CALI China Auto Logistics Inc. (delisted)

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

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

Management's Discussion and Analysis of Financial Condition and Results of Operations (“ MD&A ”) is designed to provide information that is supplemental to, and should be read together with, the Company’s condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report. Information in this Item 2 is intended to assist the reader in obtaining an understanding of the condensed consolidated financial statements, the changes in certain key items in those financial statements from quarter to quarter, the primary factors that accounted for those changes, and any known trends or uncertainties that the Company is aware of that may have a material effect on the Company’s future performance, as well as how certain accounting principles affect the condensed consolidated financial statements.

Forward Looking Statements

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

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

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our condensed consolidated financial statements and their related notes included in this Quarterly Report and our Annual Report on Form 10-K as filed with the SEC for the year ended December 31, 2016.

Business Overview

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

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

On May 2, 2017, the Company de-registered its majority owned subsidiary, Ganghui, and transferred its assets to Shisheng. Ganghui has been inactive and had no substantial assets or operations. As of June 30, 2017, the Company had $172,660 payable to the 2% noncontrolling shareholder of Ganghui, which represented the noncontrolling shareholders’ share of Ganghui’s book value prior to the de-registration date.

Critical Accounting Policies, Estimates and Assumptions

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

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

Revenue Recognition

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

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

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

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

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

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

Receivables Related to Financing Services

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

The Company evaluates the collectability of outstanding receivables at the end of each of the reporting periods and makes estimates for potential credit losses. Prior to 2015, the Company did not experience any losses on its receivable related to financing services. During the years ended December 31, 2016 and 2015, the Company experienced difficulties in collecting the receivable from a financing service customer, but the receivable was secured by certain imported automobiles. The Company took possession of these secured automobiles and sold them during the years ended December 31, 2016 and 2015. The sales proceeds were used to offset the outstanding receivable from this customer. During the six months ended June 30, 2017 and 2016, the Company recovered $290,353 and $68,813, respectively, from the reserve made in the previous periods. The Company will continue to pursue collecting the remaining receivable balance. As of June 30, 2017 and December 31, 2016, the Company recorded an allowance for uncollectible accounts receivable related to financing services in the amount of $2,811,055 and $3,031,554, respectively.

Inventories

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

Income Taxes

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

We account for income taxes using an asset and liability approach for financial accounting and reporting for income tax purposes. Under the asset and liability method, deferred income taxes are recognized for temporary differences, net operating loss carryforwards and credits by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We conduct this analysis on a quarterly basis. As of June 30, 2017 and December 31, 2016, deferred tax liabilities from continuing operations was $0.

The Company has not provided deferred taxes on unremitted earnings attributable to its international subsidiaries as they are to be reinvested indefinitely. These earnings relate to ongoing operations and are approximately $10.8 million as of June 30, 2017. Because of the availability of US foreign tax credits, it is not practicable to determine the US income tax liability that would be payable if such earnings were not indefinitely reinvested.

The Company has no material uncertain tax positions as of June 30, 2017 or unrecognized tax benefit which would affect the effective income tax rate in future periods. The Company classifies interest and/or penalties related to income tax matters in income tax expense. As of June 30, 2017, there are no interest or penalties related to uncertain tax positions. The Company does not anticipate any significant increases or decreases to its liability for unrecognized tax benefits within the next 12 months.

New Accounting Pronouncements

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

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

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

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

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

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

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

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

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

RESULTS OF OPERATIONS

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

Results of Operations for the Three Months Ended June 30, 2017 Compared to the Three Months Ended June 30, 2016

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

Our net revenue from our continuing operations for the three months ended June 30, 2017 increased 47.9% to $138,758,902 from $93,819,385 for the three months ended June 30, 2016 and our cost of revenue for the three months ended June 30, 2017 increased 48.37% to $138,237,315 for the three months ended June 30, 2017 from $93,173,641 for the three months ended June 30, 2016. Gross profit margin for our continuing operations decreased from 0.69% for the three months ended June 30, 2016 to 0.38% for the three months ended June 30, 2017. As compared to the three months ended June 30, 2016, our gross profit, (loss) income from operations, net loss from continuing operations, and net loss from continuing operations attributable to shareholders of China Auto Logistics Inc. for the three months ended June 30, 2017 decreased 19.23% to $521,587, decreased 433.07% to a loss of $169,999, decreased 28.37% to a loss of $342,169, and decreased 28.41% to a loss of $342,109, respectively, primarily due to reduced gross margins in the Sales of Automobiles and decreased revenue from Financing Services which was partially offset by a reduction in interest expense in the three months ended June 30, 2017.

Sales of Automobiles

Net revenue from Sales of Automobiles increased 48.63% to $137,892,079 for the three months ended June 30, 2017 from $92,774,929 for the same period in 2016. During the three months ended June 30, 2017 and 2016, the Company sold 1,398 automobiles and 905 automobiles, respectively, representing an increase of approximately 54% in volume. The average unit selling price per automobile decreased to $99,000 for the three months ended June 30, 2017 from $103,000 for the same period in 2016. In early August 2015, China’s official currency “Renmenbi” (“RMB”) devalued by over 3% against the U.S. dollar over a 5-day period. During the year ended December 31, 2016 and 2015, the RMB devaluated 6.7% and 5.5%, respectively, against the U.S. dollar. Some of our customers increased their orders in the second half of 2015 potentially in anticipation of increased prices due to the RMB devaluation; this trend continued until the first quarter of 2016. We witnessed a substantial decline in the second and third quarters of 2016 which may be the result of customers depleting the inventories built up in the second half of 2015 and the first quarter of 2016. We believe sales for the three months ended June 30, 2016 were unusually low due to the depletion of the inventories built up from the previous quarters, which resulted to significant increase in percentage during the three months ended June 30, 2017 compared to the same period of 2016.

Our automobile sales increased in both dollars and in quantities during the three months ended June 30, 2017 while our gross margin dropped to 0.16% during the period compared to 0.17% during the same period in the prior year. In December 2016, the PRC government imposed an additional 10% tax on any automobile sales price above approximately $190,000 (RMB1,300,000). This new tax on so-call “super luxury cars” put an immediate reduction on demands for high-end luxury automobiles. As a result, the average unit selling price per automobile declined to $99,000 during the three months ended June 30, 2017 from $103,000 during the same period in 2016. Sales for our high-end luxury automobiles declined, a segment that generally has higher profit margins, which contributed to a further decline to our gross margin for the three months ended June 30, 2017 compared to the same period in 2016. We do not expect our gross margin to be significantly higher than the current level based on our outlook for the Sales of Automobiles segment and increased competition that has resulted from more companies in the imported automobile business entering the market.

In August 2014, the China Commerce and Industry Bureau authorized the “Parallel Imported Vehicles” scheme. The “Parallel Imported Vehicles” scheme permits foreign made automobiles to be imported by importers in addition to authorized automobile dealers. This policy officially opened the imported automobile market to importers like us, so that we can now be in direct competition with the authorized dealers. This is an antitrust effort by the Chinese government to address complaints about the authorized automobile dealers overcharging for foreign-made automobiles. These new rules will also officially allow imported automobiles sold by parties other than authorized dealers to be treated the same as those sold through authorized dealers (i.e., with respect to insurance coverage and the registration process). As of June 30, 2017, the PRC government has selected Guangzhou, Shanghai, Shenzhen and Tianjin as four experimental cities to implement “Parallel Imported Vehicles” scheme.

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

During the three months ended June 30, 2017 and 2016, sales of our top three selling brands, Land Rover, Mercedes Benz, and Toyota accounted for 75% and 70%, respectively, of our total net automobile sales. Sales to the Company’s top five customers, each of which is a car dealer, accounted for 43% and 39% of the Company’s sales during the three months ended June 30, 2017 and 2016, respectively. The Company will continue to maintain close working relationships with its top customers while attempting to reduce the concentration of revenues among these top customers actively looking for new customers to enlarge its customer base.

Financing Services

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

Net revenue from Financing Services during the three months ended June 30, 2017 decreased 16.17% to $861,173 from $1,027,280 for the same period in the prior year. The Company had an aggregate amount of credit lines of approximately $136 million (RMB920 million) as of June 30, 2017. Our Financing Services income and related cost of revenue are affected by the interest rate charged by banks. Our Financing Services revenue consists of two portions: interest income and fee income. The revenue from the fee income portion of our Financing Services decreased during the three months ended June 30, 2017. Excluding revenue from the interest income portion of $566,985 and $554,735 for the three month periods ended June 30, 2017 and 2016, respectively, the revenue from the fee income portion of our Financing Services decreased 37.74% to $294,188 for the three month period ended June 30, 2017 from $472,545 for the three month period ended June 30, 2016. The gross margin for our Financing Services segment decreased to 34.16% for the three month period ended June 30, 2017 from 46.00% for the three month period ended June 30, 2016. The decrease in the gross margin of the Company’s Financing Services offerings, during the three months ended June 30, 2017, was primarily due to the continuing decline in the fee income (which has a higher gross margin than interest income) compared to the same period of 2016.

We provide Financing Services to our customers with our lines of credit with major commercial banks in the PRC, including Agricultural Bank of China, Pudong Development Bank, China Zheshang Bank, Shengjing Bank, and Bank of Heibei. We continue to strengthen our relationship with these banks and aim to negotiate with more banks for higher lines of credit at more favorable terms. Based on the Company’s business relationships with some financial institutions, we are able to obtain financing on an “as-needed” basis and we are in negotiations for a number of new credit lines. As of June 30, 2017, we had approximately $81 million lines of credit available to use in our Financing Services. As of August 10, 2017, the Company had aggregate credit lines of approximately $136 million (RMB920 million). Although all of our lines of credit have maturities of less than one year and may not be renewed on the same terms, if at all, we do not expect that the expiration of our lines of credit with any one of our existing banks will have a material adverse effect on our ability to provide Financing Services. However, if the automobile market in the PRC, and in particular the market for imported automobiles, slows down in the future, our revenue from Financing Services would be materially and adversely affected by a decreased number of transactions.

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

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

Other Services

Other services include revenue generated from Web-based Advertising. We did not generate any revenue from the Automobile Value Added service during the three month periods ended June 30, 2017 and 2016. We have revised our business plan and moved away from Web-based Advertising Services and automobile value added services to focus on Automobile Sales and Financing Services. We expect that the revenue generated from this segment will continue to be low compared to other segments.

Our Web-based Advertising Services revenue decreased 67.11% to $5,650 for the three-month period ended June 30, 2017 from $17,176 for the same period in the prior year. Revenue from Web-based Advertising Services was generated by subscription fees and advertisements.

Our cost of revenue during the three month period ended June 30, 2017 consisted primarily of the cost of automobiles purchased and certain direct labor costs for the Sales of Automobiles and interest expense related to our Financing Services. Our cost of revenue increased 48.37%, from $93,173,641 during the same three-month period in the prior year compared to $138,237,315 in 2017. The increase was primarily due to the increase in the sales volume of imported automobiles.

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

Gross profit decreased 19.23% from $645,744 during the three months ended June 30, 2016 to $521,587 during the three months ended June 30, 2017, primarily due to lower gross margins in the sales of automobiles and a decrease of financing service fee revenue.

Operating expenses increased 16.29%, from $594,704 during the three months ended June 30, 2016 to $691,586 during the three months ended June 30, 2017. The increase in operating expenses was primarily the result of more other listing costs incurred in the second quarter of 2017 compared to the same period of 2016.

Payroll costs decreased 9.84% to $42,578 during the three months ended June 30, 2017 from $47,227 during the same period in the prior year. Staff related costs decreased 16.18% to $27,609 during the three months ended June 30, 2017 from $32,939 during the same period in the prior year. The Company’s staff related costs decreased due to the overall pay and benefit decreases during the period. Advertising and promotion expenses decreased 39.97% during the period as we incurred less advertising costs during the three months ended June 30, 2017 after spending substantial amount on promotion materials during the three months ended March 31, 2017. Entertainment expenses decreased 49.00% to $10,329 during the three months ended June 30, 2017 from $20,254 during the same period in the prior year as they fluctuate from time to time depending on activities we conduct. Rent expenses increased 53.03% to $8,435 during the three months ended June 30, 2017 compared to $5,512 during the same period of 2016 as we allocated a designated section in our leased office space for our sales personnel.

Payroll expenses decreased 13.40% during the three month period ended June 30, 2017 primarily due to our reductions to the number of administration employees in order to reduce our cost.  Staff-related costs increased 90.39% primarily due to higher employee welfare costs incurred during the three month period ended June 30, 2017. Entertainment expenses decreased 1.51% to $48,181 during the three months ended June 30, 2017 from $48,921 during the same period in the prior year as we spent less on customer relationships during the three months ended June 30, 2017. Depreciation expenses increased 67.14% to $22,158 during the three months ended June 30, 2017 from $13,257 during the same period in the prior year primarily due to the depreciation on the leasehold improvements incurred on the additional leased office during 2016. Rent expenses increased 7.24% to $49,503 during the three months ended June 30, 2017 compared to $46,163 during the same period of 2016 as more office space in use during the three months ended June 30, 2017 compared to the same period of 2016. Legal, professional fees and other listing expenses for the three month period ended June 30, 2017 increased 7.02% to $123,807 during the three months ended June 30, 2017 from $115,682 during the same period of the prior year as more other listing costs incurred in the three months ended June 30, 2017.

Income (Loss) from Operations

Income from operations decreased 433.07% to a loss of $169,999 in the three month period ended June 30, 2017 from an income from operations of $51,040 in the same period of the prior year. The switch to an operating loss from an operating income was primarily due to lower gross margins in the sales of automobiles and a decrease in financing service fee revenue and higher operating expenses during the three months ended June 30, 2017 compared to the same period of prior year.

Other Income (Expenses), Net

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

We recorded net other expenses of $207,709 for the three months ended June 30, 2017 and $506,994 for the same period of the prior year. The decrease in other expenses was primarily due to decrease in interest expense as a result of lower balances of short-term borrowings after the disposal of Zhonghe in June 2016.

Our net revenue from our continuing operations for the six months ended June 30, 2017 increased 7.97% to $249,292,683 for 2017 from $230,883,403 for the six months ended June 30, 2016 and our cost of revenue for the six months ended June 30, 2017 increased 8.3% to $248,307,202 for the six months ended June 30, 2017 from $229,286,547 for the six months ended June 30, 2016. Gross profit margin for our continuing operations decreased from 0.69% for the six months ended June 30, 2016 to 0.40% for the six months ended June 30, 2017. As compared to the six months ended June 30, 2016, our gross profit, (loss) income from operations, net loss from continuing operations, and net loss from continuing operations attributable to shareholders of China Auto Logistics Inc. for the six months ended June 30, 2017 decreased 38.29% to $985,481, decreased 163.76% to a loss of $210,973, decreased 28.23% to a loss of $477,496, and decreased 28.26% to a loss of $477,355, respectively, primarily due to reduced gross margins in the Sales of Automobiles and decreased revenue from Financing Services which was partially offset by the recovery from reserve for uncollectible accounts receivable related to Financing Services and a reduction in interest expense in the six months ended June 30, 2017.

Sales of Automobiles

Net revenue from Sales of Automobiles increased 8.34% to $247,687,133 for the six months ended June 30, 2017 from $228,610,421 for the same period in 2016. During the six months ended June 30, 2017 and 2016, the Company sold 2,502 automobiles and 2,209 automobiles, respectively, representing an increase of approximately 13% in volume. The average unit selling price per automobile decreased to $99,000 for the six months ended June 30, 2017 from $104,000 for the same period in 2016. In early August 2015, China’s official currency “Renmenbi” (“RMB”) devalued by over 3% against the U.S. dollar over a 5-day period. During the year ended December 31, 2016 and 2015, the RMB devaluated 6.7% and 5.5%, respectively, against the U.S. dollar. Some of our customers increased their orders in the second half of 2015 potentially in anticipation of increased prices due to the RMB devaluation; this trend continued until the first quarter of 2016. We witnessed a substantial decline in the second and third quarters of 2016 which may be the result of customers depleting the inventories built up in the second half of 2015 and the first quarter of 2016. We believe sales for the three months ended June 30, 2016 were unusually low due to the depletion of the inventories built up from the previous quarters, which resulted to an increase in percentage during the six months ended June 30, 2017 compared to the same period of 2016.

Our automobile sales increased in both dollars and in quantities during the six months ended June 30, 2017 while our gross margin dropped to 0.17% during the period compared to 0.24% during the same period in the prior year. In December 2016, the PRC government imposed an additional 10% tax on any automobile sales price above approximately $190,000 (RMB1,300,000). This new tax on so-call “super luxury cars” put an immediate reduction on demands for high-end luxury automobiles. As a result, the average unit selling price per automobile declined to $99,000 during the six months ended June 30, 2017 from $104,000 during the same period in 2016. Sales for our high-end luxury automobiles declined, a segment that generally has higher profit margins, which contributed to a further decline to our gross margin for the six months ended June 30, 2017 compared to the same period in 2016. We do not expect our gross margin to be significantly higher than the current level based on our outlook for the Sales of Automobiles segment and increased competition that has resulted from more companies in the imported automobile business entering the market.

During the six months ended June 30, 2017 and 2016, sales of our top three selling brands, Land Rover, Mercedes Benz, and Toyota accounted for 74% and 75%, respectively, of our total net automobile sales. Sales to the Company’s top five customers, each of which is a car dealer, accounted for 41% and 44% of the Company’s sales during the six months ended June 30, 2017 and 2016, respectively. The Company will continue to maintain close working relationships with its top customers while attempting to reduce the concentration of revenues among these top customers actively looking for new customers to enlarge its customer base.