Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this annual report. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Business Overview and Recent Developing Trends
We are a supplier of parallel-import vehicles sourced in the U.S. to be sold in the PRC market. We purchase automobiles, primarily luxury brands such as Mercedes, Lexus, Range Rover, RAM and Toyota, from authorized dealers in the U.S. market and resell them to our customers, including both U.S. and PRC based parallel-import car dealers. We derive profits primarily from the price difference between our buying and selling prices for parallel-import vehicles. Our expertise lies in our ability to identify the type of parallel-import vehicles that are in high demand and to procure them in a timely manner.
The primary driver for our industry is the continuing growth of high-net-worth individuals in the PRC. We are focusing our attention on the most popular of the luxury vehicles that provide us with the best profit opportunity. We provide or utilize third parties in the U.S. to provide logistics and warehousing services and to truck transport our vehicles from an authorized dealer in the U.S. to the ultimate point of sale.
Beginning in the second half of 2023, the market for new luxury vehicles in the PRC has been negatively impacted by weak economic conditions and a shift in consumer demand towards EVs, mainly those produced domestically by PRC manufacturers. Luxury import brand manufacturers have responded to these threats by discounting the sale price of their vehicles, which has resulted in a significant challenge to our ability to generate a profit from the sale of parallel import vehicles generally. Consistent with our strategy to focus only on profitable parallel-import vehicle transactions, our unit sales during the fourth quarter of 2023 fell to 49 vehicles, a 36.4% decrease from the fourth quarter of 2022 and a 38.0% drop from unit sales in the third quarter of 2023, which resulted in our recognition of a net loss during the fourth quarter of 2023. This market dynamic has continued into 2024 and we are unable at this time to predict the point at which the market for luxury vehicles will firm and the positive spread between the price of vehicles sourced from brand manufacturers’ official distribution systems compared with those sourced via the parallel-import market will return.
We are responding to the current softness in luxury vehicle sales in China by reducing our operating costs, maintaining a very low level of inventory, and using our cashflow to strengthen our logistics and warehouse capabilities as well as cover overhead. We have significant flexibility to reduce expenses due to our scalable operations; for example, our procurement agents are paid on a commission basis only so these agents are paid only to the extent they purchase vehicles on our behalf. We are proceeding with our plans to integrate the acquisition of Edward and to acquire additional U.S.-based logistics and warehousing service providers to reduce our reliance on the purchase and sale of luxury vehicles and augment our core operations with service revenue, which we believe will provide the opportunity to generate revenue by selling these services to third-party parallel importers as well as to importers of other goods. We believe we can overlay these services with the financial services plans we launched in October 2022 for inventory financing (see “Item 1. Business—Overview—Recent Development” for more details), such that we can essentially become a one-stop shop for small- and medium-sized traders within the global supply chain sector.
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Key Factors Affecting our Results of Operations
We believe the following key factors may affect our financial condition and results of operations:
● Changes in consumer demand and consumption power in the PRC market . We primarily generate revenue from the sale of vehicles to parallel-import vehicle dealers in China, directly or through U.S. based exporters. We currently focus on luxury brands and gasoline-powered vehicles. Our industry is primarily driven by the increased number of wealthy consumers in the PRC market. If the consumption and purchasing power of Chinese customers declines, or if they are less inclined to purchase large, expensive vehicles, such as sport utility vehicles or luxury automobiles, and more inclined to purchase smaller, less expensive, and more fuel-efficient vehicles, our business and results of operations could be adversely affected.
● Fluctuations in the average selling price per vehicle and the number of vehicles available for sale caused by competition. The parallel-import vehicle dealership industry in the U.S. is relatively competitive and rapidly evolving, with many new companies joining the competition in recent years. We compete directly with other U.S. companies that sell parallel-import vehicles to the PRC, although most of our competitors are small family businesses that obtain U.S. cars through their family members or friends in the U.S. It is expected that competition will intensify in the future, and the increased competition may lead to price reductions for vehicle sales, which may result in reduced margins and a loss of market share. We purchase our inventory of vehicles from U.S. automobile dealers via third-party professional purchasing agents, and each of them can purchase a limited number of vehicles before being placed on the “exporters list.” If these purchasing agents are unable or unwilling to continue in their present positions, or if we fail to recruit new purchasing agents or maintain a sufficient number of purchasing agents to meet our purchasing demand, our business may be severely disrupted. If our procurement capabilities are impacted and we are unable to purchase popular vehicle models at reasonable procurement costs, our business and results of operations could be adversely affected. We may lose customers if we cannot successfully compete, which could adversely affect our financial performance and business prospects.
● Our ability to expand markets. During the year ended December 31, 2023, our three largest customers accounted for 53.2%, 25.5%, and 20.2% of our total revenue, respectively. For the year ended December 31, 2022, our three largest customers accounted for approximately 65% of our total revenue, while for the year ended December 31, 2021, our four largest customers accounted for 81.9% of our total revenue. While we have a strong record of performance, we cannot guarantee that we will continue to maintain our business relationships with these major customers at the same level, or at all. In the event that a significant customer terminates its relationship with us, we cannot assure that we will be able to secure an alternative arrangement with another comparable customer in a timely manner, or at all. Losing one or more of these major customers could adversely affect our revenue and profitability.
● China’s industrial Policies. Changes in consumer demand in the PRC market for fuel-efficient vehicles and electric vehicles could adversely affect our vehicle sales volumes and results of operations. Furthermore, government policies on the purchase and ownership of automobiles in the PRC, as well as stricter emission standards, may reduce the market demand for the automobiles we sell and thus negatively affect our business and growth prospects.
● Macroeconomic conditions. We facilitate the import of automobiles of foreign brands into the PRC market as parallel-import vehicles, and any adverse change in political relations between the PRC and the U.S. or any other country where those brands originate, including the ongoing trade conflicts between the U.S. and the PRC, may negatively affect our business. We are currently operating in a period of economic uncertainty and capital market disruption, which has been significantly impacted by geopolitical instability due to the ongoing military conflicts between Russia and Ukraine and in the Middle East. Our business, financial condition, and results of operations could be materially adversely affected by any negative impact on the global economy and capital markets resulting from the conflict in Ukraine, the Middle East, or any other geopolitical tensions.
Results of Operations
Major Components of Results of Operations
The automobile models we purchase and sell are among the most popular vehicles in the market, which we believe provide lucrative profit opportunities. Our selection of customers and the models we plan to purchase are based on our efforts to maximize the overall profitability of each vehicle sale. We will continue to apply this guiding principle in developing and refining our procurement and sales
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strategies. As such, we consider market conditions, capital costs, and other factors when determining the models and categories we purchase and the prices at which we sell them. While the brands, models, and their price ranges at which we sell may be adjusted, we intend to maintain the highest gross profit opportunities to improve the overall efficiency of our capital and maximize our earnings potential.
Revenue
We generate revenue by selling vehicles to U.S. parallel-import vehicle exporters and PRC parallel-import vehicle dealers. A specific vehicle model’s pricing and profitability vary based on the market demand and supply for that model. We set our selling prices based on multiple factors, including the price of the same model sold by authorized dealers in China, the normal commercial terms, customer payment methods, and anticipated workload for trading activities. The selling price is finalized as the MSRP plus adjustments, which are determined upon comprehensive consideration of the overall market conditions for vehicles as well as the customer’s payment method. In addition to those specific factors that impact the parallel-import vehicle market, our revenue may be impacted by global economic factors including the U.S. dollar/RMB exchange rate, overall financial and economic conditions in the PRC, and any significant change in relevant import or export regulations.
2023
2022
No. of Cars
Ave.
Total
No. of Cars
Ave.
Total
Sold
Selling Price
Revenue
Sold
Selling Price
Revenue
Q1
82
$
124,566
$
10,214,442
121
$
105,934
$
12,818,071
Q2
93
131,430
12,223,026
175
118,794
20,788,964
Q3
79
127,066
10,038,246
90
132,351
11,911,614
Q4
49
119,189
5,840,260
77
125,126
9,634,686
Total
303
$
126,455
$
38,315,974
463
$
119,122
$
55,153,335
Our revenue decreased by $16.8 million, or 30.5%, from $55.2 million in 2023 to $38.4 million in 2023. Despite a year-over-year revenue decline in 2023, our average selling price per vehicle increased from 2022. The initial rise was due to our shift towards models with higher profit margins. Starting from the third quarter of 2023, we began adjusting our average selling prices downward in response to short-term market volatility, which continued during the fourth quarter with the onset of price inversion in the Chinese market. These adjustments affected our fourth quarter sales, which resulted in a 39.4% drop in revenue from the same quarter in 2022.
Cost of Revenue
Our cost of revenue mainly comprises (i) the purchase cost of vehicles including dealership service fees and non-refundable taxes incurred during procurement, and (ii) fulfillment expenses, mainly including (a) compensation and bonuses for staff in the purchasing department, (b) commission paid to purchasing agents, (c) transportation and storage costs for vehicles, and (d) consulting fees paid to dealer experts to assist us in making the best purchase decisions. Allowance for slow-moving inventories is also included in the cost of revenue when our cost of inventory is higher than net realizable value.
Our cost of revenue decreased by $16.6 million, or 32.8%, from $50.7 million in 2022 to $34.1 million in 2023, primarily as a result of our decline in sales.
Interest Expense, Net
To improve our cash flow and expand our business, we obtain loans from finance companies through (i) inventory financing by keeping inventories not intended for immediate sale as collateral, (ii) LC financing by using letters of credit received from our international customers in overseas sales of parallel-import vehicles as collateral, and (iii) accessing revolving lines of credit to further support our operations and strategic initiatives. Accrued interest is recorded as interest expense. As of the date of this annual report, our LC financing annual interest rate is 18.0%, and our revolving line of credit interest rate is 18.0%.
Risks and Uncertainties
Our operations are in the U.S. and our primary market is in the PRC. Accordingly, our business, financial condition, and results of operations may be influenced by political, economic, and legal environments in the U.S. and the PRC, as well as by the general state of
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the U.S. and the PRC economies. Our results may be adversely affected by changes in the political, regulatory, and social conditions in the U.S. and the PRC.
Risks and uncertainties related to our business include, but are not limited to, the following:
● changes in consumer demand in the Chinese market towards fuel-efficient vehicles and electric vehicles could adversely affect our vehicle sales volumes and results of operations;
● the PRC government policies on the purchase and ownership of automobiles and stricter emissions standards may reduce the market demand for the automobiles we sell and thus negatively affect our business and growth prospects;
● any adverse change in political relations between the PRC and the U.S. or any other country where those brands originate, including the ongoing trade conflicts between the U.S. and the PRC, may negatively affect our business;
● the ongoing military conflicts between Russia and Ukraine and between Israel and Hamas could materially and adversely affect the global economy and capital markets, including significant volatility in commodity prices, especially energy prices, credit and capital markets, as well as supply chain interruptions; and
● the inflation in the economy may result in higher interest rates and capital costs, shipping costs, supply shortages, and increased costs of labor, and may adversely affect our liquidity, business, financial condition, and results of operations, particularly if we are unable to achieve commensurate increases in the prices we charge our customers.
Our business, financial condition, and results of operations may also be negatively impacted by risks related to natural disasters, extreme weather conditions, health epidemics, and other catastrophic incidents, which could significantly disrupt our operations.
Our operations in 2022 were affected by the COVID-19 pandemic. First, the COVID-19 pandemic restricted our purchasing agents in the U.S. from freely purchasing designated automobiles at U.S. automobile dealerships, either because of the short supply of vehicles or because of store closings or limited opening hours due to the COVID-19 pandemic. Second, the COVID-19 pandemic adversely affected the market demand for our products. Due to the implementation of significant governmental measures in the PRC, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus, parallel-import vehicle consumers were less willing to spend, and their purchasing power declined. Consequently, the market demand for luxury cars, which make up the vast majority of our inventory, has decreased dramatically. As of the date of this annual report, the spread of COVID-19 has been under control, and during the year ended December 31, 2023, the COVID-19 pandemic did not have a material impact on our financial positions and operating results.
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Comparison of Results of Operations for the Years Ended December 31, 2023 and 2022
For the Years ended December 31,
Change
2023
2022
Amount
%
USD
%
USD
%
Revenue
$
38,315,974
100.0
%
$
55,153,335
100.0
%
$
(16,837,361)
(30.5)
%
Cost of Revenue
Cost of vehicles
32,183,676
84.1
%
48,534,282
88.0
%
(16,350,606)
(33.7)
%
Fulfillment expenses
1,885,382
4.9
%
2,149,672
3.9
%
(264,290)
(12.3)
%
Total cost of revenue
34,069,058
89.0
%
50,683,954
91.9
%
(16,614,896)
(32.8)
%
Gross Profit
4,246,916
11.1
%
4,469,381
8.1
%
(222,465)
(5.0)
%
Selling expenses
668,721
1.7
%
898,852
1.6
%
(230,680)
(25.7)
%
General and administrative expenses
2,190,513
5.7
%
1,430,917
2.6
%
759,596
53.1
%
Total operating expenses
2,858,685
7.4
%
2,329,769
4.2
%
528,916
22.7
%
Income from Operations
1,388,231
3.6
%
2,139,612
3.9
%
(751,381)
(35.1)
%
Other Income (Expenses)
Interest expenses, net
(1,239,297)
(3.2)
%
(2,441,443)
(4.4)
%
1,202,146
(49.2)
%
Other income, net
31,593
0.1
%
12,974
—
%
18,619
143.5
%
Subsidy income from Business Recovery Grant Program
—
—
%
1,340,316
2.4
%
(1,340,316)
(100.0)
%
Total other expenses, net
(1,207,704)
(3.1)
%
(1,088,153)
(4.4)
%
(119,551)
11.0
%
Income before Provision for Income Tax
180,527
0.5
%
1,051,459
(0.5)
%
(187,822)
(82.8)
%
Provision for Income Taxes
46,657
0.1
%
234,479
0.4
%
(187,822)
(80.1)
%
Net Income
$
133,870
0.4
%
$
816,980
(0.9)
%
$
(683,110)
(83.6)
%
Revenue
Years Ended December 31,
2023
2022
Amount
%
Total
$
38,315,974
$
55,153,335
$
(16,837,361)
(30.5)
%
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During the year ended December 31, 2023, our financial performance reflected the consequences of our strategic decisions and external market forces. Our revenue experienced a substantial decline compared to the previous year. Revenue from our operations decreased by $16.8 million, or 30.5%, from approximately $55.2 million in 2022 to $38.4 million in 2023. This decline can be primarily attributed to an intentional pause in vehicle procurement in the fourth quarter of 2023, prompted by price inversion in the Chinese market, as well as a change in our procurement pricing strategy as detailed in our most recent quarterly report. The impact of these factors was particularly pronounced in the fourth quarter of 2023, during which period revenue was $5.8 million, a decrease of 39.4%, or $3.8 million, from the $9.6 million reported in the fourth quarter of the previous year.
Year Ended December 31,
Year Ended December 31,
2023
2022
Average Selling Price Changes
No.
Sales Amount
Ave Selling Price
No.
Sales Amount
Ave Selling Price
Amount
%
Bentley
—
$
—
$
—
2
$
537,448
$
268,724
$
—
—
%
BMW X7
5
480,210
96,042
72
6,426,881
89,262
6,780
7.6
%
Porsche Cayenne
—
—
—
26
2,405,244
92,509
—
—
%
Mercedes G550
—
—
—
8
1,538,944
192,368
—
—
%
Mercedes G63
—
—
—
8
1,917,066
239,633
—
—
%
Mercedes GLS 450
157
17,634,255
112,320
204
21,690,333
106,325
5,995
5.6
%
Mercedes Benz GLS600
12
2,877,516
239,793
1
273,603
273,603
(33,810)
(12.4)
%
Mercedes Benz S500
—
—
—
51
6,976,494
136,794
—
—
%
RAM Trucks
14
1,698,061
121,290
7
864,644
123,521
(2,230)
(1.8)
%
Land Rover Range Rover
15
2,359,979
157,332
5
800,931
160,186
(2,854)
(1.8)
%
Toyota Sequoia
32
3,242,567
101,330
2
202,383
101,192
139
0.1
%
Mercedes-Benz Sprinter
—
—
—
3
238,847
79,616
—
—
%
LEXUS LX570
—
—
—
3
318,503
106,168
—
—
%
LEXUS LX600
68
10,023,386
147,403
71
10,962,014
154,395
(6,992)
(4.5)
%
Total
303
$
38,315,974
$
126,455
463
$
55,153,335
$
119,122
$
7,334
6.2
%
(i) In 2023, we sold 303 vehicles, a 34.6% decrease from 463 in 2022. The decline was primarily due to market volatility in China, particularly price fluctuations, resulting in a halt in vehicle procurement in the fourth quarter. During this period, 49 vehicles were sold compared to 77 in 2022, representing a 36.4% decrease.
(ii) During the year ended December 31, 2023, we strategically restructured our product portfolio by discontinuing the sale of select luxury car models, such as the Porsche Cayenne, Mercedes G550, and MB S500. This decision was driven by our objective to better align with market demand, streamline resource allocation toward higher-demand models, and improve our inventory cost management.
(iii) Our average selling price per vehicle for the years ended December 31, 2023 and 2022 was $126,455 and $119,122 respectively, representing an increase of $7,334, or 6.2 %, per vehicle. This increase demonstrates our ability to adjust pricing strategies effectively and underscores the positive impact of our portfolio restructuring on our revenue profile. However, this increase was contrasted with a decrease in the volume of vehicles sold, as a result of the strategic pause in procurement in response to the price inversion in the Chinese market, which led to an overall decline in revenue.
Years Ended December 31,
2023
2022
Amount
%
Revenue:
U.S. domestic market
$
8,160,395
$
3,821,261
$
4,339,134
113.6
%
Overseas market
30,155,579
51,332,074
(21,176,495)
(41.3)
%
Total
$
38,315,974
$
55,153,335
$
(16,837,361)
(30.5)
%
(iv) Sales to U.S. market dealers/exporters in 2023 amounted to 73 vehicles, representing 24.1% of total unit sales and 21.3% of total revenue during the year, compared with 29 vehicles sold in 2022 amounting to 6.3% of total unit sales and 6.9% of total revenue in 2022. Sales to overseas markets in 2023, primarily the PRC market, amounted to 230 vehicles, representing 75.9%
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of total unit sales and 78.7% of total revenue during the year, compared with 434 vehicles in 2022, representing 93.7% of total unit sales and 93.1% of total revenue.
The size of our procurement group enables us to purchase a large number of vehicles within a short period of time; therefore, many of our U.S.-based peers turn to us for vehicle purchasing. Our cooperation with selected U.S. counterparts generally improves our cash flow without compromising our ability to deliver vehicles to our PRC clients. Recent developments, including the price inversion in the Chinese market, have reinforced the effectiveness of this approach.
Cost of Revenue
Years Ended December 31,
2023
2022
Amount
%
Cost of Revenue
Cost of vehicles
$
32,183,676
$
48,534,282
$
(16,350,606)
(33.7)
%
Fulfillment expenses
1,885,382
2,149,672
(264,290)
(12.3)
%
Total cost of revenue
$
34,069,058
$
50,683,954
$
(16,614,896)
(32.8)
%
Our total cost of revenue decreased by $16.6 million, or 32.8%, from $50.7 million in 2022 to $34.1 million in 2023. For the years ended December 31, 2023 and 2022, our total cost as a percentage of our total revenue was 88.9% and 91.9%, respectively. Our total cost of revenue decreased in line with the reduced revenue, indicating effective cost control measures. The procurement strategy shift, initiated earlier in 2023, was a significant factor in this decrease, allowing us to manage costs more effectively despite external market pressures.
Cost of Vehicles
Total cost of vehicles sold decreased by $16.3 million, or 33.7%, from $48.5 million in 2022 to $32.2 million in 2023. For the years ended December 31, 2023 and 2022, we sold 303 and 463 vehicles, respectively. The average purchase price per vehicle increased from $104,826 in 2022 to $106,217 in 2023.This increase was primarily driven by the increased MSRP of the vehicles we acquired.
The cost of vehicles sold was approximately 84.0% and 88.0% of revenue for the years ended December 31, 2023, and 2022, respectively. This favorable change is primarily attributed to the altered composition of our sales between the U.S. domestic and overseas markets. During this period, we experienced a strategic shift with an increased percentage of sales occurring domestically. Given the lower transportation costs associated with U.S. domestic sales compared to the expenses incurred for overseas delivery, our cost of revenue as a percentage of total revenue improved.
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Fulfillment Expenses
Years Ended December 31,
2023
2022
Amount
%
Fulfillment Expenses
Payroll and benefits
$
1,094,296
$
1,300,581
$
(206,286)
(15.9)
%
Buyer commission
289,153
308,948
(19,795)
(6.4)
%
Vehicle storage and towing
298,265
354,683
(56,418)
(15.9)
%
Vehicle insurance expenses
96,024
88,982
7,041
7.9
%
Consulting Fees
75,299
73,619
1,680
2.3
%
Others
32,346
22,860
9,486
41.5
%
Total fulfillment expenses
$
1,885,382
$
2,149,672
$
(264,290)
(12.3)
%
Fulfillment expenses decreased by approximately $0.3 million, or 12.3%, from $2.1 million in 2022, to $1.9 million in 2023. The decrease was mainly attributable to the cost reductions in payroll and benefits as well as the improved management of vehicle storage and towing costs. The decrease was partially offset by an increase in vehicle insurance and other miscellaneous expenses. In 2023, we made a shift in our procurement strategy by transporting a majority of our vehicles to the West Coast. While this decision resulted in an increase in procurement costs, it was offset by a decrease in selling expenses. The new strategy also streamlines shipping time and expedites receipt of payment through letters of credit, since it takes approximately 14 to 21 days to deliver a purchased vehicle to a customer overseas through the West Coast ports (compared with 40 to 60 days if through the East Coast ones), resulting in significantly shorter payment cycles.
Gross Profit
As a result of the foregoing, our gross profit decreased by $0.2 million, or 5.0%, from $4.5 million in 2022 to $4.3 million in 2023. As of percentage of revenue, the gross margin increased 3%, from 8.1% in 2022 to 11.1% in 2023. This positive shift is primarily attributable to our strategic adjustments within our product portfolio. These adjustments, which centered on optimizing the inventory mix towards products with more favorable margins, played a pivotal role in cushioning the revenue downtrend and improving our gross margin ratio.
Operating Expenses
Selling Expenses
Years Ended December 31,
2023
2022
Amount
%
Selling Expenses
Payroll and benefits
$
145,764
$
180,212
$
(34,450)
(19.1)
%
Ocean freight
498,022
710,265
(212,244)
(29.9)
%
Others
24,387
8,375
16,011
191.2
%
Total selling expenses
$
668,172
$
898,852
$
(230,680)
(25.7)
%
In 2023, our total selling expenses decreased by 25.7% to $0.7 million, representing 1.7% of our revenue, a slight increase from 1.6% in 2022. This change is due to a 29.9% reduction in ocean freight expenses and 19.1% decrease in payroll and benefits, despite a 191.2% increase in other expenses. The decrease in selling expenses can be attributed primarily to a reduction in the number of vehicles sold during the fourth quarter.
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General and Administrative Expenses
Years Ended December 31,
2023
2022
Amount
%
General and Administrative Expenses
Payroll and benefits
$
692,729
$
418,420
$
274,307
65.6
%
Rental and leases
268,801
218,305
50,495
23.1
%
Travel & entertainment
65,533
32,846
32,687
99.5
%
Legal & accounting fees
764,375
544,863
219,512
40.3
%
Recruiting fees
10,367
30,258
(19,890)
(65.7)
%
Bank charges and fees
50,844
47,915
2,929
6.1
%
Insurance expenses
155,787
15,130
140,658
929.7
%
Others
182,076
123,180
58,896
47.8
%
Total general and administrative expenses
$
2,190,513
$
1,430,917
$
759,596
53.1
%
General and administrative expenses increased by $0.8 million, or 53.1%, to $2.2 million in 2023 from $1.4 million in 2022, primarily due to (i) an increase in personnel-related expenses by approximately $0.3 million, or 65.6%, as a result of the recruitment of additional employees in 2023, (ii) the leasing of an additional office workplace in New York, resulting in increased rental and lease expenses, (iii) an increase in legal and accounting expenses, and (iv) an increase in insurance expenses due to higher costs associated with directors and officers insurance.
Other Income (Expenses)
Interest Expenses, net
Years Ended December 31,
2023
2022
Amount
%
Inventory financing
$
112,769
$
747,298
$
(634,529)
(84.9)
%
Letter of credit financing
925,426
1,669,931
(744,506)
(44.6)
%
Dealers finance charges
3,975
2,332
1,643
70.5
%
Other loan interest
31,197
18,641
12,556
67.4
%
Line of credit interest
155,245
—
155,245
100.0
%
Credit card interest
4,712
3,242
1,470
45.3
%
Premium finance interest
5,974
—
5,974
100.0
%
Total
$
1,239,297
$
2,441,443
$
(1,202,146)
(49.2)
%
Interest expenses decreased significantly by approximately $1.2 million, or 49.2%, to $1.2 million for the year ended December 31, 2023, from $2.4 million for the year ended December 31, 2022, primarily due to (i) the significant drop in inventory financing activities and reduced LC financing activities and (ii) the completion of our IPO in the third quarter of 2023, which marked a significant financial milestone and resulted in a substantial capital infusion. This financial event has played a key role in reducing our reliance on external financing and, subsequently, in the reduction of interest expenses.
In order to improve our liquidity and retain more cash to acquire new cars, we may enter into short-term loans from time to time, pledging our inventory as collateral before the vehicles are delivered to our customers. We incur interest expenses on such inventory financing, provided mainly by small lenders, generally at a rate of 1.35% to 1.80% per month. In 2023, the total weighted average balance of funds we obtained through inventory financing was $0.6 million, the interest expenses incurred was $0.1 million, and the weighted average annual interest rate was 17.6%. In 2022, the total weighted average balance of funds we obtained through inventory financing was $4.5 million, the interest expense incurred was $0.7 million, and the weighted average annual interest rate was 16.6%. As we continue to develop our third-party financial services, which are provided in the form of financing for inventory purchase, we intend to minimize our own inventory financing obtained from other parties.
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We may also finance our operations from time to time through short-term loans using letters of credit, typically received from our international customers in overseas sales of parallel-import vehicles as collateral. Generally, we borrow approximately 90% or more of the letter of credit amount with a monthly interest rate of approximately 1.5%. In 2023, the total weighted average balance of funds we obtained through LC financing decreased to $4.7 million, the interest expenses incurred was $0.9 million, and the weighted average annual interest rate was 19.5%. In 2022, the total weighted average balance of funds we obtained through LC financing was $9.0 million, the interest expenses incurred was $1.7 million, and the weighted average annual interest rate was 18.5%. The decrease in total weighted average balance of funds through LC financing and the related interest expenses incurred in 2023 reflected a lower volume of vehicles shipped and greater use of our revolving lines of credit.
As of December 31, 2023, the total weighted average balance of funds we obtained through revolving lines of credit was $0.9 million, the interest expenses incurred were $0.2 million for year ended December 31, 2023, and the weighted average annual interest rate was 18.0%.
Provision for Income Taxes
Our provision for income taxes, which consists of U.S. federal and state income taxes, amounted to approximately $50,000 and $0.2 million in 2023 and 2022, respectively.
Liquidity and Capital Resources
Cash Flows and Working Capital
We assess our liquidity in terms of our ability to generate adequate amounts of cash to meet current and future needs. We have relied primarily upon cash provided by operations and financing activities, including as necessary third-party loans and financial support from our founders.
As reflected in the accompanying consolidated financial statements, we reported net income of approximately $135,000 for the year ended December 31, 2023. We also reported cash provided by operating activities of $5.6 million for the year ended December 31, 2023, a positive working capital of $7.5 million and total stockholders’ equity of $6.9 million.
In December 2023, we further advanced our financial services strategy, initially launched in October 2022, with a focus on providing inventory financing services. This strategic progression was marked by the introduction of vehicle pledge loans, primarily aimed at parallel-import car dealers. We provided $0.7 million in loans to third parties in the fourth quarter of 2023, all of which was outstanding as of December 31, 2023. See “Note 4—Loans Receivable” in the notes to our consolidated financial statements for more details.
In August 2023, we completed our IPO of 1.25 million shares of Class A common stock and raised net proceeds of approximately $3.7 million after expenses. We commenced using our revolving lines of credit during the second quarter of 2023, which has reduced our borrowings under our inventory and LC financing and reduce our interest expenses.
We entered into a series of loan agreements with third-party companies for working capital purposes during the year ended December 31, 2023. Pursuant to these agreements, loan payables from LC financing were collateralized by letters of credit from overseas sales of parallel-import vehicles. The accounts receivable in connection with letters of credit with book value of $1,084,775 and $7,502,291 were pledged as collateral to guarantee our borrowings from these third-party companies as of December 31, 2023 and 2022, respectively.
In October 2022, we entered into agreements with two third-party companies that have been providing financial support to us since 2021. Pursuant to the agreements, we can borrow under revolving lines of credit of up to $10.0 million and $5.0 million, respectively, from these two third-party companies for a total of $15.0 million for a period of 12 months at a fixed interest rate of 1.5% per month. In December 2022, we amended the revolving line of credit agreements to extend their maturity dates to April 2024.
In June 2022, we sold 1,666,000 shares of Class A common stock at a purchase price of $1.80 per share. The gross proceeds were approximately $3.0 million, before deducting the offering expenses of approximately $0.3 million. The net proceeds were approximately $2.7 million, of which approximately $0.6 million was received in September 2022, $0.5 million in November 2022, $0.1 million in
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December 2022, $0.7 million in March 2023, and $0.5 million in July 2023, for a total receipt of approximately $2.4 million. The balance of $0.6 million is expected to be paid within six months after our IPO.
In March 2022, we entered into an amended agreement with the SBA to borrow an additional $350,000 for 30 years as working capital to alleviate economic injury caused by the COVID-19 pandemic. In aggregate, our SBA borrowings amounted to $500,000 with a maturity date of May 23, 2050. The amended loan bears a fixed interest rate of 3.75% per annum. Beginning from March 2022, 24 months from the date of the original loan agreement, we are required to make a new monthly installment payment of $2,485 within the remaining term of the loan, with the last installment to be paid in May 2050.
In assessing our liquidity, we monitor and analyze our cash on-hand, our ability to generate sufficient revenue, the collection of our accounts receivable, our ability to obtain additional financial support in the future, and our operating and capital expenditure commitments. We reported cash of $0.4 million as of December 31, 2023. As of December 31, 2023, our working capital amounted to approximately $7.5 million (namely, $9.8 million of current assets less $2.3 million of current liabilities), including $1.8 million loans payable. Our solid working capital position is supported additionally by our ability to borrow under our existing credit facilities based on past experience, our good credit history, and well-established relationship with the lenders. We have from time to time in the past several years been supported with loans from our principal stockholder, and we believe such support will be available in the future, if needed.
The completion of the IPO in the third quarter of 2023 provided us with a substantial influx of capital. With improved access to funds as a result of being a public company, we now have the increased financial flexibility to operate without the current need for external debt financing and can manage our operations with a more comfortable cash flow position.
We are working to further improve our liquidity and capital sources primarily by generating cash from operations, debt financing, and, if needed, financial support from our principal stockholder. In order to fully implement our business plan and sustain continued growth, we may also seek additional equity financing from outside investors. Based on the current operating plan, management believes that the above-mentioned measures collectively will provide sufficient liquidity to meet our future liquidity and capital requirements for at least 12 months from the issuance date of the consolidated financial statements.
Cash Flows for the Years Ended December 31, 2023 and 2022
The following table summarizes our cash flow for the years ended December 31, 2023 and 2022:
Years ended December 31,
2023
2022
Net cash provided by operating activities
$
5,610,225
$
2,189,605
Net cash (used in) investing activities
(672,500)
—
Net cash (used in) financing activities
(4,563,108)
(2,632,201)
Net increase (decrease) in cash
$
374,617
$
(442,596)
Operating Activities
Net cash provided by operating activities was $5.6 million for the year ended December 31, 2023. This was primarily attributable to a collection of $0.6 million in accounts receivable, a $4.5 million decrease in inventory, $0.5 million decrease in other receivables, and other less significant factors.
Net cash provided by operating activities was $2.2 million for the year ended December 31, 2022. This was primarily attributable to a net profit of $0.8 million, adjusted by a $10.5 million reduction in inventory and offset by (i) a $1.8 million decrease in deferred revenue (because customer prepayment and deposit was recognized as revenue during 2022 when revenue recognition criteria were met), (ii) a $7.1 million increase in accounts receivable, and (iii) other factors of less significance.
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Investing Activities
Net cash used in investing activities was $0.7 million and nil for the years ended December 31, 2023 and 2022, respectively. The increase of investing activities consisted of (i) $0.5 million in short-term loans lent to third parties, and (ii) $0.2 million in vehicle pledge loans extended to third parties.
Financing Activities
Net cash used in financing activities of $4.6 million for the year ended December 31, 2023, consisted of (i) net repayments of LC financing of $25.5 million; (ii) net repayments of inventory financing of $4.2 million; (iii) net repayments of revolving lines of credit of $2.6 million; and (iv) repayments of dealers financing of $0.4 million; partially offset by (v) proceeds from LC financing of $19.4 million; (vi) proceeds from revolving lines of credit of $3.2 million; (vi) proceeds from dealers financing of $0.4 million; (vii) proceeds from premium finance of $0.2 million; (viii) a reduction in subscriptions receivable of $1.2 million; and (ix) net proceeds from our IPO of $3.7 million.
Net cash used in financing activities of $2.6 million for the year ended December 31, 2022, consisted of (i) net repayment of LC financing of $34.3 million; (ii) net repayment of inventory financing of $26.1 million; (iii) repayment to a founder of $1.4 million; and (iv) repayment of dealers financing of $0.2 million; partially offset by (v) net proceeds from LC financing of $33.3 million, (vi) net proceeds from inventory financing of $24.3 million; (vii)issuance of common stock of $1.2 million; (viii) net financing support from long-term borrowing of $0.4 million; and (ix) financial support of $0.3 million from our founder.
Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2023:
Less than 1
1 to 5
Above 5
Total
Year
years
years
Lease commitment
$
247,479
$
66,391
$
181,088
$
—
Long-term borrowings
677,613
32,887
149,356
495,370
Total
$
925,092
$
99,278
$
330,444
$
495,370
Except for those disclosed above, we did not have any significant capital or other commitments, long-term obligations, or guarantees outstanding as of December 31, 2023.
Off-Balance Sheet Arrangements
We did not have during the period presented, and we do not currently have, any off-balance sheet financing arrangements as defined under the rules and regulations of the SEC, or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Estimates
We prepare our financial statements in conformity with the accounting principles generally accepted in the U.S. (“U.S. GAAP”), which require us to make judgments, estimates, and assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any related disclosures. Although there were no material changes made to the accounting estimates and assumptions in the past three years, we continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.
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Estimated allowance for doubtful accounts receivable
Management reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. Our Company determines the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trend. On March 13, 2024, we received requests for deferred payments from two clients, both supported by third-party guarantors. These accounts have been subject to a heightened review process, with our assessment including an evaluation of the clients’ reasons for deferral and an analysis of the financial standing of the guarantors. Based on this review, as of December 31, 2023, we concluded that these receivables remained fully collectible and, consequently, did not establish an allowance for doubtful accounts. This conclusion is subject to change as future evaluations may indicate a heightened risk of non-collection. For a detailed information on overdue amounts, please refer to “Note 3—Accounts Receivable” in the notes to our consolidated financial statements.
Estimated allowance for inventories obsolescence
Management’s estimated allowance for the inventory obsolescence reserves is based on management’s assessment of realization of inventory. Any excess of the cost over the realizable value of each item of inventories recognized as a provision for diminution in the value of inventories. As of December 31, 2023 and 2022, we recorded no reserves of inventories from the carrying amount to their net realizable values.
Estimate of the valuation allowance of deferred tax assets
Our Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, our Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. We have not assessed a valuation allowance as we determine it is more likely than not that all deferred tax assets will be realized before expiration.
Revenue Recognition
ASC 606 establishes principles for reporting information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. ASC 606 requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that our Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) our Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way our Company records its revenue. Under the new guidance, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the new guidance requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
Our Company is primarily engaged in the parallel-import vehicle dealership business and generates revenue from the sales of parallel-import vehicles to both domestic and oversea parallel-import car dealers. We purchase automobiles from the U.S. market through our large team of professional purchasing agents, and mainly resell them to parallel-import car dealers in the U.S. and PRC. In accordance with ASC 606, our Company recognizes revenue at the point in time when the performance obligation has been satisfied and control of the vehicles has been transferred to the dealers. For sales to U.S. domestic parallel-import car dealers, revenue is recognized when a vehicle is delivered and its title has been transferred to the dealers. For overseas sales, our Company sells vehicles under Cost and Freight (“CFR”) shipping point term, and revenue is recognized when a vehicle is loaded on a cargo ship and its title has been transferred to the dealers. Our Company accounts for the revenue generated from sales of vehicles on a gross basis as our Company is acting as a principal in these transactions, is subject to inventory risk, has latitude in establishing prices, and is responsible for fulfilling the promise to provide customers the specified goods, which our Company has control of the goods and has the ability to direct the use of goods to obtain substantially all the benefits. All of our Company’s contracts have one single performance obligation as the promise is to transfer the individual vehicle to parallel-import car dealers, and there is no separately identifiable other promises in the contracts. Our
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Company’s vehicles are sold with no right of return and our Company does not provide other credits or sales incentives to parallel-import car dealers. Historically, no customer returns have occurred. Therefore, our Company did not provide any sales return allowances for the years ended December 31, 2023 and 2022.
Contract balances and remaining performance obligations
Contract balances typically arise when a difference in timing between the transfer of control to the parallel-import car dealers and receipt of consideration occurs. Our Company did not have contract assets nor contract liabilities as of December 31, 2023 and 2022.
Accounts receivable, net
Accounts receivable represent the amounts that our Company has an unconditional right to consideration, which are stated at the original amount less an allowance for doubtful accounts. Our Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. Our Company determines the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trends. Our Company establishes a provision for doubtful receivables when there is objective evidence that our Company may not be able to collect amounts due. The allowance is based on management’s best estimate of specific losses on individual exposures, as well as a provision on historical trends of collections. Actual amounts received may differ from management’s estimate of credit worthiness and the economic environment. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the collection is not probable. As of December 31, 2023 and 2022, there was no allowance for doubtful accounts recorded as we consider all of the outstanding accounts receivable fully collectible.
Loans receivable, net
The Company’s loans receivable are recognized at the point of loan disbursement, initially measured at fair value, primarily reflecting the disbursed amount and associated transaction costs. Both secured and unsecured lending are encompassed in these receivables, with terms including varying interest rates and maturity dates. Subsequently, these receivables are measured at amortized cost using the effective interest method, which ensures the accurate recognition of interest income over the loan period. The interest rates for these loans may be subject to change based on the terms of loan agreements. Periodic reviews of the loan portfolio are conducted to assess for impairment, utilizing the expected credit loss model. This approach considers historical credit loss experience, current conditions, and reasonable forecasts in estimating potential credit losses. As of the date of this annual report, no significant impairment allowance has been recorded for these loans receivable.
Inventories, net
Inventories consist of new vehicles held for sale and are stated at the lower of cost or net realizable value using the specific identification method. The cost of inventory mainly includes the cost of auto vehicles purchased from U.S. automobile dealers, non-refundable sales tax, and dealership service fees. Our Company reviews its inventory periodically if any reserves are necessary for potential shrinkage. We recorded no inventory reserve as of December 31, 2023 and 2022.
Income taxes
Our Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, our Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
Our Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, our Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. We have not assessed a valuation allowance as we determine it is more likely than not that all deferred tax assets will be realized before expiration.
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Our Company records uncertain tax positions in accordance with ASC 740 (“ASC 740”), Income Taxes, on the basis of a two-step process in which (1) our Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, our Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Our Company does not believe that there were any uncertain tax positions as of December 31, 2023 and 2022.
Our Company and its operating subsidiaries in the United States are subject to the tax law of the United States. Our Company elected to file income taxes as a corporation instead of an LLC for the tax years ended December 31, 2020 through December 31, 2023. As of December 31, 2023, the tax years ended December 31, 2020 through December 31, 2022 for our consolidated income tax returns remain open for statutory examination by U.S. tax authorities.
Recent Accounting Pronouncements
See “Note 2—Summary of Significant Accounting Policies—Recent Accounting Pronouncements” in the notes to our consolidated financial statements for a discussion of recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller report company, we are not required to provide the information required by this item.
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