CHINA AUTO LOGISTICS 10-K 2011
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
For the fiscal year ended December 31, 2010
For the transition period from ______ to ______.
Commission file number: 000-52625
CHINA AUTO LOGISTICS INC.>
(Exact Name of Registrant as Specified in Its Charter)
No. 87 No. 8 Coastal Way, Floor 2, Construction Bank, FTZ
Tianjin Province, The People’s Republic of China 300461
(Address of Principal Executive Offices, Zip Code)
(Registrant’s telephone number, including area code)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes ¨ No þ
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 þNo ¨
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of March 22, 2011, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $17,664,000 based on the closing price as reported on the NASDAQ Global Market.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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 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 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 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.
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 and Zhengji, 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 and Zhengji.
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. In addition to sales of imported automobiles, which consisted of approximately 96% of our revenues generated in the last full fiscal year, Shisheng, through its majority owned subsidiary Hengjia, provides customized services such as financing services (“Financing Services>”) and customs clearance, storage, nationwide delivery services, provision of information and discounted services relating to automobile (“Automobile Value Added Services>”) to imported automobile distributors and agents as well as individual customers in China. Shisheng, through its majority owned subsidiaries (Ganghui and Hengjia), also operates two websites which provides subscribers with up-to-date sales and trading information for imported and domestically manufactured automobiles. 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.
From Shisheng’s founding in 1995, we have continued to build our customer base for imported automobiles to more than 3,000 stable customers throughout China. We are currently the only one-stop service provider in Tianjin for Financing Services and Automobile Value Added Services. We also offer three websites: (a) www.at160.com (formerly www.1365car.com) provides quotes and other information on domestically manufactured automobiles in Tianjin; (b) www.at188.com 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; and (c) 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 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 were owned by Yang Bin (a Senior Vice President and director nominee 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. 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 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.
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 roads and highway network, coupled with the expanding middle and upper-middle classes, are expected to benefit 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. The Chinese government utilized new taxation rules on imported automobiles beginning in 2005, which included adjustments on automobile retail and import taxation.
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:
Our Growth Strategy
We intend to pursue the following key elements to our growth strategy:
Our Business Lines and Products
Sale of Imported Automobiles
We conduct our sales operations of imported automobiles primarily through Shisheng and Zhengji. We are a general agent and wholesaler authorized by the Chinese government to import vehicles into the PRC. We sell approximately 25% of our vehicles to authorized dealers like Ford or Lexus, as they are not able to import all models directly, 70% to free traders or wholesalers located in inland China or non-port cities and 5% to government agencies 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 more than 3,000 agents and dealers in more than 100 cities. The largest automobile dealers in China, including Shanghai Mingjia, Guangzhou Yizhan, Zhuhai Huafa and Wuxi Baolong all have close working relationships with Shisheng. 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.
Tianjin port, as the largest port in China for the importation of automobiles, has over 400 agents and general dealers that sell automobiles to consumers. In 2010, the Company sold 2,778 imported automobiles at an average unit price of $89,272, an increase of 16.74% from 2009’s average price.
Our revenues from the sale of imported automobiles and related activities were $95.4 million for fiscal year 2006 (98.56% of all revenues), $149.2 million for fiscal year 2007 (97.85% of all revenues), $186.3 million for fiscal year 2008, (98.21% of all revenues), $209.8 million for fiscal year 2009 (97.52% of all revenues) and $247.9 million for fiscal year 2010 (96.24% of all revenues), representing a 18.17% increase from the prior fiscal year.
Many of our customers, including both authorized agents and general dealers, contend with a shortage of working capital. The imported automobile service industry has developed to address these barriers by providing short-term financing services in connection with the importation of automobiles. These service providers are located in the port cities of Dalin, Tianjin, Shanghai and Guangzhou.
Our Financing Services include letter of credit issuance services, purchase deposit financing, and import duty advance services. Our competitive advantage comes from relationships with major Chinese commercial banks, including China Agriculture Bank, Pudong Development Bank, China Merchants Bank, China Zheshang Bank and Industrial and Commercial Bank of China. As of March 5, 2011, the Company had a credit line of $51,338,578. 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 $257,983 for fiscal year 2006 (0.27% of all revenues), $736,590 for fiscal year 2007 (0.48% of all revenues), $899,538 for fiscal year 2008 (0.47% of all revenues), $1,217,727 for fiscal year 2009 (0.57% of all revenues), and $1,777,217 for fiscal year 2010 (0.69% of total revenues) representing an increase of 45.95% 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 Qizhong, the Company now sells 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, and provides other promotion services.
Our revenues from Automobile Value Added Services were $376,346 for fiscal year 2006 (0.39% of all revenues), $1,077,140 for fiscal year 2007 (0.71% of all revenues), $731,600 for fiscal year 2008 (0.39% of all revenues), $667,565 for fiscal year 2009 (0.31% of all revenues) and $1,159,340 for fiscal year 2010 (0.45% of total revenues), representing an increase of 73.67% from the prior fiscal year.
Automobile Information Websites and Advertising
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. Currently, www.cali.com.cn operates in 35 cities and with a target to expand to 60 cities by the end of 2011.
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. Because only 15% of automobiles in China are sold by authorized agents and 85% are sold by free traders, 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, which when combined with subscription revenues, represents 90% of our web-based revenue. The remaining 10% is derived from Automobile Value Added Services and Financing Services sold through the Internet.
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 local and regional Tianjin market 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.
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 repairs and car maintenance. www.goodcar.cn currently operates in Chongqing, Beijing, Tianjin, Chengdu, Wuhan and Xiamen, and is accessible through www.cali.com.cn.
Our revenues from our websites were $757,872 for fiscal year 2006 (0.78% of all revenues), $1,459,948 for fiscal year 2007 (0.96% of all revenues), $1,751,660 for fiscal year 2008 (0.92% of all revenues), $3,459,098 for fiscal year 2009 (1.61% of all revenues) and $5,962,493 for fiscal year 2010 (2.31% of total revenues), representing an increase of 72.37% 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. During 2010, we did not enter into additional management service agreements but will continue to integrate our expertise in the auto industry into any business opportunities.
Our revenues from auto mall management services were $800,050 for fiscal year 2010 (0.31% of total revenues).
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.
The Company is looking to expand its domestic automobile website to a total of 60 cities in China from the 35 cities it currently serves. The national website focuses on promotions and advertisements for manufacturers, and the city-level websites will focus on area-wide pricing information and promotions. We plan to continue expanding and including new cities to the national website, with the goal of making our national website the leading quoting and trading platform for domestic manufactured car dealers.
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, their contribution to the Company’s net income became an increasing portion in the past few years. We are confident that the Company’s website development will further benefit the Company in the coming years.
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 Automobile Value Added Services and from our websites 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.
Some of our top clients are both our customers and suppliers. We maintain close working relationships with our top customers and suppliers although we also continue to diversify our revenues and purchases. 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.
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 August 2011, November 2011, July 2011 and November 2011, 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 the entry port for approximately 50% to 60% of the automobiles imported into China annually. Many of these vehicles are imported by general dealers such as Ford and Nissan, and the government also imports vehicles directly. 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 web-based 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.
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.
We currently employ 224 full-time employees. None of our employees are unionized.
Geographical Area of the Company’s Business
All of our revenue is derived from operations within the PRC, and all of our assets are located in the PRC. For risks relating to our operations in the PRC, see discussions in the section entitled “Risk Factors” below.
You should carefully consider the following risks and the other information set forth elsewhere in this current report. If any of these risks occur, our business, financial condition and results of operations could be adversely affected. As a result, the trading price of our common stock could decline, perhaps significantly.
RISKS RELATING TO OUR COMPANY
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 2010, we derived approximately 34% of our income from operations from the sale of imported automobiles, approximately 12% of our income from operations from Financing Services, approximately 8% of our income from operations from Automobile Value Added Services, approximately 41% of our income from operations from our websites and 5% 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 larger customers are also our largest 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 5, 2011, the Company had a credit line of $51,338,578. We are currently negotiating a number of new credit lines with various banks, though 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.
To maintain our competitive advantage, we will need to further invest in research and development of our Internet operations.
In order to maintain the current competitive advantage we enjoy through our websites www.cali.com.cn, www.at188.com, www.at160.com and www.goodcar.cn, we will need to invest further in research and development of our websites to meet the needs of our customers. The failure to consistently deliver accurate real-time industrial information could cause us to lose potential or existing subscribers. In addition, if we are unable to open sub-websites in other major cities in the near future, we may fail to implement our strategy of becoming the first nationwide automobile marketing network. As technical barriers to entry for Internet competitors are not substantial, successful entry into the market by competitors could result in a decrease in our revenue.
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, Mr. Yang Bin, Ms. Wang Xinwei, Mr. Li Yangqian, Ms. Cheng Weihong and Mr. Yuan Guohua. 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.
Furthermore, under the shipping terms of some of our customer contracts, we bear the risk of loss in shipment of our products. We do not insure this risk. While we believe that the shipping companies that we use carry adequate insurance or are sufficiently solvent to cover any loss in shipment, there can be no assurance that we will be adequately reimbursed upon the loss of a significant shipment of our products.
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.
Presently 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:
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.
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:
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. Recently, there have been indications that rates of inflation have increased. In order 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. In 1979, the PRC began to promulgate a comprehensive system of laws and has since introduced many laws and regulations to provide general guidance on economic and business practices in the PRC and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. 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 which 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.
Since 1994, the exchange rate for RMB against the United States dollar has remained relatively stable, most of the time in the region of approximately RMB 8.28 to US$1.00. However, 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 primarily 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.
Future outbreaks of Severe Acute Respiratory Syndrome (“SARS”), Avian flu or other widespread public health problems could adversely affect our business.
Future outbreaks of SARS, Avian flu or other widespread public health problems in China, where all of our employees work, could negatively impact our business in ways that are hard to predict. Prior experience with the SARS virus suggests that a future outbreak of SARS, Avian flu or other widespread public health problems may lead public health authorities to enforce quarantines, which could result in closures of some of our offices and other disruptions of our operations. A future outbreak of SARS, Avian flu or other widespread public health problems could result in reduction of our advertising and fee-based revenues.
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, we depend on dividend payments from our subsidiaries in China for our revenues. The dividend tax rate is 20%. In addition, under Chinese law, our subsidiaries are only allowed to pay dividends to us out of their distributable earnings, if any, as determined in accordance with Chinese accounting standards and regulations. Moreover, our Chinese subsidiaries are required to set aside at least 10% of their respective after-tax profit, if any, and up to 50% of their registered capital to fund certain mandated reserve funds that are not payable or distributable as cash dividends.
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, 2010, we have approximately $17.1 million of cash deposited in banks, such as time deposits and bank notes, which constitute substantially all of our total cash and cash equivalents as of December 31, 2010. 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.
Recent 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 “New M&A Rules>”), which became effective on September 8, 2006, as amended on June 22, 2009. The New M&A Rules significantly revised China’s regulatory framework governing onshore-to-offshore restructurings and foreign acquisitions of domestic enterprises. The New 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 New 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 New 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 New 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 64.64% 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.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Our main offices are located at No. 87 No. 8 Coastal Way, Floor 2 Construction Bank, FTZ, Tianjin Province, PRC. This office space consists of approximately 1,521 square meters. The lease relating to our main offices has a 9-year term which expires on March 31, 2012. The annual rent for the office is approximately $15,000 (RMB 100,000).
We have an exhibition hall located at No. 129 Tian Bao Da Road, FTZ, Tianjin Province, PRC. The lease for this exhibition hall has 5-year term and expires on June 30, 2015. The annual rent for the exhibition hall is approximately $181,000 (RMB1,200,000).
In addition to the above properties, we operate 7 local offices in the PRC that handle sales and administration and daily operations. All of these locations are leased with lease terms ranging from 1 to 2 years. The annual rent for these offices is approximately $111,000 in aggregate.
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. 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. (Removed and Reserved).
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 NASDAQ Capital Market. As of January 8, 2010, the Company’s common stock has been listed on 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, 2010:
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.
As of March 22, 2011, we had approximately 13 holders of record of our common stock, and our common stock had a closing bid price of $2.76 per share.
Outstanding Options, Conversions, and Planned Issuance of Common Stock>.
As of December 31, 2010, there were no warrants or options outstanding to acquire any shares of our common stock.
Dividends and Related Policy
We do not expect to declare or pay any cash dividends on our common stock in the foreseeable future, and we currently intend to retain future earnings, if any, to finance the expansion of our business. The decision whether to pay cash dividends on our common stock will be made by our Board, in their discretion, and will depend on our financial condition, operating results, capital requirements and other factors that the Board considers significant.
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>.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
Item 6. Selected Financial Data.
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.
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 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 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 will be 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 1,063,427 shares of common stock of the Company shall be paid to the former owners of Qizhong no later than June 30, 2011.
Pursuant of 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 1,063,427 shares of common stock valued at approximately $3.46 million. The value of common stock was determined based on $3.25 per share, the per share price of the Company’s common stock on the acquisition date. The Company remitted approximately $600,000 by January 20, 2011.
Current Business of the Company
The Company, through its websites (www.cali.com.cn, www.at188.com, www.at160.com and www.goodcar.cn), provides individual and business customers with services in relation to automobile sales, custom clearance, storage, national transportation, quotation platform, and information relating to automotive services and products, including discounted gas, 24/7 emergency roadside assistance, car repairs and maintenance. Also, the Company is the only one-stop service provider in Tianjin, also providing 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 financial statements are prepared in accordance with generally accepted accounting principles in the United States (“U.S. 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 period. 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-K reflect the more significant judgments and estimates used in preparation of our 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:
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 service 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.
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.
In the process of preparing 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 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. We conduct this analysis on a quarterly basis As of December 31, 2010, the deferred tax assets amounting to $429,711 resulting from net operating loss carried forward, advertising expenses and allowance of doubtful accounts are not more likely than not to be realized and a full of valuation allowance has been provided.
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 $18.5 million as of December 31, 2010. 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, 2010 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, 2010, 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 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. As of December 31, 2010, there was no impairment of goodwill or acquired intangible assets with indefinite lives.
Accounting for Acquisitions
We record our acquisitions under the purchase method of accounting, under which the acquisition purchase price is allocated to the assets acquired and liabilities assumed based upon their respective fair values. We utilize management estimates and, in some instances, an independent third-party valuation firm to assist in determining the fair values of assets acquired, liabilities assumed and contingent consideration granted. Such estimates and valuations require us to make significant assumptions, including projections of future events and operating performance. The purchase price allocation is subject to change during the measurement period, which is limited to one year subsequent to the acquisition date. For acquisitions after January 1, 2009, adjustments to the purchase price allocation are recorded retrospectively, while for acquisitions prior to January 1, 2009, adjustments to purchase price allocation are recorded prospectively.
Recently Adopted Accounting Standards
Effective January 1, 2009, the Company adopted authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) regarding business combinations, which is now part of the Accounting Standards Codification (“ASC”) 805 “Business Combinations”. This guidance addresses the accounting and disclosure for identifiable assets acquired, liabilities assumed, and noncontrolling interests in a business combination. Also, the Company adopted guidance issued by the FASB regarding accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This guidance amended certain provisions of business combinations guidance related to the recognition, measurement, and disclosure of assets acquired and liabilities assumed in a business combination that arise from contingencies. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Effective January 1, 2009, the Company adopted authoritative guidance issued by the FASB regarding the accounting and reporting framework for noncontrolling interests by a parent company, which is now part of ASC 810 “Consolidations”, and also the disclosure requirements to distinguish between interests of the parent and interests of the noncontrolling owners of a subsidiary. The guidance requires noncontrolling interests to be separately presented as a component of equity in the Company’s consolidated balance sheets and below income tax expense in its consolidated statements of income. In addition, the guidance requires that minority interests be renamed noncontrolling interests and that a company presents a consolidated net income measure that includes the amount attributable to such noncontrolling interests for all periods presented. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Effective April 1, 2009, the Company adopted authoritative guidance codified as ASC 855 “Subsequent Events”, which establishes general standards for the accounting and disclosure of events that occur after the balance sheet date but before consolidated financial statements are issued or are available to be issued. In particular, ASC 855 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the consolidated financial statements; the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its consolidated financial statements; and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of this guidance did not have any significant impact on to Company’s consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)” codified in ASC 810 “Consolidations” which amends the evaluation criteria used to identify the primary beneficiary of a variable interest entity (“VIE”) and requires ongoing reassessment of whether an enterprise is the primary beneficiary of the VIE. The new guidance significantly changes the consolidation rules for VIEs including the consolidation of common structures, such as joint ventures, equity method investments and collaboration arrangements. The guidance is applicable to all new and existing VIEs. The provisions of this new accounting guidance are effective for interim and annual reporting periods ending after November 15, 2009 and became effective for the Company beginning in the first quarter of 2010. The adoption of this guidance did not have any significant impact on the Company’s consolidated financial statements.
Effective July 1, 2009, the Company adopted the amended authoritative guidance issued by the FASB regarding interim disclosures about the fair value of financial instruments, which is now codified in ASC 820. The guidance requires disclosures about the fair value of financial instruments for interim reporting periods as well as in annual financial statements of publicly traded companies. The guidance also requires those disclosures in summarized financial information at interim reporting periods. The adoption of this guidance did not have any significant impact on the Company’s consolidated financial statements.
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 any significant impact on the Company’s consolidated financial statements.
In July 2010, the FASB issued ASU No. 2010-20, Receivables (“ASC Topic 310”): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU requires expanded credit risk disclosures intended to provide investors with greater transparency regarding the allowance for credit losses and the credit quality of financing receivables. Under this ASU, companies will be required to provide more information about the credit quality of their financing receivables in the disclosures to financial statements, such as aging information, credit quality indicators, changes in the allowance for credit losses, and the nature and extent of troubled debt restructurings and their effect on the allowance for credit losses. Both new and existing disclosures must be disaggregated by portfolio segment or class based on the level of disaggregation that management uses when assessing its allowance for credit losses and managing its credit exposure. The disclosures as of the end of a reporting period will be effective for interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period will be effective for interim and annual reporting periods beginning on or after December 15, 2010. Management is currently evaluating the disclosure requirements under this ASU and the impact on the Company’s consolidated financial statements and the disclosures presented in the consolidated financial statements.
In December 2010, the FASB issued ASU No. 2010-28, Topic 350 - Intangibles - Goodwill and Other: When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”), which modifies Step 1 of the goodwill impairment test for reporting units with zero or negative amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exist. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating the impacts on the Company’s consolidated financial statements.
In December 2010, the FASB issued ASU No. 2010-29, Topic 805 - Business Combinations: Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”), which provides further comparative disclosure guidance and expands the pro forma disclosure requirements under ASC Topic 805. This guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. ASU 2010-29 relates to disclosure requirements only and as such does not impact the Company's consolidated financial condition or results of operations.
Results of Operations for the Fiscal Year Ended December 31, 2010 Compared To the Fiscal Year Ended December 31, 2009
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 2010 increased 19.75% to $257,681,456 from $215,188,081 for 2009 and our cost of revenue for 2010 increased 18.87% to $243,621,911 from $204,953,584 for 2009. Gross profit margin increased 70 basis points from 4.76% for 2009 to 5.46% for 2010. As compared to 2009, our gross profit, income from operations and net income in 2010 increased 37.37% to $14,059,545, 35.99% to $11,220,632 and 44.30% to $8,006,640, respectively primarily due to an increase in our revenue from financing services, web-based advertising services, automobile value added services and auto mall management services, and the Company’s increased share of its subsidiaries’ profit following its further acquisitions of equity holdings in Hengjia, Ganghui and Zhengji to 98% on July 23, 2009.
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 18.17% to $247,982,356 for 2010 from $209,843,691 for 2009. During 2010 and 2009, the Company sold 2,778 automobiles and 2,744 automobiles, respectively, representing an increase of 1.24% in volume. The average unit selling price per automobile for 2010 increased 16.74% to $89,272 from $76,474 for 2009. The Company will continue its focus on the marketing of luxury high-end automobiles.
Sales to the Company’s top three customers, each of which are car dealers, accounted for 28.9% and 29.1% of the Company’s sales during 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 actively looking for new customers to enlarge its customer base.
While transforming from an automobile trader to a modernized web-based automobile-related logistics service provider, the Company’s rate of growth in automobiles sales is expected to lower. In future years, we do not foresee our leading position as the imported automobile trader in Tianjin to change and plan to consistently enhance our profitability.
Net revenue from Financing Services for 2010 increased 45.95% to $1,777,217 from $1,217,727 for 2009. Our revenue growth from financing services is heavily dependent on overall industry growth and economic market conditions in the PRC. The Company has expanded its aggregate credit lines by approximately $15 million to $51 million as of December 31, 2010, from approximately $36 million as of December 31, 2009. Revenue from Financing Services increased as a result of the increase in credit lines during the period.
Our revenue from Financing Services increased from $1,217,727 in 2009 to $1,777,217 in 2010. Our revenue growth from financing services is heavily dependent on overall industry growth and the economic conditions of the market in the PRC. Our Company 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 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. The Company has expanded its line of credit by approximately 41.67% from $36 million as of December 31, 2009 to $51 million as of December 31, 2010 to support its Financing Services. 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, China Zheshang Bank and Industrial and Commercial Bank of China. 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 5, 2011, the Company had a credit line of $51,338,578 (RMB 340,000,000). 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
Revenue generated from advertisements on our websites has experienced continuous growth in recent years.
Following the Company’s focus on promotion and advertising of its web-based services in past years, revenue generated by our websites increased 72.37%, from $3,459,098 in 2009 to $5,962,493 in 2010. The acquisition of Qizhong contributed $477,826 to the revenue from web-based advertising services for 2010. In 2010 and 2009, all of our revenue from our websites is generated by subscription fees and advertisements. We aim to generate 50% of our revenues from our websites from subscription fees and advertisements, and 50% from automobile value added services sold over the Internet.
We are experiencing rapid development in our websites and expected to a continuous growth in revenue from our website through growing from 35 cities currently to 60 cities throughout China reaching 70% of the auto buying pubic in future years.
Automobile Value Added Services
Our Automobile Value Added Services revenue increased 73.67%, from 667,565 in 2009 to $1,159,340. The increase is primarily due to the increase in sales of automobiles and the acquisition of Qizhong contributed $56,142 to the revenue from automobile value added services for 2010.
Auto Mall Management Services
Our Auto Mall Management Services revenue for 2010 was $800,050, which represented revenue from a service agreement entered into with Tianjin Prominent Hero International Logistics Co., Ltd. dated March 1, 2010. There was no such revenue in 2009.
Cost of Revenue
Our cost of revenue in 2010 consisted primarily 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 Value Added Services and Auto Mall Management Services. Our cost of revenue increased 18.87%, from $204,953,584 in 2009 to $243,621,911 in 2010. The increase was primarily due to the increase in the purchase price 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 profits increased by 37.37% from $10,234,497 in 2009 to $14,059,545 in 2010, due to an increase in net revenues of 19.75% from $215,188,081 to $257,681,456.
Operating expenses increased 43.15%, from $1,983,219 in 2009 to $2,838,913 in 2010. This increase was a combination of a 77.33% increase in selling and marketing expenses from $630,021 in 2009 to $1,117,202 in 2010, and a 27.23% increase in general and administrative expenses (“G&A”) from $1,353,198 in 2009 to $1,721,711.
Selling and marketing expenses increased 77.33% in 2010. The following table sets forth a breakdown of the primary selling and marketing expenses of the Company:
The Company acquired Qizhong on November 1, 2010 and includes the result of operations of Qizhong for the period since the date of acquisition. As a result, selling and marketing expenses include Qizhong’s selling and marketing expenses of $228,153, representing 46.83% of the 2010 increase of selling and marketing expenses.
Office allowance increased 80.02% to $126,613 as a result of the Company’s acquisition of certain low value office equipment in 2010. Payroll expenses increased 141.43%, from $107,736 in 2009 to $260,103 in 2010 due to the cost of additional staff for the new segment of Auto Mall Management Services and the newly acquired Qizhong, and the rising costs of remuneration packages related to recruiting and maintaining skilled employees. Advertising and promotion increased by more than 4.3 times as Qizhong incurred promotion expenses of approximately $108,231 to advertise its VIP membership cards and auto-related products and services. Entertainment and auto expenses in 2010 increased 72.90% and 34.09%, respectively, which is primarily in line with the sales growth.
The following table sets forth a breakdown of the primary G&A expenses of the Company:
As a result of Qizhong, general and administrative expenses include its general and administrative expenses of $130,507, representing 35.41% of the 2010 increase of general and administrative expenses.
Payroll expenses increased 30.19% to $418,888 for 2010 from $321,762 for 2009 primarily due to the cost of additional staff for the new segment of Auto Mall Management Services and the newly acquired Qizhong, and the rising costs of remuneration packages related to recruiting and maintaining skilled employees. Legal and professional fees increased 44.03% for 2010 to $673,459 from $467,575 in 2009, due to the increased costs of handling U.S. reporting matters and the costs incurred in relation to our acquisition of Qizhong.
Income from Operations
Income from operations increased 35.99% for 2010 to $11,220,632 from $8,251,278 in 2009, which is primarily attributable to growth in revenue and gross profit. Gross profit increased 37.37% for 2010 to $14,059,545 from $10,234,497 in 2009, due to an increase in net revenues of 19.75% from $215,188,081 to $257,681,456.
We believe that inflation has had a negligible effect on operations for the fiscal years 2010 and 2009. 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, 2010 and 2009.
During the fiscal year 2010, we generated net cash from operating activities of $16,425,240, as compared to net cash provided by operating activities of $1,837,289 in 2009. The increase in net cash from operating activities is primarily a result of our increased net income during the year and an increase in net cash flows provided by operating assets and liabilities as compared to the net cash of $4,146,412 used in operating assets and liabilities in 2009. This increase in net cash flows provided by operating assets and liabilities is primarily comprised of a $11,234,004 increase in customer deposits, which was partly offset by an increase in inventories of $1,886,865, a decrease in draft notes payable of $2,969,452 and a decrease in income tax payable of $1,129,874 as compared to the same period in 2009.
During fiscal year 2010, we generated net cash flows provided by investing activities of $1,458,236, as compared to $520,337 of net cash outflows used for investing activities in 2009. The increase was primarily attributable to the cash of $1,677,446 acquired in the Qizhong acquisition.
During fiscal year 2010, net cash used for financing activities was $2,712,149, as compared to $662,650 of net cash used for financing activities in 2009. Such increase in cash used in financing activities is mainly because the Company repaid all short term borrowings but did not arrange any new loans during 2010.
Our total cash and cash equivalents increased to $17,733,502 as of December 31, 2010, as compared to $2,255,058 as of December 31, 2009.
Our management reviews accounts receivable on a regular basis to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is recorded when collection of the full amount is no longer probable. We have minimal accounts receivable from our automobile sales and trading operations for fiscal years 2010 and 2009.
We had property and equipment, net of $756,110 as of December 31, 2010 and $487,933 as of December 31, 2009. The following table sets forth a summary of our property and equipment for the fiscal years ended December 31, 2010 and 2009.
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. Quantitative and Qualitative Disclosures About Market Risk
Item 8 Financial Statements and Supplementary Data
Reference is made to pages F-1 through F-27 comprising a portion of this annual report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
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, 2010, 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.
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 effective and were operating at the reasonable assurance level. The Company will continue to evaluate the effectiveness of its disclosure controls and procedures, as the Company’s disclosure controls and procedures have not been periodically tested by the demands of being a public company for a long period of time.
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, 2010, based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Our evaluation did not include assessing the effectiveness of internal control over financial reporting for the 2010 acquisition of Qizhong, which are included in the consolidated financial statements of the Company for the year ended December 31, 2010 and constituted: $8,005,482 and $6,186,599 of total and net assets, respectively, as of December 31, 2010 and $533,972 and $21,316 of total revenues and net loss, respectively, for the year then ended. We did not assess the effectiveness of internal control over financial reporting at these newly acquired entities due to the insufficient time between the date acquired and year-end and the complexity associated with assessing internal controls during integration efforts making the process impractical.
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. Even though the management did not perform the evaluation of Qizhong’s internal control over financial reporting, we became aware of the following material weaknesses:
We did not retain sufficient qualified accounting personnel in our recent acquired company, Chongqing Qizhong Technology Development Co., Ltd., in order to prepare its financial statements in accordance with accounting principles generally accepted in the U.S. This deficiency resulted in significant amount of material adjustments to the consolidated financial statements and caused substantial delays to completing the financial reporting process.
As a result of the material weaknesses, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2010.
To remediate the material weaknesses identified in internal control over financial reporting of Qizhong, we have commenced to hire for Qizhong additional qualified accounting personnel to assist preparation of financial information, as required for future interim and annual reporting, in accordance with generally accepted accounting principles in the U.S.
The Company believes that the consolidated financial statements fairly present, in all material respects, the Company’s consolidated balance sheets as of December 31, 2010 and 2009 and the related consolidated statements of income, stockholders’ equity, and cash flows for the years ended December 31, 2010 and 2009, in conformity with generally accepted accounting principles, notwithstanding the material weaknesses 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 2010, there were no significant 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. Other Information.
Item 10. Directors, Executive Officers and Corporate Governance.
As of December 31, 2010, our current directors and executive officers were as follows:
Certain Significant Employees
Ms. Cheng Weihong, our Secretary, Senior Vice President (Head of Human Resources and General Administration) and a director nominee, is the wife of Mr. Tong Shiping, our President and Chief Executive Officer.
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:
Board of Directors Meetings and Committees
The Board held 1 meeting during the fiscal year ended December 31, 2010. 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), Gao Yang and Kong Xiaoyan were appointed to the Audit Committee. Kong Xiaoyan (Chair), Qu Zhong and Gao Yang were appointed to the Compensation Committee. Gao Yang (Chair), Kong Xiaoyan and Qu Zhong 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.
The Audit Committee is currently comprised of Howard S. Barth (Chair), Gao Yang and Kong Xiaoyan, 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 No. 87 No. 8 Coastal Way, Floor 2, Construction Bank, FTZ Tianjin Province, The People’s Republic of China 300461.
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. The members of the Nominating Committee are Gao Yang (Chair), Kong Xiaoyan and Qu Zhong, 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 No. 87 No. 8 Coastal Way, Floor 2, Construction Bank, FTZ Tianjin Province, The People’s Republic of China 300461.
During the fiscal year ended December 31, 2010, there were no changes to the procedures by which holders of our common stock may recommend nominees to the Board.
The Board established the Compensation Committee in December 2008. The Compensation Committee is currently comprised of the following Directors of the Company: Kong Xiaoyan (Chair), Qu Zhong and Gao Yang, 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 No. 87 No. 8 Coastal Way, Floor 2, Construction Bank, FTZ Tianjin Province, The People’s Republic of China 300461.
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.
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, 2010, 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 No. 87 No. 8 Coastal Way, Floor 2, Construction Bank, FTZ Tianjin Province, The People’s Republic of China 300461.
Item 11. Executive Compensation.
As of December 31, 2010, 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, 2,172,000 shares 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 22, 2011, 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.
The Company did not provide any compensation to its directors in the fiscal year ended December 31, 2010. The Company may establish certain compensation plans (e.g. options, cash for attending meetings, etc.) with respect to directors in the future.
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 22, 2011 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 11,700,000 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 22, 2011. 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.
Securities Authorized for Issuance Under Equity Compensation Plans>.
As of the fiscal year ended December 31, 2010:
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Ms. 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. For the years ended December 31, 2010 and 2009, the Company made aggregate borrowings from Cheng Weihong of $1,054,585 and $9,198, respectively, and made repayments of $500,337 and $0 to Ms. Cheng Weihong. As of December 31, 2010 and 2009, the outstanding balances due to Cheng Weihong were $573,922 and $19,391, respectively.
One of the Company’s shareholder, Sino Peace Limited, paid accrued expenses of $601,234 and $482,367 on behalf of the Company during the years ended December 31, 2010 and 2009. The amounts of $1,617,654 and $975,920 were outstanding as due to this shareholder on the consolidated balance sheet as of December 31, 2010 and 2009.
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 considerable 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.
In connection with the Qizhong 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 will become shareholders of the Company.
All members of the Company’s Board, excluding Tong Shiping, Cheng Weihong and Yang Bin, 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. 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 below are aggregate fees billed by Marcum LLP and Stonefield Josephson, Inc. for professional services rendered for the audit of the Company’s annual financial statements for the year ended December 31, 2010 and 2009.
During the fiscal year ended December 31, 2010, the fees for Marcum LLP and Stonefield Josephson, Inc. were $57,000 and $284,842 respectively, which included fees related to the audits of Qizhong’s financial statements prior to the acquisition. During the fiscal year ended December 31, 2009, the fees for Stonefield Josephson, Inc. were $195,000.
Audit Related Fees
During the fiscal years ended December 31, 2010 and December 31, 2009, our principal accountants did not render assurance and related services reasonably related to the performance of the audit or review of financial statements.
During the fiscal year ended December 31, 2010 and December 31, 2009, 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, 2010 and December 31, 2009, 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, 2010 and 2009, 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.
Our financial statements as set forth in the Index to Financial Statements attached hereto commencing on page F-1 are hereby incorporated by reference.
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 8-K, filed with the Securities and Exchange Commission on November 10, 2008.
(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 8-K, filed with the Securities and Exchange Commission on December 24, 2008.
(4) Incorporated by reference to the Company’s Form 10-Q, filed with the Securities and Exchange Commission on November 15, 2010.
(5) Incorporated by reference to the Company’s Form 8-K, filed with the Securities and Exchange Commission on November 5, 2010.
CHINA AUTO LOGISTICS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Board of Directors and Shareholders
of China Auto Logistics Inc.:
We have audited the accompanying consolidated balance sheet of China Auto Logistics Inc. and subsidiaries as of December 31, 2010 and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the year then ended. China Auto Logistics Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit 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 financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Auto Logistics Inc. and subsidiaries as of December 31, 2010, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Marcum LLP
Los Angeles, California
March 31, 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Board of Directors and Shareholders
of China Auto Logistics Inc.:
We have audited the accompanying consolidated balance sheets of China Auto Logistics Inc. and subsidiaries as of December 31, 2009 and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the year then ended. China Auto Logistics Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit 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 financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Auto Logistics Inc. and subsidiaries as of December 31, 2009, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Stonefield Josephson, Inc.
Wanchai, Hong Kong
March 29, 2010
CHINA AUTO LOGISTICS INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes form an integral part of these consolidated financial statements
CHINA AUTO LOGISTICS INC.
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes form an integral part of these consolidated financial statements
CHINA AUTO LOGISTICS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
The accompanying notes form an integral part of these consolidated financial statements
CHINA AUTO LOGISTICS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY