v3.8.0.1
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2017
Nov. 09, 2017
Document and Entity Information [Abstract]    
Entity Registrant Name China Auto Logistics Inc  
Entity Central Index Key 0001355042  
Trading Symbol CALI  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Document Type 10-Q  
Document Period End Date Sep. 30, 2017  
Document Fiscal Period Focus Q3  
Document Fiscal Year Focus 2017  
Entity Filer Category Smaller Reporting Company  
Entity Common Stock, Shares Outstanding   4,840,394

v3.8.0.1
Condensed Consolidated Balance Sheets - USD ($)
Sep. 30, 2017
Dec. 31, 2016
Current assets:    
Cash and cash equivalents $ 5,742,988 $ 3,004,932
Restricted cash 9,390,254 22,703,835
Receivable related to financing services, net 54,270,503 48,549,972
Inventories 13,007,389 13,049,065
Advances to suppliers, net 69,854,476 71,921,388
Prepaid expenses 35,324 376,581
Value added tax receivable 328,778 615,555
Total current assets 152,629,712 160,221,328
Property, plant, and equipment, net 272,681 317,282
Other assets 31,647 30,329
Total assets 152,934,040 160,568,939
Current liabilities:    
Lines of credit related to financing services 49,671,882 47,081,763
Short term borrowings 15,778,796 12,961,389
Accounts payable 2,770,789 365,120
Notes payable to suppliers 12,021,940 25,922,779
Accrued expenses 159,173 131,128
Customer deposits 42,430,668 46,047,515
Deferred revenue 52,438 48,171
Due to former shareholder 2,041,659 1,956,625
Due to shareholder 2,248,026
Due to director 69,950 1,550,745
Income tax payable 470,727 580,058
Total current liabilities 127,716,048 136,645,293
China Auto Logistics Inc. shareholders' equity:    
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued and outstanding
Common stock, $0.001 par value, 95,000,000 shares authorized, with 4,840,394 shares issued and outstanding as of September 30, 2017 and 4,034,394 shares issued and outstanding as of December 31, 2016 4,840 4,034
Additional paid-in capital 24,679,588 22,979,734
Accumulated other comprehensive income 5,121,205 3,939,898
Accumulated deficit (4,780,364) (3,363,566)
Total China Auto Logistics Inc. shareholders' equity 25,025,269 23,560,100
Noncontrolling interests 192,723 363,546
Total equity 25,217,992 23,923,646
Total liabilities and shareholders' equity $ 152,934,040 $ 160,568,939

v3.8.0.1
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares
Sep. 30, 2017
Dec. 31, 2016
Balance Sheets [Abstract]    
Preferred stock, par value (in dollars per share) $ 0.001 $ 0.001
Preferred stock, shares authorized 5,000,000 5,000,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Common stock, par value (in dollars per share) $ 0.001 $ 0.001
Common stock, shares authorized 95,000,000 95,000,000
Common stock, shares issued 4,840,394 4,034,394
Common stock, shares outstanding 4,840,394 4,034,394

v3.8.0.1
Condensed Consolidated Statements of Operations (Unaudited) - USD ($)
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Statements of Income [Abstract]        
Net revenue $ 125,231,888 $ 96,293,622 $ 374,524,571 $ 327,177,025
Cost of revenue 124,704,662 95,671,721 373,011,864 324,958,268
Gross profit 527,226 621,901 1,512,707 2,218,757
Operating expenses:        
Selling and marketing 212,440 180,371 589,823 532,676
General and administrative 564,931 460,664 1,674,355 1,443,153
Reserve (recovery) from reserve for uncollectible receivable related to financing services 519,334   228,981 (68,813)
Total operating expenses 1,296,705 641,035 2,493,159 1,907,016
(Loss) income from continuing operations (769,479) (19,134) (980,452) 311,741
Other income (expenses)        
Interest income 23,240 18,811 53,198 233,274
Interest expense (200,151) (202,803) (630,056) (1,331,835)
Gain on sale of property and equipment 1,910   1,910 2,707
Miscellaneous 4,900 3,091 8,206 6,546
Total other expenses (170,101) (180,901) (566,742) (1,089,308)
Loss from continuing operations before income taxes (939,580) (200,035) (1,547,194) (777,567)
Income tax (benefit) expense     (130,118) 87,737
Net loss from continuing operations (939,580) (200,035) (1,417,076) (865,304)
Discontinued operations:        
Income from operations of discontinued Airport Automall Automotive Services (including gain on disposal of $6,701,350 for the nine months ended September 30, 2016)       4,543,918
Income tax benefit       (246,791)
Net income from discontinued operations       4,790,709
Net (loss) income (939,580) (200,035) (1,417,076) 3,925,405
Less: Net (loss) income attributable to noncontrolling interests (137) (35) (278) 93
Net (loss) income attributable to shareholders of China Auto Logistics Inc. (939,443) (200,000) (1,416,798) 3,925,312
Net (loss) income attributable to shareholders of China Auto Logistics Inc.        
- continuing operations (939,443) (200,000) (1,416,798) (865,397)
- discontinued operations       4,790,709
Net (loss) income attributable to shareholders of China Auto Logistics Inc. $ (939,443) $ (200,000) $ (1,416,798) $ 3,925,312
(Loss) income per share attributable to shareholders of China Auto Logistics Inc. from        
- continuing operations - basic and diluted $ (0.23) $ (0.05) $ (0.35) $ (0.21)
- discontinued operations - basic and diluted       1.19
Total (loss) earnings per share attributable to shareholders of China Auto Logistics Inc. $ (0.23) $ (0.05) $ (0.35) $ 0.98
Weighted average number of common shares Outstanding        
- basic and diluted 4,095,720 4,034,494 4,055,061 4,034,494

v3.8.0.1
Condensed Consolidated Statements of Operations (Parenthetical) (Unaudited)
9 Months Ended
Sep. 30, 2016
USD ($)
Statements of Income [Abstract]  
Gain on disposal of discontinued operations $ 6,701,350

v3.8.0.1
Condensed Consolidated Statements of Comprehensive Income (Unaudited) - USD ($)
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Statements of Comprehensive Income [Abstract]        
Net (loss) income $ (939,580) $ (200,035) $ (1,417,076) $ 3,925,405
Other comprehensive income (loss)        
Foreign currency translation adjustments 509,370 (111,136) 1,181,314 (750,288)
Comprehensive (loss) income (430,210) (311,171) (235,762) 3,175,117
Less: Comprehensive (loss) income attributable to noncontrolling interests (52) (99) (271) 50
Comprehensive income attributable to shareholders of China Auto Logistics Inc. $ (430,158) $ (311,072) $ (235,491) $ 3,175,067

v3.8.0.1
Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Cash flows from operating activities    
Net (loss) income $ (1,417,076) $ 3,925,405
Add: loss from discontinued operations   1,910,641
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities    
Reserve (recovery) on reserve for uncollectible receivable related to financing services 228,981 (68,813)
Depreciation on property, plant and equipment 67,124 58,532
Gain on disposal of property and equipment (1,910) (5,702)
Change in reserve for advances to suppliers   (76,554)
Gain on sale of Zhonghe   (6,701,350)
Changes in operating assets and liabilities:    
Restricted cash 14,010,712 (35,507,788)
Accounts receivable 5,827  
Receivables related to financing services (3,624,954) 31,710,041
Inventories 563,361 (7,938,670)
Advances to suppliers 5,065,968 (54,723,792)
Prepaid expenses, other current assets and other assets 346,620 (14,304)
Value added tax receivable 301,220 (1,390,994)
Other assets   (32,244)
Accounts payable 2,226,743 1,952,284
Line of credit related to financing services 393,687 (24,103,238)
Notes payable to suppliers (14,704,314) 36,344,159
Accrued expenses 23,302 318,354
Accrued interest   897,826
Customer deposits (5,263,243) 2,161,062
Deferred revenue 1,899 (47,981)
Income tax payable (130,118) (62,549)
Cash used in operating activities from continuing operations (1,906,171) (51,395,675)
Cash used in operating activities from discontinued operations   (1,299,109)
Net cash used in operating activities (1,906,171) (52,694,784)
Cash flows from investing activities    
Cash proceeds from sale of Zhonghe, net of cash at Zhonghe of $175,767 and amount owed to Zhonghe of $4,092,476   21,750,802
Proceeds from disposal of property and equipment 5,247 8,563
Purchase of property and equipment (13,281) (342,435)
Cash (used in) provided by investing activities from continuing operations (8,034) 21,416,930
Cash provided by investing activities from discontinued operations 0 0
Net cash (used in) provided by investing activities (8,034) 21,416,930
Cash flows from financing activities    
Bank overdraft   (2,117,974)
Proceeds from short-term borrowings 19,726,363 84,846,873
Repayments of short-term borrowings (17,539,977) (57,538,686)
Proceeds from director 2,551,427 484,919
Payment to non controlling shareholders for Ganghu's book value at de-registration (175,406)  
Cash provided by financing activities from continuing operations 4,562,407 25,675,132
Cash provided by financing activities from discontinued operations 0 0
Net cash provided by financing activities 4,562,407 25,675,132
Effect of exchange rate change on cash 89,854 (126,192)
Net increase (decrease) in cash and cash equivalents 2,738,056 (5,728,914)
Cash and cash equivalents at the beginning of period 3,004,932 7,119,686
Cash and cash equivalents at the end of period 5,742,988 1,390,772
Supplemental disclosure of cash flow information    
Interest paid 1,272,773 3,958,670
Income taxes paid   150,355
Non-cash activities:    
Assumption of outstanding payable to former owner of Zhonghe by Huitong to offset the sale price of Zhonghe   $ 36,755,594
Issuance of 806,000 shares of common stock to settle debt owed to shareholder $ 1,700,660  

v3.8.0.1
Condensed Consolidated Statements of Cash Flows (Parenthetical) (Unaudited)
9 Months Ended
Sep. 30, 2016
USD ($)
Statements of Cash Flows [Abstract]  
Net proceeds from sale of equity $ 175,767
Amount owed to Zhonghe $ 4,092,476

v3.8.0.1
Organization, Nature of Business and Basis of Presentation, Going Concern, and Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 2017
Organization, Nature of Business and Basis of Presentation, Going Concern, and Summary of Significant Accounting Policies [Abstract]  
Organization, Nature of Business and Basis of Presentation, Going Concern, and Summary of Significant Accounting Policies

(1)       Organization, Nature of Business and Basis of Presentation, Going Concern, and Summary of Significant Accounting Policies

 

Organization, Nature of Business and Basis of Presentation

 

China Auto Logistics Inc. (the “Company” or “China Auto”) operates through its wholly-owned subsidiary Ever Auspicious International Limited, a Hong Kong corporation (“HKCo.”), and its wholly-owned subsidiary Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd. (“Shisheng”), a company established under the laws of the People’s Republic of China (“PRC”) and Shisheng’s wholly owned and majority owned subsidiary, Tianjin Hengjia Port Logistics Corp. (“Hengjia”).

 

On May 2, 2017, the Company de-registered its majority owned subsidiary, Tianjin Ganghui Information Technology Corp. (“Ganghui”) and transferred its assets to Shisheng. Ganghui has been inactive and had no substantial assets or operations.

 

The Company’s principal businesses include (i) sales of imported automobiles, (ii) financing services related to imported automobiles, and (iii) other services including automobile information websites and advertising services, and logistics services related to the automobile importing process and other automobile value added services, such as assistance with customs clearance, storage and nationwide delivery services.

 

The accompanying condensed consolidated balance sheet as of December 31, 2016, which has been derived from the audited consolidated financial statements and the accompanying unaudited condensed consolidated financial statements, has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations and the Company believes that the disclosures made are adequate to make the information not misleading.

 

In the opinion of management, these condensed consolidated financial statements reflect all adjustments which are of a normal recurring nature and which are necessary to present fairly the financial position of China Auto as of September 30, 2017 and the results of its operations, and cash flows for the three month and nine month periods ended September 30, 2017 and 2016. These condensed consolidated financial statements and related notes should be read in conjunction with the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2016. The results of operations for the three month and nine month periods ended September 30, 2017 are not necessarily indicative of the results which may be expected for the entire fiscal year.

 

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

 

Going Concern

 

The Company incurred operating losses and had negative operating cash flows and may continue to generate negative cash flows as the Company implements its business plan for 2017. There can be no assurance that its continuing efforts to execute its business plan will be successful and that the Company will be able to continue as a going concern. The Company’s net loss from continuing operations attributable to shareholders for the three months ended September 30, 2017 was $939,443 as compared to $200,000 for the three months ended September 30, 2016 and $1,416,798 and $865,397 for the nine months ended September 30, 2017 and 2016, respectively.

 

Net cash used in operations from continuing operations during the nine months ended September 30, 2017 and 2016 was $1,906,171 and $51,395,675, respectively.

 

The Company does not currently have sufficient cash or commitments for financing to sustain its operations for the twelve months from the issuance date of these financial statements. The Company’s plan continues to be to develop new customer relationships and substantially increase the cash flows from operations and revenue derived from our products/services. If the Company’s revenues do not reach the level anticipated in our plan, the Company may require additional financing in order to execute our operating plan. If additional financing is required, the Company cannot predict whether this additional financing will be in the form of equity, debt, or another form, and the Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that financing sources are not available, or that the Company is unsuccessful in increasing its revenues and profits, the Company may be unable to implement its current plans for expansion, repay our debt obligations or respond to competitive pressures, any of which would have a material adverse effect on its business, prospects, financial condition and results of operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. These condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses in the condensed consolidated financial statements and accompanying notes. Significant accounting estimates reflected in the Company’s condensed consolidated financial statements include the collectibility of accounts receivable, the useful lives and impairment of property and equipment, goodwill and intangible assets, the valuation of deferred tax assets and inventories and the provisions for income taxes. Actual results could differ from those estimates.

 

Principles of Consolidation

 

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

 

Currency Reporting

 

The Company’s operations in the PRC use the local currency, Renminbi (“RMB”), as their functional currency, whereas amounts reported in the accompanying condensed consolidated financial statements and disclosures are stated in U.S. dollars, the reporting currency of the Company, unless stated otherwise. As such, the condensed consolidated balance sheets of the Company have been translated into U.S. dollars at the current rates as of September 30, 2017 and December 31, 2016 and the condensed consolidated statements of income have been translated into U.S. dollars at the weighted average rates during the periods the transactions were recognized.

 

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

 

Revenue Recognition

 

The Company’s main source of income was generated through (1) sales of automobiles, (2) service fees for assisting customers to get bank financing on purchases of automobiles, (3) web-based advertising services including fees from (i) displaying graphical advertisements on the Company websites and (ii) web-based listing services that allow customers to place automobile related information on the Company’s websites, and (4) automobile value added services. The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred upon shipment or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectibility is reasonably assured.

 

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

 

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

 

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

 

The Company recognizes revenue from automobile value added services when such services are performed.

 

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

 

Receivables Related to Financing Services

 

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

 

The Company evaluates the collectability of outstanding receivables at the end of each of the reporting periods and makes estimates for potential credit losses. Prior to 2015, the Company did not experience any losses on its receivable related to financing services. During the year ended December 31, 2016 and 2015, the Company experienced difficulties in collecting the receivable from a financing service customer, but the receivable was secured by certain imported automobiles. The Company took possession of these secured automobiles and sold them during the years ended December 31, 2016 and 2015. The sales proceeds were used to offset the outstanding receivable from this customer. During the nine months ended September 30, 2017 and 2016, the Company had a net reserve of $228,981 and recovered $68,813 from the reserve made in the previous periods. The Company will continue to pursue collecting the remaining receivable balance. As of September 30, 2017 and December 31, 2016, the Company recorded an allowance for uncollectible accounts receivable related to financing services in the amount of $3,383,359 and $3,031,554, respectively.

 

Inventories

 

Inventory is stated at the lower of cost (using the specific identification method) or market (net realizable). We continually evaluate the composition of our inventory, assessing slow-moving and ongoing products. Our products are comprised of the purchase cost of automobiles which declines in value over time. We continuously evaluate our inventory to determine the reserve amount for slow-moving inventory. As of September 30, 2017 and December 31, 2016, there was no reserve for obsolescence.

 

Basic and Diluted (Loss) Income Per Share

 

Basic (loss) income per common share is computed by dividing net (loss) income available to common stockholders by the weighted average number of common shares outstanding. Diluted (loss) income per common share is computed similarly to basic (loss) income per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of September 30, 2017 and 2016, the Company did not have any common stock equivalents, therefore, the basic (loss) income per share is the same as the diluted (loss) income per share.

 

New Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update No. 2014-09 (ASU 2014-09) “Revenue from Contracts with Customers.” The standard’s core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will become effective for the Company beginning in the first quarter of 2018. Early adoption is permitted in 2017. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. The FASB issued supplemental adoption guidance and clarification to ASU 2014-09 in March 2016, April 2016, May 2016, and December 2016 within ASU 2016-08 “Revenue from Contracts with Customers: Principal vs. Agent Considerations,” ASU 2016-10 “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” ASU 2016-12 “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients,” and ASU 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” respectively. The Company expects to adopt this standard using the modified retrospective approach beginning in the first quarter of 2018. The Company has completed the initial assessment of the effect of adoption. Based on this assessment, the Company does not expect any change to the revenue recognition policy. The Company currently does not expect that adopting these standards will have a material impact on the Company’s consolidated financial statements. The Company will continue to monitor additional modifications, clarifications or interpretations undertaken by the FASB that may impact our assessments.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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


v3.8.0.1
Restricted Cash
9 Months Ended
Sep. 30, 2017
Restricted Cash [Abstract]  
Restricted Cash

(2)       Restricted Cash

 

Restricted cash consists of cash which is not available for use in the Company’s operations and is summarized as follows:

 

  September 30,  December 31, 
  2017  2016 
       
Collateral for bank’s issuance of letters of credit to the Company’s customers $3,379,284  $2,541,674 
Collateral for notes payable to suppliers  6,010,970   20,162,161 
  $9,390,254  $22,703,835 

v3.8.0.1
Property and Equipment
9 Months Ended
Sep. 30, 2017
Property and Equipment [Abstract]  
Property and Equipment

(3)       Property and Equipment

 

A summary of property and equipment is as follows:

 

  September 30,  December 31, 
  2017  2016 
       
Computers  69,477   72,134 
Office equipment, furniture and fixtures  28,599   44,766 
Leasehold improvements  155,828   149,338 
Automobiles  1,061,466   1,038,686 
   1,315,370   1,304,924 
Less: Accumulated depreciation and amortization  (1,042,689)  (987,642)
  $272,681  $317,282 

 

Depreciation and amortization expenses for property and equipment amounted to approximately $23,087 and $22,811 for the three months ended September 30, 2017 and 2016, respectively, and $67,124 and $58,532 for the nine months ended September 30, 2017 and 2016, respectively.


v3.8.0.1
Bank Overdraft
9 Months Ended
Sep. 30, 2017
Bank Overdraft [Abstract]  
Bank Overdraft

(4)       Bank Overdraft

 

In December 2016, the Company entered into an overdraft agreement with PuDong Development Bank.  Under the terms of the agreement, the Company can draw on its bank account up to $2,254,114 (RMB15,000,000) in excess of the funds on deposit.  The overdraft amount is subject to an annual interest rate of 6% and the maximum overdraft period cannot exceed 89 days.  The overdraft agreement is guaranteed by Mr. Tong Shiping, the Company’s Chairman, President and CEO, Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and a non-related entity which is a supplier of the Company, and matures in December 2017. There were no outstanding overdraft balances as of September 30, 2017 or December 31, 2016.


v3.8.0.1
Lines of Credit Related to Financing Services
9 Months Ended
Sep. 30, 2017
Lines of Credit Related to Financing Services [Abstract]  
Lines of Credit Related to Financing Services

(5)       Lines of Credit Related to Financing Services

 

The Company provides financing services to its customers using the Company’s bank facility lines of credit. The Company earns a service fee for drawing its facility lines related to its customers’ purchases of automobiles and payment of import taxes. Customers bear all the interest and fees charged by the banks and prepay those fees upon the execution of their service contracts with the Company. Customers are also required to make a deposit in the range of 10% to 15% of the purchase price of the automobiles. If customers default on payment, the banks take custody of the automobiles until the borrowings are fully repaid.

 

Interest charged by the banks for draws on these facility lines of credit is classified as cost of revenue in the consolidated statements of operations. Interest expense related to these lines of credit was $681,011 and $539,650 for the three months ended September 30, 2017 and 2016, respectively, and $1,713,036 and $1,771,252 for the nine months ended September 30, 2017 and 2016, respectively.

 

A summary of the Company’s lines of credit related to financing services follows:

 

Agricultural Bank of China

 

In September 2016 the Company entered into a facility line of credit agreement with Agricultural Bank of China, pursuant to which the Company can borrow a maximum amount of $72,131,640 (RMB480,000,000). This facility line of credit is guaranteed by five non-related entities, which are customers, suppliers or both. Borrowings under this facility line of credit bore interest at rates ranging from 4.65% to 6.88% per annum, and were repayable within 3 months to 4 months from the date of the drawing. As of September 30, 2017 and December 31, 2016, the Company had outstanding balances of $33,309,611 and $28,926,623, respectively, under this facility line of credit. This facility matured in September 2017.

 

In October 2017 the Company entered into a facility line of credit agreement with Agricultural Bank of China, pursuant to which the Company can borrow a maximum amount of $69,126,155 (RMB460,000,000). This facility line of credit is guaranteed by five non-related entities, which are customers, suppliers or both. Borrowings under this facility line of credit bear interest at rates ranging from 4.65% to 6.88% per annum, and are repayable within 3 months to 4 months from the date of the drawing. As of September 30, 2017, the Company had outstanding balances of $0 under this facility line of credit. This facility matures in October 2018.

 

PuDong Development Bank

 

In December 2016, the Company entered into a facility line of credit agreement with PuDong Development Bank, pursuant to which the Company can borrow a maximum amount of $18,032,910 (RMB120,000,000). Borrowings under this facility line of credit bear interest at rates ranging from 4.42% to 6.13% per annum, and are repayable within 3 months from the dates of drawing. As of September 30, 2017 and December 31, 2016, the Company had outstanding balances of $5,672,868 and $7,156,970, respectively, under this facility line of credit. This facility line of credit is guaranteed by Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and two non-related entity, which are suppliers of the Company, and matures in December 2017.

 

China Zheshang Bank

 

In August 2016, the Company entered into a facility line of credit agreement with China Zheshang Bank, pursuant to which the Company can borrow a maximum amount of $33,060,335 (RMB220,000,000). This facility line of credit is guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Kai Li Xing Kong Real Property Ltd., Co., an entity majorly owned by Ms. Cheng Weihong (v) Zhonghe, the Company’s former subsidiary, and (vi) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. Borrowings under this facility line of credit bore interest at a rate of 4.5% per annum, and are repayable within 3 months to 6 months from the dates of drawing. As of September 30, 2017 and December 31, 2016, the Company had outstanding balances of $0 and $7,045,426, respectively, under this facility line of credit. This facility matured in August 2017.

 

In September 2017, the Company entered into a facility line of credit agreement with China Zheshang Bank, pursuant to which the Company can borrow a maximum amount of $33,060,335 (RMB220,000,000). This facility line of credit is guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Kai Li Xing Kong Real Property Ltd., Co., an entity majorly owned by Ms. Cheng Weihong (v) Zhonghe, the Company’s former subsidiary, and (vi) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. Borrowings under this facility line of credit bear interest at a rate of 4.5% per annum, and are repayable within 3 months to 6 months from the dates of drawing. As of September 30, 2017, the Company had outstanding balances of $1,387,788 under this facility line of credit. This facility matures in September 2018.

 

Shengjing Bank

 

In November 2016, the Company entered into a facility line of credit agreement with Shengjing Bank, pursuant to which the Company can borrow a maximum amount of $7,513,713 (RMB50,000,000). This facility line of credit is guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and (iii) Tianjin Ning Chuan International Trading co., Ltd., a supplier, (iv) Tianjin Binhai International Automall Ltd. Co., a customer. Borrowings under this facility line of credit bear interest at a rate of 5.3% per annum, and are repayable within 3 months to 6 months from the dates of drawing. As of September 30, 2017 and December 31, 2016, the Company had outstanding balances of $5,345,596 and $3,952,744 under this facility line of credit. This facility matures in November 2017. 

 

Bank of Heibei

 

In March 2017, the Company entered into a facility line of credit agreement with Bank of Heibei, pursuant to which the Company can borrow a maximum amount of $7,513,713 (RMB50,000,000). This facility line of credit is guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, and (iii) Tianjin Binhai International Automall Ltd. Co., a customer. Borrowings under this facility line of credit bear interest at rates ranging from 4.0% to 4.6% per annum, and are repayable within 3 months to 6 months from the dates of drawing. As of September 30, 2017, the Company had outstanding balances of $3,956,019 under this facility line of credit. This facility matures in March 2018.


v3.8.0.1
Short Term Borrowings
9 Months Ended
Sep. 30, 2017
Short Term Borrowings [Abstract]  
Short Term Borrowings

(6Short Term Borrowings

 

Agricultural Bank of China

 

In June 2016, the Company entered into two working capital loan agreements with Agricultural Bank of China to obtain short term financing. Under the terms of these agreements, the Company can borrow up to $6,336,679 (RMB44,000,000). One of the loan agreements in the amount of $576,062 (RMB4,000,000) expired in September 2016 and the outstanding balance was repaid. The other loan agreement had an outstanding balance of $5,760,618 (RMB 40,000,000) as of December 31, 2016, matured in June 2017 and was repaid in June 2017. These loan agreement bore interest at a rate of 4.785% per annum, matured in June 2017, and was guaranteed by (i) Tianjin Binhai International Automall Ltd. Co., a customer, and (ii) Tianjin Ning Chuan International Trading Ltd. Co., a supplier, (iii) Tianjin Jing Dian Automobile Sales Information Ltd. Co., a supplier, (iv) Tianjin Shi Mao International Trading Ltd. Co., a supplier, and (v) Tianjin Ying Zhi Jie International Logistics Ltd. Co., a supplier.

 

In June 2017, the Company entered into a loan agreement with Agricultural Bank of China to obtain short term financing. Under the terms of this agreement, the Company can borrow up to $5,259,598 (RMB35,000,000). Borrowings under this loan agreement bear interest at a rate of 4.79% for a borrowing period of one year and are guaranteed by (i) Tianjin Binhai International Automall Ltd. Co., a customer, and (ii) Tianjin Ning Chuan International Trading Ltd. Co., a supplier, (iii) Tianjin Jing Dian Automobile Sales Information Ltd. Co., a supplier, (iv) Tianjin Shi Mao International Trading Ltd. Co., a supplier, and (v) Tianjin Ying Zhi Jie International Logistics Ltd. Co., a supplier. The total outstanding balance of these agreements was $5,259,598 and $0 as of September 30, 2017 and December 31, 2016, respectively. This loan matures in June 2018.

 

China Zheshang Bank

 

In July and August 2016, the Company entered into five loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $4,320,463 (RMB30,000,000). Borrowings under these loan agreements bore interest at a rate of 5.655% for a borrowing period of six months and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Kai Li Xing Kong Real Property Ltd., Co., an entity majorly owned by Ms. Cheng Weihong (v) Zhonghe, the Company’s former subsidiary, and (vi) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $0 and $4,320,463 as of September 30, 2017 and December 31, 2016, respectively. These loans matured in January and February 2017.

 

In November and December 2016, the Company entered into three loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $2,880,308 (RMB20,000,000). Borrowings under these loan agreements bore interest at a rate of 5.81% for a borrowing period of six months and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Kai Li Xing Kong Real Property Ltd., Co., an entity majorly owned by Ms. Cheng Weihong (v) Zhonghe, the Company’s former subsidiary, and (vi) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $0 and $2,880,308 as of September 30, 2017 and December 31, 2016, respectively. These loans matured in May and June 2017.

 

In April 2017, the Company entered into a loan agreement with China Zheshang Bank. Under the terms of this loan agreement, the Company borrowed an amount of $3,005,485 (RMB20,000,000). Borrowings under this loan agreement bear interest at a rate of 5% for a borrowing period of six months and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Kai Li Xing Kong Real Property Ltd., Co., an entity majorly owned by Ms. Cheng Weihong (v) Zhonghe, the Company’s former subsidiary, and (vi) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of this agreement was $3,005,485 as of September 30, 2017. This loan matures in January 2018.

 

In May and June 2017, the Company entered into three loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $3,005,485 (RMB20,000,000). Borrowings under these loan agreements bear interest at rates ranging from 5.79% to 5.81% for a borrowing period of six months and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Kai Li Xing Kong Real Property Ltd., Co., an entity majorly owned by Ms. Cheng Weihong (v) Zhonghe, the Company’s former subsidiary, and (vi) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $3,005,485 as of September 30, 2017. These loans mature in November and December 2017.

 

In June 2017, the Company entered into three loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $2,103,840 (RMB14,000,000). Borrowings under these loan agreements bear interest at a rate of 5.79% for a borrowing period of six months and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Kai Li Xing Kong Real Property Ltd., Co., an entity majorly owned by Ms. Cheng Weihong (v) Zhonghe, the Company’s former subsidiary, and (vi) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $2,103,840 as of September 30, 2017. These loans mature in December 2017.

 

In July 2017, the Company entered into three loan agreements with China Zheshang Bank. Under the terms of these agreements, the Company borrowed an aggregate amount of $2,404,388 (RMB16,000,000). Borrowings under these loan agreements bear interest at a rate of 5.79% for a borrowing period of six months and are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Binhai International Automall Ltd. Co., a customer, (iv) Kai Li Xing Kong Real Property Ltd., Co., an entity majorly owned by Ms. Cheng Weihong (v) Zhonghe, the Company’s former subsidiary, and (vi) Hezhong (Tianjin) International Development Ltd. Co., the former owner of Zhonghe. The total outstanding balance of these agreements was $2,404,388 as of September 30, 2017. These loans mature in January 2018.


v3.8.0.1
Notes Payable to Suppliers
9 Months Ended
Sep. 30, 2017
Notes Payable to Suppliers [Abstract]  
Notes Payable to Suppliers

(7)       Notes Payable to Suppliers

 

From time to time, the Company issues notes payable to suppliers, which are guaranteed by various banks. The terms of these notes payable vary depending on the negotiations with the suppliers. Typical terms are in the range of three to six months.  Prior to the expiration dates of the notes, the note holders can present these notes to the banks to draw on the note amounts if the Company does not settle the outstanding amount payable to these suppliers. The Company is subject to a bank fee of 0.05% on notes payable amounts.

 

As of September 30, 2017, the Company had thirty-one outstanding notes payable to suppliers, which mature in November and December 2017, in an aggregate amount of $12,021,940 (RMB80,000,000), the payment of which was guaranteed by Bank of Jinzhou for a period of six months. The Company was required to maintain approximately 50% of the note amounts, or $6,010,970 (RMB40,000,000) as guaranteed funds, which was classified as restricted cash as of September 30, 2017. These notes are guaranteed by (i) Mr. Tong Shiping, the Company’s Chairman, President and CEO, (ii) Ms. Cheng Weihong, a Director and Senior Vice President of the Company, (iii) Tianjin Jing Dian Automobile Sales Information Ltd. Co., a supplier, (iv) Tianjin Ning Chuan International Trading Ltd. Co., a supplier,, and (v) Tianjin Ying Zhi Jie International Logistics Ltd. Co., a supplier.

 

The purpose of these arrangements is to provide additional time for the Company to remit payments while ensuring that suppliers do not bear any credit risk, since the suppliers’ payments are guaranteed by the banks.


v3.8.0.1
Major Customers and Suppliers
9 Months Ended
Sep. 30, 2017
Major Customers and Suppliers [Abstract]  
Major Customers and Suppliers

(8)       Major Customers and Suppliers

 

The following table discloses the major customers who individually accounted for over 10% of our total net sales during the three and nine months ended September 30, 2017 and 2016, respectively:

 

  As a Percentage of Our 
Total Net Revenues
 
  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
Tianjin Jing Dian Automobile Sales Information Ltd. Co.  *   16%  10%  26%
Tianjin Binhai International Automall Ltd. Co.  17%  25   17%  13%

 

* Accounted for less than 10% of our total net sales.

 

The following table sets out our major suppliers who individually accounted for more than 10% of our total net purchases during the three and nine months ended September 30, 2017 and 2016, respectively:

 

  As a Percentage of Our 
Total Net Purchases
 
  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
Tianjin Ning Chuan International Trading Ltd.  **   12%  **   ** 
Tianjin Shi Mao International International Trading Ltd. Co.  **   **   **   18%
Tianjin Ying Zhi Jie International Logistics Ltd. Co.  **   15%  **   15%

 

** Accounted for less than 10% of our total net purchases.


v3.8.0.1
Retained Earnings
9 Months Ended
Sep. 30, 2017
Retained Earnings [Abstract]  
Retained earnings

(9)       Retained earnings

 

According to the Law of the PRC on Enterprises with Wholly-Owned Foreign Investment, the Company PRC’s subsidiaries are required to make appropriations from after-tax profits as determined under accounting principles generally accepted in the PRC (“PRC GAAP”) to non-distributable reserves. These reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise expansion reserve and (iii) a staff bonus and welfare fund. A wholly-owned PRC subsidiary is not required to make appropriations to the enterprise expansion reserve but annual appropriations to the general reserve are required to be made at 10% of the profit after tax as determined under PRC GAAP at each year-end, until such fund has reached 50% of its respective registered capital. The staff welfare and bonus reserve is determined by the board of directors. The general reserve is used to offset future losses. The subsidiary may, upon a resolution passed by the stockholders, convert the general reserve into capital. The staff welfare and bonus reserve are used for the collective welfare of the employees of the subsidiary. The enterprise expansion reserve is for the expansion of the subsidiary operations and can be converted to capital subject to approval by the relevant authorities. These reserves represent appropriations of the retained earnings determined in accordance with Chinese law.

 

In addition to the general reserve, the Company’s PRC subsidiaries are required to obtain approval from the local PRC government prior to distributing any registered share capital. Accordingly, both the appropriations to general reserve and the registered share capital of the Company’s PRC subsidiary are considered as restricted net assets and are not distributable as cash dividends. As of September 30, 2017 and December 31, 2016, the Company’s statutory reserve fund was approximately $1,543,000 and $2,317,000, respectively.


v3.8.0.1
Related Party Balances and Transactions
9 Months Ended
Sep. 30, 2017
Related Party Balances and Transactions [Abstract]  
Related Party Balances and Transactions

(10)     Related Party Balances and Transactions

 

Ms. Cheng Weihong (the Senior Vice President and Chairwoman of Shisheng and wife of China Auto’s President and Chief Executive Officer, Mr. Tong Shiping) made several non-interest bearing loans to a wholly owned subsidiary of the Company (HKCo.) to meet working capital needs of the Company. For the nine months ended September 30, 2017 and 2016, the Company made aggregate borrowings from Ms. Cheng Weihong of $2,551,427 and $484,919, respectively, and made repayments of $0 and $0 to Ms. Cheng Weihong. In September of 2017, Ms. Cheng Weihong transferred $3,948,686 of the non-interest bearing loans to Bright Praise Enterprises Limited, a British Virgin Islands corporation (“Bright Praise”). At the time of the transfer Bright Praise was a holder of 40.85% of the outstanding common stock of the Company.

 

On September 23, 2017, the Company entered into a Debt Exchange Agreement with Bright Praise pursuant to which the Company agreed to issue 806,000 shares of the Company’s common stock in exchange for Bright Praise agreeing to transfer a receivable of $1,700,660 due from HKCo. to the Company creating an intercompany debt between the Company and HKCo. The purchase price for each share of common stock was $2.11 which was the consolidated closing bid price of the Company’s common stock on the NASDAQ Capital Market on September 22, 2017. Upon the completion of this transaction, Bright Praise’s ownership in the Company increased to 50.7%. As of September 30, 2017 and December 31, 2016, the outstanding balances due to Bright Praise were $2,248,026 and $0, respectively. As of September 30, 2017 and December 31, 2016, the outstanding balances due to Ms. Cheng Weihong were $69,950 and $1,550,745, respectively.

 

The Company’s former shareholder, Sino Peace Limited, paid certain accrued expenses in the previous years on behalf of the Company. The amounts of $2,041,659 and $1,956,625 were outstanding as payable related to prior years’ professional fees on the consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively. In January 2015, December 2016, and February 2017, the Company received notification from an individual who claimed to be the owner of St. George International Limited (“St. George”) and made a claim that the debt owed to Sino Peace by the Company had been transferred to St. George.  However, the Company neither received any evidence to support such assignment nor any notification from the owner of Sino Peace that Sino Peace was transferring its legal right of collecting the receivable from the Company to St. George.   The Company has been unable to locate the owner of Sino Peace to confirm such transfer and therefore considers such claim by St. George legally unbinding at this time.

 

The balances as discussed above as of September 30, 2017 and December 31, 2016 are interest-free, unsecured and have no fixed term of repayment. During the nine months ended September 30, 2017 and 2016, there was no imputed interest charged in relation to these balances.

 

Mr. Tong Shiping and Ms. Cheng Weihong personally guarantee borrowings on various lines of credit related to the Company’s financing services and short-term borrowings.


v3.8.0.1
Segment Information
9 Months Ended
Sep. 30, 2017
Segment Information [Abstract]  
Segment Information

(11)     Segment Information

 

The Company has three principal operating segments: (1) sales of automobiles, (2) financing services, and, (3) other services. These operating segments were determined based on the nature of the services offered. Operating segments are defined as components of an enterprise about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief executive officer and chief operating officer have been identified as the chief operating decision makers. The Company’s chief operating decision makers direct the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.

 

The Company evaluates performance based on several factors, including net revenue, cost of revenue, operating expenses, and income from operations. The following tables show the continuing operations of the Company’s operating segments:

 

Three Months Ended September 30, 2017

 

  Sales of  Financing  Other       
  Automobiles  Services  Services  Corporate  Total 
                
Net revenue $124,174,090  $1,059,768  $(1,970) $-  $125,231,888 
Cost of revenue  124,023,651   681,011   -   -   124,704,662 
                     
Operating expenses                    
Selling and marketing  100,909   100,909   10,622   -   212,440 
General and administrative  67,792   67,792   5,649   423,698   564,931 
Reserve (recovery) on reserve for uncollectible  receivable related to financing services  -   519,334   -   -   519,334 
Total operating expenses  168,701   688,035   16,271   423,698   1,296,705 
Loss from operations $(18,262) $(309,278) $(18,241) $(423,698) $(769,479)
Depreciation and Amortization $8,039  $8,039  $2,414  $4,595  $23,087 

 

Three Months Ended September 30, 2016

 

  Sales of  Financing  Other       
  Automobiles  Services  Services  Corporate  Total 
                
Net revenue $95,261,933  $1,028,259  $3,430  $-  $96,293,622 
Cost of revenue  95,132,071   539,650   -   -   95,671,721 
                     
Operating expenses                    
Selling and marketing  76,659   76,658   9,019   18,035   180,371 
General and administrative  32,247   32,246   4,607   391,564   460,664 
Total operating expenses  108,906   108,904   13,626   409,599   641,035 
Income (loss) from  operations $20,956  $379,705  $(10,196) $(409,599) $(19,134)
Depreciation and Amortization $7,804  $7,804  $2,745  $4,458  $22,811 

 

Nine Months Ended September 30, 2017

 

  Sales of  Financing  Other       
  Automobiles  Services  Services  Corporate  Total 
                
Net revenue $371,861,223  $2,658,873  $4,475  $-  $374,524,571 
Cost of revenue  371,298,828   1,713,036   -   -   373,011,864 
                     
Operating expenses                    
Selling and marketing  280,166   280,166   29,491   -   589,823 
General and administrative  200,923   200,923   16,743   1,255,766   1,674,355 
Reserve (recovery) on reserve for uncollectible  receivable related to financing services  -   228,981   -   -   228,981 
Total operating expenses  481,089   710,070   46,234   1,255,766   2,493,159 
Income (loss) from operations $81,306  $235,767  $(41,759) $(1,255,766) $(980,452)
Depreciation and Amortization $23,372  $23,372  $7,023  $13,357  $67,124 

 

Nine Months Ended September 30, 2016

 

  Sales of  Financing  Other       
  Automobiles  Services  Services  Corporate  Total 
                
Net revenue $323,872,354  $3,276,141  $28,530  $-  $327,177,025 
Cost of revenue  323,187,016   1,771,252   -   -   324,958,268 
                     
Operating expenses                    
Selling and marketing  226,390   226,387   26,634   53,265   532,676 
General and administrative  162,376   231,186   23,197   1,026,394   1,443,153 
Recovery on reserve for uncollectible receivable related to financing services  -   (68,813)  -   -   (68,813)
Total operating expenses  388,766   388,760   49,831   1,079,659   1,907,016 
Income (loss) from continuing operations $296,572  $1,116,129  $(21,301) $(1,079,659) $311,741 
Depreciation and Amortization $23,701  $17,154  $7,876  $9,801  $58,532 

 

Following are total assets by segment:

 

Total Assets

 

  Sales of  Financing  Other       
  Automobiles  Services  Services  Corporate  Total 
                
As of September 30, 2017 $90,922,950  $61,612,643  $15,400  $383,047  $152,934,040 
As of December 31, 2016 $107,042,952  $53,135,295  $57,501  $333,191  $160,568,939 

v3.8.0.1
Organization, Nature of Business and Basis of Presentation, Going Concern, and Summary of Significant Accounting Policies (Policies)
9 Months Ended
Sep. 30, 2017
Organization, Nature of Business and Basis of Presentation, Going Concern, and Summary of Significant Accounting Policies [Abstract]  
Going Concern

Going Concern

 

The Company incurred operating losses and had negative operating cash flows and may continue to generate negative cash flows as the Company implements its business plan for 2017. There can be no assurance that its continuing efforts to execute its business plan will be successful and that the Company will be able to continue as a going concern. The Company’s net loss from continuing operations attributable to shareholders for the three months ended September 30, 2017 was $939,443 as compared to $200,000 for the three months ended September 30, 2016 and $1,416,798 and $865,397 for the nine months ended September 30, 2017 and 2016, respectively.

 

Net cash used in operations from continuing operations during the nine months ended September 30, 2017 and 2016 was $1,906,171 and $51,395,675, respectively.

 

The Company does not currently have sufficient cash or commitments for financing to sustain its operations for the twelve months from the issuance date of these financial statements. The Company’s plan continues to be to develop new customer relationships and substantially increase the cash flows from operations and revenue derived from our products/services. If the Company’s revenues do not reach the level anticipated in our plan, the Company may require additional financing in order to execute our operating plan. If additional financing is required, the Company cannot predict whether this additional financing will be in the form of equity, debt, or another form, and the Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that financing sources are not available, or that the Company is unsuccessful in increasing its revenues and profits, the Company may be unable to implement its current plans for expansion, repay our debt obligations or respond to competitive pressures, any of which would have a material adverse effect on its business, prospects, financial condition and results of operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. These condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Use of Estimates

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses in the condensed consolidated financial statements and accompanying notes. Significant accounting estimates reflected in the Company’s condensed consolidated financial statements include the collectibility of accounts receivable, the useful lives and impairment of property and equipment, goodwill and intangible assets, the valuation of deferred tax assets and inventories and the provisions for income taxes. Actual results could differ from those estimates.

Principles of Consolidation

Principles of Consolidation

 

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

Currency Reporting

Currency Reporting

 

The Company’s operations in the PRC use the local currency, Renminbi (“RMB”), as their functional currency, whereas amounts reported in the accompanying condensed consolidated financial statements and disclosures are stated in U.S. dollars, the reporting currency of the Company, unless stated otherwise. As such, the condensed consolidated balance sheets of the Company have been translated into U.S. dollars at the current rates as of September 30, 2017 and December 31, 2016 and the condensed consolidated statements of income have been translated into U.S. dollars at the weighted average rates during the periods the transactions were recognized.

 

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

Revenue Recognition

Revenue Recognition

 

The Company’s main source of income was generated through (1) sales of automobiles, (2) service fees for assisting customers to get bank financing on purchases of automobiles, (3) web-based advertising services including fees from (i) displaying graphical advertisements on the Company websites and (ii) web-based listing services that allow customers to place automobile related information on the Company’s websites, and (4) automobile value added services. The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred upon shipment or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectibility is reasonably assured.

 

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

 

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

 

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

 

The Company recognizes revenue from automobile value added services when such services are performed.

 

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

Receivables Related to Financing Services

Receivables Related to Financing Services

 

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

 

The Company evaluates the collectability of outstanding receivables at the end of each of the reporting periods and makes estimates for potential credit losses. Prior to 2015, the Company did not experience any losses on its receivable related to financing services. During the year ended December 31, 2016 and 2015, the Company experienced difficulties in collecting the receivable from a financing service customer, but the receivable was secured by certain imported automobiles. The Company took possession of these secured automobiles and sold them during the years ended December 31, 2016 and 2015. The sales proceeds were used to offset the outstanding receivable from this customer. During the nine months ended September 30, 2017 and 2016, the Company had a net reserve of $228,981 and recovered $68,813 from the reserve made in the previous periods. The Company will continue to pursue collecting the remaining receivable balance. As of September 30, 2017 and December 31, 2016, the Company recorded an allowance for uncollectible accounts receivable related to financing services in the amount of $3,383,359 and $3,031,554, respectively.

Inventories

Inventories

 

Inventory is stated at the lower of cost (using the specific identification method) or market (net realizable). We continually evaluate the composition of our inventory, assessing slow-moving and ongoing products. Our products are comprised of the purchase cost of automobiles which declines in value over time. We continuously evaluate our inventory to determine the reserve amount for slow-moving inventory. As of September 30, 2017 and December 31, 2016, there was no reserve for obsolescence.

Basic and Diluted (Loss) Income Per Share

Basic and Diluted (Loss) Income Per Share

 

Basic (loss) income per common share is computed by dividing net (loss) income available to common stockholders by the weighted average number of common shares outstanding. Diluted (loss) income per common share is computed similarly to basic (loss) income per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of September 30, 2017 and 2016, the Company did not have any common stock equivalents, therefore, the basic (loss) income per share is the same as the diluted (loss) income per share.

New Accounting Standards

New Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update No. 2014-09 (ASU 2014-09) “Revenue from Contracts with Customers.” The standard’s core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will become effective for the Company beginning in the first quarter of 2018. Early adoption is permitted in 2017. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. The FASB issued supplemental adoption guidance and clarification to ASU 2014-09 in March 2016, April 2016, May 2016, and December 2016 within ASU 2016-08 “Revenue from Contracts with Customers: Principal vs. Agent Considerations,” ASU 2016-10 “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” ASU 2016-12 “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients,” and ASU 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” respectively. The Company expects to adopt this standard using the modified retrospective approach beginning in the first quarter of 2018. The Company has completed the initial assessment of the effect of adoption. Based on this assessment, the Company does not expect any change to the revenue recognition policy. The Company currently does not expect that adopting these standards will have a material impact on the Company’s consolidated financial statements. The Company will continue to monitor additional modifications, clarifications or interpretations undertaken by the FASB that may impact our assessments.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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


v3.8.0.1
Restricted Cash (Tables)
9 Months Ended
Sep. 30, 2017
Restricted Cash [Abstract]  
Summary of restricted cash
 September 30,  December 31, 
  2017  2016 
       
Collateral for bank’s issuance of letters of credit to the Company’s customers $3,379,284  $2,541,674 
Collateral for notes payable to suppliers  6,010,970   20,162,161 
  $9,390,254  $22,703,835 

v3.8.0.1
Property and Equipment (Tables)
9 Months Ended
Sep. 30, 2017
Property and Equipment [Abstract]  
Summary of property and equipment
  September 30,  December 31, 
  2017  2016 
       
Computers  69,477   72,134 
Office equipment, furniture and fixtures  28,599   44,766 
Leasehold improvements  155,828   149,338 
Automobiles  1,061,466   1,038,686 
   1,315,370   1,304,924 
Less: Accumulated depreciation and amortization  (1,042,689)  (987,642)
  $272,681  $317,282 

v3.8.0.1
Major Customers and Suppliers (Tables)
9 Months Ended
Sep. 30, 2017
Major Customers and Suppliers [Abstract]  
Schedule of major customers
  As a Percentage of Our 
Total Net Revenues
 
  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
Tianjin Jing Dian Automobile Sales Information Ltd. Co.  *   16%  10%  26%
Tianjin Binhai International Automall Ltd. Co.  17%  25   17%  13%

 

* Accounted for less than 10% of our total net sales.

  

  As a Percentage of Our 
Total Net Purchases
 
  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
Tianjin Ning Chuan International Trading Ltd.  **   12%  **   ** 
Tianjin Shi Mao International International Trading Ltd. Co.  **   **   **   18%
Tianjin Ying Zhi Jie International Logistics Ltd. Co.  **   15%  **   15%

 

** Accounted for less than 10% of our total net purchases.


v3.8.0.1
Segment Information (Tables)
9 Months Ended
Sep. 30, 2017
Segment Information [Abstract]  
Schedule of operations of the Company's operating segments

Three Months Ended September 30, 2017

 

  Sales of  Financing  Other       
  Automobiles  Services  Services  Corporate  Total 
                
Net revenue $124,174,090  $1,059,768  $(1,970) $-  $125,231,888 
Cost of revenue  124,023,651   681,011   -   -   124,704,662 
                     
Operating expenses                    
Selling and marketing  100,909   100,909   10,622   -   212,440 
General and administrative  67,792   67,792   5,649   423,698   564,931 
Reserve (recovery) on reserve for uncollectible  receivable related to financing services  -   519,334   -   -   519,334 
Total operating expenses  168,701   688,035   16,271   423,698   1,296,705 
Loss from operations $(18,262) $(309,278) $(18,241) $(423,698) $(769,479)
Depreciation and Amortization $8,039  $8,039  $2,414  $4,595  $23,087 

 

Three Months Ended September 30, 2016

 

  Sales of  Financing  Other       
  Automobiles  Services  Services  Corporate  Total 
                
Net revenue $95,261,933  $1,028,259  $3,430  $-  $96,293,622 
Cost of revenue  95,132,071   539,650   -   -   95,671,721 
                     
Operating expenses                    
Selling and marketing  76,659   76,658   9,019   18,035   180,371 
General and administrative  32,247   32,246   4,607   391,564   460,664 
Total operating expenses  108,906   108,904   13,626   409,599   641,035 
Income (loss) from  operations $20,956  $379,705  $(10,196) $(409,599) $(19,134)
Depreciation and Amortization $7,804  $7,804  $2,745  $4,458  $22,811 

 

Nine Months Ended September 30, 2017

 

  Sales of  Financing  Other       
  Automobiles  Services  Services  Corporate  Total 
                
Net revenue $371,861,223  $2,658,873  $4,475  $-  $374,524,571 
Cost of revenue  371,298,828   1,713,036   -   -   373,011,864 
                     
Operating expenses                    
Selling and marketing  280,166   280,166   29,491   -   589,823 
General and administrative  200,923   200,923   16,743   1,255,766   1,674,355 
Reserve (recovery) on reserve for uncollectible  receivable related to financing services  -   228,981   -   -   228,981 
Total operating expenses  481,089   710,070   46,234   1,255,766   2,493,159 
Income (loss) from operations $81,306  $235,767  $(41,759) $(1,255,766) $(980,452)
Depreciation and Amortization $23,372  $23,372  $7,023  $13,357  $67,124 

 

Nine Months Ended September 30, 2016

 

  Sales of  Financing  Other       
  Automobiles  Services  Services  Corporate  Total 
                
Net revenue $323,872,354  $3,276,141  $28,530  $-  $327,177,025 
Cost of revenue  323,187,016   1,771,252   -   -   324,958,268 
                     
Operating expenses                    
Selling and marketing  226,390   226,387   26,634   53,265   532,676 
General and administrative  162,376   231,186   23,197   1,026,394   1,443,153 
Recovery on reserve for uncollectible receivable related to financing services  -   (68,813)  -   -   (68,813)
Total operating expenses  388,766   388,760   49,831   1,079,659   1,907,016 
Income (loss) from continuing operations $296,572  $1,116,129