10-Q 1 v202325_10q.htm Unassociated Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2010

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

For the transition period from ______ to ______.

Commission file number: 000-52625
CHINA AUTO LOGISTICS INC.
(Exact Name of Registrant as Specified in Its Charter)

Nevada
20-2574314
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
   
No. 87 No. 8 Coastal Way, Floor 2
 
Construction Bank, FTZ
 
Tianjin Province
 
The People’s Republic of China  300461
300461
(Address of Principal Executive Offices)
(Zip Code)

(86) 22-2576-2771
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ¨ No  x

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

Large accelerated filer  ¨
Accelerated filer  ¨
Non-accelerated filer  ¨
 Smaller reporting company x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
  
Outstanding at November 12, 2010
Common Stock, $.001 par value per share
  
18,100,000 shares

 
 

 

TABLE OF CONTENTS

   
Page
PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
 
Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009 (Unaudited)
1
 
Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2010 and 2009 (Unaudited)
2
 
Condensed Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2010 and 2009 (Unaudited)
3
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (Unaudited)
4
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
25
Item 4.
Controls and Procedures
25
     
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings
26
Item 1A.
Risk Factors
26
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
26
Item 3.
Default Upon Senior Securities
26
Item 4.
(Removed and Reserved)
26
Item 5.
Other Information
26
Item 6.
Exhibits
26
     
SIGNATURES
28

 
 

 

PART I – FINANCIAL INFORMATION
Item 1.  Financial Statements

CHINA AUTO LOGISTICS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

   
September 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS
           
Current assets
           
Cash and cash equivalents
 
$
4,242,314
   
$
2,255,058
 
Restricted cash
   
4,590,045
     
4,296,368
 
Accounts receivable – trade
   
84,890
     
-
 
Receivables related to financing services
   
20,095,614
     
9,499,219
 
Inventories
   
27,754,699
     
16,617,641
 
Advances to suppliers
   
18,084,307
     
18,151,077
 
Prepaid expenses
   
72,895
     
36,516
 
Value added tax refundable
   
1,656,385
     
368,272
 
Total current assets
   
76,581,149
     
51,224,151
 
                 
Property and equipment, net
   
481,766
     
487,933
 
Other assets
   
22,384
     
-
 
Total Assets
 
$
77,085,299
   
$
51,712,084
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities
               
Lines of credit related to financing services
 
$
18,342,323
   
$
7,766,981
 
Bank loans payable
   
1,939,980
     
3,221,933
 
Draft notes payable
   
-
     
2,929,030
 
Accrued expenses
   
125,501
     
455,276
 
Customer deposits
   
19,713,016
     
5,857,640
 
Deferred revenue
   
109,755
     
82,185
 
Due to shareholder
   
1,379,517
     
975,920
 
Due to director
   
40,110
     
19,391
 
Income tax payable
   
854,498
     
2,132,891
 
Total current liabilities
   
42,504,700
     
23,441,247
 
                 
Equity
               
China Auto Logistics Inc. shareholders’ equity
               
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued and outstanding
   
-
     
-
 
Common stock, $0.001 par value, 95,000,000 shares authorized, 18,100,000 shares issued and outstanding
   
18,100
     
18,100
 
Additional paid-in capital
   
13,273,530
     
13,273,530
 
Accumulated other comprehensive income
   
2,880,748
     
2,278,788
 
Retained earnings
   
18,013,137
     
12,400,067
 
Total China Auto Logistics Inc. shareholders’ equity
   
34,185,515
     
27,970,485
 
Noncontrolling interests
   
395,084
     
300,352
 
Total equity
   
34,580,599
     
28,270,837
 
                 
Total liabilities and shareholders’ equity
 
$
77,085,299
   
$
51,712,084
 

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

 
1

 

CHINA AUTO LOGISTICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net revenue
  $ 67,475,209     $ 52,826,034     $ 176,445,062     $ 143,063,820  
Cost of revenue
    63,730,308       50,107,679       166,930,262       135,604,333  
Gross profit
    3,744,901       2,718,355       9,514,800       7,459,487  
                                 
Operating expenses:
                               
Selling and marketing
    236,707       171,590       622,234       475,737  
General and administrative
    389,487       270,883       1,074,159       858,487  
Total operating expenses
    626,194       442,473       1,696,393       1,334,224  
                                 
Income from operations
    3,118,707       2,275,882       7,818,407       6,125,263  
                                 
Other income (expenses):
                               
Interest income
    5,279       4,824       43,446       8,585  
Interest expenses
    (64,787 )     (45,690 )     (132,529 )     (152,107 )
Miscellaneous
    (7,151 )     -       (1,223 )     -  
Total other expenses
    (66,659 )     (40,866 )     (90,306 )     (143,522 )
                                 
Income before income taxes
    3,052,048       2,235,016       7,728,101       5,981,741  
                                 
Income taxes
    794,136       573,941       2,029,386       1,572,244  
                                 
Net income
    2,257,912       1,661,075       5,698,715       4,409,497  
                                 
                                 
Less: Net income attributable to noncontrolling interests
    34,494       53,429       85,645       315,441  
                                 
Net income attributable to shareholders of China Auto Logistics Inc.
  $ 2,223,418     $ 1,607,646     $ 5,613,070     $ 4,094,056  
                                 
                                 
Earnings per share attributable to shareholders of China Auto Logistics Inc. – basic and diluted
  $ 0.12     $ 0.09     $ 0.31     $ 0.23  
                                 
Weighted average number of common share outstanding – basic and diluted
    18,100,000       18,100,000       18,100,000       18,100,000  

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

 
2

 

CHINA AUTO LOGISTICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net income
 
$
2,257,912
   
$
1,661,075
   
$
5,698,715
   
$
4,409,497
 
                                 
Other comprehensive income
                               
 Foreign currency translation adjustments
   
442,480
     
11,383
     
611,047
     
21,103
 
                                 
Comprehensive income
   
2,700,392
     
1,672,458
     
6,309,762
     
4,430,600
 
                                 
Less: Comprehensive income attributable to noncontrolling interests
   
41,254
     
26,328
     
94,732
     
318,957
 
                                 
Comprehensive income attributable to shareholders of China Auto Logistics Inc.
 
$
2,659,138
   
$
1,646,130
   
$
6,215,030
   
$
4,111,643
 

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

 
3

 

CHINA AUTO LOGISTICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

   
Nine Months Ended September 30,
 
   
2010
   
2009
 
             
Cash flows from operating activities
           
Net income
  $ 5,698,715     $ 4,409,497  
                 
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
               
Depreciation and amortization
    150,599       159,110  
Change of inventory reserve
    -       (146,257 )
Loss on disposal of property and equipment
    9,646       -  
                 
Changes in operating assets and liabilities:
               
Restricted cash
    (222,554 )     (4,318,845 )
Accounts receivable – trade
    (83,322 )     (648 )
Receivables related to financing services
    6,917       1,063,167  
Inventories
    (10,693,338 )     (133,523 )
Advances to suppliers
    402,670       (641,885 )
Prepaid expenses
    (35,538 )     (21,665 )
Value added tax refundable
    (1,266,812 )     608,522  
Deferred tax assets
    -       36,564  
Other assets
    (22,325 )     -  
Draft notes payable
    (2,929,437 )     -  
Accrued expenses
    46,505       131,935  
Customer deposits
    13,583,647       540,484  
Deferred revenue
    25,159       111,233  
Income tax payable
    (1,298,384 )     (57,462 )
Net cash provided by operating activities
    3,372,238       1,740,227  
                 
Cash flows from investing activities
               
Proceeds from disposal of property and equipment
    70,232       -  
Payments to acquire noncontrolling interests
    -       (444,120 )
Purchase of property and equipment
    (214,636 )     (58,078 )
Net cash used for investing activities
    (144,404 )     (502,198 )
                 
Cash flows from financing activities
               
Proceeds from short-term bank loans
    -       2,633,819  
Repayments of short-term bank loans
    (1,318,247 )     (2,633,819 )
Repayments of lines of credit related to automobile purchases
    -       (662,194 )
Advances from director
    404,361       -  
Repayments of advances from director
    (383,815 )     -  
Net cash flows used for financing activities
    (1,297,701 )     (662,194 )
                 
Effect of exchange rate change on cash
    57,123       944  
                 
Net increase in cash and cash equivalents
    1,987,256       576,779  
                 
Cash and cash equivalents at the beginning of period
    2,255,058       1,598,781  
Cash and cash equivalents at the end of period
  $ 4,242,314     $ 2,175,560  

 
4

 

CHINA AUTO LOGISTICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)

   
Nine Months Ended September 30,
 
   
2010
   
2009
 
             
Supplemental disclosure of cash flow information:
           
Interest paid
 
$
134,178
   
$
150,371
 
Income taxes paid
 
$
3,327,102
   
$
1,585,355
 
                 
Non-cash activities:
               
                 
Increase of borrowings on lines of credit for loans extended to the Company’s customers
 
$
10,206,472
   
$
10,094,783
 
Increase in balance due to shareholders for accrued expenses paid by shareholder
 
$
380,372
   
$
277,920
 
                 
Increase of draft notes receivable for customer deposits
 
$
-
   
 $
2,927,786
 
                 
Increase of draft notes payable for advances to suppliers
 
$
-
   
 $
2,927,786
 
 
The accompanying notes form an integral part of these condensed consolidated financial statements

 
5

 

CHINA AUTO LOGISTICS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1)           Summary of Significant Accounting Policies

Organization, Nature of Business and Basis of Presentation

China Auto Logistics Inc. (the "Company" or "China Auto") operates through its wholly-owned subsidiary Ever Auspicious International Limited, a Hong Kong corporation ("HKCo"), and its wholly-owned subsidiary Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd. ("Shisheng"), a company established under the laws of the People's Republic of China ("PRC"). The Company's principal business includes (i) sales of both domestically manufactured and imported automobiles, (ii) financing services related to imported automobiles, (iii) automobile information websites and advertising services, (iv) logistics services related to the automobile importing process and other automobile import value added services, such as assistance with customs clearance, storage and nationwide delivery services ("Automobile Import Value Added Services") and (v) management services to an auto mall.

The accompanying condensed consolidated balance sheet as of December 31, 2009, which has been derived from the audited consolidated financial statements and the accompanying unaudited condensed consolidated financial statements, has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") have been condensed or omitted pursuant to those rules and regulations and the Company believes that the disclosures made are adequate to make the information not misleading.

In the opinion of management, these condensed consolidated financial statements reflect all adjustments which are of a normal recurring nature and which are necessary to present fairly the financial position of China Auto as of September 30, 2010 and the results of operations for the three-month and nine-month periods ended September 30, 2010 and 2009, and the cash flows for the nine-month periods ended September 30, 2010 and September 30, 2009. These condensed consolidated financial statements and related notes should be read in conjunction with the Company's annual report on Form 10-K for the fiscal year ended December 31, 2009. The results of operations for the three months and nine months ended September 30, 2010 are not necessarily indicative of the results which may be expected for the entire fiscal year.

The preparation of condensed consolidated financial statements in conformity with US GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Basis of Consolidation

The condensed consolidated financial statements include the financial statements of China Auto and its wholly-owned and majority-owned subsidiaries.  All inter-company transactions and balances have been eliminated in preparation of the condensed consolidated financial statements.

Currency Reporting

The Company's operations in the PRC use the local currency, Renminbi ("RMB"), as their functional currency, whereas amounts reported in the accompanying condensed consolidated financial statements and disclosures are stated in U.S. dollars, the reporting currency of the Company, unless stated otherwise. As such, the condensed consolidated balance sheets of the Company have been translated into U.S. dollars at the current rates as of September 30, 2010 and December 31, 2009 and the condensed consolidated statements of income have been translated into U.S. dollars at the weighted average rates during the periods the transactions were recognized.

The resulting translation gain adjustments are recorded as other comprehensive income in the condensed consolidated statements of comprehensive income and as a separate component of equity in the condensed consolidated balance sheets.
 
Revenue Recognition

The Company’s main source of income was generated through (1) sales of automobiles, (2) service fees for assisting customers in obtaining bank financing for purchases of automobiles, (3) web-based advertising service fees, including fees from (a) displaying graphic advertisements on the Company’s websites and (b) web-based listing services that allow customers to place automobile related information on the Company’s websites, (4) automobile import value added services, and (5) auto mall management services. The financing services are provided to customers for 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.

 
6

 

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

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

Service fees for graphic 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 recognizes revenue from automobile import value added services when such services are performed.

Revenue from auto mall management services is recognized ratably over the service period.

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 sales and are detailed on invoices provided to customers. The Company accounts for Value Added Taxes on a net basis. The Company records and pays business taxes based on a percentage of the net service revenues and reports the service revenues net of the business taxes and other sales related taxes.

Receivables Related to Financing Services

The Company records receivables related to financing services when cash is loaned to customers to finance their purchases of automobiles. Upon repayment by customers, the Company records the amounts as reductions of receivables related to financing services. Receivables related to financing services represent the aggregate outstanding balance of loans from customers related to their purchases of automobiles and are considered receivables held for investment. The Company charges a fee for providing loan services and such fees are prepaid by customers. The Company amortizes these fees over the receivable term, which is typically 90 days, using the straight-line method. The Company records such amortized amounts as financing fee income and the unamortized amount is classified as deferred revenue on the Company’s condensed consolidated balance sheets.

The Company evaluates the 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 accounts receivable historically and accordingly did not record any allowance of credit losses as of September 30, 2010 and December 31, 2009.

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 September 30, 2010 and 2009, the Company did not have any common stock equivalents, therefore, the basic earnings per share is the same as the diluted earnings per share.

Reclassifications

Certain prior period amounts included in selling and marketing expenses and general and administrative expenses in condensed consolidated statements of income have been reclassified to cost of revenue, and  an amount of investing activities in condensed consolidated statements of cash flow  has been reclassified to operating activities to conform to the current period presentation. 

New Accounting Pronouncements Not Yet Adopted

In September 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13 “Revenue Recognition (Topic 605): Multiple Deliverable Revenue Element Arrangements – a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”). The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. ASU 2009-13 will be applied prospectively and will become effective during the first quarter of 2011. Early adoption is allowed. The Company does not expect the adoption of this guidance to have a significant effect on its consolidated financial position or results of operations.

 
7

 

(2)           Property and Equipment

A summary of property and equipment is as follows:
   
September 30,
   
December 31,
 
   
2010
   
2009
 
             
Computer
 
$
214,439
   
$
210,448
 
Office equipment, furniture and fixtures
   
172,851
     
125,676
 
Automobiles
   
1,051,415
     
1,029,631
 
     
1,438,705
     
1,365,755
 
Less: Accumulated depreciation
   
956,939
     
877,822
 
   
$
481,766
   
$
487,933
 

Depreciation and amortization expense for property and equipment amounted to approximately $50,550 and $50,616 for the three months ended September 30, 2010 and 2009, respectively, and $150,599 and $159,110 for the nine months ended September 30, 2010 and 2009, respectively.

(3)           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 30% 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.

China Merchants Bank

In June 2010, 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 $11,192,192 (RMB75,000,000) as of September 30, 2010. As of September 30, 2010, the Company had outstanding balances of $4,743,875. The facility line of credit matures in June 2011 and is guaranteed by a director and a non-related entity.

In May 2009, 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 $13,180,633 (RMB 90,000,000) as of December 31, 2009. As of December 31, 2009, the Company had outstanding balances of $3,739,100. This facility line of credit matured in May 2010 and was guaranteed by a director and a non-related entity.

Agricultural Bank of China

In January 2010, the Company entered into a facility line of credit agreement with Agricultural Bank of China to facilitate its financing services. Under the terms of the agreement, the Company could borrow a maximum amount of $17,161,362 (RMB115,000,000) as of September 30, 2010. The Company had an outstanding balance of $8,801,065 as of September 30, 2010. This facility line of credit is guaranteed by three non-related entities. 

In January and February 2009, the Company entered into two facility lines of credit with Agricultural Bank of China to facilitate its financing service business. Under the terms of the engagements, the Company could borrow a maximum amount of $13,619,988 (RMB93,000,000) prior to the expiration of the facilities lines in December 2009 to facilitate its financing business. The Company had an outstanding balance of $99,635 as of December 31, 2009. These facility lines of credit expired in December 2009 and were guaranteed by non-related entities.

PuDong Development Bank

In June 2010, 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 $14,922,923 (RMB100,000,000) as of September 30, 2010. As of September 30, 2010, the Company had outstanding balances of $3,995,058. The facility line of credit matures in June 2011 and is guaranteed by a director and a non-related entity.

In June 2009, the Company entered into a facility line of credit agreement with PuDong Development Bank related to its financing services. Under the terms of the agreement, the Company could borrow a maximum amount of $8,787,089 (RMB 60,000,000) as of December 31, 2009. As of December 31, 2009, the Company had outstanding balances of $3,928,246. This facility line of credit expired in May 2010 and was guaranteed by a non-related entity.

 
8

 

ZheJiang Commercial Bank

In April 2010, the Company entered into a facility line of credit agreement with ZheJiang Commercial Bank. Under the terms of the agreement, the Company could borrow a maximum amount of $7,461,462 (RMB50,000,000) as of September 30, 2010. As of September 30, 2010, the Company had outstanding balances of $802,325. The facility line of credit matures in June 2012 and is guaranteed by two directors and two non-related entities.

(4)           Short-term Bank Loans
 
Short-term bank loans as of September 30, 2010 and December 31, 2009 consist of the following:
   
September 30,
   
December 31,
 
   
2010
   
2009
 
             
Loan from Agricultural Bank of China, with interest rate of 5.841% guaranteed by non-related entities, and matures in November 2010
 
$
1,343,063
   
$
1,318,063
 
                 
Loan from Agricultural Bank of China, with interest rate of 5.841% guaranteed by non-related entities, and matures in November 2010
   
596,917
     
585,807
 
                 
Loan from Agricultural Bank of China, with interest rate of 5.346% guaranteed by non-related entities, and matured in March 2010
   
-
     
1,318,063
 
   
$
1,939,980
   
$
3,221,933
 

Weighted average interest rates for these bank loans were 5.481% and 5.663% at September 30, 2010 and December 31, 2009, respectively.

(5)           Draft Notes Payable

The Company issued certain notes payable to suppliers, which notes are guaranteed by the Company’s banks. These notes payable were issued as replacements of the accounts payable. The terms of these draft notes payable vary depending on negotiations with specific suppliers. Typical terms are in the range of three to six months. On the maturity dates, the note holders present these notes to the banks to draw cash based on the note amounts. The Company is subject to a bank fee of 0.05% on notes payable amounts.

As of December 31, 2009, the Company had a draft note payable in the amount of $2,929,030 (RMB 20,000,000). This note was guaranteed by ZheJiang Commercial Bank and matured in March 2010. The Company was required to maintain $2,929,030 as guaranteed funds, which was classified as restricted cash as of December 31, 2009. As of September 30, 2010, the Company had no outstanding draft notes payable.

The purpose of this type of arrangement is to provide additional time to the Company to remit payments while allowing vendors to avoid any credit risk since the vendors are guaranteed payment by the bank.

(6)           Major Customers and Suppliers

No customer had more than 10% of the Company’s sales during the three months ended September 30, 2010 and the sales to the Company’s two largest customers accounted for 32% of the Company’s sales during the three months ended September 30, 2009. During the nine months ended September 30, 2010 and 2009, sales to the Company’s largest customer accounted for 19% and 23%, respectively, of the Company’s sales.

Purchases from the Company’s largest supplier during the three months ended September 30, 2010 and purchases from its three largest suppliers during the three months ended September 30, 2009 accounted for 10% and 58%, respectively, of the Company’s total purchases. And, during the nine months ended September 30, 2010 and 2009, purchases from the Company's three largest suppliers accounted for 33% and 59%, respectively, of the Company’s purchases.

(7)           Related Party Balances and Transactions

Cheng Weihong (the Secretary, 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. As of September 30, 2010 and December 31, 2009, the outstanding balances due to Cheng Weihong were $40,110 and $19,391, respectively.

 
9

 

The Company’s shareholder, Sino Peace Limited, paid on behalf of the Company accrued expenses of $173,965 and $85,000 during the three months ended September 30, 2010 and 2009, respectively, and $380,372 and $277,920 during the nine months ended September 30, 2010 and 2009, respectively.  As of September 30, 2010 and December 31, 2009, outstanding balances due to Sino Peace Limited were $1,379,517 and $975,920, respectively.

(8)           Segment Information

The Company has five principal operating segments: (1) sales of automobiles, (2) financing services, (3) web-based advertising services, (4) automobile import value added services, and (5) auto mall management services. These operating segments were determined based on the nature of 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:

 
Three Months Ended
September 30, 2010
 
Sales of
Automobiles
   
Financing
Services
   
Web-based
Advertising
Services
   
Automobile
Import
Value
Added
Services
   
Auto Mall
Management
Services
   
Corporate
   
Total
 
                                           
Net revenue
  $ 64,878,374     $ 461,007     $ 1,697,522     $ 198,831     $ 239,475     $ -     $ 67,475,209  
                                                         
Cost of revenue
    63,666,549       6,887       38,805       7,828       10,239       -       63,730,308  
                                                         
Operating expenses
                                                       
Selling and marketing
    84,722       47,894       69,097       10,817       24,177       -       236,707  
General and administrative
    47,529       32,415       13,806       5,164       16,363       274,210       389,487  
Total operating expenses
    132,251       80,309       82,903       15,981       40,540       274,210       626,194  
                                                         
Income (loss) from operations
  $ 1,079,574     $ 373,811     $ 1,575,814     $ 175,022     $ 188,696     $ (274,210 )   $ 3,118,707  

Three Months Ended
September 30, 2009
 
Sales of
Automobiles
   
Financing
Services
   
Web-based
Advertising
Services
   
Automobile
Import
Value
Added
Services
   
Auto Mall
Management
Services
   
Corporate
   
Total
 
                                           
Net revenue
 
$
51,394,023
   
$
342,639
   
$
933,472
   
$
155,900
   
$
-
   
$
-
   
$
52,826,034
 
                                                         
Cost of revenue
   
50,076,877
     
3,705
     
21,148
     
5,949
     
-
     
-
     
50,107,679
 
                                                         
Operating expenses
                                                       
Selling and marketing
   
65,784
     
24,638
     
67,194
     
13,974
     
-
     
-
     
171,590
 
General and administrative
   
46,480
     
16,428
     
15,657
     
5,545
     
-
     
186,773
     
270,883
 
Total operating expenses
   
112,264
     
41,066
     
82,851
     
19,519
     
-
     
186,773
     
442,473
 
                                                         
Income (loss) from operations
 
$
1,204,882
   
$
297,868
   
$
829,473
   
$
130,432
   
$
-
   
$
 (186,773
)  
$
2,275,882
 

 
10

 

Nine Months Ended
September 30, 2010
 
Sales of
Automobiles
   
Financing
Services
   
Web-based
Advertising
Services
   
Automobile
Import
Value
Added
Services
   
Auto Mall
Management
Services
   
Corporate
   
Total
 
                                           
Net revenue
 
$
170,044,880
   
$
1,241,058
   
$
3,942,372
   
$
643,169
   
$
573,583
   
$
-
   
$
176,445,062
 
                                                         
Cost of revenue
   
166,748,310
     
18,415
     
103,593
     
23,523
     
36,421
     
-
     
166,930,262
 
                                                         
Operating expenses
                                                       
Selling and marketing
   
207,213
     
123,250
     
192,531
     
46,238
     
53,002
     
-
     
622,234
 
General and administrative
   
190,655
     
137,445
     
43,212
     
32,151
     
54,150
     
616,546
     
1,074,159
 
Total operating expenses
   
397,868
     
260,695
     
235,743
     
78,389
     
107,152
     
616,546
     
1,696,393
 
                                                         
Income (loss) from operations
 
$
2,898,702
   
$
961,948
   
$
3,603,036
   
$
541,257
   
$
430,010
   
$
(616,546
)  
$
7,818,407
 

Nine Months Ended
September 30, 2009
 
Sales of
Automobiles
   
Financing
Services
   
Web-based
Advertising
Services
   
Automobile
Import
Value
Added
Services
   
Auto Mall
Management
Services
   
Corporate
   
Total
 
                                           
Net revenue
 
$
139,344,343
   
$
960,406
   
$
2,278,890
   
$
480,181
   
$
-
   
$
-
   
$
143,063,820
 
                                                         
Cost of revenue
   
135,496,604
     
8,931
     
82,857
     
15,941
     
-
     
-
     
135,604,333
 
                                                         
Operating expenses
                                                       
Selling and marketing
   
225,149
     
74,761
     
145,949
     
29,878
     
-
     
-
     
475,737
 
General and administrative
   
169,792
     
51,015
     
45,028
     
17,006
     
-
     
575,646
     
858,487
 
Total operating expenses
   
394,941
     
125,776
     
190,977
     
46,884
     
-
     
575,646
     
1,334,224
 
                                                         
Income (loss) from operations
 
$
3,452,798
   
$
825,699
   
$
2,005,056
   
$
417,356
   
$
-
   
$
 (575,646
)  
$
6,125,263
 

Following are total assets by segment:
Total Assets  
 
Sales of
Automobiles
   
Financing
Services
   
Web-based
Advertising
Services
   
Automobile
Import
Value
Added
Services
   
Auto Mall
Management
Services
   
Corporate
   
Total
 
As of September 30, 2010
 
$
49,414,181
   
$
25,405,205
   
$
1,199,244
   
$
719,546
   
$
84,890
   
$
262,233
   
$
77,085,299
 
                                                         
As of December 31, 2009
 
$
36,248,793
   
$
14,212,513
   
$
694,877
   
$
416,926
   
$
-
   
$
138,975
   
$
51,712,084
 

 
11

 

(9)           Subsequent Event

On November 1, 2010, Shisheng entered into a Share Transfer Agreement (“Agreement”) with the equity interest owners of Chongqing Qizhong Technology Development Corporation (“goodcar.com”) to acquire 100% of equity interest of goodcar.com for a price equal to the sum of   (a) approximately $2.69 million (RMB18 million) and (b) 1.08 million shares of common stock of the Company with approximate fair value of $3.29 million.  The cash portion of purchase price is payable in the following payment schedule (i) $448,000 within three days of the execution of the Agreement date, (ii) $299,000 within one month after the registration of ownership change as a result of this acquisition, (iii) $1,943,000 within 6 months after the completion of the aforementioned ownership change.
 
The Company designated Mr. Li Yangqian (“Mr. Li”) as the general manager of goodcar.com and committed to issue to Mr. Li the Company’s common stock worth $1,000,000 if the annual net income of goodcar.com reaches $2,000,000.  The number of such shares shall be determined according to the closing price of the last trading day of the fiscal year when the net income generated from goodcar.com reaches the aforementioned performance target.
 
 

 
12

 

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

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

Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide information that is supplemental to, and should be read together with, the Company’s condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report. Information in this Item 2 is intended to assist the reader in obtaining an understanding of the condensed consolidated financial statements, the changes in certain key items in those financial statements from quarter to quarter, the primary factors that accounted for those changes, and any known trends or uncertainties that the Company is aware of that may have a material effect on the Company’s future performance, as well as how certain accounting principles affect the condensed consolidated financial statements. This includes discussion of (i) Liquidity, (ii) Capital Resources, (iii) Results of Operations, and (iv) Off-Balance Sheet Arrangements, and any other information that would be necessary to an understanding of the company’s financial condition, changes in financial condition and results of operations.

Forward Looking Statements

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

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

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our condensed consolidated financial statements and their related notes included in this Quarterly Report and our Annual Report on Form 10-K as filed with the SEC for the year ended December 31, 2009.
 
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 a 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.

 
13

 

The Exchange and the Spin-Off

On November 10, 2008, Fresh Ideas Media, Inc. entered into an Exchange Agreement (the “Exchange”) with Ever Auspicious International Limited, a Hong Kong corporation (“HKCo”), whereby Fresh Ideas Media, Inc. acquired all of the issued and outstanding securities of HKCo in exchange for the issuance by Fresh Ideas Media, Inc. of 11,700,000 newly-issued shares of our common stock. The closing of the Exchange (the “Closing”) occurred on the same day, immediately following the cancellation of an aggregate 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%, respectively, of the issued and outstanding common stock of Fresh Ideas Media, Inc.  As of the Closing, HKCo beneficially owned 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 to China Auto Logistics Inc.

In connection with the consummation of the Exchange, Fresh Ideas Media, Inc. agreed to complete 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. As a result of the spin-off, the business and operations of HKCo are the sole business and operations of Fresh Ideas Media, Inc.

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, became a wholly-owned foreign enterprise of HKCo.  This arrangement was approved by the relevant ministries of the PRC government.

Upon the completion of the above-mentioned 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 were classified as a recapitalization of Shisheng and the historical financial statements of Shisheng were reported as the Company’s historical financial statements.

Shisheng’s businesses include sales of both domestically manufactured automobiles and imported automobiles, providing financing services related to imported automobiles, and providing logistic services relating to the automobile importing process and other automobile import value added services such as assistance with customs clearance, storage and nationwide delivery services. Shisheng holds 98% equity ownership in Hengjia Port Logistics Corp. (“Hengjia”), Ganghui Information Technology Corp. (“Ganghui”) and Zhengji International Trading Corp. (“Zhengji”). Hengjia’s business is to provide web-based advertising services and automobile import value added services to wholesalers and distributors in the imported vehicle trading industry. Ganghui’s business is to provide web-based, real-time information on imported automobiles. Zhengji’s is engaged in sales of both domestically manufactured automobiles and imported automobiles.

Listing on NASDAQ

Effective January 8, 2010, the Company commenced trading of its shares of common stock on the NASDAQ Global Market under the trading symbol CALI.
 
Current Business of the Company

The Company, through its website www.at188.com, engages in automobile sales, customs clearance services, storage services and national transportation services.  The Company is the only one-stop automobile service provider in Tianjin which also provides dealer financing to its customers. Additionally, the Company’s website www.at160.com, which covered 15 cities in the beginning of 2010 and currently covers 29 cities, targets domestically manufactured automobile dealers and traders with an effective and efficient quoting platform and a user-friendly interface for the customers to identity the best quotes and packages.

On April 23, 2010, the Company launched its new website www.cali.com.cn to integrate and meet on a single site the needs of the full spectrum of the PRC’s dynamic automotive public, including dealers, suppliers, auto purchasers and drivers of both foreign and domestically manufactured automobiles. On April 21, 2010, the Company entered into a memorandum of understanding with Chongqing Qizhong Technology Development Corporation (“Chongqing Qizhong”) to acquire www.goodcar.cn and the related business (“Goodcar”). Goodcar is in the business of providing consumers with information and discounted services relating to automobiles, including discounted gas, parking, car washes, body-shop repair and car maintenance.  On November 1, 2010, Shisheng entered into a share transfer agreement with Long Jiegui, representing all shareholders of Chongqing Qizhong, to purchase all of the shares of Chongqing Qizhong for $5.99 million (RMB 40 million), consisting of $2.69 million (RMB 18 million) in cash and $3.29 million (RMB 22 million) in shares of common stock of the Company.

The Company believes the integration of these wide ranging sites and services in a single portal serving a broad spectrum of China's auto living public, as well as the addition of new web-based auto-related services, for businesses and consumers, will drive future growth.

 
14

 

Critical Accounting Policies, Estimates and Assumptions

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements. These 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 financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting periods. The most significant estimates and assumptions include revenues recognition, valuation of inventories and provisions for income taxes. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed in this Form 10-Q reflect the more significant judgments and estimates used in preparation of our condensed 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 condensed consolidated financial statements:

Revenue Recognition

The Company’s main source of income was generated through (1) sales of automobiles, (2) service fees for assisting customers in obtaining bank financing on purchases of automobiles, (3) web-based advertising service fees, including fees from (a) displaying graphic advertisements on the Company’s websites and (b) web-based listing services that allow customers to place automobile related information on the Company’s websites, (4) automobile import 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 graphic 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 recognizes revenue from automobile import value added services when such services are performed.
 
Revenue from auto mall management services is recognized ratably over the service period.

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 sales and are detailed on invoices provided to customers. The Company accounts for Value Added Taxes on a net basis. The Company records and pays business taxes based on a percentage of the net service revenues and reports the service revenue net of the business taxes and other sales related taxes.

Receivables Related to Financing Services

The Company records receivables related to Financing Services when cash is loaned to customers to finance their purchases of automobiles. Upon repayment by customers, the Company records the amounts as reductions of receivables related to Financing Services. Receivables related to Financing Services represent the aggregate outstanding balance of loans from customers related to their purchases of automobiles and are considered receivables held for investment. The Company charges a fee for providing loan services and such fees are prepaid by customers. The Company amortizes these fees over the receivable term, which is typically 90 days, using the straight-line method. The Company records such amortized amounts as financing fee income and the unamortized amount is classified as deferred revenue on the Company’s 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 accounts receivable historically and accordingly did not record any allowance of credit losses as for the three months and nine months ended September 30, 2010 and 2009 and as of balance sheet dates.

 
15

 

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 inventory is 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.

Currency Reporting

Amounts reported are stated in U.S. Dollars, unless stated otherwise. Our functional currency is 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 condensed consolidated financial statements, the condensed consolidated balance sheets of our Company have been translated into U.S. dollars at the current rates as of the end of the respective periods and the condensed consolidated statements of income have been translated into U.S. dollars at the weighted average rates during the periods the transactions were recognized. The resulting translation gain adjustments are recorded as other comprehensive income in the condensed consolidated statements of comprehensive income and as a separate component of equity in the condensed consolidated balance sheets.

Income taxes

Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the 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 FASB prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company did not incur any interest or penalties related to potential underpaid income tax expenses.
 
New Accounting Pronouncements Not Yet Adopted

In September 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13 “Revenue Recognition (Topic 605): Multiple Deliverable Revenue Element Arrangements – a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”). The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. ASU 2009-13 will be applied prospectively and will become effective during the first quarter of 2011. Early adoption is allowed. The Company does not expect the adoption of this guidance to have a significant effect on its consolidated financial position or results of operations.

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

 
16

 

RESULTS OF OPERATIONS

Results of Operations for the Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009

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

   
Three
Months
Ended
September
30, 2010
   
% of net
revenue
   
Three
Months
Ended
September
30, 2009
   
% of net
revenue
   
Change in %
 
Net revenue
 
$
67,475,209
     
100.00
%
 
$
52,826,034
     
100.00
%
   
27.73
%
Cost of revenue
   
63,730,308
     
94.45
%
   
50,107,679
     
94.85
%
   
27.19
%
Gross profit
   
3,744,901
     
5.55
%
   
2,718,355
     
5.15
%
   
37.76
%
Operating expenses
   
626,194
     
0.93
%
   
442,473
     
0.83
%
   
41.52
%
Income from operations
   
3,118,707
     
4.62
%
   
2,275,882
     
4.32
%
   
37.03
%
Other expenses
   
66,659
     
0.10
%
   
40,866
     
0.08
%
   
63.12
%
Income before income taxes and noncontrolling interests
   
3,052,048
     
4.52
%
   
2,235,016
     
4.24
%
   
36.56
%
Net income
   
2,257,912
     
3.35
%
   
1,661,075
     
3.16
%
   
35.93
%
Net income attributable to shareholders of China Auto Logistics Inc.
 
$
2,223,418
     
3.30
%
 
$
1,607,646
     
3.06
%
   
38.30
%

For the three months ended September 30, 2010, our net revenue increased 27.73% to $67,475,209, from $52,826,034 for the same period in 2009, and our cost of revenue increased 27.19% to $63,730,308 from $50,107,679 for the same period in 2009. Gross profit margin increased 39 basis points from 5.16% for the three months ended September 30, 2009 to 5.55% for the same period in 2010. As compared to the same period in 2009, our gross profit, income from operations and net income for the three months ended September 30, 2010 increased 37.76% to $3,744,901, 37.03% to $3,118,707 and 35.93% to $2,257,912, respectively, primarily due to an increase in our web-based advertising service revenue and auto mall management service revenue.

Net income attributable to shareholders of China Auto Logistics Inc. increased 38.30% from $1,607,646 for the three months ended September 30, 2009 to $2,223,418 for the three months ended September 30, 2010. The increase was primarily due to an increase in web-based advertising service revenue and auto mall management service revenue, as discussed above, and the Company’s increased share of its subsidiaries’ profits following the increase in Shisheng’s equity ownership of each of Hengjia, Ganghui and Zhengji to 98% on July 23, 2009. Previously, Shisheng held equity interests in those companies of 80%, 80% and 86.4%, respectively.

Net Revenue

The following table sets forth a summary of our net revenue by category for the periods indicated, in dollars and as a percentage of total net revenue:

   
Three
Months
Ended
September
30, 2010
   
% of net
revenue
   
Three
Months
Ended
September
30, 2009
   
% of net
revenue
   
Change in
%
 
Net revenue
 
$
67,475,209
     
100.00
%
 
$
52,826,034
     
100.00
%
   
27.73
%
- Sales of Automobiles
   
64,878,374
     
96.15
%
   
51,394,023
     
97.28
%
   
26.24
%
- Financing Services
   
461,007
     
0.68
%
   
342,639
     
0.65
%
   
34.55
%
- Web-based Advertising Services
   
1,697,522
     
2.52
%
   
933,472
     
1.77
%
   
81.85
%
- Automobile Import Value Added Services
   
198,831
     
0.29
%
   
155,900
     
0.30
%
   
27.54
%
- Auto Mall Management Services
   
239,475
     
0.36
%
   
-
     
0.00
%
   
N/A
 

Sales of Automobiles

Net revenue from sales of automobiles increased 26.24% to $64,878,374 for the three months ended September 30, 2010 from $51,394,023for the same period in 2009. During the three months ended September 30, 2010 and 2009, the Company sold 670 automobiles and 697 automobiles, respectively, representing a decrease of 3.87% in volume. The average unit selling price per automobile for the three months ended September 30, 2010 increased 31.87% to $96,833 from $73,443 for the same period in 2009.  The Company will continue its focus on the marketing of higher-end luxury automobiles.

 
17

 

Sales to the Company’s top three customers, each of which are car dealers, accounted for 18% and 39% of the Company’s sales during the three months ended September 30, 2010 and 2009, 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 by actively looking for new customers to enlarge its customer base.

Financing Services

The Company provides financing services (“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.

Net revenue from Financing Services for the three months ended September 30, 2010 increased 34.55% to $461,007 from $342,639 for the same period in 2009. The Company has expanded its aggregate credit lines by approximately $15 million to $51 million as of September 30, 2010, from approximately $36 million as of December 31, 2009. As a result of the increase in credit lines during the period, revenue from financing services increased.

Our revenue growth from financing services is heavily dependent on overall industry growth and economic market conditions in the PRC. A factor that affects our revenue from financing services is our relationship with major commercial banks, with whom we have established good credit.  Any decrease of credit limits or expiration of credit lines or other bank facilities may temporarily reduce our capacity to provide financing services or affect our purchasing power.  However, we have not experienced any difficulties in accessing credit lines and loan facilities with banks in the past.  Therefore, we do not foresee any difficulty at this time in obtaining credit lines and loan facilities from our banks.

We provide Financing Services to our customers with our lines of credit with major commercial banks in the PRC, including the Agriculture Bank of China, China Merchants Bank, PuDong Development Bank and ZheJiang Commercial Bank. We continue to strengthen our relationship with these banks and aim to negotiate with additional banks for higher lines of credit at more favorable terms. Based on the Companys business relationships with certain 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 September 30, 2010, the Company had aggregate credit lines of $51 million (RMB340 million). Although all of our lines of credit have maturities of less than two years 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. 

We view the business of Financing Services and Automobile Import Value Added Services, discussed below, as closely related, and both are heavily dependent upon market conditions. In particular, a tightening of the credit market in the PRC, to the extent it impacts our ability to obtain lines of credit from our banks or other additional financing, will also limit our ability to provide Financing Services to our customers.

Web-based Advertising Services

Revenue generated from advertisements on our websites (“Web-based Advertising Services”) has experienced continuous growth in recent periods as a result of the expanded coverage and increased popularity of our websites. Our revenue from Web-based Advertising Services increased 81.85%, from $933,472 for the three months ended September 30, 2009 to $1,697,522 for the three months ended September 30, 2010.

Currently, our websites have over 190 paid subscribers and over 1,200 advertisers, and cover 29 cities in the PRC. Our www.at188.com and  www.at160.com are two of the most popular websites in China dealing with imported and domestic cars. Currently, our revenue from our websites is mainly generated from advertisements. We aim to generate 50% of revenues from our websites subscription fees and advertisements, and 50% from other auto related services sold over the Internet.  We are rapidly developing our websites and expect continuous growth in revenue from our websites as a result of expanding our reach from 15 cities at the beginning of 2010 to currently 29 cities throughout the PRC, representing increased coverage in an additional 14 cities as compared to its presence in 15 cities for the three months ended September 30, 2009. The Company aims to reach 70% of the auto buying public in the PRC by the end of 2011.

Automobile Import Value Added Services

Revenue generated through our customs clearance, storage and nationwide delivery services (“Automobile Import Value Added Services”) increased 27.54%, from $155,900 for the three months ended September 30, 2009 to $198,831 for the three months ended September 30, 2010 due to more transactions in the three months ended September 30, 2010.

 
18

 

Auto Mall Management Services

Pursuant to a services agreement entered into by and between the Company and Tianjin Prominent Hero International Logistics Co., Ltd., dated as of March 1, 2010, 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 Company started to provide such services on March 1, 2010 and the related services fee is recognized ratably over the service period.  The related revenue earned in the period is included under our Auto Mall Management Services segment.

Our Auto Mall Management Services revenue for the three months ended September 30, 2010 was $239,475 and there was no such revenue in the same period of 2009.

Cost of Revenue

   
Three
Months
Ended
September 30,
2010
   
% of net
revenue
   
Three
Months
Ended
September 30,
2009
   
% of net
revenue
   
Change in
%
 
Net revenue
 
$
67,475,209
     
100.00
%
 
$
52,826,034
     
100.00
%
   
27.73
%
Cost of revenue
   
63,730,308
     
94.45
%
   
50,107,679
     
94.85
%
   
27.19
%

Our cost of revenue primarily consisted of the cost of automobiles imported from foreign automobile manufacturers and certain direct labor and overhead costs related to our Financing Services, Web-based Advertising Services, Automobile Import Value Added Services and Auto Mall Management Services. Our cost of revenue increased 27.19%, from $50,107,679 for the three months ended September 30, 2009 to $63,730,308 for the three months ended September 30, 2010. The increase was primarily due to an increase in the purchase price of imported automobiles and the number of automobiles sold in the period, 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 control over 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.

Operating Expenses

   
Three
Months
Ended
September
30, 2010
   
% of total
   
Three
Months
Ended
September
30, 2009
   
% of total
   
Change in
%
 
Operating Expenses
                             
- Selling and Marketing
 
$
236,707
     
37.80
%
 
$
171,590
     
38.83
%
   
37.95
%
- General and Administrative
   
389,487
     
62.20
%
   
270,883
     
61.22
%
   
43.78
%
Total
 
$
626,194
     
100.00
%
 
$
442,473
     
100.00
%
   
41.52
%

During the three months ended September 30, 2010, our total operating expenses increased 41.52% to $626,194 from $442,473 for the same period in 2009. This increase was a combination of a 37.95% increase in selling and marketing expenses to $236,707 for the three months ended September 30, 2010 from $171,590 for the same period in 2009, and a 43.78% increase in general and administrative expenses (“G&A”) to $389,487 for the three months ended September 30, 2010 from $270,883 for the same period in 2009.

The following table sets forth a breakdown of the primary selling and marketing expenses of the Company:
 
   
Three Months Ended September 30,
   
Change in
%
 
   
2010
   
2009
       
Primary selling and marketing expenses
                 
- Payroll
 
$
55,967
   
$
17,483
     
220.12
%
- Office supplies
   
42,747
     
31,579
     
35.37
%
- Entertainment
   
8,622
     
5,993
     
43.87
%
- Rent
   
52,846
     
42,365