ITEM 1.
BUSINESS.
Introduction
On November 10, 2008 (the “Closing”), China Auto Logistics Inc. (formerly known as Fresh Ideas Media, Inc.) (“USCo”) entered into a Share Exchange Agreement (the “Exchange Agreement”) with Ever Auspicious International Limited, a Hong Kong company (“HKCo”) and Bright Praise Enterprises Limited, a British Virgin Islands company and the sole shareholder of HKCo (the “Stockholder”), pursuant to which USCo acquired all of the issued and outstanding capital stock of HKCo, an inactive holding company, from the Stockholder in exchange for 1,950,000 (pre reverse split of 11,700,000) newly-issued shares of USCo’s common stock, representing approximately 64.64% of USCo’s issued and outstanding common stock (the “Exchange”). The closing of the Exchange Agreement occurred on the same day, immediately following the cancellation of an aggregate of 189,167 (pre reverse split of 1,135,000) shares of USCo’s common stock held by Phillip E. Ray and Ruth Daily, USCo’s principal stockholders immediately prior to the Closing, which was a condition of the Closing. As a result of the Exchange, HKCo became USCo’s wholly owned subsidiary. USCo’s primary business operations are those of HKCo. Shortly after the closing, USCo changed its name to China Auto Logistics Inc. (the “Company”).
On November 1, 2010, the Company acquired all of the outstanding shares of Chongqing Qizhong Technology Development Co., Ltd for $4.47 million which consisted of $1.01 million in cash, net of cash acquired and the issuance of 177,238 (pre reverse split of 1,063,427) shares of common stock valued at $3.46 million.
The following is disclosure regarding the Company, its wholly owned and majority owned operating subsidiaries, including Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd. (formerly Tianjin Shisheng Investment Group Co. Ltd.) (“Shisheng”), Tianjin Hengjia Port Logistics Corp. (“Hengjia”), Tianjin Ganghui Information Technology Corp. (“Ganghui”), Tianjin Zhengji International Trading Corp. (“Zhengji”), Chongqing Qizhong Technology Co., Ltd. (“Qizhong”), Beijing Goodcar Technology Development Co., Ltd. (“Beijing Goodcar”), Xiamen Goodcar Network Technology Co., Ltd. (“Xiamen Goodcar”), Wuhan Youlu Network Technology Co., Ltd. (“Wuhan Youlu”), Chengdu Haoche Technology Development Co., Ltd (“Chengdu Haoche”), Tianjin Goodcar Technology Development Co., Ltd. (“Tianjin Goodcar”) and Chongqing Kaizhi Technology Co., Ltd. (“Kaizhi”), each of which are formed under the laws of the People’s Republic of China (the “PRC “ or “China”) and doing business in the PRC.
During 2012, the Company deregistered the wholly owned subsidiaries of Qizhong, including Beijing Goodcar, Xiamen Goodcar, Wuhan Youlu, Chengdu Haoche, Tianjin Goodcar and Kaizhi. All of these subsidiaries’ operations have been assumed by their parent company, Qizhong. We disposed of a majority of the assets of these subsidiaries and transferred the remaining net assets to our other subsidiaries.
Except as otherwise indicated by the context, references in this report to “we,” “us,” “our,” or the “Company” are to the consolidated business of the Company, Shisheng, Hengjia, Ganghui, Zhengji, Qizhong, Beijing Goodcar, Xiamen Goodcar, Wuhan Youlu, Chengdu Haoche, Tianjin Goodcar and Kaizhi, except such terms, when used with reference to the audited consolidated financial statements and related notes contained elsewhere in this report or in the “Selected Consolidated Financial and Other Data” Section or “Management’s Discussion and Analysis of Financial Condition and Results of Operations” Section, are to the consolidated business of Shisheng, Hengjia, Ganghui, Zhengji, Qizhong, Beijing Goodcar, Xiamen Goodcar, Wuhan Youlu, Chengdu Haoche, Tianjin Goodcar and Kaizhi.
General
Our primary business is to provide a high quality comprehensive imported automobile sales and trading service and a web-based automobile sales and trading information platform to our customers. Shisheng, together with its majority owned subsidiaries Zhengji and Hengjia, sells imported automobiles (“Sales of Automobiles”), which consisted of approximately 98% of our revenue generated in the last full fiscal year. Additionally, Shisheng provides customized services such as financing services (“Financing Services”) and management services to auto mall operators (“Auto Mall Management Services”); provides, through its majority owned subsidiaries Hengjia, Ganghui, Qizhong, Beijing Goodcar, Xiamen Goodcar, Wuhan Youlu, Chengdu Hoache, Tianjin Goodcar and Kaizhi, customs clearance, storage, nationwide delivery services, provision of information and discounted services relating to automobiles (“Automobile Value Added Services”) to imported automobile distributors and agents as well as individual customers in China; and operates, through its majority owned subsidiaries Ganghui, Hengjia and Qizhong, four websites which provide subscribers with up to date sales and trading information for imported and domestically manufactured automobiles and information of auto and auto-related products and service (“Web-based Advertising Services”). 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.
We are currently the only one-stop service provider in Tianjin for Financing Services and Automobile Value Added Services. We also offer four websites: (a) www.at160.com (formerly www.1365car.com), which provides quotes and other information on domestically manufactured automobiles in Tianjin; (b) www.at188.com, which provides information on imported automobiles for the industry and individuals and boasts a fee-based membership of more than 90% of the automobile dealers and agents in Tianjin; (c) www.goodcar.cn, which provides information and discounted services relating to automobiles, including discounted gas, car washes, emergency roadside assistance and body-shop repair and car maintenance; and (d) www.cali.com.cn, which integrates the Company’s websites to provide a single portal serving a broad spectrum of China’s “auto living” public with information of auto and auto-related products and services.
History and Organizational Structure
In September 1995, Shisheng was founded by Mr. Tong Shiping and his family as a private company under the name “Tianjin Tariff-Free Zone Shisheng Property Management Corp.” Its core business was selling the domestically manufactured automobile model CHARADE, which had 10% of the automobile market share in China between 1995 and 2000. With the increased popularity of imported cars and the maturation of the Internet, Shisheng switched its core business to the sale of imported automobiles and was subsequently renamed “Tianjin Shisheng Investment Group Co. Ltd.”
In August 2001, Shisheng formed Ganghui to provide web-based, real-time information on imported automobiles. Ganghui was 80% owned by Shisheng and 20% was owned by Bian Guiying.
In September 2003, Shisheng formed Hengjia to provide Financing Services and Automobile Value Added Services to wholesalers and distributors in the imported vehicle sales and trading industry. Hengjia is 80% owned by Shisheng, with the remainder of Hengjia’s equity interest owned by Yang Jitian, Cheng Beiting, and Qian Lige.
In February 2005, Shisheng and three other founders formed Zhengji to enhance our presence in the imported automobile sales and trading industry. In January 2007, Shisheng injected additional capital of $1,024,498 (equivalent to RMB 8,000,000) into Zhengji; consequently, Shisheng’s equity interest in Zhengji increased from 32% to 86.4%, and Zhengji’s financial results were consolidated into those of Shisheng effective January 1, 2007. The remainder of Zhengji’s equity interests was owned by Yang Bin (a former Senior Vice President and director of the Company), Qian Shuqing and Zhou Shanglan.
On October 17, 2007, HKCo, a wholly owned subsidiary of Bright Praise Enterprises Limited, was incorporated in Hong Kong to act as a holding company for Shisheng. On November 1, 2007, HKCo entered into a Share Exchange Agreement with Cheng Weihong, Xia Qiming, and Qian Yuxi (collectively, the “Sellers”), pursuant to which the Sellers transferred their interest in Shisheng to HKCo for an aggregate purchase price of $12,067,254 (RMB 95,000,000). As a result of this transaction, HKCo owns all of the capital stock of Shisheng. In connection with this transaction, Shisheng changed its name from “Tianjin Shisheng Investment Group Co. Ltd.” to “Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.”
On July 23, 2009, Shisheng entered into Share Transfer Agreements to acquire additional ownership interests from other noncontrolling interest shareholders to increase its ownership interests in Ganghui, Hengjia and Zhengji to 98% each for an aggregate purchase price of $444,120.
Bright Praise Enterprises Limited is 100% owned by Mr. Choi Chun Leung Robert as trustee for the benefit of Tong Shiping (the Company’s President and CEO) and Cheng Weihong (a director of the Company and the wife of Mr. Tong). Mr. Choi is not involved in the management of Shisheng.
On November 1, 2010, Shisheng entered into a Share Transfer Agreement with the owners of Qizhong to acquire all issued and outstanding stocks of Qizhong for a net purchase price of $4.47 million, net of acquired cash, and completed the acquisition simultaneously. Qizhong, together with its wholly owned subsidiaries, Beijing Goodcar, Xiamen Goodcar, Wuhan Youlu, Chengdu Haoche, Tianjin Goodcar, Kaizhi, (collectively, “Goodcar”) is engaged in the development and operation of the website www.goodcar.cn and the business of providing customers with information and discounted services relating to automobile, including discounted gas, car washes, and body-shop repair and car maintenance.
During 2012, the Company deregistered the wholly owned subsidiaries of Qizhong, including Beijing Goodcar, Xiamen Goodcar, Wuhan Youlu, Chengdu Haoche, Tianjin Goodcar and Kaizhi. All of these subsidiaries’ operations have been assumed by their parent company, Qizhong. We disposed of a majority of the assets of these subsidiaries and transferred the remaining net assets to our other subsidiaries.
Industry Overview
China’s auto industry growth has been driven by rising domestic demand stemming from rising incomes and expanding middle and upper-middle classes. For the middle and upper-middle classes, automobiles serve not only as modes of transportation but also as status symbols. As a result, imported automobiles, particularly luxury automobiles like Mercedes Benz, BMW, Lexus and Land Rover, are in high demand. The expansion of China’s roads and highway network, coupled with the expanding middle and upper-middle classes, are expected to lead to robust auto sales in the years to come.
In November 2001, China became a member of the World Trade Organization (the “WTO”). Due to the Chinese government’s trade restrictions, imported automobiles did not flood into the Chinese market, thereby creating an opportunity for the development and growth of the domestic automobile manufacturing industry. The result has been a steady increase in the sales of Chinese manufactured automobiles, not only to the domestic market, but also into the international market.
China experienced significant economic growth and overtook the US as the world’s largest automobile market in 2011, despite challenging global economic conditions that have had a significant negative impact on the global automobile industry. According to data issued by the China Association of Automobile Manufacturers, China’s automobile sales volumes for passenger cars were 15.5 million units in 2012, representing a growth of 8.58% over 2011. Passenger cars include sedans, multipurpose vehicles and sport-utility vehicles. Foreign brands (including both imported and domestically manufactured automobiles) continued to show growth in 2012 with a growth rate of 10.13% over 2011. China’s imported automobile sales volume reached 1.132 million units in 2012, amounting to $47.552 billion in value.
Our Competitive Strengths
We are committed to keeping our competitive edge by constantly evaluating and responding to market demand and providing new products and services. Our goals are to establish successful and long-term partnerships with our customers, employees and suppliers and to provide high quality services and products. In particular, we believe the following strengths differentiate our business:
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We are headquartered in Tianjin, which is the largest port city among the top 5 port cities in China for imported automobiles. Tianjin has a strong established presence in the imported automobile market in China, which provides us with first-hand knowledge of product information and developing industry trends.
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We have a unique business model that combines Sales of Automobiles, Financing Services, Automobile Value Added Services, and an Internet-based information platform, which enhances our ability to be a one-stop service provider for all of our customers’ needs with respect to imported automobiles in the PRC.
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We have continued to grow and maintain a referral network with all major automobile distributors and agents in the PRC.
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We maintain close relationships with many major commercial banks in the PRC, including Agricultural Bank of China, China Construction Bank, Pudong Development Bank, China Merchants Bank, China Zheshang Bank, Industrial and Commercial Bank of China, Shengjing Bank and China Minsheng Bank, which give us a competitive advantage over our competitors in providing Financing Services. As of March 18, 2013, the Company had aggregate credit lines of $135 million (RMB850 million) with its banks.
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We have pioneered China’s first websites devoted to automobile sales and trading information. All of the major Chinese websites containing information on automobile sales and trading, including www.sohu.com and www.sina.com, directly link to our market data. We believe that we have a “first mover” advantage due to our websites, which specialize in imported and domestic automobiles, and we intend to capitalize on this advantage by expanding our offerings and geographic reach.
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Our key personnel each have more than ten years of Chinese automobile industry experience.
Our Growth Strategy
We intend to pursue the following key elements to our growth strategy:
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Create New Services. We will capitalize on our existing websites to target the market by aggressively introducing new services such as assisting clients in obtaining licenses and completing insurance processing. Online financing is also a service we are adding to our websites, whereby customers can obtain low interest financing. We also plan to expand into the market of selling used cars.
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Emphasize Service and Support. We will continue to build on our menu of established business offerings as a clear and viable alternative to price-only selling. We will also aim to expand our existing banking relationships and explore other cooperative relationships with major commercial banks to increase our lines of credit to provide additional Financing Services to our customers.
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Build a Relationship-Oriented Business. We have a history of building long-term relationships with clients rather than focusing on single-transactions. To that end, we aim to capitalize on our existing client base by establishing a national automobile dealer network for faster information exchange and closer coordination. We will also continue to place an emphasis on obtaining authorized agent licenses with large international automobile manufacturers.
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Build Brand Recognition. We will build brand name recognition through diverse marketing channels such as online advertising, public relations and trade-show participation.
Our Business Lines and Products
Sale of Automobiles
We conduct our sales operations of imported automobiles primarily through Shisheng, Hengjia and Zhengji. We are a general agent and wholesaler authorized by the Chinese government to import vehicles into the PRC. We sell our vehicles to authorized dealers like Ford or Lexus, as they are not able to import all models directly, free traders or wholesalers located in inland China or non-port cities and individual customers. We have the core competencies within our network to sell all makes and models of imported vehicles. Our sales network penetrates to agents and dealers in more than 100 cities. We have close working relationships with some of the largest automobile dealers in China, including Zhejiang Materials Development (formerly “Nanfang Construction Materials Limited Holding Company”) and Wuxi Baolong. Shisheng is also an authorized agent for Mercedes Benz ambulances and fire trucks. We also work closely with major automobile dealers in the overseas market.
Our revenues from the sale of imported automobiles and related activities were $186.3 million for fiscal year 2008, (98.21% of all revenues), $209.8 million for fiscal year 2009 (97.52% of all revenues), $248.0 million for fiscal year 2010 (96.03% of all revenues), $439.0 million for fiscal year 2011 (97.08% of all revenues) and $581.2 million for fiscal year 2012 (98.30% of all revenues) representing a 32.4% increase from the prior fiscal year.
Financing Services
Many of our customers, including both authorized agents and general dealers, contend with a shortage of working capital. The imported automobile service industry has developed to address these barriers by providing short-term financing services in connection with the importation of automobiles. These service providers are located in the port cities of Dalin, Tianjin, Shanghai and Guangzhou.
Our Financing Services include letter of credit issuance services, purchase deposit financing, and import duty advance services. Our competitive advantage comes from relationships with major Chinese commercial banks, including Agricultural Bank of China, Pudong Development Bank, China Merchants Bank, China Zheshang Bank, Industrial and Commercial Bank of China, Shenjing Bank and China Minsheng Bank. As of March 18, 2013, the Company had aggregate credit lines of $135 million (RMB850 million). We are currently negotiating a number of new credit lines with various banks and the Company is optimistic that it will be able to obtain financing on an as-needed basis that will be sufficient for us to provide Financing Services to our customers.
The Company provides Financing Services to its customers using its facility lines of credit with its banks. The Company earns a service fee for drawing its facility lines related to customers’ purchases of automobiles and payment of import taxes. The customers bear all the interest and fees charged by the banks and prepay such amounts upon the execution of their service contracts with the Company. The customers are also required to make a deposit in the range of 22% to 30% of the purchase price of the automobile with the Company. The banks are granted a security interest in automobiles until the borrowings are fully paid.
Our revenues from Financing Services were $899,538 for fiscal year 2008 (0.47% of all revenues), $1,217,727 for fiscal year 2009 (0.57% of all revenues), $2,332,013 for fiscal year 2010 (0.90% of total revenues), $4,102,254 for fiscal year 2011 (0.91% of total revenues) and $7,085,357 for fiscal year 2012 (1.20% of total revenues), representing an increase of 72.72% from the prior fiscal year.
Automobile Value Added Services
In addition to a shortage of working capital, all automobile dealers in China, whether they are authorized agents or general dealers, contend with cumbersome procedures relating to the import business. The imported automobile service industry has developed to address these barriers by providing customs clearance, storage and delivery services for the dealers and agents. These service providers are located in the port cities of Dalin, Tianjin, Shanghai and Guangzhou. Our efficient customs clearance service allows us to complete all vehicle import-related procedures in just three to five days. Once vehicles are cleared through customs, we offer a value-added delivery service to inland China (by air, by sea or by truck).
Following the acquisition of Goodcar, the Company began selling VIP membership cards to offer our members for an annual fee a wide array of discounts on gas purchases, parking, car washes, auto maintenance and body work repairs as well as 24/7 traffic information and emergency roadside assistance, as well as providing other promotion services. The Company reviewed the operations respect of sales of VIP membership cards and other promotion services in the fourth quarter of 2011 and determined to close these operations in 2012 to focus on its plans to develop web-based advertising services and other automobile value added services.
Our revenues from Automobile Value Added Services were $731,600 for fiscal year 2008 (0.39% of all revenues), $667,565 for fiscal year 2009 (0.31% of all revenues), $1,159,340 for fiscal year 2010 (0.45% of total revenues) and $1,951,056 for fiscal year 2011 (0.43% of all revenues) and $1,178,274 for fiscal year 2012 (0.20% of all revenues), representing a decrease of 39.61% from the prior fiscal year.
Web-based Advertising Services
www.cali.com.cn - China Auto Living Internet Portal
www.cali.com.cn integrates the Company’s websites to provide a single portal serving a broad spectrum of China’s “auto living” public with information about auto and auto-related products and services. We previously operated in 35 cities throughout China and targeted to increase the geographical coverage to 60 cities. During 2012, we reduced our coverage to one single city in Tianjin. In response to intensified competition in the online advertising markets in China and our revised plan of focusing our business on imported automobiles and related services, we are currently reviewing our website portals’ future geographical coverage in China.
We have been experiencing stiff competition in the web-based advertising arena which continues to drive the pricing of advertising revenue down. Starting in 2012, we have been shifting our focus of operating our websites from generating advertising revenue to providing automotive information to our website visitors. We are targeting to create a platform which allows our customers and potential customers to have access to our products including automobile sales, automobile valued added services and financing services. Through offering extensive automotive information and news, we are able to attract more potential customers to visit our websites. Therefore we are willing to sacrifice our advertising revenue in the near term but create opportunities for higher potential growth of our other service products. The results have been positive as our other services continue to grow at tremendous rates. Our two key operating segments, revenues from sales of automobiles and financing services grew 32% and 73%, respectively, during 2012, compared with those of 2011. We believe our business strategy of using our websites as a platform to expand our reach to our customers and potential customers will continue to benefit us long term.
www.at188.com - Imported Automobiles
With the continuous development of network technology and the growing popularization of the Internet, value-added Internet-based businesses are experiencing rapid growth in China. Accompanying the growth of the automobile markets in China, there is a strong demand for timely information regarding demand changes, market status and competitors’ quotations. www.at188.com was established by the Company in August 2000 to provide subscribers easily accessible, accurate sales and trading information about imported automobiles. In addition to imported automobile sales and trading and new model information, www.at188.com also provides parts and components information. After years of development and operation, www.at188.com has linked automobile wholesalers and retailers in China and also cooperates with major media outlets such as newspapers and television and radio stations in major cities in China.
www.at188.com charges subscribers an annual membership fee and generates revenue from on-line advertisements and web-based listing services, in addition to subscription revenues.
www.at160.com (formerly www.1365car.tj.cn) - Domestic Automobiles
To provide real-time price comparison and sales and trading information directly to this huge domestic automobile market, we launched the website www.at160.com, formerly www.1365car.tj.cn, in 2005. This website is a platform that connects manufacturers, regional distributors and end users of domestically manufactured cars, providing them with a compelling source of information about domestic vehicles and serving as a timelier alternative to traditional magazines and television. www.at160.com currently provides real-time price comparison and sales and trading information in the PRC markets with respect to domestically manufactured automobiles.
www.at160.com targets customers interested in purchasing vehicles, and it generates revenues from subscriptions and advertisements. Most domestic automobile purchases are made from “4S” shops which offer sales, service, spare parts and survey. In addition to providing customers with online information directly through the website, the Company intends to offer value-added services including automobile insurance, automobile financing, after-sale service and used car quotations.
In 2012, due to our revised plan of focusing our business on imported automobiles and related services, we gradually moved away from promoting this website which provides information on the domestic automobile market. As a result, revenue generated from this website declined substantially in 2012 compared to the prior year.
www.goodcar.cn - Information about Automotive Products and Services
www.goodcar.cn provides customers with information relating to automotive products and services, including discounted gas, car washes, emergency roadside assistance, body-shop repair and car maintenance. www.goodcar.cn currently operates in Chongqing.
During the fourth quarter of 2012, we revised our business plan and downsized Goodcar’s operations. We reviewed Goodcar’s advertising operations and decided to cease such advertising operations. We evaluated the projected revenue and profit and costs involved to operate Goodcar’s advertising operations and concluded that it would be in the Company’s best interests to cease its operations in order for us to better focus on our core businesses of automobile sales, automobile value added services, auto mall management and financing services. We continue to operate Goodcar’s website to promote our products and services in other segments, including automobile sales, automobile valued added services and financing services. Due to the closing of Goodcar’s advertising operations, we recorded goodwill impairment charges of $3,735,091 and impairment charges of $926,110 (net of deferred taxes of $314,094) related to the goodwill and intangible assets acquired in the acquisition of Goodcar.
Our revenues from our websites were $1,751,660 for fiscal year 2008 (0.92% of all revenues), $3,459,098 for fiscal year 2009 (1.61% of all revenues), $5,962,493 for fiscal year 2010 (2.31% of total revenues), $6,192,644 for fiscal year 2011 (1.37% of all revenues) and $819,344 for fiscal year 2012 (0.14% of all revenues), representing a decrease of 86.77% from the prior fiscal year.
Auto Mall Management Services
We entered a management service agreement in March 2010 to manage the Tianjin FTZ International Automobile Exhibition and Sales Center for a 1-year term. In March 2011 and 2012, the management services agreement was renewed for an additional one-year period.
Our revenues from auto mall management services were $800,050 for fiscal year 2010 (0.31% of total revenues), $945,277 for fiscal year 2011 (0.21% of all revenues) and $939,760 for fiscal year 2012 (0.16% of all revenues), representing an increase of 0.58% from the prior fiscal year.
Products Under Development
The further development of our websites are attractive means for us to develop our business due to the relatively low cost of operation, the global reach of the medium, and the security enhancements that have been and will be put in place. The business model could be expanded to combine Internet commerce and traditional sales. The success of the Internet business can help us build brand name recognition and awareness in the automobile sales and trading industry and increase our automobile sales volume.
We previously operated our domestic automobile website in 35 cities throughout China and targeted to increase the geographical coverage to 60 cities. During 2012, we reduced our coverage to one single city in Tianjin. In response to the intensified competition in the online advertising markets in China and our revised plan of focusing our business on imported automobiles and related services, we are currently reviewing our website portals’ future geographical coverage in China.
In the coming years, we will continue to shift the business focus of the Company from a traditional automobile trader to a web-based automobile-related logistics service provider. We will continue to place additional effort into the development of websites and value added services, such as online insurance and online financing. Although the revenue generated thus far through these services has been minimal, these services help make us a one stop service provider for automotive products which differentiates us from our competitors. We are confident that the Company’s continuing development in these services will further benefit the Company in the coming years. The Company initially expected to acquire an auto mall in Tianjin, China, which the Company intended to convert into the largest auto dealer for selling over 70 different car models. This project was initially set to be completed in the second half of 2011 and was subsequently postponed to 2012. We were unable to agree on terms of this potential acquisition and therefore did not complete this transaction in 2012. However we will continue to explore possible acquisition targets in order to increase our sales of automobiles.
Although we expect sales of imported automobile sales to continue to represent a considerable percentage of our revenues, we expect the percentage of our net profit generated from imported automobile sales to decline. While we intend to maintain our position as one of the leading imported automobile traders in Tianjin, we do not anticipate that revenues generated by automobile sales will maintain the same growth rate as in the past, though we do expect the percentage of our net profits generated from financing services and automobile value added services to increase.
Major Suppliers and Customers
We have stable relationships with both Chinese domestic and foreign international manufacturers. We derive a significant portion of our revenues on an aggregate basis from our top five customers, and we make a significant portion of our purchases from our top five suppliers. Sales to the Company’s top five customers, each of which is a car dealer, accounted for 39.0% and 28.4% of the Company’s net revenues during 2012 and 2011, respectively. Purchases from the Company’s top five suppliers accounted for 34.2% and 33.5% of the Company’s total net purchases during 2012 and 2011, respectively.
The following table sets out our major customers who individually accounted for over 10% of our total net sales for the years ended December 31, 2012 and 2011.
** Accounted for less than 10% of our total net revenues.
The following table sets out our major suppliers who individually accounted for more than 10% of our total net purchases for the years ended December 31, 2012 and 2011.
** Accounted for less than 10% of our total net purchases.
Some of our clients are both our customers and suppliers. None of the activities transacted between the Company and clients who are both customers and suppliers involved any commitments between the parties to repurchase the identical automobiles. We maintain close working relationships with our top customers and suppliers although we also continue to diversify our customers and suppliers.. We do not believe that the loss of any one major customer or supplier in and of itself would have a material adverse effect on our financial condition or results of operations.
Intellectual Property
Our websites, www.cali.com.cn, www.at188.com, www.at160.com and www.goodcar.cn, which are key drivers of our growth strategies, have registered domain names expiring in January 2014, November 2013, April 2013 and January 2013 (which has not yet been renewed as of March 18, 2013 but operating under grace period), respectively. These registrations, together with registrations for other sub-websites of the Company, will be renewed in the ordinary course of our business. We are currently contemplating expansion into additional cities through websites that will expand our geographical coverage and improve our brand recognition nationwide.
Competition and Pricing
Tianjin is a major entry port in China. Many of the vehicles imported into Tianjin are imported by general dealers such as Ford and Nissan. For the specialized services market related to Automobile Value Added Services and Financing Services, we believe we have secured a substantial share of the market for such services in Tianjin. Although there are a few other companies in the Tianjin market that provide Financing Services or some Automobile Value Added Services (such as storage or delivery services), we are the only one-stop service provider in Tianjin. With respect to our automobile value added services businesses, we do not presently have any major competitors.
Competitive threats may come from any company that is able to provide the services offered by us at a lower price and better quality. We charge appropriately for the high-end, high-quality services and products we offer, and we do not aspire to be the lowest cost provider of our services. Rather, we aim to distinguish ourselves from our competitors by providing the highest value to our customers.
Costs and Effects of Compliance with Environmental Laws ; Government Regulation
Our products and operations are currently in compliance with all Chinese laws and environmental standards. We are not aware of any other governmental approvals required for any of our products or operations.
All of our revenue is derived from operations within the PRC, and all of our assets are located in the PRC. For risks relating to our operations in the PRC, see discussions in the section entitled “Risk Factors” below.
Research and Development
We spent $0 and $0 on research and development activities for fiscal year 2012 and fiscal year 2011, respectively. None of these costs were borne directly by our customers.
Employees
We currently employ 73 employees, of which all are full-time employees. None of our employees are unionized.
Geographical Area of the Company’s Business
All of our revenue is derived from operations within the PRC, and all of our assets are located in the PRC. For risks relating to our operations in the PRC, see discussions in the section entitled “Risk Factors” below.
ITEM 1A.
ITEM 1A.
RISK FACTORS
You should carefully consider the following risks and the other information set forth elsewhere in this current report. If any of these risks occur, our business, financial condition and results of operations could be adversely affected. As a result, the trading price of our common stock could decline, perhaps significantly.
RISKS RELATING TO OUR COMPANY
Our business may adversely change due to the cyclical nature of the automotive industry. If the Chinese luxury automotive market does not grow as we expect or grows at a slower rate than we expect, our sales and profitability may be materially and adversely affected.
Our financial performance depends, in large part, on the varying conditions in the automotive markets, specifically the market for imported luxury automobiles in China. The volume of automobile production in Asia, North America, Europe and the rest of the world has fluctuated, sometimes significantly, from year to year, and such fluctuations often are in response to overall economic conditions and factors such as changes in interest rate levels, vehicle manufacturer incentive programs, fuel costs, consumer spending and confidence, and environmental issues. If the automotive market experiences a downturn, our results of operations and business will suffer.
We derive most of our sales revenue from sales of imported automobiles and related services in China. The continued development of our business depends, in large part, on continued growth in the luxury automotive market in China and the increase in disposable income among the Chinese population. Although China’s luxury automotive market has grown rapidly in the past, it may not continue to grow at the same rate in the future or at all. However, the developments in our market are, to a large extent, outside of our control and any reduced demand for imported automobiles or related services, or any other downturn or other adverse changes in China’s economy that impacts the disposable income of ultimate luxury car purchasers could severely harm our business.
A disproportionate amount of our income from operations is derived from the sale of imported automobiles and related services, and a disruption in, or compromise of, our sale operations or our ability to provide Automobile Value Added Services and Financing Services could adversely impact our financial condition and results of operations.
In 2012, excluding the charge for impairment of goodwill and intangible assets, we derived approximately 47% of our income from operations from the sale of imported automobiles, approximately 32% of our income from operations from Financing Services, approximately 8% of our income from operations from Automobile Value Added Services, approximately 5% of our income from operations from our websites and 8% of our income from operations from Auto Mall Management Services. We view our Financing Services and our Automobile Value Added Services to be integrally related, as our business model emphasizes our ability to be a “one-stop” services provider for all such services. A disruption in, or compromise of, our sales operations or our ability to provide Automobile Value Added Services and/or Financing Services to our customers could have a material adverse effect on our financial condition and results of operations.
We derive a significant amount of our revenue from a limited number of customers and purchase a significant portion of our inventories from a limited number of suppliers. Certain of our major customers are also major suppliers, and therefore the loss of such customers or suppliers could adversely impact our financial condition and results of operations.
We derived a significant portion of our revenues on an aggregate basis from our top five customers, and a significant portion of our purchases come from our top five suppliers. Some of our customers are also our suppliers. We maintain close working relationships with our top customers and suppliers and continue to reduce the business concentration of our revenues and purchases among our top customers and suppliers. While we do not believe that the loss of any one major customer or supplier in and of itself would have a material adverse effect on our financial condition or results of operation, the loss of more than one such major customer or supplier, or our failure to replace such customer or supplier with other customers and suppliers, could have a material adverse effect on our financial condition and our results of operations.
The imported automobile sales and services market in Tianjin is competitive; failure to maintain our current relationships with various Chinese banks or to renew existing credit lines or enter into new credit lines may hamper our growth and negatively affect our results.
As the only one-stop service provider in Tianjin, our market share in the combined Financing Services and Automobile Value Added Services maintained its leading position in Tianjin. However, in the future we anticipate increasing pressure on our business from competitors, and failure to maintain our relationships with various Chinese banks in Tianjin may adversely affect our ability to provide Financing Services to our customers and to be a “one-stop” service provider for Automobile Value Added Services and Financing Services. In addition, if our competitors are able to establish similar relationships with these banks or other financial institutions in Tianjin or our future markets, we will no longer enjoy our current competitive advantage.
As of March 18, 2013, the Company had aggregate credit lines of $135 million (RMB850 million). We are currently negotiating a number of new credit lines with various banks, although there can be no guarantee that we will be successful in doing so. If we are unable to renew existing credit lines or enter into new credit lines on a consistent basis that allows us to meet the requirements of our business or the demand of our customers for Financing Services, our business, operating margins, financial condition, cash flows and profitability could be adversely affected.
We face competition from other companies, which could force us to lower our prices, thereby adversely affecting our operating margins, financial condition, cash flows and profitability.
The markets in which we operate are highly competitive, and this competition could harm our business, results of operations, cash flow and financial condition. We believe that one significant competitive factor for our products is selling price. Although we do not aspire to be the lowest cost provider but rather the highest value provider to our customers, we could be subject to adverse results caused by our competitors’ pricing decisions. If we do not compete successfully, our business, operating margins, financial condition, cash flows and profitability could be adversely affected.
Concerns about security of e-commerce transactions and confidentiality of information on the Internet may reduce the use of our websites and impede our growth, and our Internet operations may be vulnerable to hacking, viruses and other disruptions.
A significant barrier to e-commerce and confidential communications over the Internet has been the need for security. Internet usage could decline if any well-publicized compromise of security occurred. We may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by these breaches. If unauthorized persons are able to penetrate our network security, they could misappropriate proprietary information or cause interruptions in our services. As a result, we may be required to expend capital and resources to protect against or to alleviate these problems. Security breaches could have a material adverse effect on our business, financial condition and results of operations.
We cannot assure you that our organic growth strategy will be successful.
One of our growth strategies is to grow organically through increasing the distribution and sales of our products, increasing our market share and entering new geographical markets in the PRC. However, many obstacles to increasing our market share and entering such new markets exist, including, but not limited to, costs associated with entering into such markets and attendant marketing efforts. We cannot therefore assure you that we will be able to successfully overcome such obstacles and establish our products in any additional markets. Our inability to implement this organic growth strategy successfully may have a negative impact on our ability to grow and on our future financial condition, results of operations or cash flows.
If we are not able to implement our strategies in achieving our business objectives, our business operations and financial performance may be adversely affected.
Our business plan is based on circumstances currently prevailing and the bases and assumptions that certain circumstances will or will not occur, as well as the inherent risks and uncertainties involved in various stages of development. However, there is no assurance that we will be successful in implementing our strategies or that our strategies, even if implemented, will lead to the successful achievement of our objectives. If we are not able to successfully implement our strategies, our business operations and financial performance may be adversely affected.
We may not be able to manage our expanding operations effectively, which could harm our business.
We anticipate expanding our business as we address growth in our customer base and market opportunities. In addition, the geographic dispersion of our operations as a result of overall internal growth requires significant management resources that our locally-based competitors do not need to devote to their operations. In order to manage the expected growth of our operations and personnel, we will be required to improve and implement operational and financial systems, procedures and controls, and expand, train and manage our growing employee base. Further, our management will be required to maintain and expand our strategic relationships necessary to our business. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations. If we are not successful in establishing, maintaining and managing our personnel, systems, procedures and controls, our business will be materially and adversely affected.
Our business and growth could suffer if we are unable to retain our key executives.
We depend upon the continued contributions of our senior management and other key executives, many of whom are difficult to replace. In particular, our future success is heavily dependent upon the continued service of Mr. Tong Shiping, Ms. Wang Xinwei, Mr. Yang Bin, and Ms. Cheng Weihong. If one or more of our key executives are unable or unwilling to continue in their present positions, we may not be able to easily replace them, and our business, financial condition and results of operations may be materially and adversely affected. In addition, if any of these key executives joins a competitor or forms a competing company, we may lose customers and suppliers and incur additional expenses to recruit and train personnel. Each of our executive officers has entered into standard employment agreements with us (in accordance with the format issued by the Labor and Social Security Administration in Tianjin and Chongqing) but is not subject to specific non-competition or non-solicitation agreements, as such agreements are not standard in China. We also do not maintain key-man life insurance for any of our key executives.
We face a competitive labor market in China for skilled personnel and therefore are highly dependent on the skills and services of our existing key skilled personnel and our ability to hire additional skilled employees.
Competition for highly-skilled software design, technical, managerial, finance, marketing, sales and customer service personnel is intense in China. Failure to attract, assimilate or retain qualified personnel to fulfill our current or future needs could impair our growth. Limitations on our ability to hire and train a sufficient number of personnel at all levels would limit our ability to undertake projects in the future and could cause us to lose market share. We may need to increase the levels of our employee compensation more rapidly than in the past in order to remain competitive. These additional costs could reduce our profitability and cause losses.
If we need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.
As we implement our growth strategies, we may experience increased capital needs and we may not have enough capital to fund our future operations without additional capital investments. Our capital needs will depend on numerous factors, including: (i) our profitability; (ii) the release of competitive products by our competition; (iii) the level of our investment in research and development; and (iv) the amount of our capital expenditures. We cannot assure you that we will be able to obtain capital in the future to meet our needs.
If we cannot obtain additional funding, we may be required to limit our marketing efforts and decrease or eliminate capital expenditures.
Such reductions could materially and adversely affect our business and our ability to compete. Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are acceptable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of investors in our common stock. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.
We have limited insurance coverage and do not carry any business interruption or third party liability insurance or insurance that covers the risk of loss of automobiles in shipment.
Operation of our facilities involves many risks, including natural disasters, power outages, labor disturbances and other business interruptions. We do not carry any business interruption insurance or third-party liability insurance for accidents on our property or damage relating to our operations. In addition, our existing insurance coverage may not be sufficient to cover all risks associated with our business. As a result, we may be required to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our business, financial condition and results of operations.
Our efforts in protecting our intellectual property rights from infringement may not be sufficient, and our failure to adequately protect our intellectual property rights may undermine our competitive position.
We regard our domain name registrations and other intellectual property as critical to our success. Our domain names for our websites are currently registered domain names. However, no assurance can be given that such registrations and licenses will not be challenged, invalidated, infringed or circumvented or that such intellectual property rights will provide a competitive advantage to us.
Currently we sell our products only in China. China will remain our primary market for the foreseeable future. To date, no trademark filings have been made. Therefore, the measures we take to protect our proprietary rights may be inadequate and we cannot give you any assurance that our competitors will not independently develop formulations and processes (including websites similar to www.cali.com.cn, www.at188.com, www.at160.com and www.goodcar.cn) that are substantially equivalent or superior to our own or copy our products.
Intellectual property related laws in China may not be effective in protecting our intellectual property rights, and litigation to protect our intellectual property rights may be costly.
We strive to strengthen and differentiate our product portfolio by developing new and innovative products and product improvements. As a result, we believe that the protection of our intellectual property will become increasingly important to our business. Implementation and enforcement of intellectual property-related laws in China has historically been lacking due primarily to ambiguities in PRC intellectual property law. Accordingly, protection of intellectual property and proprietary rights in China may not be as effective as in the United States or other countries. As a result, third parties may use the technologies and proprietary processes that we have developed and compete with us, which could negatively affect any competitive advantage we enjoy, dilute our brand and harm our operating results.
In addition, policing the unauthorized use of our proprietary technology can be difficult and expensive. Litigation may be necessary to enforce our intellectual property rights, and given the relative unpredictability of China’s legal system and potential difficulties enforcing a court judgment in China, there is no guarantee litigation would result in an outcome favorable to us. Furthermore, any such litigation may be costly and may divert management attention away from our core business. An adverse determination in any lawsuit involving our intellectual property is likely to jeopardize our business prospects and reputation. We have no insurance coverage against litigation costs so we would be forced to bear all litigation costs if we cannot recover them from other parties. All of the foregoing factors could harm our business and financial condition.
We may be exposed to infringement claims by third parties, which, if successful, could cause us to pay significant damage awards.
Third parties may initiate litigation against us alleging infringement of their proprietary rights. In the event of a successful claim of infringement and our failure or inability to develop non-infringing technology or license the infringed or similar technology on a timely basis, our business could be harmed. In addition, even if we are able to license the infringed or similar technology, license fees could be substantial and may adversely affect our results of operations.
High cost of Internet access may limit the growth of the Internet in China and impede our growth.
Access to the Internet in China remains relatively expensive, and may make it less likely for users to access and transact business over the Internet. Unfavorable rate developments could further decrease our visitor traffic and our ability to derive revenues from transactions over the Internet. This could have a material adverse effect on our business, financial condition and results of operations.
The acceptance of the Internet as a commercial platform in China depends on the resolution of problems relating to fulfillment and electronic payment. Our future growth of revenues depends in part on the anticipated expansion of e-commerce activities in China. As China currently does not have a reliable nationwide product distribution network, the fulfillment of goods purchased over the Internet will continue to be a factor constraining the growth of e-commerce.
An additional barrier to the development of e-commerce in China is the lack of reliable payment systems. In particular, the use of credit cards and other viable means of electronic payment in sales transactions are not as well developed in China as in some other countries, such as the United States. Various government entities and businesses are working to resolve these fulfillment and payment problems, but these problems are expected to continue to hinder the acceptance and growth of the Internet as a commercial platform in China, which could in turn adversely affect our business, financial condition and results of operations.
Our growth within the Internet market in China depends on the establishment of an adequate telecommunications infrastructure.
The telecommunications infrastructure in China is not well developed. In addition, access to the Internet is accomplished primarily by means of the Internet backbones of separate national interconnecting networks that connect through several international gateways to the Internet outside of China. The Internet backbones and international gateways are all owned and operated by the Chinese government and are the only channels through which the domestic Chinese Internet network can connect to the international Internet network. Although private sector Internet service providers exist in China, almost all access to the Internet is accomplished through ChinaNet, China’s primary commercial network, which is owned and operated by the Chinese government. As a result, we will continue to depend on the Chinese government and state-owned enterprises to establish and maintain a reliable Internet and telecommunications infrastructure to reach a broader base of Internet users in China. In addition, we will have no means of getting access to alternative networks and services, on a timely basis or at all, in the event of any disruption or failure of the network. We cannot assure you that the Internet infrastructure in China will support the demands associated with continued growth. If the necessary infrastructure standards or protocols or complementary products, services or facilities are not developed by the Chinese government and state-owned enterprises, our business, financial condition and results of operations could be materially and adversely affected.
Unexpected network interruptions caused by system failures may result in reduced visitor traffic, reduced revenue and harm to our reputation.
As the number of Chinese websites and the amount of Chinese Internet traffic increases, we cannot assure you that we will be able to increase the scale of our systems proportionately. We are also dependent upon web browsers, Internet service providers, content providers and other website operators in China, which have experienced significant system failures and system outages in the past. Any system failure or inadequacy that causes interruptions in the availability of our services, or increases the response time of our services, as a result of increased traffic or otherwise, could reduce our user satisfaction, future traffic and our attractiveness to users and advertisers.
In addition, we have limited backup systems and redundancy and we have experienced system failures and electrical outages from time to time in the past which have disrupted our operations. We do not have a disaster recovery plan in the event of damage from fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins and similar events. If any of the foregoing occurs, we may experience a complete system shut-down. We do not carry any business interruption insurance. To improve the performance and to prevent disruption of our services, we may have to make substantial investments to deploy additional servers or one or more copies of our websites to mirror our online resources. To the extent we do not address the capacity restraints and redundancy described above, such constraints could have a material adverse effect on our business, financial condition and results of operations.
Acquisitions could have negative consequences, which could harm our business.
In 2010 we acquired all of the outstanding shares of Qizhong and its subsidiaries, a group of companies engaging in the development and operation of the website www.goodcar.cn and the business of providing consumers with information and discounted services relating to automobiles, including discounted gas, parking, car washes, car repair and maintenance. Additional acquisitions could require significant capital infusions and could involve many risks including, but not limited to, the following:
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Difficulty integrating the acquired company’s personnel, products, product roadmaps, technologies, systems, processes and operations, including product delivery, order management, and information systems;
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Difficulty in forming the acquired company’s financial policies and practices to our policies and practices and in implementing and maintaining adequate internal systems and controls over financial reporting and information systems of the acquired company;
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Diversion of management’s attention and disruption of ongoing business;
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Difficulty in combining service and technology offerings and entering into new markets or geographical areas in which we have no or limited direct experience and where our competitors may have stronger market positions;
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Loss of management, sales, technical or other key personnel;
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Revenue from the acquired companies not meeting our expectations, and the potential loss of the acquired companies’ customers, distributors, resellers, suppliers, or other partners;
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Delays or difficulties and the attendant expense in evaluating, coordinating, and combining administrative, sales, research and development and other operations, facilities, and relationships with third parties in accordance with local laws and other obligations while maintaining adequate standards, controls and procedures, including financial controls and controls over information systems;
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Incurring amortization expense related to intangible assets and recording goodwill and non-amortizable assets that will be subject to impairment testing and possible impairment charges;
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Dilution of existing stockholders as a result of issuing equity securities, including the assumption of any stock options or other equity awards issued by the acquired company;
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Overpayment for any acquisition or investment or unanticipated costs or liabilities;
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Responsibility for the liabilities of the acquired company, including any potential intellectual property infringement claims or other litigation; and
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Incurring substantial write-offs, restructuring charges, and transactional expenses.
Our failure to manage these risks and challenges could materially harm our business, financial condition, and results of operations. Further, if we do not successfully address these challenges in a timely manner, we may not fully realize all of the anticipated benefits or synergies on which the value of a transaction was based. Future transactions could cause our financial results to differ from expectations of market analysts or investors for any given quarter, which could, in turn, cause a decline in our stock price.
During the fourth quarter of 2012, we revised our business plan and downsized our Qizhong operations. We reviewed Goodcar’s advertising operations and decided to cease such advertising operations. We evaluated the projected revenue and profit and costs involved to operate Goodcar’s advertising operations and concluded that it would be in the Company’s best interests to cease its operations in order for us to better focus on our core businesses of automobile sales, automobile value added services, auto mall management and financing services. We continue to operate Goodcar’s website to promote our products and services in other segments, including automobile sales, automobile valued added services and financing services. Due to the closing of Goodcar’s advertising operations, we recorded goodwill impairment charges of $3,735,091 and impairment charges of $926,110 (net of deferred taxes of $314,094) related to the goodwill and intangible assets acquired in the acquisition of Goodcar.
The staff of our accounting department lack training and experience in U.S. accounting principles, which may result in accounting errors in the financial statements that we file with the Securities and Exchange Commission (the “SEC”).
Our executive offices are located in Tianjin in the PRC. Our entire bookkeeping and accounting staff is located there. Our books and records are maintained in Chinese, using Chinese accounting principles. Chinese accounting principles vary in many important respects from US accounting principles. To file our Company’s financial statements with the SEC, our accounting staff must convert the financial statements from Chinese accounting principles to US accounting principles. However, none of the members of our accounting staff has extensive experience or training in the preparation of financial statements under accounting principles generally accepted in the United States (“US GAAP”). Neither do we have any employee who has previous experience in accounting for a US public company. This situation creates a risk that the financial statements we file with the SEC will fail to present our financial condition and/or results of operations as required by SEC rules and the principles of accounting generally applied in the United States.
We have identified material weaknesses in our internal control over financial reporting. If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results and prevent fraud. As a result, current and potential stockholders could lose confidence in our financial statements, which would harm the trading price of our common stock.
Companies that file reports with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404. SOX 404 requires management to establish and maintain a system of internal control over financial reporting and annual reports on Form 10-K filed under the Exchange Act to contain a report from management assessing the effectiveness of a company’s internal control over financial reporting. Separately, under SOX 404, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, public companies that are large accelerated or accelerated filers must include in their annual reports on Form 10-K an attestation report of their regular auditors attesting to and reporting on management’s assessment of internal control over financial reporting. Non-accelerated filers and smaller reporting companies are not required to include an attestation report of their auditors in annual reports.
A report of our management is included under Item 9A “Controls and Procedures” of this report. We are a smaller reporting company and, consequently, are not required to include an attestation report of our auditor in this annual report. However, if and when we become subject to the auditor attestation requirements under SOX 404, we can provide no assurance that we will receive an unqualified report from our independent auditors.
During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2012, management identified a material weakness relating to our lack of sufficient accounting personnel with an appropriate understanding of US GAAP and SEC reporting requirements.
We are undertaking remedial measures, which measures will take time to implement and test, to address this material weakness. There can be no assurance that such measures will be sufficient to remedy the material weakness identified or that additional material weaknesses or other control or significant deficiencies will not be identified in the future. If we continue to experience material weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Each of the foregoing results could cause investors to lose confidence in our reported financial information and lead to a decline in our stock price. See Item 9A “Controls and Procedures” for more information.
RISKS RELATING TO THE PEOPLE’S REPUBLIC OF CHINA
Political and economic policies of the PRC government could affect our business; PRC economic reform policies or nationalization could result in a total investment loss in our common stock.
All of our business, assets and operations are located in China, and all of our revenues are derived from our operations in China. Accordingly, our business, financial condition and results of operations are affected to a significant degree by economic, political and legal developments in China. Changes in political, economic and social conditions in China, adjustments in PRC government policies or changes in laws and regulations could adversely affect our business, financial condition and results of operations. The economy of China differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development in a number of respects, including:
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structure;
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level of government involvement;
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level of development;
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level of capital reinvestment;
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growth rate;
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control of foreign exchange; and
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methods of allocating resources.
Since 1949, China has primarily been a planned economy subject to a system of macroeconomic management. Although the Chinese government still owns the majority of productive assets in China, economic reform policies since the late 1970s have emphasized decentralization, autonomous enterprises and the utilization of market mechanisms. Because many reforms are unprecedented or experimental, they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect our operations.
If the PRC imposes restrictions to reduce inflation, future economic growth in the PRC could be severely affected.
Over the last few years, China’s economy has registered a high growth rate. However, China’s growth rate has not been evenly spread among all sectors of the economy, nor have all geographical regions of the country experienced the same levels of growth. Furthermore, the type of rapid growth that China is currently experiencing is often related to an increased risk of inflation. If the need arises to control inflation, the Chinese government may take similar measures as it has done in the past, including restrictions on the availability of domestic credit, reductions of the purchasing capability of certain of our customers, and limited re-centralization of the approval process for purchases of some foreign products. If similar restrictions are imposed, it may lead to a slowing of economic growth and reduce credit to finance the purchase of vehicles.
The PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
The recent nature and uncertain application of many PRC laws applicable to us create an uncertain environment for business operations and they could have a negative effect on us.
The PRC legal system is a civil law system. Unlike the common law system, the civil law system is based on written statutes in which decided legal cases have little value as precedent. Furthermore, although China has made considerable progress in introducing new laws and regulations concerning foreign investment, corporate organization and governance, commerce and trade and taxation, these laws and regulations are relatively new, and the interpretation and enforcement of these laws involve significant uncertainties. Furthermore, the promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could have a negative impact on our business and business prospects. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty.
Currency conversion and exchange rate volatility could adversely affect our financial condition.
The PRC government imposes control over the conversion of Renminbi (“RMB”) into foreign currencies. Under the current unified floating exchange rate system, the People’s Bank of China publishes an exchange rate (the “PBOC exchange rate”), based on the previous day’s dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency may enter into foreign exchange transactions at exchange rates within an authorized range above or below the PBOC exchange rate according to market conditions.
Enterprises in the PRC that require foreign exchange for transactions relating to current account items, may, without approval of the State Administration of Foreign Exchange (“SAFE”), effect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks by providing valid receipts and proofs.
Convertibility of foreign exchange in respect of capital account items, such as direct investment and capital contribution, is still subject to certain restrictions, and prior approval from the SAFE or its relevant branches must be sought.
In 2005, the Chinese government announced that they would begin pegging the exchange rate of the RMB against a number of currencies, rather than just the United States dollar. Under the new policy, RMB has fluctuated within a narrow and managed band against a basket of certain foreign currencies. As our operations are located in China, any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert United States dollars into RMB for our operations, appreciation of this currency against the United States dollar could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert RMB into United States dollars for other business purposes and the United States dollar appreciates against this currency, the United States dollar equivalent of the RMB we convert would be reduced.
Laws and regulations applicable to the Internet in China remain unsettled and could have a material adverse effect on Internet’s growth and thereby have a material adverse effect on our business.
Growth of the Internet in China could be materially and adversely affected by governmental regulation of the industry. Due to the increasing popularity and use of the Internet and other online services, it is possible that regulations may be adopted with respect to the Internet or other services covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust and characteristics and quality of products and services. Furthermore, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies conducting business online. The adoption of additional laws or regulations may slow the growth of the Internet or other services, which could in turn lead to reduced Internet traffic and increase our cost of doing business. While we are not aware of any existing or proposed regulations that have a significant direct adverse effect on our business, a restrictive regulatory policy regarding the Chinese Internet industry would have a material adverse effect on us by slowing the industry’s growth in China.
We may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us.
We conduct our operations in China and all of our assets are located in China. In addition, most of our directors and executive officers reside within China, and substantially all of the assets of these persons are located within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon those directors or executive officers, including with respect to matters arising under US federal securities laws or applicable state securities laws. Moreover, our Chinese counsel has advised us that China does not have treaties with the US and many other countries that provide for the reciprocal recognition and enforcement of judgment of courts. As a result, recognition and enforcement in China of judgments of a court of the US or any other jurisdiction in relation to any matter may be difficult or impossible.
Restrictions on paying dividends or making other payments to us bind our subsidiaries in China.
We are a holding company and do not have any assets or conduct any business operations in China other than our investments in our subsidiaries in China. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid by our PRC subsidiaries. If our PRC subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our PRC subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC laws and regulations, our PRC subsidiaries are required to allocate at least 10% of their after-tax profits each year, if any, to PRC statutory reserves before distributing dividends until the balance of such fund has reached 50% of its registered capital. Our PRC subsidiaries with foreign investment are also required to further set aside a portion of its after-tax profits to fund the employee welfare fund at the discretion of the board. Although PRC statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of our PRC subsidiaries, the reserve funds are not distributable as cash dividends except in the event of liquidation of any of our PRC subsidiaries.
The Chinese government also imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency. If we or any of our subsidiaries are unable to receive all of the revenues from our operations through these arrangements, we may be unable to effectively finance our operations or pay dividends on our common stock.
Our significant amount of deposits in certain banks in China may be at risk if these banks go bankrupt during our deposit period, and the risk of bankruptcy of the banks with which we have lines of credit may adversely affect our ability to provide financial services to our customers.
As of December 31, 2012, we have approximately $8.9 million of cash deposited in banks, such as time deposits and bank notes, and $27.0 million of restricted cash which constitute substantially all of our total cash and cash equivalents (both unrestricted and restricted) as of December 31, 2012. The terms of these deposits are, in general, up to twelve months. Historically, deposits in Chinese banks are secure due to the state policy on protecting depositors’ interests. However, China promulgated a new Bankruptcy Law in August 2006, which came into effect on June 1, 2007, which contains a separate article expressly stating that the State Council may promulgate implementation measures for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the new Bankruptcy Law, a Chinese bank may go bankrupt. In addition, since China’s accession to the WTO, foreign banks have been gradually permitted to operate in China and have been competitors against Chinese banks in many aspects, especially since the opening of Chinese business to foreign banks in late 2006. Therefore, the risk of bankruptcy of those banks in which we have deposits has increased. In the event of bankruptcy of one of the banks which holds our deposits, we are unlikely to claim our deposits back in full since we are unlikely to be classified as a secured creditor based on PRC laws. In the event that one or more of our banks files for bankruptcy protection, our ability to offer Financing Services to our customers may be materially and adversely impacted, thereby having a material adverse effect on our operations and profitability.
PRC regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate
On August 8, 2006, six PRC regulatory agencies namely, the PRC Ministry of Commerce, the State Assets Supervision and Administration Commission (“SASAC”), the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission (“CSRC”), and the State Administration of Foreign Exchange (“SAFE”), jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), which became effective on September 8, 2006, as amended on June 22, 2009. The M&A Rules significantly revised China’s regulatory framework governing onshore-to-offshore restructurings and foreign acquisitions of domestic enterprises. The M&A Rules signify greater PRC government attention to cross-border merger, acquisition and other investment activities, by confirming MOFCOM as a key regulator for issues related to mergers and acquisitions in China and requiring MOFCOM approval of a broad range of merger, acquisition and investment transactions. Further, the M&A Rules establish reporting requirements for acquisition of control by foreigners of companies in key industries, and reinforce the ability of the Chinese government to monitor and prohibit foreign control transactions in key industries. Among other things, the M&A Rules include new provisions that purport to require that an offshore special purpose vehicle, or SPV, formed for listing purposes and controlled directly or indirectly by PRC companies or individuals must obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. However, the application of this PRC regulation remains unclear regarding the scope and applicability of the CSRC approval requirement.
We are committed to complying with and to ensuring that our beneficial owners who are subject to the M&A Rules will comply with the relevant rules. However, we cannot assure you that all of our current or future beneficial owners who are PRC residents will comply with our request to make or obtain any applicable registrations or comply with these rules. Any failure by any of our current or future beneficial owners to comply with relevant requirements under this regulation could subject us to fines or sanctions imposed by the PRC government, including restrictions on our PRC subsidiaries’ ability to pay dividends or make distributions to us and our ability to increase our investment in our PRC subsidiaries.
RISKS RELATING TO OUR COMMON STOCK
The market price for shares of our common stock could be volatile; the sale of material amounts of our common stock could reduce the price of our common stock and encourage short sales.
The market price for the shares of our common stock may fluctuate in response to a number of factors, many of which are beyond our control. Such factors may include, without limitation, the general economic and monetary environment, quarter-to-quarter variations in our anticipated and actual operating results, future financing activities and the open-market trading of our shares in particular.
From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act of 1933, as amended, subject to certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who has satisfied a six month holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitations, by a non-affiliate of our Company that has satisfied a one year holding period. Any substantial sale of common stock pursuant to Rule 144 may have an adverse effect on the market price of our common stock.
One stockholder exercises significant control over matters requiring stockholder approval.
Bright Praise Enterprises Limited has voting power equal to approximately 44.61% of our voting securities. As a result, Bright Praise Enterprises Limited, through such stock ownership, exercises significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership in Bright Praise Enterprises Limited may also have the effect of delaying or preventing a change in control of us that may be otherwise viewed as beneficial by stockholders other than Bright Praise Enterprises Limited.
We may incur significant costs to ensure compliance with US corporate governance and accounting requirements.
We may incur significant costs associated with our public company reporting requirements, costs associated with applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the SEC. We expect all of these applicable rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board of Directors (the “Board”) or as executive officers. We are currently evaluating and monitoring developments with respect to these applicable rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
Failure to maintain effective internal controls in accordance with the Sarbanes-Oxley Act of 2002 could negatively impact the market price of our common stock. Out-of-period adjustments could require us to restate or revise previously issued financial statements.
Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report by management on the effectiveness of our internal control over financial reporting in our annual reports on Form 10-K. In addition, our independent registered public accounting firm must report on the effectiveness of the internal control over financial reporting. Although we review our internal control over financial reporting in order to ensure compliance with the Section 404 requirements, if we or our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at which these controls are documented, designed, operated or reviewed, or if our independent registered public accounting firm interprets the requirements, rules and/or regulations differently from our interpretation, then they may issue a report that is qualified. This could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which ultimately could negatively impact our stock price.
We do not foresee paying cash dividends in the foreseeable future.
We have not paid cash dividends on our stock, and we do not plan to pay cash dividends on our stock in the foreseeable future.
We may be required to raise additional financing by issuing new securities with terms or rights superior to those of our shares of common stock, which could adversely affect the market price of our shares of common stock.
We may require additional financing to fund future operations, including expansion in current and new markets, programming development and acquisition, capital costs and the costs of any necessary implementation of technological innovations or alternative technologies. We may not be able to obtain financing on favorable terms, if at all. If we raise additional funds by issuing equity securities, the percentage ownership of our current stockholders will be reduced, and the holders of the new equity securities may have rights superior to those of the holders of shares of our common stock, which could adversely affect the market price and the voting power of shares of our common stock. If we raise additional funds by issuing debt securities, the holders of these debt securities would similarly have some rights senior to those of the holders of shares of common stock, and the terms of these debt securities could impose restrictions on operations and create a significant interest expense for us.
We may have difficulty raising necessary capital to fund operations as a result of market price volatility for our shares of common stock.
In recent years, the securities markets in the United States have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operations, performances, underlying asset values or prospects of such companies. For these reasons, our shares of common stock can also be expected to be subject to volatility resulting from purely market forces over which we will have no control. If our business development plans are successful, we may require additional financing to continue to develop and exploit existing and new technologies and to expand into new markets. The exploitation of our technologies may, therefore, be dependent upon our ability to obtain financing through debt and equity or other means.
We are responsible for the indemnification of our officers and directors which could result in substantial expenditures, which we may be unable to recoup.
Our Articles of Incorporation and Bylaws provide for the indemnification of our directors and officers, under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of us. This indemnification policy could result in substantial expenditures, which we may be unable to recoup.
We rely on our PRC subsidiaries for the distribution of any dividends to our shareholders.
We are a company incorporated in the United States and our cash flow depends on dividends from our PRC subsidiaries. In order for us to distribute any dividends to our shareholders, we will rely on dividends distributed by our PRC subsidiaries. PRC regulations currently permit payment of dividends only out of accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Under current PRC laws and regulations, our PRC subsidiaries are required, where applicable, to allocate a portion of their net profits to PRC statutory reserves before distributing dividends, including at least 10% of their net profit to PRC statutory reserves until the balance of such fund has reached 50% of their registered capital. These reserves can only be used for specific purposes, including making-up cumulative losses of previous years, conversion to our equity capital, and application to business expansion, and are not distributable as dividends. Further, if our PRC subsidiaries incur debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Our PRC subsidiaries’ restricted net assets as of December 31, 2012 amounted to approximately $3,559,000.
Techniques employed by short sellers may drive down the market price of the Company’s common stock.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s best interests for the price of the stock to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. These short attacks have, in the past, led to selling of shares in the market.
Recently, public companies that have substantially all of their operations in China have been the subject of short selling. Much of the scrutiny and negative publicity has centered around allegations of a lack of effective internal control over financial reporting resulting in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result, many of these companies are now conducting internal and external investigations into the allegations and, in the interim, are subject to shareholder lawsuits and/or SEC enforcement actions.
It is not clear what effect such negative publicity would have on the Company, if any. If the Company were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, the Company could have to expend a significant amount of resources to investigate such allegations and/or defend itself. While the Company would strongly defend against any such short seller attacks, the Company may be constrained in the manner in which it can proceed against the relevant short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could distract the Company’s management from growing the Company. Even if such allegations are ultimately proven to be groundless, allegations against the Company could severely impact its business operations and stockholders equity, and any investment in the Company’s stock could be greatly reduced or rendered worthless.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2.
ITEM 2.
PROPERTIES.
Our main offices are located at Floor 1 FTZ International Auto Mall, 86 Tianbao, Tianjin Province, PRC. The lease relating to our main offices has a 1-year term which expires on December 31, 2012 which was renewed in December 2012 for term through December 31, 2013. The annual rent for the office is approximately $19,000 (RMB 120,000).
Additional show room space is located at Floor 1 FTZ International Auto Mall, 86 Tianbao, Tianjin Province, PRC. The lease relating to our main offices has a 1-year term which expires on December 31, 2012. The annual rent for the office is approximately $19,000 (RMB 120,000).
Additional office and show room space is located at Floor 1 FTZ International Auto Mall, 86 Tianbao, Tianjin Province, PRC. The lease relating to our main offices has a 1-year term which expires on November 30, 2013. The annual rent for the office is approximately $28,000 (RMB 175,740).
Additional office and show room space is located at Floor 1 FTZ International Auto Mall, 86 Tianbao, Tianjin Province, PRC. The lease relating to our main offices has a 1-year term which expires on November 30, 2013. The annual rent for the office is approximately $29,000 (RMB 180,540).
We also had an exhibition hall located at No. 129 Tian Bao Da Road, FTZ, Tianjin Province, PRC. The lease for this exhibition hall had a 5-year term and was to expire on June 30, 2015. The annual rent for the exhibition hall was approximately $187,000 (RMB1,200,000). However, following negotiations with the lessor, the lease was terminated early in November 2012 and we had no additional costs and commitments upon the termination of this lease.
We believe that all our properties and equipment have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS.
As of the date of this filing, neither the Registrant nor any of its subsidiaries are a party to any legal proceeding that could reasonably be expected to have material impact on its operations or finances.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Shares of our common stock have been listed for trading on the OTCBB under the ticker symbol “CALG.OB” since January 29, 2009. On June 30, 2009, the Company’s common stock was listed on the NASDAQ Capital Market. As of January 8, 2010, the Company’s common stock has been listed on the NASDAQ Global Market. The following table sets forth the quarterly average high and low bid prices per share for our common stock for the two most recently completed fiscal years in the period that ended on December 31, 2012. Where applicable, the prices set forth below give retroactive effect to our one-for-six reverse stock split which became effective on October 9, 2012.
The source for the high and low closing bids quotations is the Google Finance website and does not reflect inter-dealer prices. Such quotations are without retail mark-ups, mark-downs or commissions, and may not represent actual transactions.
Holders
As of March 27, 2013, we had 16 holders of record of our common stock, and our common stock had a closing bid price of $4.55 per share.
Outstanding Options, Conversions, and Planned Issuance of Common Stock.
As of December 31, 2012, there were no warrants or options outstanding to acquire any shares of our common stock.
Dividends and Related Policy
We presently intend to retain all earnings, if any, for use in our business operations and accordingly, the Board of Directors (the “Board”) does not anticipate declaring any cash dividends for the foreseeable future. Any future determination to pay dividends will be at the discretion of the Board and will be contingent upon our financial condition, results of operations, current and anticipated cash needs, restrictions contained in current or future financing instruments, plans for expansion and such other factors as the Board deems relevant. We have not paid any cash dividends on our common stock.
PRC regulations currently permit payment of dividends only out of accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Under current PRC laws and regulations, each of our PRC subsidiaries is required, where applicable, to allocate a portion of its respective net profits to PRC statutory reserves before distributing dividends, including at least 10% of its respective net profits to PRC statutory reserves until the balance of such fund has reached 50% of its respective registered capital. These reserves can only be used for specific purposes, including making-up cumulative losses of previous years, conversion to our equity capital, and application to business expansion, and are not distributable as dividends. Further, if any of our PRC subsidiaries incur debt in the future, the instruments governing the debt may restrict such Subsidiary’s ability to pay dividends or make other distributions to us. For risks associated with the restrictions that limit our ability to pay dividends on common stock, see “Risk factors- We rely on our PRC subsidiaries for the distribution of any dividends to our shareholders.”
Transfer Agent and Registrar
Our transfer agent is Corporate Stock Transfer, located at 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209. Their telephone number is (303) 282-4800.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
None.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA.
Not applicable.
ITEM 7.
ITEM 7.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Forward Looking Statements
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 consolidated financial statements, as well as information relating to the plans of our current management and should be read in conjunction with the accompanying financial statements and their related notes included in this Report. References in this section to “we,” “us,” “our,” or the “Company” are to the consolidated business of China Auto Logistics Inc. and its wholly owned and majority owned subsidiaries.
This Report contains forward-looking statements. 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. 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.
Business Overview
Prior Operations of China Auto Logistics Inc.
China Auto Logistics Inc., formerly Fresh Ideas Media, Inc., was incorporated in the State of Nevada on February 22, 2005. Fresh Ideas Media, Inc. was engaged in the advertising and consulting business. In February 2005, Fresh Ideas Media, Inc. formed its wholly-owned subsidiary, Community Alliance, Inc. (“Community Alliance”), an entity which markets sub-licenses for take home school folders. Fresh Ideas Media, Inc. had only commenced limited operations and had not yet generated significant revenues, and was therefore considered a development stage company.
The Exchange and the Spin-Off
On November 10, 2008, Fresh Ideas Media, Inc. entered into the Exchange Agreement (“Exchange”) with a Hong Kong corporation, Ever Auspicious International Limited (“HKCo”), whereby Fresh Ideas Media, Inc. acquired all of the issued and outstanding securities of the HKCo in exchange for the issuance by Fresh Ideas Media, Inc. of 1,950,000 (pre reverse split of 11,700,000) newly-issued shares of our common stock. The closing of the Exchange (“Closing”) occurred on the same day, immediately following the cancellation of an aggregate of 189,167 (pre reverse split of 1,135,000) shares of Fresh Ideas Media, Inc.’s common stock held by Phillip E. Ray and Ruth Daily, Fresh Ideas Media, Inc.’s principal stockholders immediately prior to the Closing. Prior to the Exchange, Phillip E. Ray and Ruth Daily owned approximately 23.89% and 16.58% of the issued and outstanding common stock of Fresh Ideas Media, Inc., respectively. As of the Closing, HKCo beneficially owns approximately 64.64% of the voting capital stock of Fresh Ideas Media, Inc. As a result of the Exchange, HKCo became a wholly owned subsidiary of Fresh Ideas Media, Inc. and Fresh Ideas Media, Inc.’s primary business operations are those of HKCo. Shortly after the Closing, Fresh Ideas Media, Inc. changed its name from Fresh Ideas Media, Inc. to China Auto Logistics Inc. (the “Company”).
In connection with the consummation of the Exchange, Fresh Ideas Media, Inc. agreed to consummate the spin-off of Community Alliance through a dividend of all of the issued and outstanding capital stock of Community Alliance to holders of Fresh Ideas Media, Inc.’s common stock as of September 9, 2008. The spin-off was approved by the Board of Directors of Fresh Ideas Media, Inc. on September 9, 2008 and would be consummated upon the satisfactory resolution of all of the SEC’s comments to the Form 10 registration statement relating to Community Alliance’s common stock and such registration statement’s effectiveness. Upon the consummation of the spin-off, the business and operations of HKCo were the sole business and operations of Fresh Ideas Media, Inc.
The HKCo was incorporated in Hong Kong on October 17, 2007. Prior to December 25, 2007, HKCo had minimal assets and no operations. On December 25, 2007, Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd. (“Shisheng”) a company established under the laws of the People’s Republic of China (“PRC”), became a wholly-owned foreign enterprise of HKCo and this arrangement was approved by relevant ministries of the PRC government.
Upon the completion of the transactions on December 25, 2007 and November 10, 2008, the Company owned 100% of HKCo which owned 100% of Shisheng, the operating entity of HKCo. For financial reporting purposes, these transactions are classified as a recapitalization of Shisheng and the historical financial statements of Shisheng are reported as the Company’s historical financial statements.
On November 1, 2010, Shisheng acquired all issued and outstanding stocks of Qizhong and completed the acquisition simultaneously. As a result, Qizhong became a wholly-owned subsidiary group of the Company and was included in the Company’s consolidated financial statements from the date of acquisition.
On March 15, 2011, the Company entered into a Memorandum of Understanding with the former owners of Qizhong and agreed that the remaining cash consideration totaling $2.09 million and the consideration share of 177,238 (pre reverse split of 1,063,427) shares of common stock of the Company should be paid to the former owners of Qizhong no later than June 30, 2011.
Pursuant to the Agreement and the Memorandum of Understanding, the purchase price, net of cash acquired of $1.68 million from Qizhong, was $4.47 million for the acquisition of 100% of Qizhong’s equity interests. The purchase price of $4.47 million consisted of $1.01 million in cash ($2.69 million payable in cash less cash acquired of $1.68 million from Qizhong) and the issuance of 177,238 (pre reverse split of 1,063,427) shares of common stock valued at approximately $3.46 million. The value of common stock was determined based on $19.50 (pre reverse split of $3.25) per share, the per share price of the Company’s common stock on the acquisition date. The Company remitted approximately $600,000 and the remaining balance of the cash consideration in fiscal years 2010 and 2011, respectively. The 177,238 (pre reverse split of 1,063,427) shares of the Company’s common stock was to be unconditionally issued and was included in the Company’s equity as of December 31, 2010; the Company issued these shares during fiscal year 2011.
Current Business of the Company
The Company provides individual and business customers with services in relation to automobile sales, financing services, custom clearance, storage, national transportation, quotation platform, and information relating to automotive services and products, through its websites (www.cali.com.cn, www.at188.com, www.at160.com and www.goodcar.cn), Also, the Company sells imported automobiles, manages an auto mall for customers, and as the only one-stop service provider in Tianjin provides dealer financing to our customers.
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 generally accepted accounting principles in the United States (“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, goodwill and intangible assets, the valuation of deferred tax assets and inventories and the provision for income taxes. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed in this Form 10-K 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.
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 and are considered receivables held for investment. We charge a fee for providing loan services and such fee is prepaid by customers. We amortize these fees over the receivable 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.
We evaluate the collectibility of outstanding receivables at the end of each of the reporting periods and make estimates for potential credit losses. We have not experienced any losses on our accounts receivable historically.
Inventories
Inventory is stated at the lower of cost (using the first-in, first-out method) or market. We continually evaluate the composition of our inventory, assessing slow-moving and ongoing products. Our products are comprised of the purchase cost of automobiles which declines in value over time. We continuously evaluate our inventory to determine the reserve amount for slow-moving inventory.
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 December 31, 2012, the deferred tax assets amounted to $714,161.
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 $31.1 million as of December 31, 2012. 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 December 31, 2012 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 December 31, 2012, 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.
Goodwill and Acquired Intangible Assets Impairment
We perform our impairment tests for goodwill and acquired intangible assets with indefinite lives on an annual basis, during the fourth quarter of our fiscal year, or more frequently, if changes in facts and circumstances indicate that impairment in the value of goodwill and acquired intangible assets recorded on our consolidated balance sheet may exist. In order to estimate the fair value of goodwill and intangible assets with indefinite lives, we typically estimate future revenue, consider market factors and estimate our future cash flows. Based on these key assumptions, judgments and estimates, we determine whether we need to record an impairment charge to reduce the value of the asset carried on our balance sheet to its estimated fair value. Assumptions, judgments and estimates about future values are complex and often subjective. They can be affected by a variety of external and internal factors, including industry and economic trends and changes in our business strategy or our internal forecasts. Although we believe the assumptions, judgments and estimates we have made have been reasonable and appropriate, different assumptions, judgments and estimates could materially affect our reported financial results.
During the year ended December 31, 2011, due to the planned closing of Goodcar’s operations related to sales of VIP membership cards and other promotion services, which is a reporting unit under our Automobile Value Added Services segment, we reevaluated our goodwill and intangible assets related to this reporting unit and determined that the related goodwill and intangible assets were impaired. We recorded impairment losses of $810,571 and $83,012 ($62,259 after-tax) in respect of our goodwill and intangible assets related to this reporting unit for the year ended December 31, 2011. Except for this reporting unit, there was no indication that the carrying value of goodwill or intangible assets related to other reporting units may not be recoverable based on the result of our evaluation.
During the fourth quarter of 2012, we revised our business plan and downsized Goodcar’s operations. The Company reviewed Goodcar’s advertising operations and decided to cease such operations to generate advertising revenue. We evaluated the projected revenue and profit and costs involved to operate Goodcar’s advertising operations and concluded that it would be in the Company’s best interests to cease its operations in order for us to better focus on our core of automobile sales, automobile value added services, auto mall management and financing services. We continue to operate Goodcar’s website to promote our products and services in other segments, including automobile sales, automobile valued added services and financing services. Due to the closing of Goodcar’s advertising operations, we recorded goodwill impairment charges of $3,735,091 and impairment charges of $926,110 (net of deferred taxes of $314,094) related to the goodwill and intangible assets acquired in the acquisition of Goodcar.
In December 2012, the Company negotiated with these former owners of Qizhong with regard to the outstanding balance of these loans payable. As a result of the negotiations, these loans were forgiven by these former owners of Qizhong due to the fact that certain key executives left Goodcar after the purchase and Goodcar’s operations had not been performing the way it was expected. The formers owners were willing to forgive this debt since the actual performance of Qizhong after the acquisition was far below the performance forecast provided to the Company prior to the acquisition. The Company recorded a gain on debt forgiveness in the amount of $1,139,861 (including outstanding debt balance of $1,084,905 and foreign currency translation adjustment of $54,956) as other income in the consolidated statements of income for the year ended December 31, 2012.
Recently Adopted Accounting Standards
In May 2011, the FASB issued ASU No. 2011-04, Topic 820 - Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs (“ASU 2011-04”). The amendments establish common requirements for measuring fair value and related disclosures in accordance with accounting principles generally accepted in the United Sates and international financial reporting standards. This amendment did not require additional fair value measurements. ASU 2011-04 became effective for the first interim and annual periods beginning after December 15, 2011, and should be applied prospectively. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Topic 220 - Comprehensive Income: Presentation of Comprehensive Income (“ASU 2011-05”). The amendments eliminate the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders' equity, require consecutive presentation of the statement of net income and other comprehensive income and require reclassification adjustments from other comprehensive income to net income to be shown on the financial statements. In December 2011, the FASB issued ASU No. 2011-12, Topic 220 - Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in ASU 2011-05 (“ASU 2011-12”) to defer the effective date of the provision requiring entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. However, the remaining requirements of ASU 2011-05 became effective for the first interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08, Topic 350 - Intangibles - Goodwill and Other: Testing Goodwill for Impairment (“ASU 2011-08”), which amends current guidance to allow a company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The amendment also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 became effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
In December 2011, the FASB issued ASU No. 2011-11, Topic 210 - Balance Sheet: Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 will be effective for fiscal years beginning on or after January 1, 2013, with retrospective application for all comparable periods presented. The Company does not expect the adoption of this guidance to have a material effect on the Company’s consolidated financial statements.
In July 2012, the FASB issued ASU 2012-02 - Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”), which amends the guidance in ASC 350-30 on testing indefinite-lived intangible assets, other than goodwill, for impairment. FASB issued ASU 2012-12 in response to feedback on ASU 2011-08, which amended the goodwill impairment testing requirements by allowing an entity to perform a qualitative impairment assessment before proceeding to the two-step impairment test. Similarly, under ASU 2012-02, an entity testing an indefinite-lived intangible asset for impairment has the option of performing a qualitative assessment before calculating the fair value of the asset. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not (i.e. a likelihood of more than 50 percent) impaired, the entity would not need to calculate the fair value of the asset. ASU 2012-02 does not revise the requirement to test indefinite-lived intangible assets annually for impairment. In addition, the ASU 2012-02 does not amend the requirement to test these assets for impairment between annual tests if there is a change in events or circumstances; however, it does revise the examples of events and circumstances that an entity should consider in interim periods. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material effect on the Company’s consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, Topic 220 - Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 changes the presentation requirements of significant reclassifications out of accumulated other comprehensive income in their entirety and their corresponding effect on net income. For other significant amounts that are not required to be reclassified in their entirety, the standard requires the company to cross-reference to related footnote disclosures. ASU 2013-02 became effective for the company on January 1, 2013. The Company does not expect the adoption of this guidance to have a material effect on the Company’s consolidated financial statements.
In March 2013, the FASB issued ASU 2013-05 Topic 830 - Foreign Currency Matters (“ASU 2013-05”). ASU 2013-05 resolves the diversity in practice about whether Subtopic 810-10, Consolidation-Overall, or Subtopic 830-30, ASU 2013-05 applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. In addition, the amendments in this Update resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. ASU 2013-02 became effective for the company prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material effect on the Company’s consolidated financial statements.
Results of Operations for the Fiscal Year Ended December 31, 2012 Compared To the Fiscal Year Ended December 31, 2011
The following table sets forth certain information relating to our results of operations, and our consolidated statements of operations as a percentage of net revenue, for the periods indicated:
Our net revenue for 2012 increased 30.78% to $591,315,104 from $452,149,602 for 2011 and our cost of revenue for 2012 increased 33.04% to $580,057,718 from $436,010,820 for 2011. Gross profit margin decreased 167 basis points from 3.57% for 2011 to 1.90% for 2012. As compared to 2011, our gross profit, income from operations, net income and net income attributable to shareholders of China Auto Logistics Inc. for 2012 decreased 30.25% to $11,257,386, decreased 68.51% to $3,582,194, decreased 68.27% to $2,580,526, and decreased 68.04% to $2,567,087, respectively primarily due to the decline of web-based advertising services and automobile value added services, which were partially offset by an increase in our revenue from sales of automobiles and financing services.
Net Revenue
The following table sets forth a summary of our net revenue by categories for years indicated, in dollars and as a percentage of total net revenue:
Sales of Automobiles
Net revenue from sales of automobiles increased 32.43% to $581,292,369 for 2012 from $438,958,371 for 2011. During 2012 and 2011, the Company sold 6,588 automobiles and 4,190 automobiles, respectively, representing an increase of 57.23% in volume. The average unit selling price per automobile for 2012 decreased 16.19% to approximately $88,000 from approximately $105,000 for 2011. According to a forecast report issued by IHS Automotive (“IHS”) on April 28, 2012, it is expected that the growth rates for the high-end automobile market in China will exceed those for the mainstream automobile market. IHS also forecasts the sales will grow 139.5% during the period from 2010 through 2015. Based on the current growth forecast, China will soon become the top market for most of the major luxury automotive manufacturers. The Company will continue its focus on the marketing of luxury automobiles.
While we remain one of the leaders in the import automobile market, we continue to reduce our gross profit margin in order to expand our market share and maintain our market leader status. We have been experiencing increased competition from smaller dealers which are willing to lower their selling prices in order to increase their market share. In response, we have had to lower our prices to retain our market position. In addition, we experienced higher demand for lower end models for our top selling brands, Toyota, BMW and Mercedes Benz. As a result, average selling prices for these top three brands declined 22%, 3% and 14%, respectively for the year ended December 31, 2012 as compared to 2011. Total sales for these top three brands accounted for approximately 81% and 82% of our total automobile sales for the years ended December 31, 2012 and 2011, respectively.
Sales to the Company’s top five customers, each of which is a car dealer, accounted for 38.97% and 28.37% of the Company’s sales during 2012 and 2011, 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 for 2012 increased 72.72% to $7,085,357 from $4,102,254 for 2011. The Company had an aggregate amount of credit lines of approximately $135 million as of December 31, 2012. We continue to take advantage of the available credit lines granted by our banks to expand our financing services operations. As a result, we were able to continue to grow in the financing service segment. Our revenue growth from financing services is heavily dependent on overall industry growth and the economic conditions of the market in the PRC. We established reputable credit with most major commercial banks and although the enormous decrease or the simultaneous expiration of credit lines or other bank facilities may temporarily reduce our capacity to provide financing services and to affect our purchase power, we had not experienced formidable difficulties in the access of credit lines and any other bank facility 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 the banks in China continue to reduce their credit risks 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, and guarantees by our major customers and suppliers.
We provide Financing Services to our customers with our lines of credit with major commercial banks in the PRC, including Agricultural Bank of China, China Merchants Bank, Pudong Development Bank, China Zheshang Bank, Industrial and Commercial Bank of China, Shengjing Bank and China MinSheng Bank. We continue to strengthen our relationship with these banks and aim to negotiate with more banks for higher lines of credit at more favorable terms. Based on the Company’s business relationships with some financial institutions, we are able to obtain financing on an “as-needed” basis and we are in negotiations for a number of new credit lines. As of March 18, 2013, the Company had a credit line of $135 million (RMB850 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.
Web-based Advertising Services
In 2012 and 2011, all revenue from web-based advertising services is generated by subscription fees and advertisements. The Company previously operated its domestic automobile website in 35 cities throughout China and targeted to increase the geographical coverage to 60 cities. During 2012, we reduced our coverage to one single city in Tianjin. In response to the intensified competition in the online advertising markets in China and our revised plan of focusing our business on imported automobiles and related services, we are currently reviewing our website portals’ future geographical coverage in China. In addition, during the fourth quarter of 2012, we revised our business plan and downsized Goodcar’s operations. We reviewed Goodcar’s advertising operations and decided to cease such advertising operations. We evaluated the projected revenue and profit and costs involved to operate Goodcar’s advertising operations and concluded that it would be in the Company’s best interests to cease its operations in order for us to better focus on our core businesses of automobile sales, automobile value added services, auto mall management and financing services. We continue to operate Goodcar’s website to promote our products and services in other segments, including automobile sales, automobile valued added services and financing services.
Our web-based advertising service revenue decreased 86.77% to $819,344 for 2012 from $$6,192,644 for 2011. We have been experiencing stiff competition in the web-based advertising arena which continues to drive the pricing of advertising revenue down. Starting in 2012, we have been shifting our focus of operating our websites from generating advertising revenue to providing automotive information to our website visitors. We are targeting to create a platform that allows our customers and potential customers to have access to our products including the automobile sales, automobile valued added services and financing services. Through offering extensive automotive information and news, we are able to attract more potential customers to visit our websites. Therefore we are willing to sacrifice our advertising revenue in the near term but create opportunities for higher potential growth of our other service products. The results have been positive as our other services, especially the sales of automobiles and financing services, continue to grow which we believe will benefit us long term.
Automobile Value Added Services
Our Automobile Value Added Services (“VAS”) revenue decreased 39.61%, to $1,178,274 in 2012 from $1,951,056 in 2011. The decrease is primarily due to the decrease of Goodcar value added service as we ceased such service in the first half of 2012. We expect our VAS revenue to fluctuate from time to time depending on our customers’ needs.
Auto Mall Management Services
Pursuant to a services agreement between the Company and Tianjin Prominent Hero International Logistics Co., Ltd., dated March 1, 2011, the Company agreed to provide services to manage Tianjin FTZ International Automobile Exhibition and Sales Center (“Auto Mall Management Services”) for a one-year period for an aggregate consideration of $1,000,000. The related services fee is recognized ratably over the service period and included as revenue from Auto Mall Management Services. On March 1, 2012, the services agreement was renewed for a term of 1 year for an aggregate consideration of $1,000,000.
Our Auto Mall Management Services revenue for 2012 and 2011 were $939,760 and $945,277, respectively.
Cost of Revenue
Our cost of revenue in 2012 consisted primarily of the cost of automobiles purchased and certain direct labor and overhead costs related to our Financing Services, Web-based Advertising Services, Automobile Value Added Services and Auto Mall Management Services. Our cost of revenue increased 33.04%, from $436,010,820 in 2011 to $580,057,718 in 2012. The increase was primarily due to the increase in the sales volume of imported automobiles in the year, which is consistent with our net revenue growth rate.
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 30.25% from $$16,138,782 in 2011 to $11,257,386 in 2012, due to the cost of revenue increasing at a higher rate than the increase of net revenues. We are experiencing more competition from our competitors which drove down the sales prices. In addition, we sold more lower-end automobiles, which generate lower gross profit margins.
Operating Expenses
Operating expenses increased 61.19%, from $4,761,694 in 2011 to $7,675,192 in 2012. This increase was a result of 421.63% increase of the impairment loss of goodwill and intangible assets on Goodcar from $893,583 in 2011 to $4,661,201 in 2012, which was partially offset by a 34.32% decrease of selling and marketing expenses from $1,488,408 in 2011 to $977,555 in 2012 and a 14.42% decrease of general and administrative expense from $2,379,703 in 2011 to $2,036,436 in 2012.
Selling and Marketing Expenses
Selling and marketing expenses decreased 34.32% in 2012. The following table sets forth a breakdown of the primary selling and marketing expenses of the Company:
Payroll and staff related costs decreased 71.93% and 32.48%, respectively, to $153,262 and $80,154, respectively, in 2012 as we substantially reduced employee headcounts at Goodcar as personnel at our headquarters were able to assume those functions. In addition, as we shifted our focus away from the web-based advertising segment, we continued to reduce this segment’s employee head counts. Advertising and promotion expenses and entertainment expenses decreased by 88.96% and 37.48%, respectively, due to reduced costs of promoting our web-based advertising related business. Rental expenses decreased 1.27% primarily due to reduction of Goodcar office locations which was partially offset of gradual rent increases of our office and exhibition facilities.
General and Administrative Expenses
The following table sets forth a breakdown of the primary general and administrative expenses of the Company:
Depreciation expense decreased as certain assets in various Goodcar locations were disposed. Payroll costs decreased 53.39% to $360,140 as we substantially reduced employee headcounts at Goodcar as personnel at our headquarters were able to assume those functions. Staff related costs increased 6.03%. to $152,961 in 2012 as we paid severance to our former Goodcar employees which was partially offset by reduced costs due to a substantially smaller number of employees at Goodcar during 2012. Legal and professional fees increased 22.52% to $911,669 in 2012 from $744,079 in 2011, due to general increases of our costs as a U.S. public company. Rent decreased as we closed down several of our Goodcar local offices.
Impairment Loss of Goodwill and Intangible Assets
During the year ended December 31, 2011, due to the planned closing of Goodcar’s operations related to sales of VIP membership cards and other promotion services, which is a reporting unit under our Automobile Value Added Services segment, we reevaluated our goodwill and intangible assets related to this reporting unit and determined that the related goodwill and intangible assets were impaired. We recorded impairment losses of $810,571 and $83,012 ($62,259 after-tax) in respect of our goodwill and intangible assets related to this reporting unit for the year ended December 31, 2011.
During the fourth quarter of December 31, 2012, we revised our business plan and downsized Goodcar’s operations. During the fourth quarter of 2012, the Company reviewed Goodcar’s advertising operations and decided to cease such operations to generate advertising revenue. We evaluated the projected revenue and profit and costs involved to operate Goodcar’s advertising operations and concluded that it would be in the Company’s best interests to cease its operations in order for us to better focus on our core businesses of automobile sales, automobile value added services, auto mall management and financing services. We continue to operate Goodcar’s website to promote our products and services in other segments, including automobile sales, automobile valued added services and financing services. Due to the closing of Goodcar’s advertising operations, we recorded goodwill impairment charges of $3,735,091 and impairment charges of $926,110 (net of deferred taxes of $314,094) related to the goodwill and intangible assets acquired in the acquisition of Goodcar.
Income from Operations
Income from operations decreased 68.51% to $3,582,194 in 2012 from $11,377,088 in 2011. Excluding the impairment charge of goodwill and intangible assets of $4,661,201 in 2012 and $893,583 in 2011, our income from operations decreased 35.4% to $8,243,395 in 2012 from $12,270,671 in 2011. The decrease was primarily due to the continuous decline of our gross profit margin on the sales of automobiles from 1.27% in 2011 to 0.89% in 2012. However as we continue to enjoy a high growth in our sales of automobiles, we believe we will continue to maintain our leadership in the imported luxury automobiles industry which will help us to increase the volume for our other service segments. Therefore we foresee our business strategy will continue to help us grow long term.
Other Income (Expenses), Net
Other income (expenses) primarily consists of interest income related to bank deposits, interest expense related to bank borrowings, loss on disposal of property and equipment, and gain on forgiveness of debt.. We recorded a net other income of $594,510 for fiscal year 2012 and a net other income of $58,747 for fiscal year 2011, primarily due to the gain on forgiveness of debt to the former shareholders of Goodcar. In December 2012, the Company negotiated with these former owners of Qizhong with regard to the outstanding balance of these loans payable. As a result of the negotiations, these loans were forgiven by these former owners of Qizhong because certain key executives left Goodcar after the purchase and Goodcar’s operations had not been performing the way it was expected. We incurred higher interest expense as we had more outstanding balances on our short-term borrowings in 2012.
Income Tax
Income tax expense for the year ended December 31, 2012 was $1,596,179, a decrease from $3,303,177 for the year ended December 31, 2011, which is primarily in line with the decline of our income from operations.
Inflation
We believe that inflation has had a negligible effect on operations for the fiscal years 2012 and 2011. However, overall commodity inflation is an ongoing concern for our business and has been a considerable operational and financial focus for the Company. We continue to monitor commodity costs and work with our suppliers and customers to manage changes in commodity costs.
Liquidity and Capital Resources
We generally finance our operations through a combination of operating profit and short-term borrowings from banks. During the reporting periods, we arranged a number of bank loans to satisfy our financing needs. As of the date of this Form 10-K, we have not experienced any difficulty in raising funds through bank loans, and we have not experienced any liquidity problems in settling our payables in the normal course of business and repaying our bank loans when they come due.
We believe that the level of financial resources is a significant factor for our future development and accordingly, we may determine from time to time to raise capital through private debt or equity financings to strengthen the Company’s financial position, to expand our facilities and to provide us with additional flexibility to take advantage of business opportunities. No assurances can be given that we will be successful in raising such additional capital on terms acceptable to us.
The following table sets forth a summary of our cash flows for the fiscal years ended December 31, 2012 and 2011.
Operating Activities
During the fiscal year 2012, we used net cash for operating activities of $15,351,117, as compared to $16,075,060 in fiscal year 2011. The decrease in net cash used for operating activities is primarily a result of a decrease in net cash flows used in operating assets and liabilities as compared to 2011. The decrease of net cash used in operations is primarily due to the net effects of reduction of net income, increase of impairment loss on goodwill and intangible assets, gain on forgiveness of debt, increase of restricted cash, decrease of advances from suppliers, increase of notes payable to suppliers, and decrease of customer deposits.
Investing Activities
During fiscal years 2012 and 2011, we used net cash flows in investing activities of $6,058 and of $97,141, respectively. We purchased property and equipment in the amount of $6,058 in 2012 as compared to $127,145 in 2011. We sold certain property and equipment resulting in proceeds of $0 in 2012 and $30,004 in 2011, respectively.
Financing Activities
During fiscal years 2012 and 2011, net cash provided by financing activities was $16,061,147 and $6,210,253, respectively. We had net short-term borrowings of $15,561,407 in 2012 as compared to $4,266,818 in 2011. We received loans from a director in the amount of $852,075 in 2012 and $38,710 in 2011, and repaid $352,335 in 2012 and $590,796 in 2011. We repaid loans to the former Qizhong shareholders in the amount of $2,754,479 during 2011. In addition, we received the proceeds of the issuance of shares totaling $5,250,000 during 2011.
Our total cash and cash equivalents increased to $8,888,749 as of December 31, 2012, as compared to $8,184,793 as of December 31, 2011.
Working Capital
As of December 31, 2012, the Company had working capital of $59,162,436 compared to $51,218,044 as of December 31, 2011.
The Company’s cash is used to finance the purchases of inventory, payments for advances from suppliers, and restricted cash as requirements for our financing service operations, lines of credit related to financing services and short-term borrowings. As of December 31, 2012, the decrease of working capital was primarily attributable to an increase of restricted cash of $8,209,475, a decrease of receivable related to financing services of $32,117,429, a decrease in notes receivable in the amount of $3,174,201, a decrease of inventories in the amount of $1,561,109, and a decrease of advances from suppliers of $1,727,461, which was partially offset by a decrease in lines of credit related to financing services of $36,182,939, an increase of short-term borrowings of $15,388,026, an increase of notes payable to suppliers of $12,696,196, and a decrease of customer deposits of $27,734,525.
The Company has aggregate outstanding balance of lines of credit related to financing services of $51,528,018 and $87,710,957 as of December 31, 2012 and 2011, respectively, and outstanding balances of short term borrowings of $19,673,128 and $4,285,102 as of December 31, 2012 and 2011, respectively.
We aim to continue to improve the level of working capital through increased net profits and cash flow and efficiently controlling costs. The Company previously adopted measures to lower holding costs of inventories and continues to develop and maintain good relationships with banks for favorable financing terms.
Capital Expenditures
We had property and equipment, net of $314,126 as of December 31, 2012 and $642,672 as of December 31, 2011. The decrease in fiscal year 2012 was mainly due to the depreciation expense of $162,420 and the loss on disposal of property and equipment of $172,043, which was offset by new additions to property and equipment of $6,058.
The following table sets forth a summary of our property and equipment for the fiscal years ended December 31, 2012 and 2011
Foreign Cash
As of December 31, 2012 and 2011, the Company had cash deposits of $8,851,507 and $8,169,268 placed with several banks and a financial institution in the People’s Republic of China, where there is currently no rule or regulation in place for obligatory insurance of accounts with banks and financial institutions.
If the foreign cash and cash equivalents are expatriated to finance any needs of our operations in the U.S., we may need to accrue and pay U.S. taxes. Currently, we have not provided for U.S. income and foreign withholding taxes on undistributed earnings of our PRC subsidiaries since we intend to reinvest our earnings to further expand our businesses in mainland China and do not intend to declare dividends to our U.S. holding company in the foreseeable future.
Indebtedness
We entered into several banking facilities with Agricultural Bank of China, China Merchants Bank, Pudong Development Bank, China Zheshang Bank, Industrial and Commercial Bank of China, Shengjing Bank and China MinSheng Bank. As of December 31, 2012 and 2011, the Company had aggregate credit lines of $135 million (RMB850,000,000) and $179 million (RMB1,125 million), respectively, had outstanding balances under these credit lines amounted to $52 million and $88 million, respectively.
As of December 31, 2012, we had an aggregate outstanding loan balance of $19,673,128 related to certain short-term loan agreements with Agricultural Bank of China and China Zheshang Bank. As of December 31, 2011, we had outstanding loan balance of $4,285,102 related to a short-term loan agreement with China Zheshang Bank. These loans carried interest at rates ranging from 0.92% to 7.8% per annum and maturity dates between six months to one year from the original loan agreement dates. These loans were used for our working capital. We continue to take advantage of the low interest rate environment and our excellent relationships with the major banks to secure loans at attractive terms. In order to expand our revenues on sales of automobiles, we are required to have a significant amount of working capital since our suppliers require deposits for orders. As we continue to see growth in our automobile sales business, we expect to continue to use short term loans to finance our business expansion.
During fiscal year 2011, we entered into a factoring agreement with China Zheshang Bank in which all of our notes receivable as of December 31, 2011 were transferred with recourse to China Zheshang Bank. Under the terms of the agreement, the bank advanced the Company up to 80% of the amount of the factored receivables and collected the factored receivable balances directly from the customers. The bank charges interest at a rate of 7.8% per annum on the amount advanced and withheld the interest from the final payment to us on collection. For fiscal year 2011, the Company received advances under the factoring agreement of $4,285,102, which was classified as short term borrowings on the consolidated balance sheet as of December 31, 2011. This loan was repaid during the year ended December 31, 2012.
Debt Forgiveness
In connection with the Goodcar acquisition, we assumed the balances due to former owners of Qizhong of $1,084,905. Upon completion of the share issuance, these former owners of Qizhong then became shareholders of the Company. In December 2012, we negotiated with these former owners of Qizhong with regard to the outstanding balance of these loans payable. As a result of the negotiations, these loans were forgiven by these former owners of Qizhong due to the fact that certain key executives left Goodcar after the purchase and Goodcar’s operations had not been performing the way it was expected. The formers owners were willing to forgive this debt since the actual performance of Qizhong after the acquisition was far below the performance forecast provided to the Company prior to the acquisition. We recorded a gain on debt forgiveness in the amount of $1,139,861 (including outstanding debt balance of $1,084,905 and foreign currency translation adjustment of $54,956) as other income in the consolidated statements of income for the year ended December 31, 2012.
Trend Information
Other than as disclosed elsewhere in this Form 10-K, we are not aware of any trends, uncertainties, demands, commitments or events for the periods discussed in this section that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, nor any that caused the disclosed financial information to not necessarily be indicative of future operating results or financial conditions.
Off-Balance Sheet Arrangements
We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to pages through F 29 comprising a portion of this annual report on Form 10-K.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls or procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues are instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2012, the end of the annual period covered by this report. The evaluation of our disclosure controls and procedures included a review of the disclosure controls’ and procedures’ objectives, design, implementation and the effect of the controls and procedures on the information generated for use in this report. In the course of our evaluation, we sought to identify errors, control problems or acts of fraud and to confirm the appropriate corrective actions, including process improvements, were being undertaken. Our Chief Executive Officer and Chief Financial Officer have concluded that the Company had a material weakness in its internal control over financial reporting as of December 31, 2012 because the Company’s accounting department personnel had limited knowledge and experience in U.S. GAAP and SEC reporting requirements as of December 31, 2012.
Based on the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective as of December 31, 2012.
Internal Control Over Financial Reporting
(a) Management’s Annual Report on Internal Control Over Financial Reporting.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2012, based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
During this evaluation, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, has identified one material weakness in the control environment of the Company. The material weaknesses are related to
■
the Company’s accounting department personnel have limited knowledge and experience in US GAAP and SEC Reporting.
As stated in the Form 10K for the year ended December 31, 2011, we had another material weakness, “the failure to retain sufficient qualified accounting personnel in Goodcar, a subsidiary group acquired by the Company in November 1, 2010, to prepare financial statements in accordance with accounting principles generally accepted in the US.” During the three months ended June 30, 2012, the Company’s accounting team in our headquarters assumed the responsibilities for all the accounting and reporting functions of Goodcar. Accordingly, such material weakness above no longer existed as of December 31, 2012.
A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result of the material weakness identified above, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2012.
To remediate the material weaknesses identified in internal control over financial reporting of the Company, we have done the following:
■
hired an external consultant with extensive experience in US GAAP and SEC reporting who is responsible for assisting the Company with (i) the preparation of its financial statements in accordance with US GAAP, (ii) its periodic SEC reporting process and (iii) providing on-going training to the Company’s accounting staff to enhance their knowledge in US GAAP;
■
continued our efforts to recruit additional personnel with sufficient knowledge and experience in US GAAP; and
■
continued our efforts to provide ongoing training courses in US GAAP to existing personnel, including our Chief Financial Officer and the Financial Controller.
The Company believes that the consolidated financial statements fairly present, in all material respects, the Company’s consolidated balance sheets as of December 31, 2012 and 2011 and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years ended December 31, 2012 and 2011, in conformity with accounting principles generally accepted in the US, notwithstanding the material weakness we identified.
This Annual Report on Form 10-K does not include an attestation report of the Registrant's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Registrant's registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permit the Registrant to provide only management's report in this Annual Report.
(b) Changes in Internal Control Over Financial Reporting.
During our fiscal year 2012, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION.
Pursuant to that certain Office Tenancy Contract, effective as of January 1, 2012, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Hengjia Port Logistics Co., Ltd. (attached hereto as Exhibit 10.2), the Company leased a booth at Tianjin Free Trade Zone International Automall, No.86, Tianbao Avenue, Tianjin Free Trade Zone.
Pursuant to that certain Office Tenancy Contract, effective as of January 1, 2012, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd. (attached hereto as Exhibit 10.3), the Company leased its main offices at Tianjin Free Trade Zone International Automall, No.86, Tianbao Avenue, Tianjin Free Trade Zone.
Pursuant to that certain Contract on Import L/C Issuing Limits, dated as of September 13, 2012, by and between Tianjin Binhai Shisheng Business and Trade Group Co., Ltd. and the Agricultural Bank of China Tianjin Heping Sub-branch (attached hereto as Exhibit 10.4), the Company entered into a facility line of credit with a maximum amount of RMB 520,000,000.
Pursuant to that certain Termination Agreement, dated as of November 30, 2012, by and between Tianjin Shimao Auto Logistics Center Co., Ltd and Tianjin Binhai Shisheng Trading Group Co., Ltd. (attached hereto as Exhibit 10.5), the Company terminated its lease for 129 Tianbao Avenue, Free Trade Zone, Tianji.
Pursuant to those certain Office Tenancy Contracts, each effective as of December 1, 2012, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Zhengji International Trade Co., Ltd. (attached hereto as Exhibit 10.6 and Exhibit 10.7), the Company leased two booths and two offices at Tianjin Free Trade Zone International Automall, No.86, Tianbao Avenue, Tianjin Free Trade Zone.
Pursuant to that certain Office Tenancy Contract, effective as of January 1, 2013, by and between Tianjin Binhai International Automall Co., Ltd. and Tianjin Binhai Shisheng Trading Group Co., Ltd. (attached hereto as Exhibit 10.8), the Company leased its main offices at Tianjin Free Trade Zone International Automall, No.86, Tianbao Avenue, Tianjin Free Trade Zone.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Our current directors were elected at the last annual meeting, which occurred on November 19, 2012, and will serve until the next annual meeting. As of December 31, 2012, our current directors and executive officers were as follows:
Name
Age
Position Held
Experience
Tong, Shiping
Chief Executive Officer, President and Chairman of the Board
Mr. Tong has served as President and Chief Executive Officer of the Company since 1995, when the Company’s wholly owned operating subsidiary Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd. (formerly Tianjin Shisheng Investment Group Co. Ltd.) (“Shisheng”) was founded. He earned his Bachelor degree in computer science from the China Air Force Engineering University. Mr. Tong is also a director of the Tianjin Car Logistics Association. The Board believes that Mr. Tong has the experience, qualifications, attributes and skills necessary to serve on the Board because of his over 17 years of experience in the China auto industry, his having provided leadership and strategic direction to the Company as its founder, and his unparalleled understanding of the Company’s operations and products.
Jin, Yan
Chief Operating Officer
Mr. Yan has served as Chief Operating Officer of the Company since July of 2012. From 2007 to 2010, he served as Managing Director of Madeleine Gourmet Restaurant which operated a series of chain restaurants. Prior to his appointment as COO, he served as General Manager of Sales for the Company since 2011. He also earned an MBA from Tianjin Nankai University.
Cheng, Weihong
Senior Vice President (Head of Human Resources and General Administration) and Director
Ms. Cheng has served as Senior Vice President (Head of Human Resources and General Administration) of the Company since 1995. She earned her Bachelor degree from Shijazhuang Military Medical University. Ms. Cheng is also a co-founder of Shisheng and has served as the Chairwoman of Shisheng since 1995. The Board believes that Ms. Cheng has the experience, qualifications, attributes and skills necessary to serve on the Board because of her over 18 years of experience in the China auto industry as Secretary and Senior VP of the Company.
Wang, Xinwei
Chief Financial Officer, Treasurer, Vice President and Director
Ms. Wang has served as the Chief Financial Officer, Treasurer and Vice President of the Company since joining Shisheng in 2001. She earned her Bachelor degree in industry accounting from Tianjin Radio and TV University. Ms. Wang is a qualified Chinese certified public accountant. The Board believes that Ms Wang has the experience, qualifications, attributes and skills necessary to serve on the Board because of her extensive executive leadership and financial expertise as CFO, Treasurer and VP of the Company.
Name
Age
Position Held
Experience
Barth, Howard S.
Director
Mr. Barth has operated his own public accounting firm in Toronto, Canada since 1985, and has over 30 years of experience as a chartered accountant. Currently he is also director and chairman of the Audit Committee of Guanwei Recycing Corp. (a Nasdaq-listed company) since November 2008 and a director of Yukon Gold Corp. (an OTCBB-listed company). From 2005 until May 2008, he served as a director of Yukon Gold Corp. and from May 2008 to December 2008 he serves as President and C.E.O. ( at the time, dual listed on the OTCBB and TSX). He has also been a director and chairman of the Audit Committee from December 2005 until June 2009 for Nuinsco Resources Limited (a TSX listed company). He was also a director of Offshore Petroleum Corp. and Uranium Hunter Corporation (an OTCBB listed company). He is a member of the Canadian Institute of Chartered Accountants and the Ontario Institute of Chartered Accountants. He earned his B.A. and M.B.A. at York University. The Board believes that Mr. Barth has the experience, qualifications, attributes and skills necessary to serve on the Board because of his extensive experience and financial expertise in public companies.
Wang, Wei
Director
Mr. Wang has served as the General Manager of Sales of Vcanland Holding Group since 2007, where he has successfully operated a number of real estate development projects and has dealt with accounting issues. He also received a bachelor degree from the Tianjin Institute of Urban Construction. The Board believes that Mr. Wang has the experience, qualifications, attributes and skills necessary to serve on the Board because of his successful management experience and familiarity with accounting issues.
Yang, Lili
Director
Ms. Yang has served as the accounting director of Tianbao International Trade & Exhibition Ltd. since 2005, where she obtained years of experience in providing customers with commercial financing services. The Board believes that Ms. Yang has the experience, qualifications, attributes and skills necessary to serve on the Board because of her extensive experience in accounting.
Zou, Baoying
Director
Mr. Zou retired in 2004 from a long career in the education sector. He has been a member of the China Association for Promoting Democracy since 1984, a highly respected and influential organization. Due to such membership, Mr. Zou has established a wide network with local governmental authorities, which will be very helpful in furthering the Company’s business development. The Board believes that Mr. Zou has the experience, qualifications, attributes and skills necessary to serve on the Board because of his distinguished career and political affiliations.
Certain Significant Employees
None.
Family Relationships
Ms. Cheng Weihong, our Senior Vice President (Head of Human Resources and General Administration) and a director, is the wife of Mr. Tong Shiping, our President, Chief Executive Officer and Chairman of the Board.
Involvement in Legal Proceedings
None of our directors, persons nominated to become a director, executive officers or control persons have been involved in any of the following events during the past 10 years:
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Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of bankruptcy or within two years prior to that time; or
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Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); or
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Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
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Being found by a court of competent jurisdiction (in a civil violation), the SEC or the Commodity Future Trading Commission to have violated a federal or state securities or commodity law, and the judgment has not been reversed, suspended, or vacated; or
●
Being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: any Federal or State securities or commodities law or regulation; or any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity. This violation does not apply to any settlement of a civil proceeding among private litigants; or
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Being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Board of Directors Meetings and Committees
The Board held 2 meetings during the fiscal year ended December 31, 2012. Each Director attended, either in person or telephonically, at least 75% of the aggregate Board of Directors meetings and meetings of committees on which he served during his tenure as a director or committee member.
On December 12, 2008, the Board approved and authorized the establishment of three new committees: the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee. Howard S. Barth (Chair, Financial Expert), Wang Wei and Yang Lili were appointed to the Audit Committee. Yang Lili (Chair), Wang Wei and Zou Baoying were appointed to the Compensation Committee. Wang Wei (Chair), Yang Lili and Zou Baoying were appointed to the Nominating and Corporate Governance Committee. The charter of each committee is also available in print to any stockholder who requests it.
Audit Committee
The Audit Committee is currently comprised of Howard S. Barth (Chair), Wang Wei and Yang Lili, each of whom are “independent” as independence is currently defined in applicable Securities and Exchange Commission’s (the “SEC”) rules. The Board has determined that Howard S. Barth qualifies as an “Audit Committee financial expert,” as defined in applicable SEC rules implementing Section 407 of the Sarbanes-Oxley Act of 2002. The Board made a qualitative assessment of Mr. Barth’s level of knowledge and experience based on a number of factors, including his formal education and experience.
The Audit Committee is responsible for overseeing the Company’s corporate accounting, financial reporting practices, audits of financial statements and the quality and integrity of the Company’s financial statements and reports. In addition, the Audit Committee oversees the qualifications, independence and performance of the Company’s independent auditors. In furtherance of these responsibilities, the Audit Committee’s duties include the following: evaluating the performance of and assessing the qualifications of the independent auditors; determining and approving the engagement of the independent auditors to perform audit, reviewing and attesting to services and performing any proposed permissible non-audit services; evaluating employment by the Company of individuals formerly employed by the independent auditors and engaged on the Company’s account and any conflicts or disagreements between the independent auditors and management regarding financial reporting, accounting practices or policies; discussing with management and the independent auditors the results of the annual audit; reviewing the financial statements proposed to be included in the Company’s annual report on Form 10-K; discussing with management and the independent auditors the results of the auditors’ review of the Company’s quarterly financial statements; conferring with management and the independent auditors regarding the scope, adequacy and effectiveness of internal auditing and financial reporting controls and procedures; and establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting control and auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Audit Committee operates under the written Audit Committee Charter adopted by the Board in December of 2007, a copy of which may be obtained by writing the Secretary of the Company at Floor 1 FTZ International Auto Mall, 86 Tianbao Avenue, Free Trade Zone, Tianjin Province, The People’s Republic of China 300461 and is available on the Company’s website at http://www.chinaautologisticsinc.com.
Nominating/Corporate Governance Committee
The Nominating and Corporate Governance Committee (the “Nominating Committee”) is responsible for preparing a list of candidates to fill the expiring terms of directors serving on our Board. The Nominating Committee submits the list of candidates to the Board who determines which candidates will be nominated to serve on the Board. The names of nominees are then submitted for election at our Annual Meeting of Stockholders. The Nominating Committee also submits to the entire Board a list of nominees to fill any interim vacancies on the Board resulting from the departure of a member of the Board for any reason prior to the expiration of his term. In recommending nominees to the Board, the Nominating Committee keeps in mind the functions of this body. The Nominating Committee considers various criteria, including general business experience, general financial experience, knowledge of the Company’s industry (including past industry experience), education, and demonstrated character and judgment. The Nominating Committee will consider director nominees recommended by a stockholder if the stockholder mails timely notice to the Secretary of the Company at its principal offices, which notice includes (i) the name, age and business address of such nominee, (ii) the principal occupation of such nominee, (iii) a brief statement as to such nominee’s qualifications, (iv) a statement that such nominee consents to his or her nomination and will serve as a director if elected, (v) whether such nominee meets the definition of an “independent” director under the applicable SEC rules and (vi) the name, address, class and number of shares of capital stock of the Company held by the nominating stockholder. Any person nominated by a stockholder for election to the Board will be evaluated based on the same criteria as all other nominees. The Nominating Committee also oversees our adherence to our corporate governance standards. Although not part of any formal policy, the goal of the Nominating Committee is a balanced and diverse Board, with members whose skills, viewpoint, background and experience complement each other and, together, contribute to the Board’s effectiveness as a whole. The members of the Nominating Committee are Wang Wei (Chair), Yang Lili and Zou Baoying, each of whom is “independent” as defined by the Company Guide of the American Stock Exchange. The Nominating Committee operates under the written Nominating Committee Charter adopted by the Board in December of 2008, a copy of which may be obtained by writing the Secretary of the Company at Floor 1 FTZ International Auto Mall, 86 Tianbao Avenue, Free Trade Zone, Tianjin Province, The People’s Republic of China 300461 and is available on the Company’s website at http://www.chinaautologisticsinc.com.
During the fiscal year ended December 31, 2012, there were no changes to the procedures by which holders of our common stock may recommend nominees to the Board.
Compensation Committee
The Compensation Committee is currently comprised of the following Directors of the Company: Yang Lili (Chair), Wang Wei and Zou Baoying, each of whom is “independent” as defined by the applicable SEC rules. The Compensation Committee reviews and, as it deems appropriate, recommends to the Board’s policies, practices and procedures relating to the compensation of the officers and other managerial employees and the establishment and administration of employee benefit plans. It advises and consults with the officers of the Company as may be requested regarding managerial personnel policies. The Compensation Committee also has such additional powers as may be conferred upon it from time to time by the Board. The Compensation Committee operates under the written Compensation Committee Charter adopted by the Board in December of 2008, a copy of which may be obtained by writing the Secretary of the Company at Floor 1 FTZ International Auto Mall, 86 Tianbao Avenue, Free Trade Zone, Tianjin Province, The People’s Republic of China 300461 and is available on the Company’s website at http://www.chinaautologisticsinc.com.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors, executive officers and persons who own more than 10% of a registered class of the Company’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Directors, officers and greater than 10% shareholders are required to furnish the Company with copies of all Section 16(a) forms they file.
To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company, with respect to the fiscal year ended December 31, 2012, the officers, directors and beneficial owners of more than 10% of our common stock have filed their initial statements of ownership on Form 3 on a timely basis, and the officers, directors and beneficial owners of more than 10% of our common stock have also filed the required Forms 4 or 5 on a timely basis.
Code of Ethics
On December 12, 2008, the Board approved a Code of Business Conduct and Ethics (the “Code”). This Code applies to all directors, officers and employees. A copy of the Code may be obtained by writing the Secretary of the Company at Floor 1 FTZ International Auto Mall 86 Tianbao Avenue, Free Trade Zone Tianjin Province, the People’s Republic of China, 300461.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION.
(1)
Mr. Tong Shiping’s total compensation for the fiscal year ended December 31, 2012 is $57,112 (RMB360,000) (based on the weighted average rate of RMB to U.S. dollars during the year 2012).
(2)
Ms. Wang Xinwei’s total compensation for the fiscal year ended December 31, 2012 is $38,075 (RMB240,000) (based on the weighted average rate of RMB to U.S. dollars during the year 2012).
(3)
Mr. Yang Bin’s total compensation for the fiscal year ended December 31, 2012 is $16,658 (RMB105,000) (based on the weighted average rate of RMB to U.S. dollars during the year 2012). Mr. Yang Bin resigned from his positions effective July 17, 2012.
(4)
Ms. Cheng Weihong’s total compensation for the fiscal year ended December 31, 2012 is $38,075 (RMB240,000) (based on the weighted average rate of RMB to U.S. dollars during the year 2012).
(5)
Mr. Jin Yan’s total compensation for the fiscal year ending December 31, 2012 is $4,759 (RMB30,000) (based on the weighted average rate of RMB to U.S. dollars during the year 2012).
(6)
Mr. Li Yangqian’s total compensation for the fiscal year ending December 31, 2012 is $15,864 (RMB100,000) (based on the weighted average rate of RMB to U.S. dollars during the year 2012). Mr. Li Yangqian resigned from his positions effective July 17, 2012.
As of December 31, 2012, the Company did not have any “Grants of Plan-Based Awards”, “Outstanding Equity Awards”, “Option Exercises and Stock Vested”, “Pension Benefits”, “Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans”, or “Potential Payments Upon Termination or Change in Control” to report.
Each of the executive officers of the Company have entered into standard employment contracts with Shisheng, a form of which is attached as an exhibit to this Report. The contracts have one-year terms and are otherwise consistent with the standard form prescribed by the Tianjin Labor and Social Security Administration. None of the employment contracts provide for annual total compensation payments in excess of $100,000. The amounts listed in the table above were paid by Shisheng.
The 2010 Omnibus Long-Term Incentive Plan (the “Plan”) assists the Company in attracting, retaining, and rewarding high-quality executives, employees, directors and other persons who provide services to the Company, enabling such persons to acquire or increase a proprietary interest in the Company, strengthening the mutuality of interests between such persons and the Company, and providing annual and long-term incentives for such persons expend maximum efforts in the creation of stockholder value. The Plan is administered by the Compensation Committee, such other committee as determined by the Board of Directors, or a subcommittee consisting solely of non-employee, outside directors. The Plan does not limit the availability of awards to any particular class or classes of eligible employees. Awards granted under the Plan are not transferable, except in the event of the participant's death. Under the Plan, 362,000 shares (reflected a one-for-six reverse split of the Company’s issued and outstanding shares of common stock on October 6, 2012) are currently reserved and available for delivery in connection with awards under the Plan.
The Plan was approved by our stockholders at the Annual Meeting on November 18, 2010. As of March 27, 2013, no awards have been granted under the Plan.
Compensation Discussion and Analysis
The Company’s compensation program is designed to provide our executive officers with competitive remuneration and to reward their efforts and contributions to the Company. Elements of compensation for our executive officers include base salary and cash bonuses.
Before we set the base salary for our executive officers each year, we research the market compensation in Tianjin for executives in similar positions with similar qualifications and relevant experience, and add a 10%-15% premium as an incentive to attract high-level employees. Company performance does not play a significant role in the determination of base salary.
Cash bonuses may also be awarded to our executives on a discretionary basis at any time. Cash bonuses are also awarded to executive officers upon the achievement of specified performance targets, including annual revenue targets for the Company.
Director Compensation
In fiscal year 2012 the Company paid an annual compensation of $24,000 to Howard S. Barth, our audit committee chair/director. Other than these payments to Mr. Barth, the Company did not provide any compensation to its directors in the fiscal year ended December 31, 2012. The Company may establish certain other compensation plans (e.g. options, cash for attending meetings, etc.) with respect to directors in the future.
Compensation Committee Interlocks and Insider Participation in Compensation Decisions
During the last fiscal year, none of the Company’s executive officers served on the board of directors or compensation committee of any other entity whose executive officers served either the Company’s Board or Compensation Committee.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information regarding the beneficial ownership of our common stock as of March 27, 2013 for each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
* Unless otherwise noted, the address is that of the Company’s.
** Choi Chun Leung Robert is the beneficial owner of 1,648,140 shares of our common stock through his 100% ownership of Bright Praise Enterprises Limited and through his position as the sole director of Bright Praise Enterprises Limited.
Security Ownership of Management Directors and Officers
The following table sets forth the ownership interest in our common stock of all directors and officers individually and as a group as of March 27, 2013. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
* Unless otherwise noted, the address is that of the Company’s.
** Choi Chun Leung Robert holds 100% ownership of Bright Praise Enterprises Limited as trustee for the benefit of Tong Shiping and Cheng Weihong
Securities Authorized for Issuance Under Equity Compensation Plans.
As of the fiscal year ended December 31, 2012:
(1)
As of March 27, 2013, no options, warrants or rights to purchase securities had been issued under the 2010 Omnibus Long-Term Incentive Plan.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Ms. Cheng Weihong (the Senior Vice President and Chairwoman of Shisheng and wife of China Auto’s President and Chief Executive Officer, Mr. Tong Shiping) made non-interest bearing loans to the Company from time to time to meet working capital needs of the Company. For the years ended December 31, 2012 and 2011, the Company made aggregate borrowings from Ms. Cheng Weihong of $852,075 and $0, respectively, and made repayments of $352,335 and $590,796 to Ms. Cheng Weihong. As of December 31, 2012 and 2011, the outstanding balances due to Ms. Cheng Weihong were $512,023 and $22,316, respectively.
One of the Company’s shareholders, Sino Peace Limited, paid accrued expenses of $0 and $440,113 on behalf of the Company during the years ended December 31, 2011 and 2012. The amounts of $2,156,166 and $2,156,235 were outstanding as due to this shareholder on the consolidated balance sheet as of December 31, 2012 and 2011.
On November 1, 2010, the Company acquired all issued and outstanding stocks of Qizhong. In connection with this acquisition, the amount of $2,717,925 representing the part of purchase consideration payable in cash to the former owners of Qizhong was outstanding as due to these shareholders on the consolidated balance sheet as of December 31, 2010. This balance was fully paid during the year ended December 31, 2011.
In connection with the Goodcar acquisition, the Company assumed the balances due to former owners of Qizhong of $1,084,905. Upon completion of the share issuance, these former owners of Qizhong then became shareholders of the Company. In December 2012, the Company negotiated with these former owners of Qizhong with regard to the outstanding balance of these loans payable. As a result of the negotiations, these loans were forgiven by these former owners of Qizhong due to the fact that certain key executives left Goodcar after the purchase and Goodcar’s operations had not been performing the way it was expected. The formers owners were willing to forgive this debt since the actual performance of Qizhong after the acquisition was far below the performance forecast provided to the Company prior to the acquisition. The Company recorded a gain on debt forgiveness in the amount of $1,139,861 (including outstanding debt balance of $1,084,905 and foreign currency translation adjustment of $54,956) as other income in the consolidated statements of income for the year ended December 31, 2012. As of December 31, 2012 and 2011, outstanding balance due to these former owners of Qizhong was $0 and $1,140,313, respectively.
Mr. Tong, Shiping and Ms. Cheng Weihong personally guarantee borrowings on various lines of credit related to our financing services and short-term borrowings.
Director Independence
All members of the Company’s Board, excluding Tong Shiping, Cheng Weihong and Wang Xinwei, are independent directors of the Company, and as such, they satisfy the definition of independence in accordance with SEC rules and NASDAQ listing standards.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
Our independent accountant is Marcum LLP. As reported in our Form 8-K filed on October 6, 2010, the Company appointed Marcum LLP as its independent accountant effective as of October 1, 2010. Our previous independent accountant was Stonefield Josephson, Inc., which combined its practice with Marcum LLP effective as of October 1, 2010. Set forth below are aggregate fees billed by Marcum LLP for professional services rendered for the audit of the Company’s annual financial statements for the year ended December 31, 2012 and 2011.
Audit Fees
During the fiscal year ended December 31, 2012 and 2011, the fees for Marcum LLP were $289,305 and $223,882, respectively.
Audit Related Fees
During the fiscal year ended December 31, 2012, the fees for Marcum LLP were $15,953 related to agreed-upon procedures related to a cash verification request from the NASDAQ Stock Market. During the fiscal year ended December 31, 2011, our principal accountants did not render assurance and related services reasonably related to the performance of the audit or review of financial statements.
Tax Fees
During the fiscal year ended December 31, 2012 and December 31, 2011, our principal accountant did not render services to us for tax compliance, tax advice and tax planning.
All Other Fees
During the fiscal years ended December 31, 2012 and December 31, 2011, there were no fees billed for products and services provided by the principal accountants other than those set forth above.
The Audit Committee has reviewed the above fees for non-audit services and believes such fees are compatible with the independent registered public accountants’ independence.
Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Accountant
The policy of the Audit Committee, and the Board acting as a whole prior to the establishment of the Audit Committee, is to pre-approve all audit and non-audit services provided by the independent accountants. These services may include audit services, audit-related services, tax fees, and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is subject to a specific budget. The Audit Committee, and the Board acting as a whole prior to the establishment of the Audit Committee, has delegated pre-approval authority to certain committee members when expedition of services is necessary. The independent accountants and management are required to periodically report to the full Audit Committee, and the Board acting as a whole prior to the establishment of the Audit Committee, regarding the extent of services provided by the independent accountants in accordance with this pre-approval delegation, and the fees for the services performed to date. None of the fees paid to the independent accountants during fiscal years ended December 31, 2012 and 2011, under the categories Audit-Related and All Other fees described above were approved by the Audit Committee, and the Board acting as a whole prior to the establishment of the Audit Committee, after services were rendered pursuant to the de minimis exception established by the SEC. All work is preapproved.
PART IV
ITEM 15
ITEM 15
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Financial Statements.
Our financial statements as set forth in the Index to Financial Statements attached hereto commencing on page are hereby incorporated by reference.
(b) Exhibits.
The following exhibits, which are numbered in accordance with Item 601 of Regulation S-K, are filed herewith or, as noted, incorporated by reference herein:
(1) Incorporated by reference to the Company’s Form SB2 filed with the Securities and Exchange Commission on March 7, 2006, Definitive Schedule 14C Information Statement filed on December 5, 2008 and Form 8-K filed on October 9, 2012.
(2) Incorporated by reference to the Company’s Definitive Schedule 14C Information Statement filed with the Securities and Exchange Commission on December 5, 2008
(3) Incorporated by reference to the Company’s Form 10-Q, filed with the Securities and Exchanges Commission on May 15, 2012.
(4) Incorporated by reference to the Company’s Form 8-K, filed with the Securities and Exchange Commission on December 24, 2008.
* Attached hereto
CHINA AUTO LOGISTICS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2012
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors
China Auto Logistics Inc.
We have audited the accompanying consolidated balance sheets of China Auto Logistics Inc. and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of China Auto Logistics Inc. and subsidiaries, as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Marcum llp
Los Angeles, California
April 1, 2013
CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
The accompanying notes form an integral part of these consolidated financial statements
CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes form an integral part of these consolidated financial statements
CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
The accompanying notes form an integral part of these consolidated financial statements
CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
The accompanying notes form an integral part of these consolidated financial statements
CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
The accompanying notes form an integral part of these consolidated financial statements
CHINA AUTO LOGISTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Organization and Nature of Business
The consolidated financial statements consist of the financial statements of China Auto Logistics Inc. (the “Company” or “China Auto”), and the following wholly owned and majority owned subsidiaries of the Company:
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Ever Auspicious International Limited (“HKCo”),
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Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd. (“Shisheng”),
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Tianjin Ganghui Information Technology Corp. (Ganghui”),
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Tianjin Hengjia Port Logistics Corp. (“Hengjia”),
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Zhengji International Trading Corp. (“Zhengji”),
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Chongqing Qizhong Technology Co., Ltd (“Qizhong”),
On November 10, 2008, China Auto, formerly Fresh Ideas Media, Inc. (“Fresh Ideas”), incorporated on February 22, 2005 in the State of Nevada, entered into a Share Exchange Agreement with HKCo. Under the Share Exchange Agreement, China Auto issued 1,950,000 (pre reverse split of 11,700,000) shares of its common stock to acquire all the issued and outstanding capital stock of HKCo. The closing of the Share Exchange Agreement occurred on the same day, immediately following the cancellation of an aggregate of 189,167 (pre reverse split of 1,135,000) shares of the Company’s common stock held by Phillip E. Ray and Ruth Daily, the Company’s principal stockholders immediately prior to the Closing, which was a condition of the Closing. Prior to the closing of the Share Exchange and the cancellation of shares stated above, the Company had a total of 1,255,833 (pre reverse split of 7,535,000) shares of common stock issued and outstanding. As a result of the Exchange, HKCo became the Company’s wholly-owned subsidiary. Upon the closing of this transaction, the Company’s primary business operations are those of HKCo. Shortly after the closing, Fresh Ideas changed its name to China Auto Logistics Inc.
HKCo was incorporated in Hong Kong on October 17, 2007. Prior to December 25, 2007, HKCo had minimal assets and no operations. On November 1, 2007, HKCo entered into a share exchange agreement with Cheng Weihong, Xia Qiming and Qian Yuxi (the “Seller”), pursuant to which the Sellers transferred their interests in Shisheng to HKCo for an aggregate purchase price of $12,067,254 (RMB95,000,000) which was paid via issuance of equity interests of HKCo. Upon the completion of this transaction on December 25, 2007, Shisheng became a wholly-owned foreign enterprise (“WFOE”) of HKCo and this arrangement was approved by the relevant ministries of the PRC government. As a result of this transaction, the owners and management of Shisheng end up controlling HKCo and thus this transaction was classified as a recapitalization of Shisheng using the purchase method of accounting.
Upon the completion of the transactions on December 25, 2007 and November 10, 2008, the Company owned 100% of HKCo which owned 100% of Shisheng, the operating entity of the Company. For financial reporting purposes, these transactions are classified as a recapitalization of Shisheng and the historical financial statements of Shisheng are reported as China Auto’s historical financial statements.
Shisheng was incorporated in the People’s Republic of China (“PRC”) on September 1, 1995. Shisheng’s business includes sales of both domestically manufactured automobiles and imported automobiles (“Sales of Automobiles”), providing financing services related to imported automobiles (“Financing Services”), and providing logistic services relating to the automobile importing process and other automobile value added services such as assistance with customs clearance, storage and nationwide delivery services (such services, “Automobile Value Added Services”).
In August 2001, Shisheng formed Ganghui to provide web-based, real-time information on imported automobiles. Ganghui was 80% owned by Shisheng.
In September 2003, Shisheng formed Hengjia to provide automobile value added services to wholesalers and distributors in the imported vehicle trading industry. Hengjia was 80% owned by Shisheng.
In February 2005, Shisheng and three other founders formed Zhengji to enhance the imported automobile trading industry. Zhengji was 32% owned by Shisheng since 2005. In January 2007, Shisheng injected additional capital of $1,024,498 (equivalent to RMB 8,000,000) into Zhengji. Consequently, Shisheng's equity interest in Zhengji increased from 32% to 86.4%.
On July 23, 2009, Shisheng entered into Share Transfer Agreements to acquire additional ownership interests from other noncontrolling interest shareholders to increase its ownership interests in its Ganghui, Hengjia and Zhengji to 98% each for an aggregate amount of $444,120.
On November 1, 2010, Shisheng entered into a Share Transfer Agreement with the owners of Qizhong to acquire all issued and outstanding stocks of Qizhong and completed the acquisition simultaneously. Qizhong is engaged in the development and operation of the website www.goodcar.cn and the business of providing customers with information and discounted services relating to automobiles, including discounted gas, car washes, and body-shop repair and car maintenance. Beijing Goodcar Technology Development Co., Ltd. (“Beijing Goodcar”), Xiamen Goodcar Network Technology Co., Ltd. (“Xiamen Goodcar”), Wuhan Youlu Network Technology Co., Ltd (“Wuhan Youlu”), Chengdu Haoche Technology Development Co., Ltd. (“Chengdu Haoche”), Tianjin Goodcar Technology Development Co., Ltd (“Tianjin Goodcar”) and Chongqing Kaizhi Technology Co., Ltd. (“Kaizhi”)are wholly-owned subsidiaries of Qizhong (collectively, “Goodcar”). These services provided by Goodcar were then included in the Company’s segments of web-based advertising services and automobile value added services.
During 2012, the Company deregistered the wholly owned subsidiaries of Qizhong, including Beijing Goodcar, Xiamen Goodcar, Wuhan Youlu, Chengdu Haoche, Tianjin Goodcar and Kaizhi. All of these subsidiaries’ operations have been assumed by their parent company, Qizhong. The Company has disposed of the majority of the assets of these subsidiaries and transferred the remaining net assets to the Company’s other subsidiaries.
(2)
Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
Reverse Stock Split
On October 9, 2012, the Company filed a Certificate of Amendment of its Articles of Incorporation to effect a one-for-six reverse split of the Company’s issued and outstanding shares of common stock, par value $0.001 per share. The Certificate of Amendment was effective upon filing on October 9, 2012. The Company’s stockholders, at a Special Meeting of Stockholders held on September 4, 2012, had previously authorized the Company’s Board of Directors to effect a reverse stock split at a ratio of up to one-for-six to be determined by the Board of Directors. There was no change to the authorized shares of common stock of the Company as a result of the reverse stock split. Any fraction of a share of common stock that would otherwise have resulted from the reverse split was rounded up to the next whole share. Accordingly, all references to numbers of common shares and per-share data in the accompanying consolidated financial statements and notes have been retroactively adjusted to reflect the effects of the reverse stock split.
Principles of Consolidation
The consolidated financial statements include the financial statements of China Auto and its wholly-owned and majority-owned subsidiaries. All inter-company transactions and balances have been eliminated in preparation of the consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses in the consolidated financial statements and accompanying notes. Significant accounting estimates reflected in the Company's consolidated financial statements include the collectibility of accounts receivable, the useful lives and impairment of property and equipment, goodwill and intangible assets, the valuation of deferred tax assets and inventories and the provisions for income taxes. Actual results could differ from those estimates.
Currency Reporting
Amounts reported in the consolidated financial statements are stated in US Dollars, unless stated otherwise. Our functional currency is the Renminbi (“RMB”). Foreign currency transactions (outside the PRC) are translated into RMB according to the prevailing exchange rate at the transaction dates. Assets and liabilities denominated in foreign currencies at the balance sheet dates are translated into RMB at period-end exchange rates. For the purpose of preparing the consolidated financial statements, the consolidated balance sheets of our Company have been translated into US dollars at the current rates as of the end of the respective periods and the consolidated statements of income have been translated into US dollars at the weighted average rates during the periods the transactions were recognized. The resulting translation gain adjustments are recorded as other comprehensive income in the consolidated statements of comprehensive income and as a separate component of the consolidated statements of shareholders’ equity.
Fair Value Disclosures of Financial Instruments
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact its business, and it considers assumptions that market participants would use when pricing the asset or liability.
As a basis for considering such assumptions, a three-tier fair value hierarchy prioritizes the inputs utilized in measuring fair value as follows:
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Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
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Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
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Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company has estimated the fair value amounts of its financial instruments using the available market information and valuation methodologies considered to be appropriate and has determined that the carrying value of the Company’s accounts receivable, receivables related to financing services, notes receivable, value added tax receivable, inventories, prepaid expenses, accounts payable, advances to suppliers, lines of credit related to financing services, short-term borrowings, notes payable to suppliers, accrued expenses, customer deposits, deferred revenue, due to shareholders, due to director, and income tax payable as of December 31, 2012 and 2011 approximate fair value.
Other Comprehensive Income
Other comprehensive income consists of other gains and losses affecting shareholders’ equity that, under US GAAP, are excluded from net income. The changes in other comprehensive income of $223,954 and $2,411,684 for the years ended December 31, 2012 and 2011, respectively, are foreign currency translation adjustments.
Concentrations of Credit Risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, accounts receivable, notes receivable and receivables related to financing services. The Company places its cash and cash equivalents with reputable financial institutions with high credit ratings.
The Company conducts credit evaluations of customers and generally does not require collateral or other security from customers. The Company establishes an allowance for doubtful accounts primarily based upon the age of the receivables and factors relevant to determining the credit risk of specific customers. The amount of receivables ultimately not collected by the Company has generally been consistent with management's expectations and the allowance established for doubtful accounts.
Major Customers
During the years ended December 31, 2012, customer #1 accounted for 16.2% of the Company’s net revenue. During the year ended December 31, 2011, customer #2 accounted for 10.6% of the Company’s net revenue.
Major Suppliers
Supplier# 1 accounted for 10.7% of the Company’s purchases during the year ended December 31, 2012. No supplier accounted for 10% or more of the Company’s purchase during the year ended December 31, 2011.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash at bank and on hand and highly liquid investments which are unrestricted as to withdrawal or use, and which have remaining maturities of three months or less when purchased. The Company’s deposits in banks located in the PRC are not protected by any insurance and such uninsured amounts totaled $8,850,433 and $8,169,268 as of December 31, 2012 and 2011, respectively.
Restricted Cash
The Company is required to maintain certain amounts of cash in its banks to secure certain banks’ letters of credit issued to its customers, certain draws on its lines of credit, short-term borrowings and notes payable to suppliers. Restricted cash to secure these bank lines is not protected by any insurance and such restricted cash totaled $27,015,351 and $18,805,876 as of December 31, 2012 and 2011, respectively.
Accounts and Notes Receivable
Accounts and notes receivable are stated at the amount the Company expects to collect. The allowance for doubtful accounts is based on management’s assessment of the collectability of specific customer accounts, the aging of the accounts receivable, historical experience and other currently available evidence. Accounts and notes receivable are charged off against the allowance when collectability is determined to be permanently impaired. As of December 31, 2012 and 2011, the Company had an allowance for doubtful accounts of $0 and $2,796, respectively, in respect of its accounts receivable; and had no allowance for doubtful accounts in respect of its notes receivable.
During the year ended December 31, 2011, one of the Company’s customers provided the Company with promissory notes on the date of purchase. The payment dates of the promissory notes are six months from the date of issue. For consolidated balance sheet presentation purposes, amounts due to the Company under these promissory notes are presented as notes receivable. As of December 31, 2011, notes receivable totaled $4,761,225. All of these promissory notes are sold with recourse to China Zheshang Bank, with which the Company regularly does business. The sales of these notes receivable have been accounted for as secured borrowings, as the Company has not met the criteria for sale treatment. The principal amount of the notes sold with recourse is included in both notes receivable and short-term borrowings until the underlying note obligations are ultimately satisfied through payment by the customer to the bank. As of December 31, 2011, the principal amount of such promissory notes included in notes receivable and short term borrowings on the consolidated balance sheets totaled $4,761,225 and $4,285,102, respectively. The notes receivable were fully collected during the year ended December 31, 2012.
Receivables Related to Financing Services
The Company records a receivable related to financing services when cash is loaned to the customers to finance their purchases of automobiles. Upon repayments by the customers, the Company records the amounts as reductions of receivables related to financing services. Receivables related to financing services represent the aggregate outstanding balance of loans from customers related to their purchases of automobiles. The Company charges a fee for providing loan services and such fee is prepaid by the customers. The Company amortizes these fees over the receivable term, which is typically 90 days, using the straight-line method. The Company records such amortized amounts as financing fee income and the unamortized amount is classified as deferred revenue on the Company’s consolidated balance sheets.
The Company evaluates the collectibility of outstanding receivables at the end of each of the reporting periods and makes estimates for potential credit losses. The Company has not experienced any losses on its receivable related to financing services historically and accordingly did not record any allowance of credit losses as of December 31, 2012 and 2011.
Inventories
Inventories consist primarily of the purchase cost of automobiles valued at the lower of cost (first-in, first-out) or market. As of December 31, 2012 and 2011, there was no reserve for obsolescence.
Property and Equipment, net
Property and equipment, net are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line basis method over the following estimated useful lives:
Long-Lived Assets
Long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related assets or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value of asset less disposal costs. The Company determined that there was no impairment of long-lived assets as of December 31, 2012 and 2011.
Goodwill
Goodwill arising from business combinations represents the excess of the purchase price over the estimated fair value of the net assets of the businesses acquired.
Goodwill is tested annually for impairment, during the fourth quarter of our fiscal year, or more frequently if circumstances indicate the possibility of impairment. Significant judgments required to estimate fair value include estimating future cash flows, and determining appropriate discount rates, growth rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value which could trigger impairment.
In evaluating goodwill for impairment using the two-step test to identify any potential impairment and to measure any amount of impairment, the first step is based upon a comparison of the fair value of each of the Company’s reporting units and the carrying value of the reporting unit’s net assets, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not to be impaired; otherwise, step two is required. Under step two, the implied fair value of goodwill, calculated as the difference between the fair value of the reporting unit and the fair value of the reporting unit’s net assets, is compared with the carrying value of the goodwill. The excess of the carrying value of goodwill over the implied fair value represents the amount impaired.
The Company uses a combination of valuation techniques, primarily using discounted cash flows to determine the fair values of its reporting units and market based multiples as supporting evidence. The variables and assumptions used, all of which are level 3 fair value inputs, including the projections of future revenues and expenses, working capital, terminal values, discount rates and long term growth rates. The market multiples observed in sale transactions are determined separately for each reporting unit are based on the weighted average cost of capital determined for each of the Company’s reporting units and is 22.44% in 2011. In addition we make certain judgments about the selection of comparable companies used in determining market multiples in valuing our reporting units, as well as certain assumptions to allocate shared assets and liabilities to calculate values for each of our reporting units. The underlying assumptions used are based on historical actual experience and future expectations that are consistent with those used in the Company’s strategic plan. The Company compares the fair value of each of its reporting units to their respective carrying values, including related goodwill. We also compare our book value and the estimates of fair value of the reporting units to our market capitalization as of and at dates near the annual testing date. Management uses this comparison as additional evidence of the fair value of the Company, as our market capitalization may be suppressed by other factors such as the control premium associated with a controlling shareholder, our leverage or general expectations regarding future operating results and cash flows. In situations where the implied value of the Company under the Income or Market Approach is significantly different than our market capitalization, we re-evaluate and adjust, if necessary, the assumptions underlying our Income and Market Approach models. Our estimates of the fair values of these reporting units, and the related goodwill, could change over time based on a variety of factors, including the aggregate market value of the Company’s common stock, actual operating performance of the underlying businesses or the impact of future events on the cost of capital and the related discount rates used.
In the fourth quarter of 2011, due to the planned closing of Goodcar’s operations related to sales of VIP membership cards and other promotion services, which is included in the Company’s Automobile Value Added Services segment, the Company reevaluated its related goodwill and determined that the goodwill related to its Automobile Value Added Services reporting unit was impaired. Accordingly, the Company recorded a goodwill impairment charges of $810,571 during the year ended December 31, 2011.
In the fourth quarter of 2012, the Company revised its business plan and downsized Goodcar’s operations. The Company reviewed Goodcar’s advertising operations and decided to cease such operations to generate advertising revenue. The Company evaluated the projected revenue and profit and costs involved to operate Goodcar’s advertising operations and concluded that it would be in the Company’s best interest to cease its operations in order for it to better focus on its core business in automobile sales, automobile value added services and financing services. The Company continues to operate Goodcar’s website to promote our products and services in other segments, including automobile sales, automobile valued added services and financing services. Due to the closing of Goodcar’s advertising operations, the Company recorded an impairment charge of $3,735,091 related to the goodwill acquired in the acquisition of Goodcar.
Intangible Assets
Intangible assets consist of trademark, advertising customer relationships and memberships, arose from the acquisition of Qizhong. Amortization is calculated using the straight-line method over the following estimated useful lives:
Intangible assets with finite lives are carried at cost less accumulated amortization.
Intangible assets with an indefinite useful life are not amortized. The Company’s trademark acquired in November 2010 as a result of the acquisition of Goodcar is not subject to amortization, as the remaining useful life is indefinite. The value of the trademark was $743,072 as of December 31, 2011. If the intangible assets that are not being amortized are subsequently determined to have a finite useful life, the assets will be tested for impairment, and then amortized prospectively over their estimated remaining useful lives and accounted for in the same manner as other intangible assets that are subject to amortization. Intangible assets with indefinite useful lives are tested for impairment annually or more frequently if events or changes in circumstances indicate that they might be impaired.
During the fourth quarter of 2011, the Company conducted an impairment analysis on its intangible assets and, due to the planned closing of Goodcar’s operations related to sales of VIP membership cards and other promotion services, determined that its intangible assets related to its Automobile Value Added Services reporting unit was impaired. Accordingly, the Company recorded impairment charges totaling $83,012 ($62,259 after-tax) related to memberships.
During the fourth quarter of 2012, the Company recorded impairment charge of $926,110 (net of deferred taxes of $314,094) related to intangible assets acquired in the acquisition of Goodcar.
Noncontrolling Interests
Noncontrolling interests represent the noncontrolling interest stockholders’ proportionate share of the equity of Hengjia, Zhengji and Ganghui. The noncontrolling interests in 2012 and 2011 are summarized as below:
The noncontrolling interests in Hengjia, Zhengji and Ganghui that are not owned by the Company are shown as “noncontrolling interests” in the consolidated balance sheets as of December 31, 2012 and 2011 and “net income attributable to noncontrolling interests” in the consolidated statements of income for the years ended December 31, 2012 and 2011.
Deferred Revenue
Deferred revenue includes amounts received from customers for which services revenue recognition is not yet appropriate. All deferred revenue is anticipated to be recognized within the next 12 months from the balance sheet dates.
Revenue Recognition
The Company’s main source of income was generated through (1) sales of automobiles, (2) service fees for assisting customers to get bank financing on purchases of automobiles, (3) web-based advertising service fees, including fees from (i) displaying graphical advertisements on the Company websites and (ii) web-based listing services that allow customers to place automobile related information on the Company’s websites, (4) automobile value added services and (5) auto mall management services. The financing services are provided to customers on automobiles not sold by the Company. The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred upon shipment or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectibility is reasonably assured.
The Company recognizes the sales of automobiles upon delivery and acceptance by the customers and where collectibility is reasonably assured.
Service revenue related to financing services is recognized ratably over the financing period.
Service fees for graphical advertisements on the Company’s websites are charged on a fixed fee basis. The Company recognizes the advertising revenue when the service is performed over the service term. The Company charges a monthly fee for listing services and recognizes the revenue when services are performed. The Company offers sales incentives to its customers in the form of (i) subscription exemption; (ii) discounted prices and (iii) free advertisements. The Company classifies sales incentives as a reduction of net revenues. Revenues, net of discounts and allowances, are recognized ratably over the service periods.
The Company recognizes revenue from automobile value added services when such services are performed.
Value Added Taxes represent amounts collected on behalf of specific regulatory agencies that require remittance by a specified date. These amounts are collected at the time of sale and are detailed on invoices provided to customers. The Company accounts for value added taxes on a net basis. The Company recorded and paid business taxes based on a percentage of the net service revenues and reported the service revenue net of the business taxes and other sales related taxes.
Cost of Revenue
Cost of revenue includes the purchase cost of the automobiles, freight and all the direct costs related to the sales of the automobiles. All costs related to the Company’s distribution network are included in the cost of revenue.
Operating Expenses
Selling and marketing expenses include salaries and employee benefits, rent, advertising, travel and entertainment and insurance.
General and administrative expenses include management and office salaries and employee benefits, depreciation for office facilities, office equipment and automobiles, travel and entertainment, insurance, legal and accounting, consulting fees, workers’ compensation insurance, and other office expenses.
Advertising
The Company expenses advertising costs when incurred. The Company incurred approximately $14,000 and $131,000 of advertising expenses for the years ended December 31, 2012 and 2011, respectively. Advertising expense is included in the caption “Selling and Marketing” within operating expenses on the consolidated statements of income.
Income taxes
Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, net operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.
The Company recognizes tax benefits that satisfy a greater than 50% probability threshold and provides for the estimated impact of interest and penalties for such tax benefits. The Company did not incur any interest or penalties related to potential underpaid income tax expenses during the years ended December 31, 2012 and 2011.
Basic and Diluted Earnings Per Share
Basic earnings per common share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per common share is computed similarly to basic earnings per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of December 31, 2012 and 2011, the Company did not have any common stock equivalents, therefore, the basic earnings per share is the same as the diluted earnings per share.
Recently Adopted Accounting Standards
In May 2011, the FASB issued ASU No. 2011-04, Topic 820 - Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs (“ASU 2011-04”). The amendments establish common requirements for measuring fair value and related disclosures in accordance with accounting principles generally accepted in the United States of America and international financial reporting standards. This amendment did not require additional fair value measurements. ASU 2011-04 became for the first interim and annual periods beginning after December 15, 2011, and should be applied prospectively. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Topic 220 - Comprehensive Income: Presentation of Comprehensive Income (“ASU 2011-05”). The amendments eliminate the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders' equity, require consecutive presentation of the statement of net income and other comprehensive income and require reclassification adjustments from other comprehensive income to net income to be shown on the financial statements. In December 2011, the FASB issued ASU No. 2011-12, Topic 220 - Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in ASU 2011-05 (“ASU 2011-12”) to defer the effective date of the provision requiring entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. However, the remaining requirements of ASU 2011-05 became for the first interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08, Topic 350 - Intangibles - Goodwill and Other: Testing Goodwill for Impairment (“ASU 2011-08”), which amends current guidance to allow a company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The amendment also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 became for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
In December 2011, the FASB issued ASU No. 2011-11, Topic 210 - Balance Sheet: Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 will be effective for fiscal years beginning on or after January 1, 2013, with retrospective application for all comparable periods presented. The Company does not expect the adoption of this guidance to have a material effect on the Company’s consolidated financial statements.
In July 2012, the FASB issued ASU 2012-02 - Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”), which amends the guidance in ASC 350-30 on testing indefinite-lived intangible assets, other than goodwill, for impairment. FASB issued ASU 2012-12 in response to feedback on ASU 2011-08, which amended the goodwill impairment testing requirements by allowing an entity to perform a qualitative impairment assessment before proceeding to the two-step impairment test. Similarly, under ASU 2012-02, an entity testing an indefinite-lived intangible asset for impairment has the option of performing a qualitative assessment before calculating the fair value of the asset. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not (i.e. a likelihood of more than 50 percent) impaired, the entity would not need to calculate the fair value of the asset. ASU 2012-02 does not revise the requirement to test indefinite-lived intangible assets annually for impairment. In addition, the ASU 2012-02 does not amend the requirement to test these assets for impairment between annual tests if there is a change in events or circumstances; however, it does revise the examples of events and circumstances that an entity should consider in interim periods. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material effect on the Company’s consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, Topic 220 - Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 changes the presentation requirements of significant reclassifications out of accumulated other comprehensive income in their entirety and their corresponding effect on net income. For other significant amounts that are not required to be reclassified in their entirety, the standard requires the company to cross-reference to related footnote disclosures. ASU 2013-02 became effective for the company on January 1, 2013. The Company does not expect the adoption of this guidance to have a material effect on the Company’s consolidated financial statements.
In March 2013, the FASB issued ASU 2013-05 Topic 830 - Foreign Currency Matters (“ASU 2013-05”). ASU 2013-05 resolves the diversity in practice about whether Subtopic 810-10, Consolidation-Overall, or Subtopic 830-30, ASU 2013-05 applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. In addition, the amendments in this Update resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. ASU 2013-02 became effective for the company prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material effect on the Company’s consolidated financial statements.
(3)
Restricted Cash
Restricted cash consists of cash which is not available for use in the Company’s operations and is summarized as follows:
(4)
Notes Receivable
During the year ended December 31, 2012, the Company’s major customer paid for the purchases of the Company’s auto products by issuing notes receivable in an aggregate amount of approximately $1,587,024 (RMB 10,000,000). This note receivable is a short-term promissory note issued by the Bank of Dalian that entitles the Company to receive the full face amount from the bank at maturity, which is three months from the date of issuance in January 2013.
During the year ended December 31, 2011, one of the Company’s long term customers paid for the purchases of the Company’s auto products by issuing notes receivable in the amount of approximately $4,761,225 (RMB 30,000,000). These notes receivable are short-term promissory notes issued by the Bank of Shanghai that entitle the Company to receive the full face amount from the bank at maturity, which is 6 months from the date of issuance. The Company arranged to transfer, with recourse its notes receivable during the year ended December 31, 2011 to China Zheshang Bank under a factoring arrangement. Details of the factoring arrangement are disclosed in Note 9(a). These notes were fully collected during the year ended December 31, 2012.
(5)
Property and Equipment, Net
A summary of property and equipment is as follows:
Depreciation and amortization expense for property and equipment amounted to $162,420 and $238,730 for the years ended December 31, 2012 and 2011, respectively.
(6)
Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2011 are as follows:
In the fourth quarter of 2011, due to the planned closing of Goodcar’s operations related to sales of VIP membership cards and other promotion services, the Company reevaluated its goodwill and concluded that the goodwill related to its Automobile Value Added Services reporting unit was impaired. Based upon the implied fair value of goodwill, the Company recorded a goodwill impairment charge of $810,571.
During the fourth quarter of 2012, the Company revised its business plan and downsized Goodcar’s operations. The Company reviewed Goodcar’s advertising operations and decided to cease such operations to generate advertising revenue. The Company evaluated the projected revenue and profit and costs involved to operate Goodcar’s advertising operations and concluded that it would be in the Company’s best interest to cease its operations in order for it to better focus on its core business in automobile sales, automobile value added services and financing services. The Company continues to operate Goodcar’s website to promote our products and services in other segments, including automobile sales, automobile valued added services and financing services. Due to the closing of Goodcar’s advertising operations, the Company recorded an impairment charge of $3,735,091 related to the goodwill acquired in the acquisition of Goodcar.
(7)
Intangible Assets, Net
All the Company’s intangible assets were acquired in connection with Goodcar on November 1, 2010. As of December 31, 2012 and 2011, the Company’s intangible assets include:
During the year ended December 31, 2011, due to the planned closing of Goodcar’s operations related to sales of VIP membership cards and other promotion services, the Company compared the carrying value of the memberships to the undiscounted cash flow expected to be generated from those customers. For those memberships for which the carrying amount was larger than its estimated undiscounted cash flow, the Company recorded an impairment charge to the extent the carrying amount of customer relationships exceeded its fair value. The Company recorded an impairment charge of intangible assets totaling $83,012 ($62,259 after-tax).
During the fourth quarter of 2012, the Company recorded an impairment charge of $926,110 (net of deferred taxes of $314,094) related to intangible assets acquired in the acquisition of Goodcar.
Amortization expense for intangible assets was $179,063 and $252,750 for the year ended December 31, 2012 and 2011, respectively.
(8)
Lines of Credit Related to Financing Services
The Company provides financing services to its customers using the Company’s bank facility lines of credit. The Company earns a service fee for drawing its facility lines related to its customers’ purchases of automobiles and payment of import taxes. Customers bear all the interest and fees charged by the banks and prepay those fees upon the execution of their service contracts with the Company. Customers are also required to make a deposit in the range of 15% to 20% 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 income. Interest expense related to these lines of credit was $3,374,466 and $1,648,992 for the years ended December 31, 2012 and 2011, respectively.
China Merchants Bank
In June 2011, the Company entered into a facility line of credit agreement with China Merchants Bank. Under the terms of the agreement, the Company could borrow a maximum amount of $12,696,196 (RMB 80,000,000). The borrowings under the facility line of credit bear interest at rates ranging from 4.27% to 5.78% per annum and are repayable within 3 months from the dates of drawing. As of December 31, 2012 and 2011, the Company had an outstanding balance of $0 and $8,905,335, respectively, under the facility line of credit. The facility line of credit, which was guaranteed Ms. Cheng Weihong director of the Company,, matured in June 2012 and was repaid.
In June 2012, the Company entered into a facility line of credit agreement with China Merchants Bank. Under the terms of the agreement, the Company could borrow a maximum amount of $12,696,196 (RMB 80,000,000). The borrowings under the facility line of credit bear interest at rates to be determined upon drawing. During the year ended December 31, 2012, the interest is charged at rates ranging between 3.37% and 3.44% per annum and is repayable within 3 months from the dates of drawing. As of December 31, 2012 and 2011, the Company had an outstanding balance of $10,542,205 and $0, respectively, under the facility line of credit. The facility line of credit is guaranteed by Ms. Cheng Weihong and a non-related entity which is a supplier of the Company, and matures in June 2013.
Agricultural Bank of China
(a)
In February 2011, the Company entered into a facility line of credit agreement with Agricultural Bank of China. Under the terms of the agreement, the Company could borrow a maximum amount of $76,177,175 (RMB 480,000,000). The facility line of credit is guaranteed by Mr. Tong Shiping, direct and CEO of the Company, and Ms. Cheng Weihong and originally matured in December 2012. In September 2012, the Company and Agricultural Bank of China executed another facility line of credit agreement which superseded the February 2011 agreement. See (b) below.
The borrowings under these facility lines of credit bear interest at rates ranging from 4.82% to 5.88% per annum and are repayable within three months from the dates of drawing. As of December 31, 2012 and 2011, the Company had outstanding balances of $0 and $47,601,718, respectively, under these facility lines of credit.
(b)
In September 2012, the Company entered into a facility line of credit agreement with Agricultural Bank of China. Under the terms of the agreement, the Company could borrow a maximum amount of $82,525,273 (RMB 520,000,000) as of December 31, 2012. The facility line of credit is guaranteed by five non-related entities, which are customers, suppliers or both, and one of which is a major customer, and matures in September 2013.
The borrowings under these facility lines of credit bear interest at rates ranging from 4.18% to 5.24% per annum and are repayable on the due dates which are predetermined prior to each draw. As of December 31, 2012, the Company had outstanding balances of $40,085,271 under this facility line of credit.
(c)
In addition to the above facility lines of credit agreements with Agricultural Bank of China, the Company had $0 and $11,437,429 of short borrowings with Agricultural Bank of China as of December 31, 2012 and 2011. These short term borrowings bear interest at rates ranging between 3.23% and 3.74% per annum, mature within three months or six months from the dates of borrowing and are secured by the amount of $0 and $11,437,429 deposited to the bank, which is presented as restricted cash on the consolidated balance sheets as of December 31, 2012 and 2011.
PuDong Development Bank
In August 2011, the Company entered into a facility line of credit agreement with PuDong Development Bank. Under the terms of the agreement, the Company could borrow a maximum amount of $15,870,244 (RMB 100,000,000). The borrowings under these facility lines of credit bear interest at rates ranging from 4.97% to 6.47% per annum. As of December 31, 2012 and 2011, the Company had an outstanding balance of $0 and $9,093,646, respectively, under the facility line of credit. The facility line of credit was guaranteed by Ms. Cheng Weihong and a non-related entity, which was also a supplier and a customer of the Company, and matured in August 2012.
In December 2012, the Company entered into a facility line of credit agreement with PuDong Development Bank. Under the terms of the agreement, the Company could borrow a maximum amount of $15,870,244 (RMB 100,000,000). The borrowings under these facility lines of credit bear interest at rates ranging from 4.97% to 6.47% per annum. As of December 31, 2012, the Company had outstanding balance of $0, under the facility line of credit. The facility line of credit was guaranteed by Ms. Cheng Weihong and a non-related entity, which is also a supplier and a customer of the Company, and matures in December 2013.
China Zheshang Bank
In April 2010, the Company entered into a facility line of credit agreement with China Zheshang Bank. Under the terms of the agreement, the Company could borrow a maximum amount of $7,935,122 (RMB 50,000,000) . This facility line of credit is guaranteed by Mr. Tong Shiping and Ms. Cheng Weihong and two non-related entities, which are also suppliers and customers of the Company, and matured in June 2012.
In November 2011, the Company entered into a facility line of credit agreement with China Zheshang Bank. Under the terms of the agreement, the Company could borrow a maximum amount of $23,805,367 (RMB 150,000,000). This facility line of credit is guaranteed by Mr. Tong Shiping and Ms. Cheng Weihong and two non-related entities, one of which is a supplier and customer of the Company and the other one is owned by a close personal friend of Mr. Tong Shiping, the Company’s president and CEO, and matures in November 2013.
In September 2012, the Company entered into a facility line of credit agreement with China Zheshang Bank which superseded the November 2011 facility line of credit agreement mentioned above. Under the terms of the agreement, the Company could borrow a maximum amount of $23,805,367 (RMB 150,000,000) as of December 31, 2012. This facility line of credit is guaranteed by Mr. Tong Shiping, Ms. Cheng Weihong, and two unrelated parities, which are also customers (including one major customer) of the Company, and matures in September 2013.
The borrowing under these facility lines of credit bear interest at a rate of 5.00% per annum and are repayable within 3 months from the dates of drawing. As of December 31, 2012 and 2011, the Company had outstanding balances of $900,542 and $496,181, respectively, under these facility lines of credit.
Industrial and Commercial Bank of China
In November 2011, the Company entered into a facility line of credit agreement with Industrial and Commercial Bank of China. Under the terms of the agreement, there is no stipulated maximum amount of borrowings but each drawing from the facility line is subject to approval from the bank on an individual basis. The borrowings under this facility bear interest at a rate of 4.17% per annum and are repayable within 3 months from the dates of drawing. As of December 31, 2012 and 2011, the Company had outstanding balances of $0 and $742,595, respectively, under the facility line of credit. The facility line of credit matured in November 2012.
Shengjing Bank
In February 2011, the Company entered into a facility line of credit agreement with Shengjing Bank. Under the terms of agreement, the Company could borrow a maximum amount of $11,109,171 (RMB 70,000,000). The borrowings under this facility bear interest at rates ranging from 4.25% to 4.28% per annum and are repayable within 3 month from the dates of drawing. As of December 31, 2012 and 2011, the Company had no outstanding balances under the facility line of credit. The facility line of credit was guaranteed by Ms. Cheng Weihong and a non-related entity, which was also a supplier and customer of the Company, and matured in February 2012.
China Minsheng Bank
In April 2011, the Company entered into a facility line of credit agreement with China Minsheng Bank. Under the terms of the agreement, the Company could borrow a maximum amount of $12,696,196 (RMB 80,000,000). The borrowings under this facility bore interest at a rate 6.47% per annum and were repayable within 3 months from the dates of drawing. As of December 31, 2012 and 2011, the Company had outstanding balances of $0 and $9,434,053 under the facility line of credit. The facility line of credit was guaranteed by Mr. Tong Shiping and Ms. Cheng Weihong and two non-related entities, which were suppliers and customers of the Company, and matured in April 2012.
(9)
Short Term Borrowings
(a) Factoring Agreement
In December 2011, the Company entered into a factoring agreement with China Zheshang Bank under which it sells receivables with recourse to the bank. Under the terms of the agreement, the bank advances the Company up to 80% of the amount of the receivables sold and collects the factored receivable balances directly from the customers. The maximum borrowing percentage was subsequently increased to 90% per a verbal approval by the bank. The bank charges interest at a rate of 7.8% per annum on the amount advanced and withholds the interest from the final payment to the Company on collection. In the event of a commercial dispute on the receivable, the factor has the right to demand that the Company repurchase the receivable and refund any advances to the bank. The agreement allows the Company to sell receivables totaling up to $15,870,245 (RMB 100,000,000). The factoring agreement expired in December 2012.
As of December 31, 2012 and 2011, the outstanding balances of $0 and $4,285,102, respectively, were classified as short term borrowings in the consolidated balance sheets.
As of December 31, 2012 and 2011, the Company had outstanding balances of $0 and $4,761,225, respectively, for the sale of receivables under this factoring agreement. Amounts outstanding under the agreement are included in short-term borrowings in the consolidated balance sheets, as the sale of these receivables has not met the criteria for sale treatment in accordance with ASC 860.
(b) Pledge Financing Agreements
In March, April, June, July, September and October 2012, the Company entered into twelve short term financing agreements with Agricultural Bank of China (“ABC”) for a period of six months. Four of the agreements expired and outstanding amounts were repaid during the year ended December 31, 2012. The total outstanding balance of these agreements was $16,608,604 as of December 31, 2012. Under the terms of the agreements, ABC advanced $16,608,404 to the Company and as conditions of these financing agreements, the Company is required to pledge its notes receivable in the aggregate amount of $1,587,024 (RMB 10,000,000) as guarantees. In addition, the Company is required to maintain a bank deposit of $16,140,039 (RMB 101,700,000) which is classified as restricted cash in the consolidated balance sheet as of December 31, 2012. Based on the preliminary estimates of the bank, these financing loans carry interest at a rate equal to the LIBOR plus a rate between 0.3% and 2.6% (a rate range between 0.92% and 3.33% at December 31, 2012). Upon the repayment dates of these draws, the Company will make final interest payments which could result in the effective interest rate paid to differ from the estimated interest rates provided by the bank prior to the draws. These draws are repayable on various dates between January 2013 and April 2013.
(c) Overdraft Agreement
In April 2012, the Company entered into an overdraft agreement with PuDong Development Bank. Under the terms of the agreement, the Company can borrow a maximum amount of $1,587,024 (RMB 10,000,000). This overdraft line of credit is part of the RMB 100,000,000 facility line of credit with PuDong Development Bank stated above. The borrowing under this facility bore interest at a rate of 7.32% for a borrowing period of 90 days and 8.0532% for an additional period of 30 days, and was secured by restricted cash deposited at the bank. The overdraft agreement, which was guaranteed by Ms. Cheng Weihong and a non-related entity, which was a supplier and a customer of the Company, matured in August 2012 and was repaid.
(d) Loan Agreements
In September 2012, the Company entered into four loan agreements with China Zheshang Bank. Under the terms of the agreements, the Company borrowed an aggregate loan amount of $3,064,524 (RMB 19,309,874). The borrowings under these loan agreements bears interest at a rate of 5.6% for a borrowing period of six months and are guaranteed by Mr. Tong Shiping, Ms. Cheng Weihong, a personal friend of Mr. Tong Shiping, and two unrelated parities, which are also customers (including one major customer) of the Company. Total outstanding balance of these agreements was $3,064,524 as of December 31, 2012.
(10)
Notes Payable to Suppliers
The Company issued certain notes payable to suppliers which are guaranteed by the 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 payable to these suppliers. The Company is subject to a bank fee of 0.05% on notes payable amounts.
As of December 31, 2012, the Company had outstanding notes payable to suppliers in an aggregate amount of $12,696,196 (RMB 80,000,000) of which Bank of Jinzhou will guarantee payments to suppliers within term of these notes for a period of six months. The Company was required to maintain 50% of the notes amounts, or $6,348,098 as guaranteed funds, which was classified as restricted cash as of December 31, 2012.
The purpose of this arrangement is to provide additional time for the Company to remit payments while the suppliers do not bear any credit risk since the suppliers’ payments are guaranteed by the banks.
(11)
Income Taxes
China Auto and HKCo do not generate any income and therefore are not subject to US or Hong Kong income taxes. The Company conducts substantially all of its business through its PRC operating subsidiaries and they are subject to PRC income taxes. The Company’s subsidiaries in the PRC are subject to the standard 25% tax rate in 2012 and 2011.
The Company’s income tax provision amounted to $1,596,179 and $3,303,177, respectively, for the years ended December 31, 2012 and 2011 (an effective rate of 38.22% and 28.90% for 2012 and 2011, respectively). A reconciliation of the provision for income taxes, with amounts determined by applying the statutory US federal income tax rate to income before income taxes, is as follows:
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible or are utilized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon an assessment of the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are tested whether they are deductible or can be utilized, management believes that the deferred tax assets amounting to $0 and $503,281 resulting from net operating loss carryforwards, advertising expenses and allowance for doubtful accounts as of December 31, 2012 and 2011, respectively, are not more likely than not to be realized.
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 $31.1 million as of December 31, 2012. Because of the availability of US foreign tax credits, it is not practicable to determine the US income tax liability that would be payable if such earnings were not indefinitely reinvested.
The Company is subject to income taxes in the PRC. Tax regulations are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. All tax positions taken, or expected to be taken, continue to be more likely than not ultimately settled at the full amount claimed. The Company’s tax filings are subject to the PRC tax bureau’s examination for a period up to 5 years. The Company is not currently under any examination by the PRC tax bureau.
(12)
Shareholders’ equity
On July 1, 2011, the Company entered into a securities purchase agreement, pursuant to which the Company issued to certain accredited investors 500,000 (pre reverse split of 3,000,000) shares of common stock of the Company at the price of $10.50 (pre reverse split of $1.75) each for the aggregate cash consideration of $5,250,000.
(13)
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 December 31, 2012 and December 31, 2011, the Company’s statutory reserve fund was approximately $3,559,000 and $2,881,000, respectively.
(14)
Related Party Balances and Transactions
Ms. Cheng Weihong (the Senior Vice President and Chairwoman of Shisheng and wife of China Auto’s President and Chief Executive Officer, Mr. Tong Shiping) made non-interest bearing loans to the Company from time to time to meet working capital needs of the Company. For the years ended December 31, 2012 and 2011, the Company made aggregate borrowings from Ms. Cheng Weihong of $852,075 and $38,710, respectively, and made repayments of $352,335 and $590,796 to Ms. Cheng Weihong. As of December 31, 2012 and 2011, the outstanding balances due to Ms. Cheng Weihong were $512,023 and $22,316, respectively.
One of the Company’s shareholders, Sino Peace Limited, paid accrued expenses of $0 and $440,113 on behalf of the Company during the years ended December 31, 2011 and 2012. The amounts of $2,156,166 and $2,156,235 were outstanding as due to this shareholder on the consolidated balance sheet as of December 31, 2012 and 2011.
On November 1, 2010, the Company acquired all issued and outstanding stocks of Qizhong. In connection with this acquisition, the amount of $2,717,925 representing the part of purchase consideration payable in cash to the former owners of Qizhong was outstanding as due to these shareholders on the consolidated balance sheet as of December 31, 2010. This balance was fully paid during the year ended December 31, 2011.
In connection with the Goodcar acquisition, the Company acquired the balances due to former owners of Qizhong of $1,084,905. Upon completion of the share issuance, these former owners of Qizhong then became shareholders of the Company. In December 2012, the Company negotiated with these former owners of Qizhong with regard to the outstanding balance of these loans payable. As a result of the negotiations, these loans were forgiven by these former owners of Qizhong due to the fact that certain key executives left Goodcar after the purchase and Goodcar’s operations had not been performing the way it was expected. The formers owners were willing to forgive this debt since the actual performance of Qizhong after the acquisition was far below the performance forecast provided to the Company prior to the acquisition. The Company recorded a gain on debt forgiveness in the amount of $1,139,861 (including outstanding debt balance of $1,084,905 and foreign currency translation adjustment of $54,956) as other income in the consolidated statements of income for the year ended December 31, 2012. As of December 31, 2012 and 2011, outstanding balance due to these former owners of Qizhong was $0 and $1,140,313, respectively.
The balances as discussed above as of December 31, 2012 and 2011 are interest-free, unsecured and have no fixed term of repayment. During the years ended December 31, 2012 and 2011, there was no imputed interest charged in relation to these balances.
(15)
Commitments
The Company leases certain office and marketing premises under non-cancelable leases. These office leases begin to expire in 2012. Rent expense under operating leases were $240,724 for 2012 and $330,877 for 2011. The leases expire at various dates through 2013. In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties.
Future minimum lease payments under non-cancelable operating leases were as follows:
(16)
Segment Information
The Company has five principal operating segments: (1) sales of automobiles, (2) financing services, (3) web-based advertising, and, (4) automobile value added services, and (5) auto mall management 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 operations of the Company's operating segments:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: April 1, 2013
POWER OF ATTORNEY
The registrant and each person whose signature appears below hereby appoint Tong Shiping as attorney-in-fact with full power of substitution, severally, to execute in the name and on behalf of the registrant and each such person, individually and in each capacity stated below, one or more amendments to the annual report which amendments may make such changes in the report as the attorney-in-fact acting deems appropriate and to file any such amendment to the report with the US Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Tong Shiping
Chief Executive Officer and Director
April 1, 2013
Tong Shiping
(Principal Executive Officer)
/s/ Wang Xinwei
Chief Financial Officer, Treasurer, Vice President and Director
April 1, 2013
Wang Xinwei
(Principal Accounting Officer)
/s/ Cheng Weihong
Senior Vice President (Head of Human Resources and General
April 1, 2013
Cheng Weihong
Administration) and Director
/s/ Howard S. Barth
Director
April 1, 2013
Howard S. Barth
/s/ Wang Wei
Director
April 1, 2013
Wang Wei
/s/ Yang Lili
Director
April 1, 2013
Yang Lili
/s/ Zou Baoying
Director
April 1, 2013
Zou Baoying
Index to Exhibits
(1) Incorporated by reference to the Company’s Form SB2 filed with the Securities and Exchange Commission on March 7, 2006, Definitive Schedule 14C Information Statement filed on December 5, 2008 and Form 8-K filed on October 9, 2012.
(2) Incorporated by reference to the Company’s Definitive Schedule 14C Information Statement filed with the Securities and Exchange Commission on December 5, 2008
(3) Incorporated by reference to the Company’s Form 10-Q, filed with the Securities and Exchanges Commission on May 15, 2012.
(4) Incorporated by reference to the Company’s Form 8-K, filed with the Securities and Exchange Commission on December 24, 2008.
* Attached hereto