NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Organization,
Nature of Business and Basis of Presentation, Going Concern, and Summary of Significant Accounting Policies
Organization,
Nature of Business and Basis of Presentation
China
Auto Logistics Inc. (the “
Company
” or “
China Auto
”) operates through its wholly-owned subsidiary
Ever Auspicious International Limited, a Hong Kong corporation (“
HKCo
.”), and its wholly-owned subsidiary Tianjin
Seashore New District Shisheng Business Trading Group Co. Ltd. (“
Shisheng
”), a company established under the
laws of the People’s Republic of China (“
PRC
”) and Shisheng’s wholly owned and majority owned subsidiary,
Tianjin Hengjia Port Logistics Corp. (“
Hengjia
”).
On
May 2, 2017, the Company de-registered its majority owned subsidiary, Tianjin Ganghui Information Technology Corp. (“
Ganghui
”)
and transferred its assets to Shisheng. Ganghui has been inactive and had no substantial assets or operations.
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 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.
The
accompanying condensed consolidated balance sheet as of December 31, 2016, which has been derived from the audited consolidated
financial statements and the accompanying unaudited condensed consolidated financial statements, has been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission (the “
SEC
”). Certain information and note
disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted
in the United States of America (“
U.S. GAAP
”) have been condensed or omitted pursuant to those rules and regulations
and the Company believes that the disclosures made are adequate to make the information not misleading.
In
the opinion of management, these condensed consolidated financial statements reflect all adjustments which are of a normal recurring
nature and which are necessary to present fairly the financial position of China Auto as of September 30, 2017 and the results
of its operations, and cash flows for the three month and nine month periods ended September 30, 2017 and 2016. These condensed
consolidated financial statements and related notes should be read in conjunction with the Company’s annual report on Form
10-K for the fiscal year ended December 31, 2016. The results of operations for the three month and nine month periods ended September
30, 2017 are not necessarily indicative of the results which may be expected for the entire fiscal year.
The
preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Going
Concern
The
Company incurred operating losses and had negative operating cash flows and may continue to generate negative cash flows as the
Company implements its business plan for 2017. There can be no assurance that its continuing efforts to execute its business plan
will be successful and that the Company will be able to continue as a going concern. The Company’s net loss from continuing
operations attributable to shareholders for the three months ended September 30, 2017 was $939,443 as compared to $200,000 for
the three months ended September 30, 2016 and $1,416,798 and $865,397 for the nine months ended September 30, 2017 and 2016, respectively.
Net
cash used in operations from continuing operations during the nine months ended September 30, 2017 and 2016 was $1,906,171 and
$51,395,675, respectively.
The
Company does not currently have sufficient cash or commitments for financing to sustain its operations for the twelve months from
the issuance date of these financial statements. The Company’s plan continues to be to develop new customer relationships
and substantially increase the cash flows from operations and revenue derived from our products/services. If the Company’s
revenues do not reach the level anticipated in our plan, the Company may require additional financing in order to execute our
operating plan. If additional financing is required, the Company cannot predict whether this additional financing will be in the
form of equity, debt, or another form, and the Company may not be able to obtain the necessary additional capital on a timely
basis, on acceptable terms, or at all. In the event that financing sources are not available, or that the Company is unsuccessful
in increasing its revenues and profits, the Company may be unable to implement its current plans for expansion, repay our debt
obligations or respond to competitive pressures, any of which would have a material adverse effect on its business, prospects,
financial condition and results of operations. These factors raise substantial doubt about the Company's ability to continue as
a going concern. These condensed consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
Use
of Estimates
The
preparation of condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, revenue and expenses in the condensed consolidated financial
statements and accompanying notes. Significant accounting estimates reflected in the Company’s condensed consolidated financial
statements include the collectibility of accounts receivable, the useful lives and impairment of property and equipment, goodwill
and intangible assets, the valuation of deferred tax assets and inventories and the provisions for income taxes. Actual results
could differ from those estimates.
Principles
of Consolidation
The
condensed consolidated financial statements include the financial statements of China Auto and its wholly-owned and majority-owned
subsidiaries. All inter-company transactions and balances have been eliminated in preparation of the condensed consolidated financial
statements.
Currency
Reporting
The
Company’s operations in the PRC use the local currency, Renminbi (“
RMB
”), as their functional currency,
whereas amounts reported in the accompanying condensed consolidated financial statements and disclosures are stated in U.S. dollars,
the reporting currency of the Company, unless stated otherwise. As such, the condensed consolidated balance sheets of the Company
have been translated into U.S. dollars at the current rates as of September 30, 2017 and December 31, 2016 and the condensed consolidated
statements of income have been translated into U.S. dollars at the weighted average rates during the periods the transactions
were recognized.
The
resulting foreign currency translation adjustments are recorded in determining other comprehensive income in the condensed consolidated
statements of comprehensive income and as a separate component of equity in the condensed consolidated balance sheets.
Revenue
Recognition
The
Company’s main source of income was generated through (1) sales of automobiles, (2) service fees for assisting customers
to get bank financing on purchases of automobiles, (3) web-based advertising services including fees from (i) displaying graphical
advertisements on the Company websites and (ii) web-based listing services that allow customers to place automobile related information
on the Company’s websites, and (4) automobile value added services. The Company recognizes revenue when there is persuasive
evidence of an arrangement, delivery has occurred upon shipment or services have been rendered, the seller’s price to the
buyer is fixed or determinable, and collectibility is reasonably assured.
The
Company recognizes the sales of automobiles upon delivery and acceptance by the customers and where collectibility is reasonably
assured.
Service
revenue related to financing services is recognized ratably over the financing period.
Service
fees for graphical advertisements on the Company’s websites are charged on a fixed fee basis. The Company recognizes the
advertising revenue when the service is performed over the service term. The Company charges a monthly fee for listing services
and recognizes the revenue when services are performed. The Company offers sales incentives to its customers in the form of (i)
subscription exemption; (ii) discounted prices and (iii) free advertisements. The Company classifies sales incentives as a reduction
of net revenues. Revenues, net of discounts and allowances, are recognized ratably over the service periods.
The
Company recognizes revenue from automobile value added services when such services are performed.
Value
added taxes (“
VAT
”) represent amounts collected on behalf of specific regulatory agencies that require remittance
by a specified date. These amounts are collected at the time of sale and are detailed on invoices provided to customers. The Company
accounts for VAT on a net basis. The Company recorded and paid business taxes based on a percentage of the net service revenues
and reported the service revenue net of the business taxes and other sales related taxes.
Receivables
Related to Financing Services
The
Company records receivables related to financing services when cash is loaned to customers to finance their purchases of automobiles.
Upon repayment by customers, the Company records the amounts as reductions of receivables related to financing services. Receivables
related to financing services represent the aggregate outstanding balance of loans from customers related to their purchases of
automobiles. The Company charges a fee for providing loan services and such fees are prepaid by customers. The Company amortizes
these fees over the receivable term, which is typically 90 days, using the straight-line method. The Company records such amortized
amounts as financing fee income and the unamortized amount is classified as deferred revenue on the Company’s condensed
consolidated balance sheets.
The
Company evaluates the collectability of outstanding receivables at the end of each of the reporting periods and makes estimates
for potential credit losses. Prior to 2015, the Company did not experience any losses on its receivable related to financing services.
During the year ended December 31, 2016 and 2015, the Company experienced difficulties in collecting the receivable from a financing
service customer, but the receivable was secured by certain imported automobiles. The Company took possession of these secured
automobiles and sold them during the years ended December 31, 2016 and 2015. The sales proceeds were used to offset the outstanding
receivable from this customer. During the nine months ended September 30, 2017 and 2016, the Company had a net reserve of $228,981
and recovered $68,813 from the reserve made in the previous periods. The Company will continue to pursue collecting the remaining
receivable balance. As of September 30, 2017 and December 31, 2016, the Company recorded an allowance for uncollectible accounts
receivable related to financing services in the amount of $3,383,359 and $3,031,554, respectively.
Inventories
Inventory
is stated at the lower of cost (using the specific identification method) or market (net realizable). We continually evaluate
the composition of our inventory, assessing slow-moving and ongoing products. Our products are comprised of the purchase cost
of automobiles which declines in value over time. We continuously evaluate our inventory to determine the reserve amount for slow-moving
inventory. As of September 30, 2017 and December 31, 2016, there was no reserve for obsolescence.
Basic
and Diluted (Loss) Income Per Share
Basic
(loss) income per common share is computed by dividing net (loss) income available to common stockholders by the weighted average
number of common shares outstanding. Diluted (loss) income per common share is computed similarly to basic (loss) income per common
share, except that the denominator is increased to include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common shares were dilutive. As of September 30, 2017 and
2016, the Company did not have any common stock equivalents, therefore, the basic (loss) income per share is the same as the diluted
(loss) income 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 has completed the initial assessment of the effect of adoption. Based on this assessment, the Company does not expect
any change to the revenue recognition policy. The Company currently does not expect that adopting these standards will have a
material impact on the Company’s consolidated financial statements. The Company will continue to monitor additional modifications,
clarifications or interpretations undertaken by the FASB that may impact our assessments.
In
November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
.
Under ASU 2015-17, a reporting entity is required to classify deferred tax assets and liabilities as noncurrent in a classified
statement of financial position. Current guidance requiring the offsetting of deferred tax assets and liabilities of a tax-paying
component of an entity and presentation as a single noncurrent amount is not affected. The standard is effective for public entities
for the annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted
for financial statements as of the beginning of an interim or annual reporting period. Entities may apply the update prospectively
to all deferred tax assets and liabilities, or retrospectively for all periods presented. The Company adopted this standard during
the quarter ended March 31, 2017. The adoption of this ASU did not have a material effect on the Company’s consolidated
financial statements.
The
FASB issued ASU 2016-02,
Leases (Topic 842)
. ASU 2016-02 requires that a lessee recognize the assets and liabilities that
arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments
(the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases
with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not
to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases
at the beginning of the earliest period presented using a modified retrospective approach. Public business entities should apply
the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted for all public business entities and
all nonpublic business entities upon issuance. The Company has not yet determined the effect of the adoption of this standard
on the Company’s consolidated financial position and results of operations.
In
March 2016, the FASB issued Accounting Standard Update No. 2016-09 (ASU 2016-09) “Improvements to Employee Share-Based Payment
Accounting.” ASU 2016-09 simplifies several aspects of employee share-based payment accounting, including the income tax
consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This
guidance will become effective for us beginning in the first quarter of 2017. Early adoption is permitted. The Company adopted
this standard during the quarter ended March 31, 2017. The adoption of this ASU did not have a material effect on the Company’s
consolidated financial statements.
In
June 2016, the FASB issued Accounting Standard Update No. 2016-13 (ASU 2016-13) “Measurement of Credit Losses
on Financial Instruments.” ASU 2016-13 requires measurement and recognition of expected credit losses for financial
assets held. This guidance will become effective for us beginning in the first quarter of 2020 and must be adopted using a modified
retrospective approach, with certain exceptions. Early adoption is permitted beginning in the first quarter of 2019. The
adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In
August 2016, the FASB issued Accounting Standards Update 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments. This update addresses whether to present certain specific cash flow items as operating, investing
or financing activities. The amendments in this update are effective for public entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period.
The Company is currently assessing the impact of the future adoption of this standard on its consolidated Statements of Cash Flows.
In
October 2016, the FASB issued Accounting Standards Update 2016-16 Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other
Than Inventory. This update removes the current exception in US GAAP prohibiting entities from recognizing current and deferred
income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current
exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold
to a third party remains unaffected. The amendments in this update are effective for public entities for annual reporting periods
beginning after December 15, 2017. Early adoption is permitted and should be in the first interim period if an entity issues interim
financial statements. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.
In
November 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230), to require entities to
show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash
flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted
cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents
are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the
statement of cash flows to the related captions in the balance sheet. Entities will also have to disclose the nature of restricted
cash and restricted cash equivalent balances. The new guidance will be effective for fiscal years beginning after December 15,
2017, including the interim periods within those years. Early adoption is permitted and the new guidance is applied retrospectively.
The Company is in the process of evaluating the impact of adoption on its consolidated statement of cash flows and disclosures.
The
Company is not aware of any recently issued accounting pronouncements that, when adopted, will have a material effect on the Company’s
financial position, results of operations or cash flows.
(2) Restricted
Cash
Restricted
cash consists of cash which is not available for use in the Company’s operations and is summarized as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Collateral for bank’s issuance of letters of credit to the Company’s customers
|
|
$
|
3,379,284
|
|
|
$
|
2,541,674
|
|
Collateral for notes payable to suppliers
|
|
|
6,010,970
|
|
|
|
20,162,161
|
|
|
|
$
|
9,390,254
|
|
|
$
|
22,703,835
|
|
(3) Property
and Equipment
A
summary of property and equipment is as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Computers
|
|
|
69,477
|
|
|
|
72,134
|
|
Office equipment, furniture and fixtures
|
|
|
28,599
|
|
|
|
44,766
|
|
Leasehold improvements
|
|
|
155,828
|
|
|
|
149,338
|
|
Automobiles
|
|
|
1,061,466
|
|
|
|
1,038,686
|
|
|
|
|
1,315,370
|
|
|
|
1,304,924
|
|
Less: Accumulated depreciation and amortization
|
|
|
(1,042,689
|
)
|
|
|
(987,642
|
)
|
|
|
$
|
272,681
|
|
|
$
|
317,282
|
|
Depreciation
and amortization expenses for property and equipment amounted to approximately $23,087 and $22,811 for the three months ended
September 30, 2017 and 2016, respectively, and $67,124 and $58,532 for the nine months ended September 30, 2017 and 2016, respectively.
(4) Bank
Overdraft
In
December 2016, the Company entered into an overdraft agreement with PuDong Development Bank. Under the terms of the
agreement, the Company can draw on its bank account up to $2,254,114 (RMB15,000,000) in excess of the funds on deposit. The
overdraft amount is subject to an annual interest rate of 6% and the maximum overdraft period cannot exceed 89 days. The
overdraft agreement is guaranteed by Mr. Tong Shiping, the Company’s Chairman, President and CEO, Ms. Cheng Weihong, a Director
and Senior Vice President of the Company, and a non-related entity which is a supplier of the Company, and matures in December
2017. There were no outstanding overdraft balances as of September 30, 2017 or December 31, 2016.
(5) Lines
of Credit Related to Financing Services
The
Company provides financing services to its customers using the Company’s bank facility lines of credit. The Company earns
a service fee for drawing its facility lines related to its customers’ purchases of automobiles and payment of import taxes.
Customers bear all the interest and fees charged by the banks and prepay those fees upon the execution of their service contracts
with the Company. Customers are also required to make a deposit in the range of 10% to 15% of the purchase price of the automobiles.
If customers default on payment, the banks take custody of the automobiles until the borrowings are fully repaid.
Interest
charged by the banks for draws on these facility lines of credit is classified as cost of revenue in the consolidated statements
of operations. Interest expense related to these lines of credit was $681,011 and $539,650 for the three months ended September
30, 2017 and 2016, respectively, and $1,713,036 and $1,771,252 for the nine months ended September 30, 2017 and 2016, respectively.
A
summary of the Company’s lines of credit related to financing services follows:
Agricultural
Bank of China
In
September 2016 the Company entered into a facility line of credit agreement with Agricultural Bank of China, pursuant to which
the Company can borrow a maximum amount of $72,131,640 (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 4.65% to 6.88% per annum, and were repayable within 3 months to 4 months from the date of the drawing. As of September 30,
2017 and December 31, 2016, the Company had outstanding balances of $33,309,611 and $28,926,623, respectively, under this facility
line of credit. This facility matured in September 2017.
In
October 2017 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 $69,126,155 (RMB460,000,000). 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 bear interest at rates ranging
from 4.65% to 6.88% per annum, and are repayable within 3 months to 4 months from the date of the drawing. As of September 30,
2017, the Company had outstanding balances of $0 under this facility line of credit. This facility matures in October 2018.
PuDong
Development Bank
In
December 2016, the Company entered into a facility line of credit agreement with PuDong Development Bank, pursuant to which the
Company can borrow a maximum amount of $18,032,910 (RMB120,000,000). Borrowings under this facility line of credit bear interest
at rates ranging from 4.42% to 6.13% per annum, and are repayable within 3 months from the dates of drawing. As of September 30,
2017 and December 31, 2016, the Company had outstanding balances of $5,672,868 and $7,156,970, respectively, under this facility
line of credit. This facility line of credit is guaranteed by Ms. Cheng Weihong, a Director and Senior Vice President of the Company,
and two non-related entity, which are suppliers of the Company, and matures in December 2017.
China
Zheshang Bank
In
August 2016, the Company entered into a facility line of credit agreement with China Zheshang Bank, pursuant to which the Company
can borrow a maximum amount of $33,060,335 (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 bore 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 September 30, 2017 and December 31, 2016, the Company
had outstanding balances of $0 and $7,045,426, respectively, under this facility line of credit. This facility matured in August
2017.
In
September 2017, 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 $33,060,335 (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 September 30, 2017, the Company had outstanding
balances of $1,387,788 under this facility line of credit. This facility matures in September 2018.
Shengjing
Bank
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
$
7,513,713
(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, (iv) Tianjin Binhai International Automall Ltd. Co., a customer. Borrowings under this facility line of credit
bear interest at a rate of 5.3% per annum, and are repayable within 3 months to 6 months from the dates of drawing. As of September
30, 2017 and December 31, 2016, the Company had outstanding balances of $5,345,596 and $3,952,744 under this facility line of
credit. This facility matures in November 2017.
Bank
of Heibei
In
March 2017, the Company entered into a facility line of credit agreement with Bank of Heibei
, pursuant
to which t
he Company can borrow a maximum amount of
$
7,513,713
(RMB50,000,000).
This facility line of credit is guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii)
Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and (iii) Tianjin Binhai International Automall Ltd. Co.,
a customer. Borrowings under this facility line of credit bear interest at rates ranging from 4.0% to 4.6% per annum, and are
repayable within 3 months to 6 months from the dates of drawing. As of September 30, 2017, the Company had outstanding balances
of $3,956,019 under this facility line of credit. This facility matures in March 2018.
(
6
)
Short Term Borrowings
Agricultural
Bank of China
In
June 2016, the Company entered into two working capital loan agreements with Agricultural Bank of China to obtain short term financing.
Under the terms of these agreements, the Company can borrow up to $6,336,679 (RMB44,000,000). One of the loan agreements in the
amount of $576,062 (RMB4,000,000) expired in September 2016 and the outstanding balance was repaid. The other loan agreement had
an outstanding balance of $5,760,618 (RMB 40,000,000) as of December 31, 2016, matured in June 2017 and was repaid in June 2017.
These loan agreement bore interest at a rate of 4.785% per annum, matured in June 2017, and was 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.
In
June 2017, the Company entered into a loan agreement with Agricultural Bank of China to obtain short term financing. Under the
terms of this agreement, the Company can borrow up to $5,259,598 (RMB35,000,000). Borrowings under this loan agreement bear interest
at a rate of 4.79% for a borrowing period of one year and are 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. The total outstanding balance of these agreements was $5,259,598 and $0 as of September 30, 2017
and December 31, 2016, respectively. This loan matures in June 2018.
China
Zheshang Bank
In
July and August 2016, the Company entered into five loan agreements with China Zheshang Bank. Under the terms of these agreements,
the Company borrowed an aggregate amount of $4,320,463 (RMB30,000,000). Borrowings under these loan agreements bore interest at
a rate of 5.655% for a borrowing period of six months and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman,
President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International
Automall Ltd. Co., a customer, (iv) Kai Li Xing Kong Real Property Ltd., Co., an entity majorly owned by Ms. Cheng Weihong (v)
Zhonghe, the Company’s former subsidiary, and (vi) Hezhong (Tianjin) International Development Ltd. Co., the former owner
of Zhonghe. The total outstanding balance of these agreements was $0 and $4,320,463 as of September 30, 2017 and December 31,
2016, respectively. These loans matured in January and February 2017.
In
November and December 2016, the Company entered into three loan agreements with China Zheshang Bank. Under the terms of these
agreements, the Company borrowed an aggregate amount of $2,880,308 (RMB20,000,000). Borrowings under these loan agreements bore
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 $0 and $2,880,308 as of September 30, 2017 and
December 31, 2016, respectively. These loans matured in May and June 2017.
In
April 2017, the Company entered into a loan agreement with China Zheshang Bank. Under the terms of this loan agreement, the Company
borrowed an amount of $3,005,485 (RMB20,000,000). Borrowings under this loan agreement bear interest at a rate of 5% 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 this agreement was $3,005,485 as of September 30, 2017. This loan matures in January 2018.
In
May and June 2017, the Company entered into three loan agreements with China Zheshang Bank. Under the terms of these agreements,
the Company borrowed an aggregate amount of $3,005,485 (RMB20,000,000). Borrowings under these loan agreements bear interest at
rates ranging from 5.79% to 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 $3,005,485 as of September 30, 2017. These loans
mature in November and December 2017.
In
June 2017, the Company entered into three loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company
borrowed an aggregate amount of $2,103,840 (RMB14,000,000). Borrowings under these loan agreements bear interest at a rate of
5.79% 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 $2,103,840 as of September 30, 2017. These loans mature in December 2017.
In
July 2017, the Company entered into three loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company
borrowed an aggregate amount of $2,404,388 (RMB16,000,000). Borrowings under these loan agreements bear interest at a rate of
5.79% 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 $2,404,388 as of September 30, 2017. These loans mature in January 2018.
(7) Notes
Payable to Suppliers
From
time to time, the Company issues notes payable to suppliers, which are guaranteed by various banks. The terms of these notes payable
vary depending on the negotiations with the suppliers. Typical terms are in the range of three to six months. Prior
to the expiration dates of the notes, the note holders can present these notes to the banks to draw on the note amounts if the
Company does not settle the outstanding amount payable to these suppliers. The Company is subject to a bank fee of 0.05% on notes
payable amounts.
As
of September 30, 2017, the Company had thirty-one outstanding notes payable to suppliers, which mature in November and December
2017, in an aggregate amount of $12,021,940 (RMB80,000,000), 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 $6,010,970 (RMB40,000,000) as guaranteed
funds, which was classified as restricted cash as of September 30, 2017. These notes 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 Jing Dian Automobile Sales Information Ltd. Co., a supplier, (iv) Tianjin Ning Chuan International Trading Ltd. Co., a
supplier,, and (v) Tianjin Ying Zhi Jie International Logistics Ltd. Co., a supplier.
The
purpose of these arrangements is to provide additional time for the Company to remit payments while ensuring that suppliers do
not bear any credit risk, since the suppliers’ payments are guaranteed by the banks.
(8) Major
Customers and Suppliers
The
following table discloses the major customers who individually accounted for over 10% of our total net sales during the three
and nine months ended September 30, 2017 and 2016, respectively:
|
|
As a Percentage of Our
Total Net Revenues
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Tianjin Jing Dian Automobile Sales Information Ltd. Co.
|
|
|
*
|
|
|
|
16
|
%
|
|
|
10
|
%
|
|
|
26
|
%
|
Tianjin Binhai International Automall Ltd. Co.
|
|
|
17
|
%
|
|
|
25
|
|
|
|
17
|
%
|
|
|
13
|
%
|
*
Accounted for less than 10% of our total net sales.
The
following table sets out our major suppliers who individually accounted for more than 10% of our total net purchases during the
three and nine months ended September 30, 2017 and 2016, respectively
:
|
|
As a Percentage of Our
Total Net Purchases
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Tianjin Ning Chuan International Trading Ltd.
|
|
|
**
|
|
|
|
12
|
%
|
|
|
**
|
|
|
|
**
|
|
Tianjin Shi Mao International International Trading Ltd. Co.
|
|
|
**
|
|
|
|
**
|
|
|
|
**
|
|
|
|
18
|
%
|
Tianjin Ying Zhi Jie International Logistics Ltd. Co.
|
|
|
**
|
|
|
|
15
|
%
|
|
|
**
|
|
|
|
15
|
%
|
**
Accounted for less than 10% of our total net purchases.
(9) Retained
earnings
According
to the Law of the PRC on Enterprises with Wholly-Owned Foreign Investment, the Company PRC’s subsidiaries are required to
make appropriations from after-tax profits as determined under accounting principles generally accepted in the PRC (“
PRC
GAAP
”) to non-distributable reserves. These reserve funds include one or more of the following: (i) a general reserve,
(ii) an enterprise expansion reserve and (iii) a staff bonus and welfare fund. A wholly-owned PRC subsidiary is not required to
make appropriations to the enterprise expansion reserve but annual appropriations to the general reserve are required to be made
at 10% of the profit after tax as determined under PRC GAAP at each year-end, until such fund has reached 50% of its respective
registered capital. The staff welfare and bonus reserve is determined by the board of directors. The general reserve is used to
offset future losses. The subsidiary may, upon a resolution passed by the stockholders, convert the general reserve into capital.
The staff welfare and bonus reserve are used for the collective welfare of the employees of the subsidiary. The enterprise expansion
reserve is for the expansion of the subsidiary operations and can be converted to capital subject to approval by the relevant
authorities. These reserves represent appropriations of the retained earnings determined in accordance with Chinese law.
In
addition to the general reserve, the Company’s PRC subsidiaries are required to obtain approval from the local PRC government
prior to distributing any registered share capital. Accordingly, both the appropriations to general reserve and the registered
share capital of the Company’s PRC subsidiary are considered as restricted net assets and are not distributable as cash
dividends. As of September 30, 2017 and December 31, 2016, the Company’s statutory reserve fund was approximately $1,543,000
and $2,317,000, respectively.
(10) Related
Party Balances and Transactions
Ms.
Cheng Weihong (the Senior Vice President and Chairwoman of Shisheng and wife of China Auto’s President and Chief Executive
Officer, Mr. Tong Shiping) made several non-interest bearing loans to a wholly owned subsidiary of the Company (HKCo.) to meet
working capital needs of the Company. For the nine months ended September 30, 2017 and 2016, the Company made aggregate borrowings
from Ms. Cheng Weihong of $2,551,427 and $484,919, respectively, and made repayments of $0 and $0 to Ms. Cheng Weihong. In September
of 2017, Ms. Cheng Weihong transferred $3,948,686 of the non-interest bearing loans to Bright Praise Enterprises Limited, a British
Virgin Islands corporation (“
Bright Praise
”). At the time of the transfer Bright Praise was a holder of 40.85%
of the outstanding common stock of the Company.
On
September 23, 2017, the Company entered into a Debt Exchange Agreement with Bright Praise pursuant to which the Company agreed
to issue 806,000 shares of the Company’s common stock in exchange for Bright Praise agreeing to transfer a receivable of
$1,700,660 due from HKCo. to the Company creating an intercompany debt between the Company and HKCo. The purchase price for each
share of common stock was $2.11 which was the consolidated closing bid price of the Company’s common stock on the NASDAQ
Capital Market on September 22, 2017. Upon the completion of this transaction, Bright Praise’s ownership in the Company
increased to 50.7%. As of September 30, 2017 and December 31, 2016, the outstanding balances due to Bright Praise were $2,248,026
and $0, respectively. As of September 30, 2017 and December 31, 2016, the outstanding balances due to Ms. Cheng Weihong were $69,950
and $1,550,745, respectively.
The
Company’s former shareholder, Sino Peace Limited, paid certain accrued expenses in the previous years on behalf of the Company.
The amounts of $2,041,659 and $1,956,625 were outstanding as payable related to prior years’ professional fees on the consolidated
balance sheets as of September 30, 2017 and December 31, 2016, respectively. In January 2015, December 2016, and February 2017,
the Company received notification from an individual who claimed to be the owner of St. George International Limited
(“
St. George
”) and made a claim that the debt owed to Sino Peace by the Company had been transferred to
St. George. However, the Company neither received any evidence to support such assignment nor any notification
from the owner of Sino Peace that Sino Peace was transferring its legal right of collecting the receivable from the Company to
St. George. The Company has been unable to locate the owner of Sino Peace to confirm such transfer and therefore considers
such claim by St. George legally unbinding at this time
.
The
balances as discussed above as of September 30, 2017 and December 31, 2016 are interest-free, unsecured and have no fixed term
of repayment. During the nine months ended September 30, 2017 and 2016, there was no imputed interest charged in relation to these
balances.
Mr.
Tong Shiping and Ms. Cheng Weihong personally guarantee borrowings on various lines of credit related to the Company’s financing
services and short-term borrowings.
(11) Segment
Information
The
Company has three principal operating segments: (1) sales of automobiles, (2) financing services, and, (3) other services. These
operating segments were determined based on the nature of the services offered. Operating segments are defined as components of
an enterprise about which separate financial information is available and that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance. The Company’s chief executive officer and chief
operating officer have been identified as the chief operating decision makers. The Company’s chief operating decision makers
direct the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.
The
Company evaluates performance based on several factors, including net revenue, cost of revenue, operating expenses, and income
from operations. The following tables show the continuing operations of the Company’s operating segments:
Three
Months Ended September 30, 2017
|
|
Sales of
|
|
|
Financing
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Automobiles
|
|
|
Services
|
|
|
Services
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
124,174,090
|
|
|
$
|
1,059,768
|
|
|
$
|
(1,970
|
)
|
|
$
|
-
|
|
|
$
|
125,231,888
|
|
Cost of revenue
|
|
|
124,023,651
|
|
|
|
681,011
|
|
|
|
-
|
|
|
|
-
|
|
|
|
124,704,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
100,909
|
|
|
|
100,909
|
|
|
|
10,622
|
|
|
|
-
|
|
|
|
212,440
|
|
General and administrative
|
|
|
67,792
|
|
|
|
67,792
|
|
|
|
5,649
|
|
|
|
423,698
|
|
|
|
564,931
|
|
Reserve (recovery) on reserve for uncollectible receivable related to financing services
|
|
|
-
|
|
|
|
519,334
|
|
|
|
-
|
|
|
|
-
|
|
|
|
519,334
|
|
Total operating expenses
|
|
|
168,701
|
|
|
|
688,035
|
|
|
|
16,271
|
|
|
|
423,698
|
|
|
|
1,296,705
|
|
Loss from operations
|
|
$
|
(18,262
|
)
|
|
$
|
(309,278
|
)
|
|
$
|
(18,241
|
)
|
|
$
|
(423,698
|
)
|
|
$
|
(769,479
|
)
|
Depreciation and Amortization
|
|
$
|
8,039
|
|
|
$
|
8,039
|
|
|
$
|
2,414
|
|
|
$
|
4,595
|
|
|
$
|
23,087
|
|
Three
Months Ended September 30, 2016
|
|
Sales of
|
|
|
Financing
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Automobiles
|
|
|
Services
|
|
|
Services
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
95,261,933
|
|
|
$
|
1,028,259
|
|
|
$
|
3,430
|
|
|
$
|
-
|
|
|
$
|
96,293,622
|
|
Cost of revenue
|
|
|
95,132,071
|
|
|
|
539,650
|
|
|
|
-
|
|
|
|
-
|
|
|
|
95,671,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
76,659
|
|
|
|
76,658
|
|
|
|
9,019
|
|
|
|
18,035
|
|
|
|
180,371
|
|
General and administrative
|
|
|
32,247
|
|
|
|
32,246
|
|
|
|
4,607
|
|
|
|
391,564
|
|
|
|
460,664
|
|
Total operating expenses
|
|
|
108,906
|
|
|
|
108,904
|
|
|
|
13,626
|
|
|
|
409,599
|
|
|
|
641,035
|
|
Income (loss) from operations
|
|
$
|
20,956
|
|
|
$
|
379,705
|
|
|
$
|
(10,196
|
)
|
|
$
|
(409,599
|
)
|
|
$
|
(19,134
|
)
|
Depreciation and Amortization
|
|
$
|
7,804
|
|
|
$
|
7,804
|
|
|
$
|
2,745
|
|
|
$
|
4,458
|
|
|
$
|
22,811
|
|
Nine
Months Ended September 30, 2017
|
|
Sales of
|
|
|
Financing
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Automobiles
|
|
|
Services
|
|
|
Services
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
371,861,223
|
|
|
$
|
2,658,873
|
|
|
$
|
4,475
|
|
|
$
|
-
|
|
|
$
|
374,524,571
|
|
Cost of revenue
|
|
|
371,298,828
|
|
|
|
1,713,036
|
|
|
|
-
|
|
|
|
-
|
|
|
|
373,011,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
280,166
|
|
|
|
280,166
|
|
|
|
29,491
|
|
|
|
-
|
|
|
|
589,823
|
|
General and administrative
|
|
|
200,923
|
|
|
|
200,923
|
|
|
|
16,743
|
|
|
|
1,255,766
|
|
|
|
1,674,355
|
|
Reserve (recovery) on reserve for uncollectible receivable related to financing services
|
|
|
-
|
|
|
|
228,981
|
|
|
|
-
|
|
|
|
-
|
|
|
|
228,981
|
|
Total operating expenses
|
|
|
481,089
|
|
|
|
710,070
|
|
|
|
46,234
|
|
|
|
1,255,766
|
|
|
|
2,493,159
|
|
Income (loss) from operations
|
|
$
|
81,306
|
|
|
$
|
235,767
|
|
|
$
|
(41,759
|
)
|
|
$
|
(1,255,766
|
)
|
|
$
|
(980,452
|
)
|
Depreciation and Amortization
|
|
$
|
23,372
|
|
|
$
|
23,372
|
|
|
$
|
7,023
|
|
|
$
|
13,357
|
|
|
$
|
67,124
|
|
Nine
Months Ended September 30, 2016
|
|
Sales of
|
|
|
Financing
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Automobiles
|
|
|
Services
|
|
|
Services
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
323,872,354
|
|
|
$
|
3,276,141
|
|
|
$
|
28,530
|
|
|
$
|
-
|
|
|
$
|
327,177,025
|
|
Cost of revenue
|
|
|
323,187,016
|
|
|
|
1,771,252
|
|
|
|
-
|
|
|
|
-
|
|
|
|
324,958,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
226,390
|
|
|
|
226,387
|
|
|
|
26,634
|
|
|
|
53,265
|
|
|
|
532,676
|
|
General and administrative
|
|
|
162,376
|
|
|
|
231,186
|
|
|
|
23,197
|
|
|
|
1,026,394
|
|
|
|
1,443,153
|
|
Recovery on reserve for uncollectible receivable related to financing services
|
|
|
-
|
|
|
|
(68,813
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(68,813
|
)
|
Total operating expenses
|
|
|
388,766
|
|
|
|
388,760
|
|
|
|
49,831
|
|
|
|
1,079,659
|
|
|
|
1,907,016
|
|
Income (loss) from continuing operations
|
|
$
|
296,572
|
|
|
$
|
1,116,129
|
|
|
$
|
(21,301
|
)
|
|
$
|
(1,079,659
|
)
|
|
$
|
311,741
|
|
Depreciation and Amortization
|
|
$
|
23,701
|
|
|
$
|
17,154
|
|
|
$
|
7,876
|
|
|
$
|
9,801
|
|
|
$
|
58,532
|
|
Following
are total assets by segment:
Total
Assets
|
|
Sales of
|
|
|
Financing
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Automobiles
|
|
|
Services
|
|
|
Services
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
$
|
90,922,950
|
|
|
$
|
61,612,643
|
|
|
$
|
15,400
|
|
|
$
|
383,047
|
|
|
$
|
152,934,040
|
|
As of December 31, 2016
|
|
$
|
107,042,952
|
|
|
$
|
53,135,295
|
|
|
$
|
57,501
|
|
|
$
|
333,191
|
|
|
$
|
160,568,939
|
|