit Risk
Financial
instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents,
restricted cash, accounts receivable, notes receivable and receivables related to financing services. The Company places its cash
and cash equivalents with reputable financial institutions with high credit ratings.
The
Company conducts credit evaluations of customers and generally does not require collateral or other security from customers. The
Company establishes an allowance for doubtful accounts primarily based upon the age of the receivables and factors relevant to
determining the credit risk of specific customers. The amount of receivables ultimately not collected by the Company has generally
been consistent with management’s expectations and the allowance established for doubtful accounts.
Major
Customers
During
the years ended December 31, 2016, two customers accounted for an aggregate of 38% of the Company’s net revenue. During
the year ended December 31, 2015, one customer accounted for 25% of the Company’s net revenue. Sales to this customer were
related to the Sales of Automobiles segment.
Major
Suppliers
Two
suppliers accounted for an aggregate of 28% and 30% of the Company’s purchases during the years ended December 31, 2016
and 2015, respectively. Purchases from these suppliers were related to the Sales of Automobiles segment.
Cash
and Cash Equivalents
Cash
and cash equivalents consist of cash at banks and on hand and highly liquid investments which are unrestricted as to withdrawal
or use, and which have original maturities of three months or less when purchased. The Company’s deposits in banks located
in the PRC and Hong Kong are not fully protected by insurance and such uninsured amounts totaled $2,853,274 and $7,007,902 as
of December 31, 2016 and 2015, respectively.
Restricted
Cash
The
Company is required to maintain certain amounts of cash in its banks to secure certain banks’ letters of credit issued to
its customers, certain draws on its lines of credit, short-term borrowings and notes payable to suppliers. Restricted cash to
secure these bank lines is not protected by any insurance and such restricted cash totaled $22,703,835 and $23,799,346 as of December
31, 2016 and 2015, respectively.
Receivables
Related to Financing Services
The
Company records a receivable related to financing services when cash is loaned to the customers to finance their purchases of
automobiles. Upon repayments by the customers, the Company records the amounts as reductions of receivables related to financing
services. Receivables related to financing services represent the aggregate outstanding balance of loans from customers related
to their purchases of automobiles. The Company charges a fee for providing loan services and such fee is prepaid by the customers.
The Company amortizes these fees over the receivable term, which is typically 90 days, using the straight-line method. The Company
records such amortized amounts as financing fee income and the unamortized amount is classified as deferred revenue on the Company’s
consolidated balance sheets.
The
Company evaluates the collectibility of outstanding receivables at the end of each of the reporting periods and makes estimates
for potential credit losses. 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. The Company will continue to pursue collecting the remaining receivable balance. As of December
31, 2016 and 2015, the Company recorded an allowance for uncollectible account on receivable related to financing services in
the amount of $3,031,554 and $3,081,331, respectively.
Inventories
Inventories
consist primarily of the purchase cost of automobiles valued at the lower of cost (determined by specific identification method)
or market (net realizable). As of December 31, 2016 and 2015, there was no reserve for obsolescence.
Advances
to suppliers
Advances
to suppliers consist primarily of advance payments to suppliers for automobile purchases. As of December 31, 2016 and 2015, the
reserve for potential uncollectible accounts amounted to $111,684 and $196,512, respectively.
Property
and Equipment
,
net
Property
and equipment, net are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line basis
method over the following estimated useful lives:
Computers
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3 to 5 years
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Office equipment, furniture and fixtures
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3 to 5 years
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Leasehold improvements
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Shorter of Useful Lives or Remaining Term of Lease
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Automobiles
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5 years
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Long-Lived
Assets
Long-lived
assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate. The Company
evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there
are indications of impairment, the Company uses future undiscounted cash flows of the related assets or asset grouping over the
remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient
to recover the recorded asset values, the assets are written down to their estimated fair value. Long-lived assets to be disposed
of are reported at the lower of the carrying amount or fair value of asset less disposal costs.
The
Company engaged a third party specialist to perform a real estate appraisal for the Airport International Auto Mall included in
the discontinued Airport Auto Mall Automotive Services reporting unit at December 31, 2015. The Company determined that the fair
value of the Airport International Auto Mall exceeded its carrying value. The fair value was determined using three approaches
including (i) the income approach which is based on the estimated future discounted cash flow generated from this property, (ii)
the market approach which is based on the current market value of comparable properties, and (iii) the replacement cost approach.
Based on results of the real estate appraisal, the fair market value exceeded the carrying value of the Airport International
Auto Mall at December 31, 2015. As a result, the Company recorded no impairment on the Airport International Auto Mall during
the year ended December 31, 2015.
Goodwill
and Acquired Intangible Assets Impairment
Goodwill
arising from business combinations represents the excess of the purchase price over the estimated fair value of the net assets
of the businesses acquired.
Goodwill
is tested annually for impairment, during the fourth quarter of our fiscal year, or more frequently if circumstances indicate
the possibility of impairment. Significant judgments required to estimate fair value include estimating future cash flows, and
determining appropriate discount rates, growth rates and other assumptions. Changes in these estimates and assumptions could materially
affect the determination of fair value which could trigger impairment.
In
evaluating goodwill for impairment using the two-step test to identify any potential impairment and to measure any amount of impairment,
the first step is based upon a comparison of the fair value of each of the Company’s reporting units and the carrying value
of the reporting unit’s net assets, including goodwill. If the fair value of the reporting unit exceeds its carrying value,
goodwill is considered not to be impaired; otherwise, step two is required. Under step two, the implied fair value of goodwill,
calculated as the difference between the fair value of the reporting unit and the fair value of the reporting unit’s net
assets, is compared with the carrying value of the goodwill. The excess of the carrying value of goodwill over the implied fair
value represents the amount impaired.
The
Company uses a combination of valuation techniques, primarily using discounted cash flows to determine the fair values of its
reporting units and market based multiples as supporting evidence. The variables and assumptions used, all of which are level
3 fair value inputs, including the projections of future revenues and expenses, working capital, terminal values, discount rates
and long term growth rates. The market multiples observed in sale transactions are determined separately for each reporting unit
are based on the weighted average cost of capital determined for each of the Company’s reporting units. In addition we make
certain judgments about the selection of comparable companies used in determining market multiples in valuing our reporting units,
as well as certain assumptions to allocate shared assets and liabilities to calculate values for each of our reporting units.
The underlying assumptions used are based on historical actual experience and future expectations that are consistent with those
used in the Company’s strategic plan. The Company compares the fair value of each of its reporting units to their respective
carrying values, including related goodwill. We also compare our book value and the estimates of fair value of the reporting units
to our market capitalization as of and at dates near the annual testing date. Management uses this comparison as additional evidence
of the fair value of the Company, as our market capitalization may be suppressed by other factors such as the control premium
associated with a controlling shareholder, our leverage or general expectations regarding future operating results and cash flows.
In situations where the implied value of the Company under the Income or Market Approach is significantly different than our market
capitalization, we re-evaluate and adjust, if necessary, the assumptions underlying our Income and Market Approach models. Our
estimates of the fair values of these reporting units, and the related goodwill, could change over time based on a variety of
factors, including the aggregate market value of the Company’s common stock, actual operating performance of the underlying
businesses or the impact of future events on the cost of capital and the related discount rates used.
As
of December 31, 2015, the Company performed an impairment test on its goodwill and customer relationships for the Sales of Automobiles
unit which was initially acquired through the Zhonghe acquisition. Zhonghe was disposed on June 1, 2016. Due to the uncertainties
on implementation of the retail automobile sales and the historical net loss incurred by Zhonghe’s sales of automobile reporting
unit, the Company believed the indicators for impairments existed at December 31, 2015. As a result, the Company conducted a 2-step
quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair value of the Sales of
Automobiles unit with its carrying value. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value,
the management performs the second step of the goodwill impairment test. The second step of the goodwill impairment test involves
comparing the implied fair value of Sales of Automobiles unit’s goodwill with the carrying value of that goodwill. The amount,
by which the carrying value of the goodwill exceeds its implied fair value, if any, was recognized as an impairment loss. Upon
the completion of the evaluation, the Company concluded that an impairment on the goodwill existed at December 31, 2015. The fair
values were estimated based on the future discounted cash flow generated from this reporting unit. As a result, the Company recorded
an impairment loss on goodwill of $3,962,422 related to the Sales of Automobiles unit for the fiscal year 2015.
Intangible
Assets
As
of December 31, 2015, intangible assets consist of customer relations arose from the Zhonghe Acquisition. Amortization is calculated
using the straight-line method over five years. Intangible assets are carried at cost less accumulated amortization. As of December
31, 2015, the Company performed a detailed quantitative impairment test on the customer relations. The Company performed Step
1 of quantitative goodwill impairment test and determined the carrying value of the customer relations for the Sales of Automobiles
unit was less than the fair value indicating impairment. The customers acquired from the Zhonghe acquisition on November 30, 2013
generated substantially less sales during the year ended December 31, 2015 compared to those in 2014 and the periods prior to
the Company’s acquisition. The Company measured the carrying amount of the intangible asset against the estimated undiscounted
future cash flows associated with this asset. Should the sum of the expected future net cash flows be less than the carrying value
of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by
which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available.
If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the
discounted value of estimated future cash flows. The evaluation of asset impairment requires the Company to make assumptions about
future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results
may differ from assumed and estimated amounts. Upon the completion of the impairment evaluation, the Company concluded that an
impairment on the customer relations existed at December 31, 2015. As a result, the Company recorded an impairment loss on customer
relations of $318,992 related to the Sales of Automobiles unit for the fiscal year of 2015.
Noncontrolling
Interests
Noncontrolling
interests represent the noncontrolling interest stockholders’ proportionate share of the equity of Hengjia and Ganghui.
The noncontrolling interests in 2016 and 2015 are summarized as below:
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As of December 31,
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2016
|
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2015
|
|
|
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|
|
|
|
|
Hengjia
|
|
|
2.0
|
%
|
|
|
2.0
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%
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Ganghui
|
|
|
2.0
|
%
|
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|
2.0
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%
|
The
noncontrolling interests in Hengjia and Ganghui that are not owned by the Company are shown as “noncontrolling interests”
in the consolidated balance sheets as of December 31, 2016 and 2015 and “net income (loss) attributable to noncontrolling
interests” in the consolidated statements of operations for the years ended December 31, 2016 and 2015. On September 23,
2015, the Company sold its 98% equity interest in Zhengji and therefore the 2% noncontrolling interest in Zhengji no longer existed
at December 31, 2016 and 2015.
Deferred
Revenue
Deferred
revenue includes amounts received from customers for which services revenue recognition is not yet appropriate. All deferred revenue
is anticipated to be recognized within the next 12 months from the balance sheet dates.
Revenue
Recognition
The
Company’s main source of income was generated through (1) sales of automobiles, (2) service fees for assisting customers
to get bank financing on purchases of automobiles, (3) web-based advertising 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 represent amounts collected on behalf of specific regulatory agencies that require remittance by a specified date.
These amounts are collected at the time of sale and are detailed on invoices provided to customers. The Company accounts for value
added taxes on a net basis. The Company recorded and paid business taxes based on a percentage of the net service revenues and
reported the service revenue net of the business taxes and other sales related taxes.
Cost
of Revenue
Cost
of revenue includes the purchase cost of the automobiles, inventory obsolescence, freight-in and all the direct costs related
to the sales of the automobiles, and interest expense and line of credit fees related to the financing services. All costs related
to the Company’s distribution network are included in the cost of revenue.
Operating
Expenses
Selling
and marketing expenses include salaries and employee benefits, rent, advertising, travel and entertainment and insurance.
General
and administrative expenses include management and office salaries and employee benefits, depreciation for office facilities,
office equipment and automobiles, travel and entertainment, insurance, legal and accounting, consulting fees, workers’ compensation
insurance, and other office expenses.
Advertising
The
Company expenses advertising costs when incurred. The Company incurred approximately $8,000 and $14,000 of advertising expenses
for the years ended December 31, 2016 and 2015, respectively. Advertising expense is included in the caption “Selling and
Marketing” within operating expenses on the consolidated statements of income.
Income
taxes
Deferred
income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts
in the consolidated financial statements, net operating loss carry forwards and credits, by applying enacted statutory tax rates
applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided
for in accordance with the laws of the relevant taxing authorities.
The
Company recognizes tax benefits that satisfy a greater than 50% probability threshold and provides for the estimated impact of
interest and penalties for such tax benefits. The Company did not incur any interest or penalties related to potential underpaid
income tax expenses during the years ended December 31, 2016 and 2015.
Basic
and Diluted Earnings (Loss) Per Share
Basic
earnings (loss) per common share is computed by dividing net earnings (loss) attributable to common stockholders by the weighted
average number of common shares outstanding. Diluted earnings (loss) per common share is computed similarly to basic earnings
(loss) per common share, except that the denominator is increased to include the number of additional common shares that would
have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of
December 31, 2016 and 2015, the Company did not have any common stock equivalents, therefore, the basic earnings (loss) per share
is the same as the diluted earnings (loss) per share.
New
Accounting Standards
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
August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements – Going Concern, Disclosures of Uncertainties
about an Entity’s Ability to Continue as a Going Concern
, which provides guidance on determining when and how reporting
entities must disclose going concern uncertainties in their financial statements. The new standard requires management to perform
interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance
of the entity’s financial statements. Additionally, an entity must provide certain disclosures if there is substantial doubt
about the entity's ability to continue as a going concern. The new standard will be effective for fiscal years and interim periods
within those fiscal years, ending after December 15, 2016. Early adoption is permitted. The Company adopted this standard
during the fourth quarter of 2016. The adoption of this ASU did not have a material effect on the Company’s consolidated
financial statements..
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 effects of this update on our financial
position, results of operations and cash flows are not expected to be material.
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. We plan to adopt the
guidance in the first quarter of 2017. The adoption of this standard is not expected to have a material impact 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 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.
(2)
Sale of Zhonghe
On
June 1, 2016, Shisheng entered into (i) an Equity Transfer Agreement with Huitong to sell 100% of the equity of Zhonghe, and (ii)
a Debt Transfer Agreement, by and among Shisheng, Huitong, and Hezhong. Zhonghe owns and operates the Airport International Automall
located in the Tianjin Airport Economic Area and owns 40% of Car King Tianjin.
Under
the terms of the Equity Transfer Agreement, the sale price for the Zhonghe equity was approximately $61.8 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. The details of the net assets sold by segments are shown below:
|
|
|
|
|
Airport Auto Mall
|
|
|
|
|
|
|
Sales of Automobiles
|
|
|
Automotive Services
|
|
|
Total
|
|
Sale price
|
|
$
|
310,422
|
|
|
$
|
61,408,588
|
|
|
$
|
61,719,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
-
|
|
|
|
172,811
|
|
|
|
172,811
|
|
Restricted cash
|
|
|
33,117,518
|
|
|
|
-
|
|
|
|
33,117,518
|
|
Inventories
|
|
|
254,364
|
|
|
|
-
|
|
|
|
254,364
|
|
Advances to suppliers
|
|
|
88,802,719
|
|
|
|
-
|
|
|
|
88,802,719
|
|
Due to Shisheng
|
|
|
-
|
|
|
|
4,023,656
|
|
|
|
4,023,656
|
|
Other current assets
|
|
|
3,652
|
|
|
|
606,714
|
|
|
|
610,366
|
|
Property and equipment
|
|
|
-
|
|
|
|
58,953,246
|
|
|
|
58,953,246
|
|
Short-term borrowings
|
|
|
(79,030,440
|
)
|
|
|
-
|
|
|
|
(79,030,440
|
)
|
Notes payable to suppliers
|
|
|
(41,396,897
|
)
|
|
|
-
|
|
|
|
(41,396,897
|
|
Customer deposits
|
|
|
(969,521
|
)
|
|
|
-
|
|
|
|
(969,521
|
)
|
Deferred tax liabilities
|
|
|
-
|
|
|
|
(8,901,815
|
)
|
|
|
(8,901,815
|
)
|
Other current liabilities
|
|
|
(470,973
|
)
|
|
|
(75,267
|
)
|
|
|
(546,240
|
)
|
Total net assets
|
|
|
310,422
|
|
|
|
54,779,345
|
|
|
|
55,089,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale, net of tax
|
|
$
|
-
|
|
|
$
|
6,629,243
|
|
|
$
|
6,629,243
|
|
The
disposal of Zhonghe and its Sales of Automobiles division is not considered a strategic shift on the Company’s Sales of
Automobiles as such disposal does not impact any of the geographic coverage, line of business or any other divisions or operations
of the Company. Therefore the Company concluded that the disposal of Zhonghe’s Sales of Automobiles division should not
be classified as discontinued operations.
The
Airport Automall Automotive Services unit was comprised of two sectors including (1) the rental of the airport automall and (2)
the joint venture investment in Car King Used Cars. Huitong obtained control of Zhonghe on June 1, 2016. After the completion
of the disposal, the Company is no longer involved with the rental or used car business and has no continuing cash inflows or
outflows from this unit. The disposal of the Airport Automall Automotive Services unit has a material impact on the Company’s
cash flow and operating results. Therefore the Company concluded that the disposal of the Airport Auto Mall Automotive Services
unit should be classified as discontinued operations.
Interest
expense allocated to the discontinued operation was the interest expense directly related to financing the Zhonghe acquisition
and the operations of the Automobiles and Airport Automall Automotive Services unit.
The
loss from discontinued operations presented in the condensed statements of operations consists of the following for the period
from January 1, 2016 through May 31, 2016 and the year ended December 31, 2015:
|
|
Period from January 1, through
May 31,
2016
|
|
|
Year Ended December 31, 2015
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
306,839
|
|
|
$
|
1,787,294
|
|
Cost of revenue
|
|
|
-
|
|
|
|
-
|
|
Gross profit
|
|
|
306,839
|
|
|
|
1,787,294
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
939,136
|
|
|
|
778,140
|
|
(Loss) income from discontinued operations
|
|
|
(632,297
|
)
|
|
|
1,009,154
|
|
Other expenses
|
|
|
(1,517,210
|
)
|
|
|
(4,444,884
|
)
|
Loss from discontinued operations before income tax benefits
|
|
|
(2,149,507
|
)
|
|
|
(3,435,730
|
)
|
Gain on sale of discontinued operations
|
|
|
6,629,243
|
|
|
|
-
|
|
Gain (loss) on discontinued operations before income tax benefits
|
|
|
4,479,736
|
|
|
|
(3,435,730
|
)
|
Income tax benefit
|
|
|
(245,096
|
)
|
|
|
(976,054
|
)
|
Net income (loss) from discontinued operations
|
|
$
|
4,724,832
|
|
|
$
|
(2,459,676
|
)
|
The
Company accounted for the Zhonghe’s 40% equity interest in Car King Tianjin using the equity method of accounting prior
to the sale of Zhonghe. The results of operations and financial position of the Company’s equity basis investments through
May 31, 2016 are summarized below:
Condensed statements of operations information:
|
|
Period from January 1, through
May 31,
2016
|
|
|
Year Ended December 31, 2015
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,378,878
|
|
|
$
|
8,059,578
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
1,102,205
|
|
|
$
|
2,506,168
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(667,958
|
)
|
|
$
|
(2,190,676
|
)
|
Condensed balance sheet information:
|
|
As of
May 31,
2016
|
|
|
As of
December 31,
2015
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
537,738
|
|
|
$
|
629,912
|
|
|
|
|
|
|
|
|
|
|
Non current assets
|
|
|
775,716
|
|
|
|
860,671
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,313,454
|
|
|
$
|
1,490,583
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
4,245,268
|
|
|
$
|
3,792,402
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ deficit
|
|
|
(2,931,814
|
)
|
|
|
(2,301,819
|
)
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ deficit
|
|
$
|
1,313,454
|
|
|
$
|
1,490,583
|
|
Restricted
cash consists of cash which is not available for use in the Company’s operations and is summarized as follows:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Collateral for bank’s issuance of letters of credit to the Company’s customers
|
|
$
|
2,541,674
|
|
|
$
|
4,921,950
|
|
Collateral for notes payable to suppliers
|
|
|
20,162,161
|
|
|
|
18,877,396
|
|
|
|
$
|
22,703,835
|
|
|
$
|
23,799,346
|
|
(
4
)
|
Property and Equipment
,
Net
|
A
summary of property and equipment is as follows:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Computers
|
|
|
72,134
|
|
|
|
74,057
|
|
Office equipment, furniture and fixtures
|
|
|
44,766
|
|
|
|
44,731
|
|
Leasehold improvements
|
|
|
149,338
|
|
|
|
32,354
|
|
Automobiles
|
|
|
1,038,686
|
|
|
|
970,810
|
|
|
|
|
1,304,924
|
|
|
|
1,121,952
|
|
Less: Accumulated depreciation and amortization
|
|
|
(987,642
|
)
|
|
|
(1,049,210
|
)
|
|
|
$
|
317,282
|
|
|
$
|
72,742
|
|
Depreciation
and amortization expense for property and equipment amounted to $80,709 and $56,581 for the years ended December 31, 2016 and
2015, respectively.
The
changes in the carrying amount of goodwill for the year ended December 31, 2015 are as follows:
|
|
Sales of Automobiles Unit
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
|
4,013,416
|
|
Impairment loss
|
|
|
(3,962,422
|
)
|
Translation adjustment
|
|
|
(50,994
|
)
|
Balance as of December 31, 2015
|
|
$
|
-
|
|
As
of December 31, 2015, the Company performed an impairment test on the goodwill and customer relations for the Sales of Automobiles
unit. Upon the completion of the impairment evaluation, the Company concluded that an impairment on the goodwill existed at December
31, 2015. The fair values were estimated based on the future discounted cash flow generated from this reporting unit. As a result,
the Company recorded an impairment loss on goodwill of $3,962,422 related to the Sales of Automobiles unit for the fiscal year
2015.
(
6
)
|
Intangible Asset
,
Net
|
As
of December 31, 2015, the balance for customer relations related to the Sales of Automobiles unit is summarized as follows:
|
|
Life
|
|
|
Cost
|
|
|
Foreign currency translation adjustments
|
|
|
Less: Accumulated Impairment
|
|
|
Less: Accumulated Amortization
|
|
|
Net Carrying Amount
|
|
Intangible asset subject to amortization – Customer Relations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
5 years
|
|
|
$
|
555,002
|
|
|
$
|
(17,749
|
)
|
|
$
|
(318,992
|
)
|
|
$
|
(218,261
|
)
|
|
$
|
-
|
|
Amortization
expense for intangible assets was $0 and $109,369 for the year ended December 31, 2016 and 2015, respectively.
The
customers acquired from the Zhonghe acquisition on November 30, 2013 generated substantially less sales during the year ended
December 31, 2015 compared to those in 2014 and the periods prior to acquisition. Upon the completion of the impairment evaluation,
the Company concluded that an impairment on the customer relations existed at December 31, 2015. As a result, the Company recorded
an impairment loss on customer relations of $318,992 related to the Sales of Automobiles unit for the fiscal year of 2015.
In
January 2015, the Company entered into an overdraft agreement with PuDong Development Bank. Under the terms of the
agreement, the Company can draw on its bank account up to $2,131,009 (RMB15,000,000) in excess of the funds on deposit. The
overdraft amount is subject to an annual interest rate of 6.72% and the maximum overdraft period cannot exceed 89 days. The
overdraft agreement is guaranteed by Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and a non-related
entity which is a supplier of the Company, and matured in December 2015. The outstanding balance of the facility was $2,131,009
as of December 31, 2015.
(
8
)
|
Lines of Credit Related to Financing Services
|
The
Company provides financing services to its customers using the Company’s bank facility lines of credit. The Company earns
a service fee for drawing its facility lines related to its customers’ purchases of automobiles and payment of import taxes.
Customers bear all the interest and fees charged by the banks and prepay those fees upon the execution of their service contracts
with the Company. Customers are also required to make a deposit in the range of 10% to 15% of the purchase price of the automobiles.
If customers default on payment, the banks take custody of the automobiles until the borrowings are fully repaid.
Interest
charged by the banks for draws on these facility lines of credit is classified as cost of revenue in the consolidated statements
of operations. Interest expense related to these lines of credit was $2,317,843 and $3,206,455 for the years ended December 31,
2016 and 2015, respectively.
A
summary of the Company’s lines of credit related to financing services follows:
China
Merchants Bank
In
March 2015, the Company entered into a facility line of credit agreement with China Merchants Bank, pursuant to which the Company
can borrow a maximum amount of $10,081,081 (RMB70,000,000). Borrowings under this facility line of credit bear interest at rates
to be determined upon drawing and bear interest at rates ranging from 4.11% to 4.79% per annum, during the three months ended
September 30, 2016 and borrowings under this facility were repayable within 3 months from the dates of drawing. As of December
31, 2015, the Company had an outstanding balance of $6,613,276 under this facility line of credit. This facility line of credit
is guaranteed by Mr. Tong Shiping, the Company’s Chairman, President and CEO, Ms. Cheng Weihong, a Director and Senior Vice
President of the Company, and a non-related entity which is a supplier of the Company, and matured in March 2016 which was not
renewed.
Agricultural
Bank of China
In
September 2015 the Company entered into a facility line of credit agreement with Agricultural Bank of China, pursuant to which
the Company can borrow a maximum amount of $69,127,411 (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 3.60% to 5.01% per annum, and were repayable within 3 months to 4 months from the date of the drawing. As of December 31,
2016 and December 31, 2015, the Company had outstanding balances of $0 and $33,531,505, respectively, under this facility line
of credit. This facility matured in September 2016.
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 $69,127,411 (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 3.60% to 5.07% per annum, and were repayable within 3 months to 4 months from the date of the drawing. As of December 31,
2016 and December 31, 2015, the Company had outstanding balances of $28,926,623 and $0, respectively, under this facility line
of credit. This facility matures in September 2017.
PuDong
Development Bank
In
December 2015, the Company entered into a facility line of credit agreement with PuDong Development Bank, pursuant to which the
Company can borrow a maximum amount of $17,281,853 (RMB120,000,000). Borrowings under this facility line of credit bear interest
at rates ranging from 4.47% to 5.76% per annum, and are repayable within 3 months from the dates of drawing. As of December 31,
2016 and December 31, 2015, the Company had outstanding balances of $0 and $8,091,241, respectively, under this facility line
of credit. This facility line of credit is guaranteed by Ms. Cheng Weihong, a Director and Senior Vice President of the Company,
and a non-related entity, which is a supplier of the Company, and matured in December 2016.
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 $17,281,853 (RMB120,000,000). Borrowings under this facility line of credit bear interest
at rates ranging from 4.47% to 5.76% per annum, and are repayable within 3 months from the dates of drawing. As of December 31,
2016 and December 31, 2015, the Company had outstanding balances of $7,156,970 and $0, respectively, under this facility line
of credit. This facility line of credit is guaranteed by Ms. Cheng Weihong, a Director and Senior Vice President of the Company,
and two non-related entity, which are suppliers of the Company, and matures in December 2017.
China
Zheshang Bank
In
August 2015, the Company entered into a facility line of credit agreement with China Zheshang Bank, pursuant to which the Company
can borrow a maximum amount of $25,922,779 (RMB180,000,000). This facility line of credit is guaranteed by (i) Mr. Tong Shiping,
the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company,
(iii) Tianjin Binhai International Automall Ltd. Co., a customer, and (iv) Zhonghe, the Company’s former subsidiary, (v)
Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. Borrowings under this facility line of credit
bore interest at rates ranging from 4.5% to 5.3% per annum, and are repayable within 3 months to 6 months from the dates of drawing.
As of December 31, 2016 and December 31, 2015, the Company had outstanding balances of $0 and $8,374,161, respectively, under
this facility line of credit. This facility matured in August 2016.
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 $31,683,397 (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 December 31, 2016, the Company had outstanding
balances of $7,045,426 under this facility line of credit. This facility matures in August 2017.
Industrial
and Commercial Bank of China
In
June 2015, the Company entered into a facility line of credit agreement with
Industrial and Commercial
Bank of China, pursuant to which
the Company can borrow a maximum amount of
$14,401,544 (RMB100,000,000).
This facility line of credit is guaranteed by Zhonghe, the Company’s former subsidiary. Borrowings under this facility
line of credit bear interest at rates ranging from 3.2% to 4.25% per annum, and are repayable within 3 months to 6 months from
the dates of drawing. As of December 31, 2016 and December 31, 2015, the Company had outstanding balances of $0 and $5,431,703,
respectively, under this facility line of credit. This facility matured in June 2016 and was not renewed.
China
Minsheng Bank
In
April 2015, the Company entered into a facility line of credit agreement with
China Minsheng Bank,
pursuant to which t
he Company can borrow a maximum amount of
$11,521,235 (RMB80,000,000).
This facility line of credit is guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii)
Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co.,
a customer, and (iv) Zhonghe, the Company’s former subsidiary. Borrowings under this facility line of credit bore interest
at rates ranging from 0.19% to 1.66% per annum, and were repayable on the due dates, which were determined prior to each draw.
As of December 31, 2016 and December 31, 2015, the Company had outstanding balances of $0 and $6,248,270, respectively, under
this facility line of credit. This facility matured in April 2016 and was not renewed.
Shengjing
Bank
In
November 2015, the Company entered into a facility line of credit agreement with Shengjing Bank
,
pursuant to which t
he Company can borrow a maximum amount of
$7,200,772 (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 4.8% to 6.0% per annum, and are
repayable within 3 months to 6 months from the dates of drawing. As of December 31, 2016 and December 31, 2015, the Company had
outstanding balances of $0 and $4,714,023 under this facility line of credit. This facility matured in November 2016.
In
November 2016, the Company entered into a facility line of credit agreement with Shengjing Bank
,
pursuant to which t
he Company can borrow a maximum amount of
$7,200,772 (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 4.8% to 5.2% per annum, and are
repayable within 3 months to 6 months from the dates of drawing. As of December 31, 2016 and December 31, 2015, the Company had
outstanding balances of $3,952,744 and $0 under this facility line of credit. This facility matures in November 2017.
(
9
)
|
Short Term Borrowings
|
Agricultural
Bank of China
In
February 2015, the Company entered into three working capital loan agreements with Agricultural Bank of China to obtain short
term financing. Under the terms of these agreements, the Company can borrow up to $13,865,993 (RMB90,000,000). The outstanding
balance was $13,865,993 as of December 31, 2015. These short term loans bore interest at a rate of 6.16% per annum, matured in
February 2016, and were secured by the Airport International Auto Mall and related land use rights.
In
June 2015, the Company entered into a working capital loan agreement with Agricultural Bank of China to obtain short term financing.
Under the terms of this agreement, the Company can borrow up to $6,932,996 (RMB45,000,000). The outstanding balance was $6,932,996
as of December 31, 2015. This short term loan bore interest at a rate of 5.61% per annum, matured in June 2016, and was secured
by the Airport International Auto Mall and related land use rights.
In
July 2015, the Company entered into a working capital loan agreement with Agricultural Bank of China to obtain short term financing.
Under the terms of this agreement, the Company can borrow up to $5,546,397 (RMB36,000,000). The outstanding balance totaled $0
and $5,546,397 as of June 30, 2016 and December 31, 2015, respectively. This short term loan bears interest at a rate of 5.34%
per annum, matured in July 2016, and is secured by the Airport International Auto Mall and related land use rights. This loan
was disposed of as a result of sale of Zhonghe.
In
August 2015, the Company entered into a working capital loan agreement with Agricultural Bank of China to obtain short term financing.
Under the terms of this agreement, the Company can borrow up to $5,546,397 (RMB36,000,000). The outstanding balance totaled $0
and $5,546,397 as of June 30, 2016 and December 31, 2015, respectively. This short term loan bears interest at a rate of 5.06%
per annum, matured in August 2016, 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. This loan was disposed of as a result of sale of Zhonghe.
In
September 2015, the Company entered into a working capital loan agreement with Agricultural Bank of China to obtain short term
financing. Under the terms of this agreement, the Company can borrow up to $3,389,465 (RMB22,000,000). The outstanding balance
totaled $0 and $3,389,465 as of June 30, 2016 and December 31, 2015, respectively. This short term loan bears interest at a rate
of 5.06% per annum, matured in August 2016, 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. This loan was disposed of as a result of sale of Zhonghe.
In
January 2016, the Company entered into three working capital loan agreements with Agricultural Bank of China to obtain short term
financing. Under the terms of these agreement, the Company can borrow up to $12,193,268 (RMB81,000,000). The outstanding balance
totaled $0 and $0 as of June 30, 2016 and December 31, 2015, respectively. These short term loans bear interest at a rate of 4.785%
per annum, matured in January 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. This loan was disposed of as a result of sale of Zhonghe.
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 $5,760,618 as of December 31, 2016. The other loan agreement bears interest at a rate of 4.785% per
annum, matured in January 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
August and September 2015, the Company entered into five loan agreements with China Zheshang Bank. Under the terms of these agreements,
the Company borrowed an aggregate amount of $4,585,633 (RMB29,763,970). Borrowings under these loan agreements bore interest at
rates ranging from 4.6% to 4.85% for a borrowing period of six months and were guaranteed by (i) Mr. Tong Shiping, the Company’s
Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai
International Automall Ltd. Co., a customer, (iv) Zhonghe, the Company’s former subsidiary, and (v) Hezhong (Tianjin) International
Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $4,585,633 as of December
31, 2015. These loans matured in February and March 2016.
In
December 2015, the Company entered into three loan agreements with China Zheshang Bank. Under the terms of these agreements, the
Company borrowed an aggregate amount of $3,081,332 (RMB20,000,000). Borrowings under these loan agreements bear interest at a
rate of 4.35% for a borrowing period of six months and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President
and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall
Ltd. Co., a customer, (iv) Zhonghe, the Company’s former subsidiary, and (v) Hezhong (Tianjin) International Development
Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $3,081,332 as of December 31, 2015.
These loans matured in June 2016.
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 bear 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 $4,320,463 and $0 as of December 31, 2016 and December 31, 2015,
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 $2,880,308 (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 $2,880,308 and $0 as of December 31, 2016 and December
31, 2015, respectively. These loans mature in May and June 2017.
Tianjin
Binhai Rural Commercial Bank
In
July and August 2015, the Company entered into two loan agreements with Tianjin Binhai Rural Commercial Bank. Under the terms
of these agreements, the Company borrowed a maximum amount of $24,342,521 (RMB158,000,000). Borrowings under these loan agreements
bear interest at a rate of 7.03% and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO,
(ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd.
Co., a customer, (iv) Tianjin Binhai Shisheng Trading Group Co., Ltd., the Company’s subsidiary, (v) Xin Jiang Kai Li Xing
Kong Automobile Sales Service Co., Ltd., a potential customer, (vi) Xin Jiang Kai Yuan Heng Ji Real Estate Development Co., Ltd.,
a potential customer’s affiliate, (vii) Cheng Jun, shareholder of the Company’s supplier, (viii) Kai Li Xing Kong
Automobile Sales Service Co., Ltd., a customer, and (ix) Tianjin Ying Zhi Jie International Logistics Co. , Ltd., a supplier.
The total outstanding balance of these agreements was $24,342,521 as of December 31, 2015. These loan agreements were originally
scheduled to mature in July and August 2016 but were repaid early in March and April 2016.
In
March 2016, the Company entered into two loan agreements with Tianjin Binhai Rural Commercial Bank. Under the terms of these agreements,
the Company borrowed a maximum amount of $11,290,063 (RMB75,000,000). Borrowings under these loan agreements bear interest at
a rate of 6.525% and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong,
a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Tianjin
Ning Chuan International Trading Ltd. Co., a supplier (v) Cheng Jun, shareholder of the Company’s supplier, (vii) Kai Li
Xing Kong Automobile Sales Service Co., Ltd., a customer, (viii) Tianjin Ying Zhi Jie International Logistics Co. , Ltd., a supplier.
These loan agreements were originally scheduled to mature in March 2017. These loans were disposed of as a result of sale of Zhonghe.
In
April 2016, the Company entered into two loan agreements with Tianjin Binhai Rural Commercial Bank. Under the terms of this agreement,
the Company borrowed a maximum amount of $8,881,516 (RMB59,000,000). Borrowings under this loan agreement bear interest at a rate
of 6.525% and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong,
a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Tianjin
Ning Chuan International Trading Ltd. Co., a supplier, (v) Cheng Jun, shareholder of the Company’s supplier, (vi) Xin Jiang
Kai Li Xing Kong Automobile Sales Service Co., Ltd., a potential customer, (vi) Kai Li Xing Kong Automobile Sales Service Co.,
Ltd., a customer, and (viii) Tianjin Ying Zhi Jie International Logistics Co. , Ltd., a supplier. The Company repaid $15,353,836
(RMB99,000,000) during the three months ended March 31, 2016. These loan agreements mature in April 2017. These loans were disposed
of as a result of sale of Zhonghe.
In
April 2016, the Company entered into a loan agreement with Tianjin Binhai Rural Commercial Bank. Under the terms of this agreement,
the Company borrowed a maximum amount of $32,515,381 (RMB216,000,000). Borrowings under this loan agreement bear interest at a
rate of 6.4125% and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong,
a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Tianjin
Ning Chuan International Trading Ltd. Co., a supplier, (v) Cheng Jun, shareholder of the Company’s supplier, (vi) Xin Jiang
Kai Li Xing Kong Automobile Sales Service Co., Ltd., a potential customer, , (vii) Kai Li Xing Kong Automobile Sales Service Co.,
Ltd., a customer, and (viii) Tianjin Ying Zhi Jie International Logistics Co. , Ltd., a supplier. This loan agreement matures
in April 2019. This loan was disposed of as a result of sale of Zhonghe.
(
10
)
|
Notes Payable to Suppliers
|
From
time to time, the Company issues notes payable to suppliers, which are guaranteed by various banks. The terms of these notes payable
vary depending on the negotiations with the suppliers. Typical terms are in the range of three to six months. Prior
to the expiration dates of the notes, the note holders can present these notes to the banks to draw on the note amounts if the
Company does not settle the outstanding amount payable to these suppliers. The Company is subject to a bank fee of 0.05% on notes
payable amounts.
Bank
of Jinzhou
As
of December 31, 2015, the Company had four outstanding notes payable to suppliers, matured in June 2016, in an aggregate amount
of $5,392,331 (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 $2,698,020 (RMB17,512,036) as guaranteed funds, which was classified
as restricted cash as of December 31, 2015.
As
of December 31, 2015, the Company had five outstanding notes payable to suppliers, matured in January and February 2016, in an
aggregate amount of $6,932,996 (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 $3,468,882 (RMB22,515,475) as guaranteed funds,
which was classified as restricted cash as of December 31, 2015.
As
of December 31, 2016, the Company had four outstanding notes payable to suppliers, which matured in May 2017, in an aggregate
amount of $5,040,540 (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 $2,520,270 (RMB17,500,000) as guaranteed funds, which was classified
as restricted cash as of December 31, 2016.
As
of December 31, 2016, the Company had five outstanding notes payable to suppliers, which matured in January 2017, in an aggregate
amount of $6,480,695 (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 $3,240,347 (RMB22,500,000) as guaranteed funds, which was classified
as restricted cash as of December 31, 2016.
Tianjin
Binhai Rural Commercial Bank
As
of December 31, 2015, the Company had fifteen outstanding notes payable to suppliers, matured in February 2016, in an aggregate
amount of $21,184,156 (RMB137,500,000), the payment of which was guaranteed by Tianjin Binhai Rural Commercial Bank for a period
of six months. The Company was required to maintain approximately 60% of the note amounts, or $12,710,494 (RMB82,500,000) as guaranteed
funds, which was classified as restricted cash as of December 31, 2015.
Agricultural
Bank of China
As
of December 31, 2016, the Company had three outstanding notes payable to suppliers, matured in January 2017, in an aggregate amount
of $14,401,544 (RMB100,000,000), the payment of which was guaranteed by Agricultural Bank of China for a period of one year. The
Company was required to maintain approximately 100% of the note amounts, or $14,401,544 (RMB100,000,000) as guaranteed funds,
which was classified as restricted cash as of December 31, 2016.
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.
China
Auto and HKCo do not generate any income and therefore are not subject to US or Hong Kong income taxes. The Company conducts substantially
all of its business through its PRC operating subsidiaries and they are subject to PRC income taxes. The Company’s subsidiaries
in the PRC are subject to the standard 25% tax rate in 2016 and 2015.
The
components of loss before income tax expenses from continuing operations for the years ended December 31, 2016 and 2015 follows:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Loss before income tax expenses from continuing operations
|
|
|
|
|
|
|
US Federal
|
|
$
|
-
|
|
|
$
|
|
_
|
Non US
|
|
|
(629,317
|
)
|
|
|
(9,306,284
|
)
|
|
|
|
(629,317
|
)
|
|
|
(9,306,284
|
)
|
The
Company’s income tax expense from continuing operations amounted to $113,163 and $249,988 for the years ended December 31,
2016 and 2015, respectively, (an effective rate of -18.0% and -2.7% for 2016 and 2015, respectively). A reconciliation of the
provision (benefit) for income taxes from continuing operations, with amounts determined by applying the statutory US federal
income tax rate to income before income taxes, is as follows:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Computed tax benefit at US federal statutory rate of 34%
|
|
$
|
(213,968
|
)
|
|
$
|
(3,164,137
|
)
|
|
|
|
|
|
|
|
|
|
Permanent differences:
|
|
|
|
|
|
|
|
|
Meals and entertainment (non-deductible portion)
|
|
|
38,178
|
|
|
|
23,565
|
|
Legal and professional fees (non-deductible portion)
|
|
|
213,368
|
|
|
|
213,203
|
|
Impairment loss on goodwill
|
|
|
-
|
|
|
|
1,347,223
|
|
Tax rate difference between US and PRC on foreign earnings
|
|
|
(9,947
|
)
|
|
|
418,274
|
|
Write –off of deferred tax valuation allowance as a result of sale of Zhengji
|
|
|
-
|
|
|
|
522,337
|
|
Change in valuation allowance
|
|
|
19,810
|
|
|
|
794,897
|
|
Exchange rate change on valuation allowance
|
|
|
897
|
|
|
|
34,928
|
|
Other
|
|
|
64,825
|
|
|
|
59,698
|
|
|
|
$
|
113,163
|
|
|
$
|
249,988
|
|
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Details of income taxes from continuing operations
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
US Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
PRC
|
|
|
113,163
|
|
|
|
249,988
|
|
Total current provision (benefit)
|
|
|
113,163
|
|
|
|
249,988
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
US Federal
|
|
|
-
|
|
|
|
-
|
|
PRC
|
|
|
-
|
|
|
|
-
|
|
Total deferral benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision from continuing operations
|
|
$
|
113,163
|
|
|
$
|
249,988
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Details of deferred taxes from continuing operations
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating losses carryforwards
|
|
$
|
39,767
|
|
|
$
|
44,071
|
|
Allowance for doubtful account – receivable related to Financing Services
|
|
|
757,889
|
|
|
|
770,333
|
|
Allowance for doubtful account – advances to suppliers
|
|
|
27,920
|
|
|
|
49,128
|
|
|
|
|
825,576
|
|
|
|
863,532
|
|
Valuation allowance
|
|
|
(825,576
|
)
|
|
|
(863,532
|
)
|
Total deferred tax asset
|
|
|
-
|
|
|
|
-
|
|
In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become deductible or are utilized.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies
in making this assessment. Based upon an assessment of the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are tested whether they are deductible or can be utilized, management
believes that the deferred tax assets amounting to $825,576 and $863,532 as of December 31, 2016 and 2015, respectively, are not
more likely than not to be realized. Accordingly the Company provided a valuation allowance amounting to $825,576 and $863,532
against the deferred tax assets as of December 31, 2016 and 2015, respectively. As of December 31, 2016, the Company had unused
net operating loss carryforward from its PRC subsidiaries in the amount of approximately $159,000 which may be applied against
future taxable income and begins to expire after the year of 2019.
The
Company has not provided deferred taxes on unremitted earnings attributable to its international subsidiaries as they are to be
reinvested indefinitely. These earnings relate to ongoing operations and are approximately $17.3 million as of December 31, 2016.
Because of the availability of US foreign tax credits, it is not practicable to determine the US income tax liability that would
be payable if such earnings were not indefinitely reinvested.
The
Company is subject to income taxes in the PRC. Tax regulations are subject to the interpretation of the related tax laws and regulations
and require significant judgment to apply. All tax positions taken, or expected to be taken, continue to be more likely than not
ultimately settled at the full amount claimed. The Company’s tax filings are subject to the US Federal tax bureau’s
examination for a period up to three years and PRC tax bureau’s examination for a period up to 5 years. The Company is not
currently under any examination by the PRC tax bureau.
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 December 31, 2016 and December 31, 2015, the Company’s statutory reserve fund was approximately $2,317,000
and $2,126,000, respectively.
(
13
)
|
Related Party Balances and Transactions
|
Ms.
Cheng Weihong (the Senior Vice President and Chairwoman of Shisheng and wife of China Auto’s President and Chief Executive
Officer, Mr. Tong Shiping) made non-interest bearing loans to the Company from time to time to meet working capital needs of the
Company. For the years ended December 31, 2016 and 2015, the Company made aggregate borrowings from Ms. Cheng Weihong of $686,185
and $599,120, respectively, and made repayments of $0 and $454,280 to Ms. Cheng Weihong. As of December 31, 2016 and 2015, the
outstanding balances due to Ms. Cheng Weihong were $1,550,745 and $722,028, 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 $1,956,625 and $2,093,182 were outstanding as payable related to prior years’ professional fees on the consolidated
balance sheets as of December 31, 2016 and 2015, 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 December 31, 2016 and 2015 are interest-free, unsecured and have no fixed term of repayment.
During the years ended December 31, 2016 and 2015, there was no imputed interest charged in relation to these balances.
On
September 1 2015, the Company and Tongshang Kai Li (Tianjin) Automobile Import Export Company Limited (“Tongshang Kai Li”)
entered into a Loan Agreement (the “Loan Agreement”). Pursuant to the terms of the Loan Agreement, Tongshang Kai Li
advanced funds, at an annual interest rate of 15%, to the Company for the Company’s short term working capital needs until
December 31, 2015; the expiration date of the Loan Agreement. During the year ended December 31, 2015, the Company borrowed a
total of $1,457,982 which incurred interest of $148,534. As of December 31, 2015 there were no outstanding balances due to Tongshang
Kai Li as all amounts were repaid.
Tongshang
Kai Li is 51% owned by Tianjin Kai Li Xing Kong Real Property Limited Co. (“Tianjin Kai Li”), and 49% owned by Ningbo
Tong Shang Rong Chuang Investment Limited Co.. Ms. Cheng Weihong, a Director and Senior Vice President of the Company, owns 99%
of Tianjin Kai Li. Therefore, Ms. Cheng Weihong has 50.49% of beneficial ownership in Tongshang Kai Li.
Mr.
Tong Shiping and Ms. Cheng Weihong personally guarantee borrowings on various lines of credit related to our financing services
and short-term borrowings.
The
Company leases certain office and marketing premises under non-cancelable leases. These office leases begin to expire in 2016.
Rent expenses under operating leases were $325,264 for 2016 and $166,567 for 2015. The leases expire at various dates through
2016. In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties.
Future
minimum lease payments under non-cancelable operating leases were as follows:
2017
|
|
$
|
217,925
|
|
2018
|
|
|
181,993
|
|
2019
|
|
|
45,498
|
|
|
|
$
|
445,416
|
|
(
15
)
|
Segment Information
|
The
Company has four principal operating segments: (1) sales of automobiles, (2) financing services, (3) airport auto mall automotive
services, and, (4) 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:
Year
Ended December 31
,
2016
|
|
Sales of
|
|
|
Financing
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Automobiles
|
|
|
Services
|
|
|
Services
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
462,712,818
|
|
|
$
|
4,314,291
|
|
|
$
|
33,660
|
|
|
$
|
-
|
|
|
$
|
467,060,769
|
|
Cost of revenue
|
|
|
461,781,404
|
|
|
|
2,317,843
|
|
|
|
-
|
|
|
|
-
|
|
|
|
464,099,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
332,940
|
|
|
|
332,941
|
|
|
|
35,046
|
|
|
|
-
|
|
|
|
700,927
|
|
General and administrative
|
|
|
336,996
|
|
|
|
336,995
|
|
|
|
28,083
|
|
|
|
1,167,083
|
|
|
|
1,869,157
|
|
Reserve for uncollectible account on receivable related to financing services
|
|
|
-
|
|
|
|
158,092
|
|
|
|
-
|
|
|
|
-
|
|
|
|
158,092
|
|
Total operating expenses
|
|
|
669,936
|
|
|
|
828,028
|
|
|
|
63,129
|
|
|
|
1,167,083
|
|
|
|
2,728,176
|
|
Income (loss) from operations
|
|
$
|
261,478
|
|
|
$
|
1,168,420
|
|
|
$
|
(29,469
|
)
|
|
$
|
(1,167,083
|
)
|
|
$
|
233,346
|
|
Depreciation and Amortization
|
|
$
|
31,366
|
|
|
$
|
24,924
|
|
|
$
|
10,177
|
|
|
$
|
14,242
|
|
|
$
|
80,709
|
|
Year
Ended December 31
,
2015
|
|
Sales of
|
|
|
Financing
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Automobiles
|
|
|
Services
|
|
|
Services
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
440,728,484
|
|
|
$
|
5,567,208
|
|
|
$
|
48,755
|
|
|
$
|
-
|
|
|
$
|
446,344,447
|
|
Cost of revenue
|
|
|
439,577,424
|
|
|
|
3,367,292
|
|
|
|
-
|
|
|
|
-
|
|
|
|
442,944,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
359,506
|
|
|
|
359,506
|
|
|
|
42,295
|
|
|
|
-
|
|
|
|
761,307
|
|
General and administrative
|
|
|
288,673
|
|
|
|
288,673
|
|
|
|
41,239
|
|
|
|
1,030,974
|
|
|
|
1,649,559
|
|
Reserve for uncollectible account on receivable related to financing services
|
|
|
-
|
|
|
|
3,216,727
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,216,727
|
|
Impairment on goodwill and intangible assets
|
|
|
4,281,414
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,281,414
|
|
Total operating expenses
|
|
|
4,929,593
|
|
|
|
3,864,906
|
|
|
|
83,534
|
|
|
|
1,030,974
|
|
|
|
9,909,007
|
|
Income (loss) from operations
|
|
$
|
(3,778,533
|
)
|
|
$
|
(1,664,990
|
)
|
|
$
|
(34,779
|
)
|
|
$
|
(1,030,974
|
)
|
|
$
|
(6,509,276
|
)
|
Depreciation and Amortization
|
|
$
|
140,418
|
|
|
$
|
10,815
|
|
|
$
|
8,536
|
|
|
$
|
6,181
|
|
|
$
|
165,950
|
|
Total
Assets
|
|
Sales of
|
|
|
Financing
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobiles
|
|
|
Services
|
|
|
Services
|
|
|
Corporate
|
|
|
Discontinued
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
$
|
107,042,952
|
|
|
$
|
53,135,295
|
|
|
$
|
57,501
|
|
|
$
|
333,191
|
|
|
$
|
-
|
|
|
$
|
160,568,939
|
|
As of December 31, 2015
|
|
$
|
136,370,503
|
|
|
$
|
89,374,861
|
|
|
$
|
361,090
|
|
|
$
|
361,090
|
|
|
$
|
61,755,609
|
|
|
$
|
288,223,153
|
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
|
CHINA
AUTO LOGISTICS INC.
|
|
|
|
|
By:
|
/s/
Tong Shiping
|
|
Name:
|
Tong
Shiping
|
|
Title:
|
Chief
Executive Officer
|
|
|
|
|
By:
|
/s/
Wang Xinwei
|
|
Name:
|
Wang
Xinwei
|
|
Title
|
Chief
Financial Officer
|
Dated:
March 28, 2017
POWER
OF ATTORNEY
The
registrant and each person whose signature appears below hereby appoint Tong Shiping as attorney-in-fact with full power of substitution,
severally, to execute in the name and on behalf of the registrant and each such person, individually and in each capacity stated
below, one or more amendments to the annual report which amendments may make such changes in the report as the attorney-in-fact
acting deems appropriate and to file any such amendment to the report with the US Securities and Exchange Commission.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Tong Shiping
|
|
Chief
Executive Officer and Director
|
|
March
28, 2017
|
Tong
Shiping
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
Wang Xinwei
|
|
Chief
Financial Officer, Treasurer, Vice President and Director
|
|
March
28, 2017
|
Wang
Xinwei
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Cheng Weihong
|
|
Senior
Vice President (Head of Human Resources and
|
|
March
28, 2017
|
Cheng
Weihong
|
|
General
Administration) and Director
|
|
|
|
|
|
|
|
/s/
Howard S. Barth
|
|
Director
|
|
March
28, 2017
|
Howard
S. Barth
|
|
|
|
|
|
|
|
|
|
/s/
Lv Fuqi
|
|
Director
|
|
March
28, 2017
|
Lv
Fuqi
|
|
|
|
|
|
|
|
|
|
/s/
Yang Lili
|
|
Director
|
|
March
28, 2017
|
Yang
Lili
|
|
|
|
|
|
|
|
|
|
/s/
Bai Shaohua
|
|
Director
|
|
March
28, 2017
|
Bai
Shaohua
|
|
|
|
|
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)
|
|
Loan
Agreement, dated September 1, 2015, by and between the Company and Tongshang Kai Li Automobile Import Export Company Limited
|
10.2(4)
|
|
Payment
Extension Agreement, dated November 10, 2015, by and between Tianjin Binhai Shisheng Trading Group Co., Ltd. and Hezhong International
Development Co., Ltd.
|
10.3(5)
|
|
Office
Tenancy Contract, dated February 18, 2016, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai
Shisheng Trading Group Co., Ltd.
|
10.4(6)
|
|
Payment
Extension Agreement, dated May 12, 2016, by and between Tianjin Binhai Shisheng Trading Group Co., Ltd. and Hezhong International
Development Co., Ltd.
|
10.5(7)
|
|
Office
Tenancy Contract, dated effected as of April 1, 2016, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin
Binhai Shisheng Trading Group Co., Ltd.
|
10.6(7)
|
|
Office
Management Contract, dated effected as of April 1, 2016, by and between Tianjin Binhai International Automall Co., Ltd. and
Tianjin Binhai Shisheng Trading Group Co., Ltd.
|
10.7(8)
|
|
Equity
Transfer Agreement, dated June 1, 2016, by and between Tianjin Binhai Shisheng Trading Group Co., Ltd. and Wuxi Huitong Automobile
Sales and Service Co., Ltd.
|
10.8(8)
|
|
Debt
Transfer Agreement, dated June 1, 2016, by and among Tianjin Binhai Shisheng Trading Group Co., Ltd., Wuxi Huitong Automobile
Sales and Service Co., Ltd. and Hezhong (Tianjin) International Development Co., Ltd.
|
10.9*
|
|
Booth
and (or) Office Tenancy Contract, dated December 1, 2016, by and between Tianjin Binhai International Automall Co., Ltd. and
Tianjin Binhai Shisheng Trading Group Co., Ltd.
|
10.10*
|
|
Office
Tenancy Contract, dated January 1, 2017, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai
Shisheng Trading Group Co., Ltd.
|
14.1(9)
|
|
Code
of Business Conduct and Ethics
|
21.1*
|
|
Subsidiaries
of the Registrant
|
31.1*
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
31.2*
|
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
32.1*
|
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
101.INS*
|
|
XBRL
Instance Document
|
101.SCH*
|
|
XBRL
Taxonomy Extension Schema Document
|
101.CAL*
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
101.DEF*
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
101.LAB*
|
|
XBRL
Taxonomy Extension Labels Linkbase Document
|
101.PRE*
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
(1)
Incorporated by reference to the Company’s Form 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 April 7, 2016.
(4)
Incorporated by reference to the Company’s Form 8-K, filed with the Securities and Exchange Commission on November 16, 2015.
(5)
Incorporated by reference to the Company’s Form 10-K, filed with the Securities and Exchange Commission on April 7, 2016.
(6)
Incorporated by reference to the Company’s Form 10-Q, filed with the Securities and Exchange Commission on May 16, 2016.
(7)
Incorporated by reference to the Company’s Form 8-K, filed with the Securities and Exchange Commission on November 14, 2016.
(8)
Incorporated by reference to the Company’s Form 8-K, filed with the Securities and Exchange Commission on June 7, 2016.
(9)
Incorporated by reference to the Company’s Form 8-K, filed with the Securities and Exchange Commission on December 24, 2008.
*Filed
herewith
55
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