Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this quarterly report on Form 10-Q.
Forward-Looking Statements
This quarterly report on Form 10-Q contains “forward-looking statements.” All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to: any projections of earnings, revenue, or other financial items; any statements regarding the adequacy, availability, and sources of capital, any statements of the plans, strategies, and objectives of management for future operations; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “plan,” “project,” or “anticipate,” and other similar words. In addition to any assumptions and other factors and matters referred to specifically in connection with such forward-looking statements, factors that could cause actual results or outcomes to differ materially from those contained in the forward-looking statements include those factors set forth in the “Risk Factors” section included in our registration statement on Form S-1 (File No. 333-280743), as amended, which was initially filed with the SEC on July 10, 2024 and declared effective by the SEC on July 15, 2024.
Although we believe that the expectations reflected in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed in this quarterly report. We do not intend, and undertake no obligation, to update any forward-looking statement, except as required by law.
The information included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes included in this quarterly report on Form 10-Q, and the audited consolidated financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report.
Business Overview and Recent Developing Trends
We are a provider of warehousing and logistics services, historically in connection with the sale of parallel-import vehicles sourced in the U.S. to be sold in the PRC market, and more recently for the transportation of other goods between the U.S. and the PRC. We began our operations in 2016 exclusively as a parallel-import vehicle dealer for luxury brand automobiles but have now focused on facilitating non-vehicle trade in view of the continued weakness for imported automobiles in the PRC.
From 2016 to the first half of 2022, we experienced significant growth in sales volume, revenue, and gross profit due to our core strengths and a favorable economic climate. Since 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 electric vehicles (“EVs”), mainly those produced domestically by PRC manufacturers. Luxury import brand dealers have responded to these threats by discounting the sale price of their vehicles, which has lately prevented us from generating a profit from the sale of parallel import vehicles. These adverse market conditions have continued in the first half of 2024 and we are unable to predict the point at which a 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.
To diversify our revenue and further leverage our in-depth expertise in the parallel-import vehicle industry, we have embarked on a plan to acquire logistics and warehousing businesses with the goals to reduce costs and increase efficiency in managing the transaction cycle. In February 2024, we successfully completed the acquisition of Edward Transit Express Group Inc. (“Edward”) and started providing our own logistics and warehousing services. For the six months ended June 30, 2024, we generated revenues of approximately $0.2 million from logistics and warehousing services, representing approximately 31.8% of our total revenues for the period.
We are committed to streamlining operations to reduce costs, enhance efficiency, and attract new clients. Management believes these strategic initiatives will position the Company for sustainable growth and increased market share.
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Results of Operations
Revenues
The Company operates in two business segments: parallel-import vehicle sales and logistics and warehousing services. Revenue from the parallel-import vehicle dealership business is generated from the sale of parallel-import vehicles to both domestic and overseas parallel-import car dealers. We purchase automobiles from the U.S. market through our team of professional purchasing agents, and resell them mainly to parallel-import car dealers in the U.S. and the PRC. In accordance with ASC 606, we recognize revenue 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, the Company sells vehicles under CFR shipping terms, and revenue is recognized when a vehicle is loaded on a cargo ship and its title has been transferred to the dealers. We account for the revenue generated from sales of vehicles on a gross basis as we are acting as a principal in these transactions, are subject to inventory risk, have latitude in establishing prices, and are responsible for fulfilling customer orders.
In the logistics and warehousing services segment, revenue from freight forwarding services, both export and import, is recognized when the services are provided, based on the relative transit time. Our role as the principal in these services involves managing the entire shipping process from origin to destination, allowing revenue recognition on a gross basis throughout the transit period. For warehousing services, revenue is primarily derived from storage fees, which are recognized based on the actual number of days the goods are stored in the warehouse while awaiting further transportation.
Cost of Revenues
Our cost of revenue from parallel-import vehicles sold 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 from logistics and warehousing service mainly includes the associated costs of freight and fulfillment expenses. We act as a principal, controlling the goods and services, bearing inventory and pricing risks, and fulfill performance obligations directly.
Interest Expense, Net
In the past, to improve our cash flow and support parallel-import vehicles business, we obtained loans from finance companies through (i) LC financing by using letters of credit from our international customers in overseas sales of parallel-import vehicles as collateral, and (ii) accessing revolving lines of credit to further support our operations and strategic initiatives. Accrued interest is recorded as interest expense.
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 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 EVs, or a general declining purchasing power of PRC consumers, may 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;
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● 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 several of its regional adversaries 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
● 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.
Comparison of Results of Operations for the periods presented:
Three months ended June 30,
Change
Six Months Ended June 30,
Change
2024
2023
Amount
%
2024
2023
Amount
%
USD
%
USD
%
USD
%
USD
%
Revenues
Parallel-import Vehicles
$
200,297
68.2
%
$
12,223,026
100.0
%
$
(12,022,729)
(98.4)
%
$
1,631,248
90.5
%
$
22,437,468
100.0
%
$
(20,806,220)
(92.7)
%
Logistics and Warehousing
93,563
31.8
%
—
—
%
93,563
100.0
%
170,397
9.5
%
—
—
%
170,397
100.0
%
Total Revenues
293,860
100.0
%
12,223,026
100.0
%
(11,929,167)
(97.6)
%
1,801,645
100.0
%
22,437,468
100.0
%
(20,635,823)
(92.0)
%
Cost of Revenues
Cost of vehicles
200,297
68.3
%
10,319,991
84.4
%
(10,119,694)
(98.1)
%
1,515,270
84.2
%
18,824,494
83.9
%
(17,309,224)
(92.0)
%
Fulfillment expenses
15,537
5.3
%
650,666
5.3
%
(635,129)
(97.6)
%
140,798
7.8
%
1,217,548
5.4
%
(1,076,750)
(88.4)
%
Ocean Freight Costs
45,598
15.5
%
—
—
%
45,598
100.0
%
88,098
4.9
%
—
—
%
88,098
100.0
%
Total cost of revenues
261,432
89.1
%
10,970,657
89.7
%
(10,709,225)
(97.6)
%
1,744,166
96.9
%
20,042,042
89.3
%
(18,297,876)
(91.3)
%
Gross Profit (Loss)
32,428
11.0
%
1,252,369
10.3
%
(1,219,941)
(97.4)
%
57,479
3.2
%
2,395,426
10.7
%
(2,337,947)
(97.6)
%
Selling expenses
19,422
6.6
%
141,340
1.2
%
(121,918)
(86.3)
%
98,262
5.5
%
419,123
1.9
%
(320,861)
(76.6)
%
General and administrative expenses
865,354
294.5
%
565,400
4.6
%
299,954
53.1
%
1,632,996
90.6
%
1,146,470
5.1
%
486,526
42.4
%
Total operating expenses
884,776
301.1
%
706,740
5.8
%
178,036
25.2
%
1,731,258
96.1
%
1,565,593
7.0
%
165,665
10.6
%
(Loss) Income From Operations
(852,348)
(290.1)
%
545,629
4.5
%
(1,397,977)
(256.2)
%
(1,673,779)
(92.9)
%
829,833
3.7
%
(2,503,612)
(301.7)
%
Other (Expense) Income
Interest expense, net
(36,200)
(12.3)
%
(334,855)
(2.7)
%
298,655
(89.2)
%
(98,965)
(5.5)
%
(771,914)
(3.4)
%
672,949
(87.2)
%
Other income, net
28,393
9.7
%
1,968
—
%
26,425
1,342.7
%
57,945
3.2
%
3,902
—
%
54,043
1,385.0
%
Total other expense, net
(7,807)
(2.6)
%
(332,887)
(2.7)
%
325,080
(97.7)
%
(41,020)
(2.3)
%
(768,012)
(3.4)
%
726,992
(94.7)
%
(Loss) Income before Income Tax Provision
(860,155)
(292.7)
%
212,742
1.8
%
(1,072,897)
(504.3)
%
(1,714,799)
(95.2)
%
61,821
0.3
%
(1,776,620)
(2,873.8)
%
Income tax (benefit) provision
(247,275)
(84.1)
%
56,997
0.5
%
(304,272)
(533.8)
%
(492,989)
(27.4)
%
14,009
0.1
%
(506,998)
(3,619.1)
%
Net (Loss) Income
$
(612,880)
(208.6)
%
$
155,745
1.3
%
$
(768,625)
(493.5)
%
$
(1,221,810)
(67.8)
%
$
47,812
0.2
%
$
(1,269,622)
(2,655.4)
%
Comparison of the Three Months Ended June 30, 2024 and 2023
Revenues
For the three months ended June 30, 2024 and 2023, revenue decreased by $11.9 million, or 97.6%, from approximately $12.2 million to $0.3 million. This substantial decrease was primarily due to the continued decline in our parallel-import vehicles business. The newly established logistics and warehousing segment, operational since the acquisition of Edward in February 2024, generated revenue of $0.1 million, representing about 31.8% to our total revenues for the three months ended June 30, 2024.
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Parallel-import Vehicles Segment
We continue to face significant challenges in the parallel-import vehicle market. Revenue from vehicle sales decreased by $12.0 million, or 98.4%, from approximately $12.2 million for the three months ended June 30, 2023 to $0.2 million for the three months ended June 30, 2024. The decrease was primarily due to the ongoing economic weakness in the PRC and a sustained shift in consumer preferences towards domestically produced EVs. Additionally, more aggressive pricing strategies adopted by luxury import brand manufacturers have further compressed our margins in this segment. These evolving market dynamics have led to a reduction in our vehicle sales volume and associated revenues. For the three months ended June 30, 2024, we sold one vehicle, compared with 93 for the three months ended June 30, 2023.
Three Months Ended June 30,
2024
2023
Change Amount
Change
%
Revenue from parallel-import vehicles:
U.S. domestic market
$
200,297
$
5,257,545
$
(5,057,248)
(96.2)
%
Overseas market
—
6,695,481
(6,695,481)
(100.0)
%
Total
$
200,297
$
12,223,026
$
(12,022,729)
(98.4)
%
Cost of Revenue from Parallel-import Vehicles
Three Months Ended June 30,
2024
2023
Change Amount
Change
%
Cost of Revenue from parallel-import vehicles sold
Cost of Vehicles sold
$
200,297
$
10,319,991
$
(10,119,694)
(98.1)
%
Fulfillment Expenses
15,537
650,666
(635,129)
(97.6)
%
Total Cost of Revenue from parallel-import vehicles sold
$
215,834
$
10,970,657
$
(10,754,823)
(98.0)
%
Our total cost of revenue from parallel-import vehicles sold decreased by approximately $10.8 million, or 98.0%, to $0.2 million for the three months ended June 30, 2024 from $11.0 million for the same period of 2023. For the three months ended June 30, 2024 and 2023, total cost as a percentage of revenue was 107.8% and 89.8%, respectively. Our total cost of revenue from parallel-import vehicles sold decreased in line with the reduced revenue.
Cost of Vehicles
Total cost of vehicles sold decreased by $10.1 million, or 98.1%, to $0.2 million for the three months ended June 30, 2024 from $10.3 million for the three months ended June 30, 2023. We sold one vehicle during the three months ended June 30, 2024, and 93 vehicles during the three months ended June 30, 2023.
The cost of vehicles sold was 100.0% and approximately 84.4% of revenue from parallel-import vehicles for the three months ended June 30, 2024 and 2023, respectively. We expedited the sale of the remaining inventory in response to weak market conditions in order to optimize asset turnover and manage inventory risk.
Fulfillment Expenses
Fulfillment expenses decreased by approximately $0.6 million, or 97.6%, to $15,537 for the three months ended June 30, 2024 from $0.6 million for the three months ended June 30, 2023. This substantial reduction in fulfillment expenses resulted from the continued effect of our strategic decision in the fourth quarter of 2023 to halt new vehicle procurement. As a consequence, during the second quarter of 2024, we sold only one vehicle, significantly reducing associated costs such as buyer commissions, vehicle storage and towing fees, insurance, and consulting fees.
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Logistics and Warehousing Segment
For the three months ended June 30, 2024, we reported total revenue of $93,563 generated from logistics and warehousing services, of which $20,160 was derived from vehicle-related services. The remaining service revenue amounting to $73,403 was generated from services for goods other than vehicles. We began recording logistics and warehousing revenue as of the date of the Edward acquisition on February 2, 2024. As of June 30, 2024, our logistics and warehousing services catered to 21 customers from various regions, including the PRC, Hong Kong, Vietnam, and the United States.
Gross Profit
Gross profit from the combined business segments during the second quarter of 2024 decreased by approximately $1.2 million, or 97.4%, compared with the second quarter of 2023. As a percentage of revenue, the gross margin increased from 10.2% for the three months ended June 30, 2023, to 11.0% for the three months ended June 30, 2024.
Operating Expenses
General and Administrative Expenses
Three Months Ended June 30,
2024
2023
Amount
%
General and Administrative Expenses
Payroll and Benefits
$
335,867
$
179,739
$
156,128
86.9
%
Rental and Leases
81,348
74,675
6,673
8.9
%
Travel and Entertainment
7,962
17,305
(9,343)
(54.0)
%
Legal and Accounting Fees
196,147
227,672
(31,525)
(13.8)
%
Recruiting Fees
81,598
3,112
78,486
2,521.8
%
Bank charges and fees
1,545
17,840
(16,295)
(91.3)
%
Insurance Expenses
86,467
3,118
83,349
2,673.1
%
Depreciation and Amortization Expenses
18,537
—
18,537
100.0
%
Others
55,884
41,939
13,945
33.3
%
Total General and Administrative Expenses
$
865,354
$
565,400
$
299,954
53.1
%
General and administrative expenses increased by $0.3 million, or 53.1%, to $0.9 million for the three months ended June 30, 2024 from $0.6 million for the three months ended June 30, 2023, primarily due to increases in (i) personnel-related expenses to support the newly launched logistics and warehousing segment, (ii) recurring expenses associated with new business lines, aligning with our strategic shift towards logistics and warehousing, (iii) depreciation and amortization expenses, primarily due to the acquisition of new fixed assets and additional intangible assets from the Edward acquisition, as detailed in Notes 6 and 8; and (iv) insurance expenses due to higher costs associated with directors and officers insurance.
Selling expenses decreased significantly during the second quarter of 2024 to approximately $20,000, from $0.1 million for the second quarter of 2023. This decrease was the result of the contraction in vehicle sales volume, reflecting the current market demand dynamics. Selling expense as a percentage of revenue was 6.6% and 1.2% for the three months ended June 30, 2024 and 2023, respectively.
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Other (Expense) Income
Interest Expense, net
For the Three Months Ended June 30,
2024
2023
Amount
%
Inventory Financing
$
—
$
14,246
$
(14,246)
(100.0)
%
LC Financing
—
251,031
(251,031)
(100.0)
%
Dealers Finance Charges
—
2,850
(2,850)
(100.0)
%
Other Loan Interest
8,011
7,849
162
2.1
%
Line of Credit Interest
27,899
57,398
(29,499)
(51.4)
%
Credit Card Interest
290
1,481
(1,191)
(80.4)
%
Total Interest Expense
$
36,200
$
334,855
$
(298,655)
(89.2)
%
Interest expense decreased significantly by approximately $0.3 million, or 89.2%, to approximately $40,000 for the three months ended June 30, 2024, from $0.3 million for the three months ended June 30, 2023, primarily due to (i) no new inventory or LC financing activities, and (ii) cash generated from the completion of our IPO in the third quarter of 2023, followed by follow-on offerings in May and July 2024, which collectively resulted in a substantial capital infusion that was partially used to pay down debt.
Provision for Income Taxes
Our provision for income tax benefit was $0.2 million for the three months ended June 30, 2024, compared with a provision for income taxes of approximately $60,000 for the same period in 2023, respectively.
Comparison of the Six Months Ended June 30, 2024 and 2023
Revenues
For the six months ended June 30, 2024 and 2023, revenue decreased by $20.6 million, or 92.0%, from approximately $22.4 million to $1.8 million. This significant decrease was primarily due to a continued decline in our parallel-import vehicles business. The newly established logistics and warehousing segment, operational since the acquisition of Edward in February 2024, generated revenue of $170,397, representing about 9.5% of our total revenues for the six months ended June 30, 2024.
Parallel-import Vehicles Segment
We continue to face significant challenges in the parallel-import vehicle market. Revenue from vehicle sales decreased by $20.8 million, or 92.7%, from approximately $22.4 million for the six months ended June 30, 2023 to $1.6 million for the six months ended June 30, 2024. The decrease was primarily due to the ongoing economic weakness in the PRC and a shift in consumer preferences towards domestically produced EVs.
Six Months Ended June 30, 2024
Six Months Ended June 30, 2023
Average Selling Price Changes
No.
Sales Amount
Ave Selling Price
No.
Sales Amount
Ave Selling Price
Amount
%
BMW X7
—
$
—
$
—
5
$
480,120
$
96,042
$
—
—
%
Mercedes G63
1
200,297
$
200,297
—
—
—
—
—
%
Mercedes GLS 450
11
1,175,116
106,829
83
9,172,404
110,511
(3,622)
(3.3)
%
Mercedes Benz GLS600
—
—
—
12
2,877,516
239,793
—
—
%
RAM Trucks
—
—
—
14
1,698,061
121,290
—
—
%
Land Rover Range Rover
—
—
—
10
1,614,422
161,412
—
—
%
Toyota Sequoia
—
—
—
24
2,433,859
101,411
—
—
%
LEXUS LX600
2
255,835
127,917
27
4,160,996
154,111
(26,194)
(17.0)
%
Total
14
$
1,631,248
$
116,518
175
$
22,437,468
$
128,214
$
(11,696)
(9.1)
%
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For the six months ended June 30, 2024, we sold 14 vehicles, compared with 175 for the six months ended June 30, 2023. The significant decrease in vehicle sales can be attributed to the ongoing market volatility in the PRC, especially price fluctuations that ultimately led to a halt in our vehicle procurement starting in the fourth quarter of 2023. This pause has continued into the first half of 2024 and is directly impacting our sales volume.
Six Months Ended June 30,
2024
2023
Change Amount
Change %
Revenue from parallel-import vehicles:
U.S. domestic market
$
200,297
$
6,915,780
$
(6,715,483)
(97.1)
%
Overseas market
1,430,951
15,521,688
(14,090,737)
(90.8)
%
Total
$
1,631,248
$
22,437,468
$
(20,806,220)
(92.7)
%
During the six months ended June 30, 2024, our direct sales to the PRC market accounted for 87.7% of our total revenue from parallel-import vehicles, while for the six months ended June 30, 2023, 69.2% of our total revenue from parallel-import vehicles was generated from overseas sales.
Cost of Revenue from Parallel-import Vehicles
Six Months Ended June 30,
2024
2023
Change Amount
Change %
Cost of Revenue from parallel-import vehicles sold
Cost of Vehicles sold
$
1,515,270
$
18,824,494
$
(17,309,224)
(92.0)
%
Fulfillment Expenses
140,798
1,217,548
(1,076,750)
(88.4)
%
Total Cost of Revenue from parallel-import vehicles sold
$
1,656,068
$
20,042,042
$
(18,385,974)
(91.7)
%
Our total cost of revenue from parallel-import vehicles sold decreased by $18.4 million, or 91.7%, to $1.6 million for the six months ended June 30, 2024 from $20.0 million for the same period of 2023. For the six months ended June 30, 2024 and 2023, total cost as a percentage of revenue was 101.5% and 89.3%, respectively. Our total cost of revenue from parallel-import vehicles sold decreased in line with the reduced revenue.
Cost of Vehicles
Total cost of vehicles sold decreased by $17.3 million, or 92.0%, to $1.5 million for the six months ended June 30, 2024 from $18.8 million for the six months ended June 30, 2023. We sold 14 vehicles during the six months ended June 30, 2024, and 175 vehicles during the six months ended June 30, 2023.
The cost of vehicles sold was approximately 92.9% and 83.9% of revenue from parallel-import vehicles for the six months ended June 30, 2024 and 2023, respectively. This unfavorable change can be attributed to our strategic decision to adjust pricing in response to continued market volatility and competitive pressures.
Fulfillment Expenses
Six Months Ended June 30,
2024
2023
Change Amount
Change %
Fulfillment expenses
Payroll and Benefits
$
83,855
$
681,499
$
(597,644)
(87.7)
%
Buyer Commission
750
194,353
(193,603)
(99.6)
%
Vehicle Storage and Towing
—
226,900
(226,900)
(100.0)
%
Vehicle Insurance Expenses
42
57,677
(57,635)
(99.9)
%
Consulting Fee
—
30,530
(30,530)
(100.0)
%
Others
56,151
26,589
29,562
111.2
%
Total Fulfillment Expenses
$
140,798
$
1,217,548
$
(1,076,750)
(88.4)
%
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Fulfillment expenses decreased by approximately $1.1 million, or 88.4%, to $0.1 million for the six months ended June 30, 2024 from $1.2 million for the six months ended June 30, 2023. This substantial reduction stems from our strategic decision initiated in the fourth quarter of 2023 to halt new vehicle procurements. This pause has continued to significantly reduce related costs such as buyer commission, vehicle storage and towing costs, vehicle insurance, and consulting fees.
Logistics and Warehousing Segment
For the six months ended June 30, 2024, the Company reported total revenue of $170,397 generated from logistics and warehousing services, of which $33,835 was derived from vehicle-related services. The rest $136,562 was generated from services for goods other than vehicles. We began recording logistics and warehousing revenue as of the date of the Edward acquisition on February 2, 2024.
Gross Profit
Gross profit from the combined business segments during the six months ended June 30, 2024 decreased by approximately $2.3 million, or 97.6%, compared with the same period of 2023. As a percentage of revenue, the gross margin decreased from 10.7% for the six months ended June 30, 2023, to 3.2% for the six months ended June 30, 2024.
Operating Expenses
Selling Expenses
Six Months Ended June 30,
2024
2023
Amount
%
Selling Expenses
Payroll and benefits
$
77,652
$
117,676
$
(40,024)
(34.0)
%
Ocean Freight
20,610
291,712
(271,102)
(92.9)
%
Others
—
9,735
(9,735)
(100.0)
%
Total Selling expenses
$
98,262
$
419,123
$
(320,861)
(76.6)
%
Selling expenses decreased significantly for the six months ended June 30, 2024 to approximately $0.1 million, from $0.4 million for the six months ended June 30, 2023. This decrease was the result of the contraction in vehicle sales volume that naturally led to a reduction in associated selling activities, reflecting current market demand dynamics; Selling expenses as a percentage of revenue was 5.5% and 1.9% for the six months ended June 30, 2024 and 2023, respectively.
General and Administrative Expenses
Six Months Ended June 30,
2024
2023
Amount
%
General and Administrative Expenses
Payroll and Benefits
$
532,290
$
329,851
$
202,439
61.4
%
Rental and Leases
167,552
130,280
37,272
28.6
%
Travel and Entertainment
27,445
20,188
7,257
35.9
%
Legal and Accounting Fees
506,062
548,857
(42,795)
(7.8)
%
Recruiting Fees
85,084
4,444
80,640
1,814.6
%
Bank charges and fees
5,740
33,863
(28,123)
(83.0)
%
Insurance Expenses
174,439
7,985
166,454
2,084.7
%
Depreciation and Amortization Expenses
29,422
—
29,422
100.0
%
Others
104,962
71,002
33,960
47.8
%
Total General and Administrative Expenses
$
1,632,996
$
1,146,470
$
486,526
42.4
%
General and administrative expenses increased by $0.5 million, or 42.4%, to $1.6 million for the six months ended June 30, 2024 from $1.1 million for the six months ended June 30, 2023, primarily due to (i) an increase in personnel-related expenses by approximately $0.2 million, or 61.4%, which was attributed to the hiring of additional staff to support the newly launched logistics and warehousing segment, (ii) the acquisition of Edward, which resulted in the addition of a new office workspace in California, increasing our rental and lease expenses, (iii) an increase in recruiting expenses associated with the development of new business lines, aligning with the
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company's strategic shift towards logistics and warehousing, (iv) an increase in depreciation and amortization expenses, primarily due to the acquisition of new fixed assets and additional intangible assets, as detailed in Notes 6 & 8; and (v) an increase in insurance expenses due to higher costs associated with directors and officers insurance.
Other (Expense) Income
Interest Expense, net
For the Six Months Ended June 30,
2024
2023
Amount
%
Inventory Financing
$
—
$
112,769
$
(112,769)
(100.0)
%
LC Financing
23,123
581,456
(558,333)
(96.0)
%
Dealers Finance Charges
—
3,016
(3,016)
(100.0)
%
Other Loan Interest
15,563
15,794
(231)
(1.5)
%
Line of Credit Interest
59,235
57,398
1,837
3.2
%
Credit Card Interest
48
1,481
(1,433)
(96.8)
%
Premium Finance Interest
996
—
996
100.0
%
Total Interest Expense
$
98,965
$
771,914
$
(672,949)
(87.2)
%
Interest expense decreased by approximately $0.7 million, or 87.2%, to approximately $0.1 million for the six months ended June 30, 2024, from $0.8 million for the six months ended June 30, 2023, primarily due to (i) no new inventory or LC financing activities and (ii) cash generated from the completion of our IPO in the third quarter of 2023, followed by follow-on offerings in May and July 2024, which collectively resulted in a substantial capital infusion that was partially used to pay down debt.
To improve our liquidity and retain more cash to acquire new vehicles, we previously borrowed money on a short-term basis, pledging our inventory as collateral before the vehicles are delivered to our customers. These loans accrued interest at rates ranging from 1.35% to 1.8% per month. For the six months ended June 30, 2024, no funds for inventory financing were borrowed, resulting in no related interest expense. For the six months ended June 30, 2023, interest expense incurred was $0.1 million, and the weighted average annual interest rate was 17.6%.
In addition to inventory financing, we previously financed our operations from time to time through short-term loans using letters of credit as collateral, which were typically received from our international customers in overseas sales of parallel-import vehicles. Generally, these loans allowed us to borrow approximately 90% or more of the letter of credit amount with a monthly interest rate of 1.5%. However, due to the significant reduction in vehicle sales and the resulting decline in the need for such financing, we did not utilize LC financing during the six months ended June 30, 2024. The total weighted average balance of funds we obtained through LC financing decreased to $0.2 million, interest expense incurred was approximately $20,000 for the six-month period, and the weighted average annual interest rate was 18.8%. For the six months ended June 30, 2023, the total weighted average balance of funds we obtained through LC financing was $6.0 million, interest expense incurred was $0.6 million, and the weighted average annual interest rate was 19.5%.
Starting from 2024, we ceased utilizing our revolving lines of credit, as the proceeds from our IPO and follow-on offerings provided sufficient liquidity. There were no new borrowings under these credit lines during the six months ended June 30, 2024, reflecting a strategic decision to reduce reliance on external debt. As of June 30, 2024, the total weighted average balance of funds we obtained through revolving lines of credit was $0.7 million, interest expense incurred was approximately $60,000 for the six months ended June 30, 2024, and the weighted average annual interest rate was 18.0%. For the six months ended June 30, 2023, the total weighted average balance of funds we obtained through revolving lines of credit was $0.6 million, interest expense incurred was approximately $60,000, and the weighted average annual interest rate was 18.0%.
Provision for Income Taxes
Our provision for income tax benefit was $0.5 million for the six months ended June 30, 2024 compared with income tax expense of approximately $14,000 for the same period in 2023.
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Liquidity and Capital Resources
Cash Flows and Working Capital
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 and cash equivalents of $6.3 million as of June 30, 2024. As of June 30, 2024, our working capital amounted to approximately $12.4 million.
As reflected in the accompanying unaudited condensed consolidated financial statements, we reported a net loss of $1.2 million for the six months ended June 30, 2024. We also reported cash provided by operating activities of $0.8 million, and total stockholders’ equity of $13.8 million.
Historically, our primary uses of cash have been to finance working capital needs. We believe that we will be able to fund current operations and other commitments for at least the next 12 months from operating cash flow and our cash and cash equivalents.
Additional sources of cash may be needed due to unanticipated changes in business conditions or other future developments. If additional resources are required, we may sell additional equity or debt securities. The sale of additional equity or equity-linked securities could result in additional dilution to stockholders. The incurrence of indebtedness would result in increased debt service obligations and could include operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, or at all.
Cash Flows for the Six Months Ended June 30, 2024 and 2023
The following table summarizes our cash flows for the six months ended June 30, 2024 and 2023:
Six Months ended June 30,
2024
2023
Net cash provided by operating activities
$
827,980
$
4,145,363
Net cash used in investing activities
(912,617)
—
Net cash provided by (used in) financing activities
5,944,540
(3,611,618)
Net increase in cash
$
5,859,903
$
533,745
Operating Activities
Net cash provided by operating activities was $0.8 million for the six months ended June 30, 2024. This was primarily attributable to a collection of $1.4 million in accounts receivable, a $1.5 million decrease in inventory, a $0.5 million increase in other receivables, and other less significant factors.
Net cash provided by operating activities was $4.1 million for the six months ended June 30, 2023. This was primarily attributable to a collection of $4.9 million in accounts receivable and partially offset by a $1.0 million increase in inventory and other factors of less significance.
Investing Activities
Net cash used in investing activities was approximately $0.9 million for the six months ended June 30, 2024. The increase in investing activities consisted of (i) approximately $0.2 million in cash paid for the Edward acquisition, net of cash acquired, (ii) $1.0 million in short-term loans lent to third parties, (iii) collection of vehicle pledge loans extended to third parties of approximately 0.2 million, (iv) collection of short-term loans extended to a third party of $0.5 million, and (v) acquired new fixed assets of $0.4 million.
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Financing Activities
Net cash provided by financing activities was $5.9 million for the six months ended June 30, 2024, which consisted of (i) net proceeds from the May 2024 follow-on public offering of approximately $7.3 million, (ii) net repayments of LC financing of $1.0 million; (iii) net repayments of premium finance of approximately $150,000; (iv) payment for the equity warrant termination of approximately $80,000; and (v) repayments to a line of credit of approximately $0.1 million.
Net cash used in financing activities of $3.6 million for the six months ended June 30, 2023, consisted of (i) net repayments of LC financing of $14.9 million; (ii) net repayments of inventory financing of $4.1 million; (iii) net repayments of revolving lines of credit of $0.7 million; and (iv) repayments of dealers financing of $0.2 million; partially offset by (v) proceeds from LC financing of $12.7 million; (vi) proceeds from revolving lines of credit of $2.5 million; (vi) proceeds from dealers financing of $0.3 million; and (vii) issuance of common stock of $0.7 million.
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 Policies
The preparation of financial statements and related disclosures in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Note 2, “Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2023 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements. There have been no material changes to the Company’s critical accounting estimates since the 2023 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk .
As a smaller reporting company, we are not required to provide this information.