China Auto Logistics Inc - FORM 10-Q

Attached files

file	filename
EX-32.2 - China Auto Logistics Inc	v231098_ex32-2.htm
EX-31.2 - China Auto Logistics Inc	v231098_ex31-2.htm
EX-32.1 - China Auto Logistics Inc	v231098_ex32-1.htm
EX-10.12 - China Auto Logistics Inc	v231098_ex10-12.htm
EX-10.13 - China Auto Logistics Inc	v231098_ex10-13.htm
EX-31.1 - China Auto Logistics Inc	v231098_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2011

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

For the transition period from ______ to ______.

Commission file number: 000-52625

CHINA AUTO LOGISTICS INC.

(Exact Name of Registrant as Specified in Its Charter)

Nevada	20-2574314
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

No. 87 No. 8 Coastal Way, Floor 2
Construction Bank, FTZ
Tianjin Province
The People’s Republic of China 300461	300461
(Address of Principal Executive Offices)	(Zip Code)

(86) 22-2576-2771

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þNo ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No ¨

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

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company þ

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

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

Class		Outstanding at August 5, 2011
Common Stock, $.001 par value per share		22,163,427 shares

TABLE OF CONTENTS

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010 (Unaudited)	1
	Condensed Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2011 and 2010 (Unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income for the Three Months and Six Months Ended June 30, 2011 and 2010 (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited)	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	26

PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Default Upon Senior Securities	27
Item 4.	(Removed and Reserved)	27
Item 5.	Other Information	27
Item 6.	Exhibits	28

SIGNATURES		29

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CHINA AUTO LOGISTICS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	June 30,		December 31,
	2011		2010
ASSETS
Current assets
Cash and cash equivalents	$	7,126,121	$	17,733,502
Restricted cash		33,440,685		5,969,306
Accounts receivable – trade, net of allowance of doubtful accounts of $2,722 and $2,633
as of June 30, 2011 and December 31, 2010, respectively		113,230		145,840
Receivables related to financing services		30,370,255		39,106,056
Inventories		30,015,602		19,052,212
Advances to suppliers		23,123,451		13,752,616
Prepaid expenses		176,678		179,526
Value added tax refundable		1,393,442		40,950
Deferred tax assets		-		10,057
Total current assets		125,759,464		95,990,065

Property and equipment, net		696,692		756,110
Goodwill		4,427,205		4,321,930
Intangible assets, net		1,590,015		1,677,649
Other assets		47,461		54,034
Total Assets	$	132,520,837	$	102,799,788

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Lines of credit related to financing services	$	59,217,488	$	36,038,949
Accrued expenses		463,557		481,804
Customer deposits		21,717,694		17,464,320
Deferred revenue		209,956		260,705
Due to shareholders		3,157,164		5,420,484
Due to director		22,055		573,922
Income tax payable		1,003,374		1,239,119
Total current liabilities		85,791,288		61,479,303
Deferred tax liability		401,773		419,413
Total liabilities		86,193,061		61,898,716
Equity
China Auto Logistics Inc. shareholders’ equity
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued and outstanding		-		-
Common stock, $0.001 par value, 95,000,000 shares authorized, 19,163,427 shares issued and outstanding		19,163		19,163
Additional paid-in capital		16,728,605		16,728,605
Accumulated other comprehensive income		4,310,175		3,313,472
Retained earnings		24,770,041		20,406,707
Total China Auto Logistics Inc. shareholders’ equity		45,827,984		40,467,947
Noncontrolling interests		499,792		433,125
Total equity		46,327,776		40,901,072

Total liabilities and shareholders’ equity	$	132,520,837	$	102,799,788

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

CHINA AUTO LOGISTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010

Net revenue	$	126,226,569		$	54,820,581		$	207,437,369		$	108,969,853
Cost of revenue		122,069,426			51,786,674			199,306,002			103,199,954
Gross profit		4,157,143			3,033,907			8,131,367			5,769,899

Operating expenses:
Selling and marketing		364,496			187,127			738,643			385,527
General and administrative		667,018			292,362			1,349,834			684,672
Total operating expenses		1,031,514			479,489			2,088,477			1,070,199

Income from operations		3,125,629			2,554,418			6,042,890			4,699,700

Other income (expenses)
Interest income		15,164			5,582			27,682			38,167
Interest expenses		-			(28,191	)		-			(67,742	)
Miscellaneous		(1,490	)		5,928			(10,577	)		5,928
Total other income (expenses)		13,674			(16,681	)		17,105			(23,647	)

Income before income taxes		3,139,303			2,537,737			6,059,995			4,676,053

Income taxes		825,932			650,734			1,642,120			1,235,250

Net income		2,313,371			1,887,003			4,417,875			3,440,803

Less: Net income attributable to
noncontrolling interests		27,171			25,798			54,541			51,152

Net income attributable to shareholders of
China Auto Logistics Inc.	$	2,286,200		$	1,861,205		$	4,363,334		$	3,389,651

Earnings per share attributable to
shareholders of China Auto Logistics Inc.
– basic and diluted	$	0.12		$	0.10		$	0.23		$	0.19

Weighted average number of common share
outstanding
– basic and diluted		19,163,427			18,100,000			19,163,427			18,100,000

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

CHINA AUTO LOGISTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2009

Net income	$	2,313,371	$	1,887,003	$	4,417,875	$	3,440,803

Other comprehensive income
Foreign currency translation adjustments		584,372		160,479		1,008,829		168,567

Comprehensive income		2,897,743		2,047,482		5,426,704		3,609,370

Less: Comprehensive income attributable to
noncontrolling interests		33,897		27,992		66,667		53,478

Comprehensive income attributable to
shareholders of China Auto Logistics Inc.	$	2,863,846	$	2,019,490	$	5,360,037	$	3,555,892

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

CHINA AUTO LOGISTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended June 30,
	2011			2010

Cash flows from operating activities
Net income	$	4,417,875		$	3,440,803

Adjustments to reconcile net income to net cash provided by
(used for) operating activities
Depreciation and amortization		255,094			100,050
Loss on disposal of property and equipment		796			2,495

Changes in operating assets and liabilities:
Restricted cash		(27,058,194	)		1,079,348
Accounts receivable – trade		35,243			(83,322	)
Receivables related to financing services		1,564,185			117,943
Inventories		(10,375,952	)		(4,044,400	)
Advances to suppliers		(8,889,673	)		(1,311,971	)
Prepaid expenses, other current assets and other assets		13,973			8,203
Value added tax refundable		(1,332,659	)		(328,895	)
Deferred tax assets		10,107			-
Accounts payable		(16,715	)		-
Line of credit related to financing services		30,095,836			-
Draft notes payable		-			(2,929,437	)
Accrued expenses		357,899			(11,471	)
Customer deposits		3,805,060			6,505,928
Deferred revenue		(55,829	)		61,155
Income tax payable		(261,777	)		(1,432,829	)
Deferred tax liability		(31,317	)		-
Net cash provided by (used for) operating activities		(7,466,048	)		1,173,600

Cash flows from investing activities
Proceeds from disposal of property and equipment		531			18,987
Purchase of property and equipment		(55,122	)		(213,702	)
Net cash used for investing activities		(54,591	)		(194,715	)

Cash flows from financing activities
Repayments of short-term bank loans		-			(1,318,247	)
Repayments to shareholders		(2,754,479	)		-
Proceeds from director		38,710			-
Repayments to director		(590,796	)		-
Net cash flows used for financing activities		(3,306,565	)		(1,318,247	)

Effect of exchange rate change on cash		219,823			15,539

Net decrease in cash and cash equivalents		(10,607,381	)		(323,823	)

Cash and cash equivalents at the beginning of period		17,733,502			2,255,058
Cash and cash equivalents at the end of period	$	7,126,121		$	1,931,235

CHINA AUTO LOGISTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Continued)

	Six Months Ended June 30,
	2011			2010

Supplemental disclosure of cash flow information
Interest paid	$	-		$	28,191
Income taxes paid	$	1,925,107		$	2,670,329

Non-cash activities

(Decrease) Increase of borrowings on lines of credit for loans extended to the Company’s customers	$	(7,955,523	)	$	16,010,892

Increase in balance due to shareholders for accrued expenses paid by shareholder	$	387,204		$	206,406

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

CHINA AUTO LOGISTICS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) Summary of Significant Accounting Policies

Organization, Nature of Business and Basis of Presentation

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

The accompanying condensed consolidated balance sheet as of December 31, 2010, which has been derived from the audited consolidated financial statements and the accompanying unaudited condensed consolidated financial statements, has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") have been condensed or omitted pursuant to those rules and regulations and the Company believes that the disclosures made are adequate to make the information not misleading.

In the opinion of management, these condensed consolidated financial statements reflect all adjustments which are of a normal recurring nature and which are necessary to present fairly the financial position of China Auto as of June 30, 2011 and the results of operations for the three-month and six-month periods ended June 30, 2011 and 2010, and the cash flows for the six-month periods ended June 30, 2011 and 2010. These condensed consolidated financial statements and related notes should be read in conjunction with the Company's annual report on Form 10-K for the fiscal year ended December 31, 2010. The results of operations for the three-month and six-month periods ended June 30, 2011 are not necessarily indicative of the results which may be expected for the entire fiscal year.

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

Principles of Consolidation

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

Currency Reporting

The Company's operations in the PRC use the local currency, Renminbi ("RMB"), as their functional currency, whereas amounts reported in the accompanying condensed consolidated financial statements and disclosures are stated in U.S. dollars, the reporting currency of the Company, unless stated otherwise. As such, the condensed consolidated balance sheets of the Company have been translated into U.S. dollars at the current rates as of June 30, 2011 and December 31, 2010 and the condensed consolidated statements of income have been translated into U.S. dollars at the weighted average rates during the periods the transactions were recognized.

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

Revenue Recognition

The Company’s main source of income was generated through (1) sales of automobiles, (2) service fees for assisting customers to get bank financing on purchases of automobiles, (3) web-based advertising service fees, including fees from (i) displaying graphical advertisements on the Company websites and (ii) web-based listing services that allow customers to place automobile related information on the Company’s websites, (4) automobile value added services and (5) auto mall management services. The financing services are provided to customers on automobiles not sold by the Company. The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred upon shipment or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectibility is reasonably assured.

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

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

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

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

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

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

Receivables Related to Financing Services

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

The Company evaluates the collectibility of outstanding receivables at the end of each of the reporting periods and makes estimates for potential credit losses. The Company has not experienced any losses on its accounts receivable historically and accordingly did not record any allowance of credit losses as of June 30, 2011 and December 31, 2010.

Goodwill

Goodwill arising from business combinations represents the excess of the purchase price over the estimated fair value of the net assets of the businesses acquired.

Goodwill is tested annually for impairment, during the fourth quarter of our fiscal year, or more frequently if circumstances indicate the possibility of impairment. Significant judgments required to estimate fair value include estimating future cash flows, and determining appropriate discount rates, growth rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value which could trigger impairment. There was no impairment of goodwill as of June 30, 2011 and December 31, 2010. No events have occurred subsequent to June 30, 2011 that indicates impairment may have occurred.

Basic and Diluted Earnings Per Share

Basic earnings per common share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per common share is computed similarly to basic earnings per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of June 30, 2011 and 2010, the Company did not have any common stock equivalents, therefore, the basic earnings per share is the same as the diluted earnings per share.

Recently Adopted Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04 “ Amendments to achieve common fair value measurement and disclosure requirements in US GAAP and IFRSs (“ASU 2011-04”), which clarify how to measure and disclose fair value. The amendment clarifies the intent behind the application of existing fair value measurements and disclosures and other amendments which change principles or requirements for fair value measurements or disclosures. The amendment becomes effective prospectively for the Company’s interim period ending March 31, 2012. Early application is not permitted. The Company does not expect the amendment to have a material impact on its financial position, result of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05 “Presentation of Comprehensive Income” (“ASU 2011-05”) to amend ASC 220 “Comprehensive Income”. The amendments require comprehensive income to be presented as either a continuous statement of comprehensive income or two separate but consecutive statements. The amendments do not affect the disclosures required regarding comprehensive income. These amendments are to be applied retrospectively for interim and fiscal year periods beginning after December 15, 2011. The Company believes that its current presentation of comprehensive income has already complied with the amendments and the adoption of such amendments do not have a material impact on its financial results and disclosures.

(2) Business Combination

Qizhong Acquisition

On November 1, 2010, the Company entered into a purchase agreement (the “Agreement”) with the shareholders of Chongqing Qizhong Technology Co., Ltd. (“Qizhong”) to acquire all of the issued and outstanding stock of Qizhong and completed the acquisition simultaneously.

Pursuant of the Agreement and a related Memorandum of Understanding, the purchase price, net of cash acquired of $1.68 million from Qizhong, was $4.47 million for the acquisition of 100% of Qizhong’s equity interests. The purchase price of $4.47 million consisted of $1.01 million in cash ($2.69 million payable in cash less cash acquired of $1.68 million from Qizhong) and the issuance of 1,063,427 shares of common stock valued at approximately $3.46 million. The value of common stock was determined based on $3.25 per share, the per share price of the Company’s common stock on the acquisition date.

Qizhong is engaged in the development and operation of the website www.goodcar.cn and the business of providing customers with information and discounted services, including discounted gas, parking, car washes, body-shop repair and car maintenance. The acquisition of Qizhong allows the Company to expand its offerings to customers with the addition of a wide range of automotive products and services, while simultaneously bolstering the growth of automobile value added services sales and realized synergies.

Qizhong’s results of operations are included in the Company’s consolidated statements of income from the acquisition date.

(3) Property and Equipment

A summary of property and equipment is as follows:

	June 30,		December 31,
	2011		2010

Computer	$	222,044	$	216,978
Office equipment, furniture and fixtures		414,108		373,499
Leasehold improvement		130,676		127,695
Automobiles		1,260,151		1,210,204
		2,026,979		1,928,376
Less: Accumulated depreciation and amortization		1,330,287		1,172,266
	$	696,692	$	756,110

Depreciation and amortization expense for property and equipment amounted to approximately $58,568 and $52,126 for the three months ended June 30, 2011 and 2010, respectively; and amounted to approximately $129,828 and $100,050 for the six months ended June 30, 2011 and 2010, respectively.

(4) Goodwill

As of June 30, 2011 and December 31, 2010, our goodwill is as follows:

	June 30,		December 31,
	2011		2010

Acquired goodwill	$	4,278,188	$	4,278,188
Foreign currency translation adjustment		149,017		43,742
	$	4,427,205	$	4,321,930

There were no impairment losses during the three months and six months ended June 30, 2011 and 2010.

(5) Intangible Assets

Intangible assets include:

	As of June 30, 2011						As of December 31, 2010
	Cost		Accumulated Amortization		Net Carrying Value		Cost		Accumulated Amortization		Net Carrying Value

Advertising customer relationships	$	930,178	$	154,999	$	775,179	$	908,956	$	37,877	$	871,079
Memberships		105,420		14,056		91,364		103,005		3,400		99,605
	$	1,035,598	$	169,055	$	866,543	$	1,011,961	$	41,277	$	970,684

Intangible asset not subject to amortization:
Trademark		723,472		-		723,472		706,965		-		706,965
	$	1,759,070	$	169,055	$	1,590,015	$	1,718,926	$	41,277	$	1,677,649

All intangible assets were acquired in connection with the Qizhong acquisition in November 1, 2010, and there was no further addition to intangibles.

Amortization expenses for the three months and six months ended June 30, 2011 are $62,994 and $125,266, respectively. There was no intangible and no amortization expenses in the three months and six months ended June 30, 2010.

Estimated amortization expense relating to the existing intangible assets with definite lives for each of the five succeeding fiscal years is as follows:

Remaining of 2011	$	126,815
2012		253,629
2013		253,629
2014		214,901
2015		17,569
	$	866,543

(6) Lines of Credit Related to Financing Services

The Company provides financing services to its customers using the Company’s bank facility lines of credit. The Company earns a service fee for drawing its facility lines related to its customers’ purchases of automobiles and payment of import taxes. Customers bear all the interest and fees charged by the banks and prepay those fees upon the execution of their service contracts with the Company. Customers are also required to make a deposit in the range of 22% to 30% of the purchase price of the automobiles. If customers default on payment, the banks take custody of the automobiles until the borrowings are fully repaid.

China Merchants Bank

In June 2010, the Company entered into a facility line of credit agreement with China Merchants Bank. As of December 31, 2010, the Company had outstanding balances of $6,514,492 under this facility. This facility, which was guaranteed by a director of the Company and a non-related company, matured in June 2011

In June 2011, the Company entered into a facility line of credit agreement with China Merchants Bank. Under the terms of the agreement, the Company could borrow a maximum amount of $12,361,703 (RMB80,000,000) as of June 30, 2011. The borrowings under this facility carry interest at rates ranging from 3.80% to 4.50% per annum and are repayable within 3 months. As of June 30, 2011, the Company had an outstanding balance of $2,420,389 under this facility. The facility line of credit matures in June 2012 and is guaranteed by a director and a non-related entity.

Agricultural Bank of China

In January 2010, the Company entered into a facility line of credit agreement with Agricultural Bank of China to facilitate its financing services. Under the terms of the agreement, the Company could borrow a maximum amount of $17,769,949 (RMB115,000,000) as of June 30, 2011. This facility line of credit matures in January 2012 and is guaranteed by three non-related entities.

In February 2011, the Company entered into a facility line of credit agreement with Agricultural Bank of China to facilitate its financing services. Under the terms of the agreement, the Company could borrow a maximum amount of $74,170,221 (RMB480,000,000) as of June 30, 2011. This facility line of credit matures in December 2012 and is guaranteed by two directors of the Company.

The borrowings under these facilities carry interest at rates ranging from 2.30% to 2.75% per annum and are repayable within 3 months. As of June 30, 2011 and December 31, 2010, the Company had outstanding balances of $22,085,474 and $15,622,679, respectively, under these facilities.

In addition to the above facility lines of credit agreements with Agricultural Bank of China, the Company had $30,425,374 of short term foreign currency borrowings with Agricultural Bank of China as of June 30, 2011. These short term foreign currency borrowings carry interest at rates ranging from 6.56% to 6.59% per annum, mature within 3 months or 6 months from the date of drawings and are secured by the restricted cash deposited to the bank.

PuDong Development Bank

In June 2010, the Company entered into a facility line of credit agreement with PuDong Development Bank. Under the terms of the agreement, the Company could borrow a maximum amount of $15,099,582 (RMB100,000,000) as of December 31, 2011. The borrowings under this facility carry interest at rates ranging from 4.45% to 4.47% per annum and are repayable within 3 months. As of June 30, 2011 and December 31, 2010, the Company had outstanding balances of $679,411 and $4,836,186, respectively, under this facility. The facility line of credit matured in June 2011 and was guaranteed by a director and a non-related entity. The outstanding balances under this facility as of June 30, 2011 are payable within 3 months from the date of drawings.

China Zheshang Bank

In April 2010, the Company entered into a facility line of credit agreement with China Zheshang Bank. Under the terms of the agreement, the Company could borrow a maximum amount of $7,726,065 (RMB50,000,000) as of June 30, 2011. The borrowings under this facility carry interest at rates ranging from 3.48% to 5.60% per annum and are repayable within 3 months. As of June 30, 2011 and December 31, 2010, the Company had outstanding balances of $0 and $60,216, respectively, under this facility. The facility line of credit matures in June 2012 and is guaranteed by two directors and two non-related entities.

Industrial and Commercial Bank of China

In November 2010, the Company entered into a facility line of credit agreement with Industrial and Commercial Bank of China. Under the terms of the agreement, there is no stipulated maximum amount of borrowings but each drawing from the facility line is subject to approval from the bank on an individual basis. The borrowings under this facility carry interest at rates ranging from 3.63% to 3.64% per annum and are repayable within 3 months. As of June 30, 2011 and December 31, 2010, the Company had outstanding balances of $495,635 and $9,005,376, respectively, under this facility. The facility line of credit matures in November 2011.

Shengjing Bank

In February 2011, the Company entered into a facility line of credit agreement with Shengjing Bank. Under the terms of the agreement, the Company could borrow a maximum amount of $10,816,491(RMB70,000,000) as of June 30, 2011. The borrowings under this facility carry interest at rates ranging from 4.25% to 4.28% per annum and are repayable within 3 months. As of June 30, 2011, the Company had outstanding balances of $1,702,492 under this facility. The facility line of credit matures in February 2012 and is guaranteed by a director of the Company and a non-related company.

China Minsheng Bank

In April 2011, the Company entered into a facility line of credit agreement with China Minsheng Bank. Under the terms of the agreement, the Company could borrow a maximum amount of $12,361,703 (RMB80,000,000) as of June 30, 2011. The borrowings under this facility carry interest at a rate of 3.55% per annum and are repayable within 3 months. As of June 30, 2011, the Company had outstanding balances of $1,408,713 under this facility. The facility line of credit matures in April 2012 and is guaranteed by two directors of the Company and two non-related companies.

(7) Major Customers and Suppliers

No customer had 10% or more of the Company’s sales during the three months and six months June 30, 2011. There was one customer, who accounted for 10% or more of the Company’s sales, and who accounted for 24% and 28%, respectively, of the Company’s sales during the three months and six months ended June 30, 2010.

No supplier had 10% or more of the Company’s purchases during the three months and six months June 30, 2011. There were one and three suppliers, who accounted for 10% or more of the Company’s purchases, and who accounted for 10% and 42%, respectively, of the Company’s purchases during the three months and six months ended June 30, 2010.

(8) Retained earnings

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

In addition to the general reserve, the Company’s PRC subsidiaries is required to obtain approval from the local PRC government prior to distributing any registered share capital. Accordingly, both the appropriations to general reserve and the registered share capital of the Company’s PRC subsidiary are considered as restricted net assets and are not distributable as cash dividends. As of June 30, 2011 and December 31, 2010, the Company’s statutory reserve fund was approximately $2,499,000 and $2,054,000, respectively.

(9) Related Party Balances and Transactions

Cheng Weihong (the Secretary, Senior Vice President and Chairwoman of Shisheng and wife of China Auto’s President and Chief Executive Officer, Mr. Tong Shiping) made non-interest bearing loans to the Company from time to time to meet working capital needs of the Company. As of June 30, 2011 and December 31, 2010, the outstanding balances due to Cheng Weihong were $22,055 and $573,922, respectively.

The Company’s shareholder, Sino Peace Limited, paid on behalf of the Company accrued expenses of $236,137 and $120,939 during the three months ended June 30, 2011 and 2010, respectively; and of $387,204 and $206,406 during the six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011 and December 31, 2010, the outstanding balances due to Sino Peace Limited were $2,046,929 and $1,617,654, respectively.

In connection with the Company’s acquisition of Qizhong on November 1, 2010, the Company paid the cash consideration of approximately $2,754,000 (RMB18,000,000) and issued 1,063,427 shares of common stock of the Company to the former owners of Qizhong during the six months ended June 30, 2011. As of December 31, 2010, the cash consideration payable in connection with this acquisition of $2,717,925 (RMB18,000,000) was outstanding as Due to Shareholders on the consolidated balance sheet. These former owners of Qizhong became shareholders of the Company.

In connection with the Qizhong acquisition, the Company assumed the balances due to the former owners of Qizhong, which were $1,110,235 and $1,084,905 as of June 30, 2011 and December 31, 2010, respectively.

The balances as discussed above as of June 30, 2011 and December 31, 2010 are interest-free, unsecured and have no fixed term of repayment. During the three months and six months ended June 30, 2011 and 2010, there was no imputed interest charged in relation to these balances.

(10) Segment Information

The Company has five principal operating segments: (1) sales of automobiles, (2) financing services, (3) web-based advertising services, (4) automobile value added services, and (5) auto mall management services. These operating segments were determined based on the nature of services offered. Operating segments are defined as components of an enterprise about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's Chief Executive Officer and Chief Operating Officer have been identified as the chief operating decision makers. The Company's chief operating decision makers direct the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.

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

Three Months Ended June 30, 2011	Sales of Automobiles		Financing Services		Web-based Advertising Services		Automobile Value Added Services		Auto Mall Management Services		Corporate			Total

Net revenue	$	123,093,521	$	519,788	$	2,001,057	$	375,560	$	236,643	$	-		$	126,226,569

Cost of revenue		121,850,514		6,238		173,836		28,355		10,483		-			122,069,426

Operating expenses
Selling and marketing		78,624		34,162		205,313		31,353		15,044		-			364,496
General and administrative		43,618		185,063		108,896		21,552		11,189		296,700			667,018
Total operating expenses		122,242		219,225		314,209		52,905		26,233		296,700			1,031,514

Income (loss) from operations	$	1,120,765	$	294,325	$	1,513,012	$	294,300	$	199,927	$	(296,700	)	$	3,125,629

Three Months Ended June 30, 2010	Sales of Automobiles		Financing Services		Web-based Advertising Services		Automobile Value Added Services		Auto Mall Management Services		Corporate			Total

Net revenue	$	52,782,164	$	460,468	$	1,167,519	$	159,644	$	250,786	$	-		$	54,820,581

Cost of revenue		51,723,982		5,144		28,489		7,560		21,499		-			51,786,674

Operating expenses
Selling and marketing		60,426		39,228		60,178		7,541		19,754		-			187,127
General and administrative		54,214		45,214		16,403		7,582		22,768		146,181			292,362
Total operating expenses		116,640		84,442		76,581		15,123		42,522		146,181			479,489

Income (loss) from operations	$	943,542	$	370,882	$	1,062,449	$	136,961	$	186,765	$	(146,181	)	$	2,554,418

Six Months Ended June 30, 2011	Sales of Automobiles		Financing Services		Web-based Advertising Services		Automobile Value Added Services		Auto Mall Management Services		Corporate			Total

Net revenue	$	201,361,939	$	855,271	$	3,973,039	$	774,463	$	472,657	$	-		$	207,437,369

Cost of revenue		198,859,280		7,115		351,177		45,415		43,015		-			199,306,002

Operating expenses
Selling and marketing		173,121		61,708		407,923		64,096		31,795		-			738,643
General and administrative		106,643		208,302		198,818		41,203		25,321		769,547			1,349,834
Total operating expenses		279,764		270,010		606,741		105,299		57,116		769,547			2,088,477

Income (loss) from operations	$	2,222,895	$	578,146	$	3,015,121	$	623,749	$	372,526	$	(769,547	)	$	6,042,890

Six Months Ended June 30, 2010	Sales of Automobiles		Financing Services		Web-based Advertising Services		Automobile Value Added Services		Auto Mall Management Services		Corporate			Total

Net revenue	$	105,166,506	$	780,051	$	2,244,850	$	444,338	$	334,108	$	-		$	108,969,853

Cost of revenue		103,081,761		11,528		64,788		15,695		26,182		-			103,199,954

Operating expenses
Selling and marketing		122,491		75,356		123,434		35,421		28,825		-			385,527
General and administrative		143,126		105,030		29,406		26,987		37,787		342,336			684,672
Total operating expenses		265,617		180,386		152,840		62,408		66,612		342,336			1,070,199

Income (loss) from operations	$	1,819,128	$	588,137	$	2,027,222	$	366,235	$	241,314	$	(342,336	)	$	4,699,700

Following are total assets by segment:

Total Assets	Sales of Automobiles		Financing Services		Web-based Advertising Services		Automobile Value Added Services		Auto Mall Management Services		Corporate		Total
As of June 30, 2011	$	58,078,560	$	65,915,369	$	5,513,770	$	1,662,820	$	143,732	$	1,206,586	$	132,520,837

As of December 31, 2010	$	40,891,786	$	50,165,943	$	5,804,586	$	2,466,742	$	221,150	$	3,249,581	$	102,799,788

(11) Subsequent Event

On July 1, 2011, the Company entered into a Securities Purchase Agreement, pursuant to which the Company would issue to certain accredited investors 3,000,000 shares of common stock of the Company at the price of $1.75 each for the aggregate price of $5,250,000. The issuance of the 3,000,000 shares of common stock of the Company was completed on July 8, 2011 and the proceeds from this share issue were fully received on July 26, 2011.

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

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

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

Forward Looking Statements

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

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

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our condensed consolidated financial statements and their related notes included in this Quarterly Report and our Annual Report on Form 10-K as filed with the SEC for the year ended December 31, 2010.

BUSINESS OVERVIEW

Prior Operations of China Auto Logistics Inc.

China Auto Logistics Inc., formerly Fresh Ideas Media, Inc., was incorporated in the State of Nevada on February 22, 2005. Fresh Ideas Media, Inc. was engaged in the advertising and consulting business. In February 2005, Fresh Ideas Media, Inc. formed a wholly-owned subsidiary, Community Alliance, Inc. (“Community Alliance”), an entity which markets sub-licenses for take-home school folders. Fresh Ideas Media, Inc. had only commenced limited operations and had not yet generated significant revenues, and was therefore considered a development stage company.

The Exchange and the Spin-Off

On November 10, 2008, Fresh Ideas Media, Inc. entered into an Exchange Agreement (the “Exchange”) with Ever Auspicious International Limited, a Hong Kong corporation (“HKCo”), whereby Fresh Ideas Media, Inc. acquired all of the issued and outstanding securities of HKCo in exchange for the issuance by Fresh Ideas Media, Inc. of 11,700,000 newly-issued shares of our common stock. The closing of the Exchange (the “Closing”) occurred on the same day, immediately following the cancellation of an aggregate of 1,135,000 shares of Fresh Ideas Media, Inc.’s common stock held by Phillip E. Ray and Ruth Daily, Fresh Ideas Media, Inc.’s principal stockholders immediately prior to the Closing. Prior to the Exchange, Phillip E. Ray and Ruth Daily owned approximately 23.89% and 16.58%, respectively, of the issued and outstanding common stock of Fresh Ideas Media, Inc. As of the Closing, HKCo beneficially owned approximately 64.64% of the voting capital stock of Fresh Ideas Media, Inc. As a result of the Exchange, HKCo became a wholly owned subsidiary of Fresh Ideas Media, Inc. and Fresh Ideas Media, Inc.’s primary business operations are those of HKCo. Shortly after the Closing, Fresh Ideas Media, Inc. changed its name to China Auto Logistics Inc.

In connection with the consummation of the Exchange, Fresh Ideas Media, Inc. agreed to complete the spin-off of Community Alliance through a dividend of all of the issued and outstanding capital stock of Community Alliance to holders of Fresh Ideas Media, Inc.’s common stock as of September 9, 2008. The spin-off was approved by the Board of Directors of Fresh Ideas Media, Inc. on September 9, 2008. As a result of the spin-off, the business and operations of HKCo are the sole business and operations of Fresh Ideas Media, Inc.

HKCo was incorporated in Hong Kong on October 17, 2007. Prior to December 25, 2007, HKCo had minimal assets and no operations. On December 25, 2007, Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd. (“Shisheng”), a company established under the laws of the People’s Republic of China, became a wholly-owned foreign enterprise of HKCo. This arrangement was approved by the relevant ministries of the PRC government.

Upon the completion of the above-mentioned transactions on December 25, 2007 and November 10, 2008, the Company owned 100% of HKCo which owned 100% of Shisheng, the operating entity of HKCo. For financial reporting purposes, these transactions were classified as a recapitalization of Shisheng and the historical financial statements of Shisheng were reported as the Company’s historical financial statements.

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

On November 1, 2010, Shisheng entered into a Share Transfer Agreement with the owners of Qizhong to acquire all issued and outstanding stocks of Qizhong for a net purchase price of $4.47 million, net of acquired cash, and completed the acquisition simultaneously. Qizhong is engaged in the development and operation of the website www.goodcar.cn and the business of providing customers with information and discounted services relating to automobile, including discounted gas, car washes, and body-shop repair and car maintenance.

Listing on NASDAQ

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

Current Business of the Company

The Company, through its website www.at188.com, provides real-time trading information on imported automobiles for suppliers and customers. It is the only website in China specializing in imported automobiles. The Company is the only one-stop automobile service provider in Tianjin which also provides dealer financing to its customers. Additionally, the Company’s website www.at160.com, which currently covers 35 cities, targets domestically manufactured automobile dealers and traders with an effective and efficient quoting platform and a user-friendly interface for customers to identity the best quotes and packages.

On April 23, 2010, the Company launched its new portal www.cali.com.cn to integrate and meet on a single site the needs of the full spectrum of the PRC’s dynamic automotive public, including dealers, suppliers, auto purchasers and drivers of both foreign and domestically manufactured automobiles. It engages in automobile sales, customs clearance services, storage services and national transportation services. The Company also, through Qizhong, operates the website www.goodcar.cn and is engaged in the business of providing customers with information and discounted services relating to automobile, including discounted gas, car washes, and body-shop repair and car maintenance.

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

Critical Accounting Policies, Estimates and Assumptions

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements. These financial statements are prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenues and expenses, to disclose contingent assets and liabilities on the date of the financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting periods. The most significant estimates and assumptions include revenues recognition, valuation of inventories and provisions for income taxes. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed in this Form 10-Q reflect the more significant judgments and estimates used in preparation of our condensed consolidated financial statements. We believe there have been no material changes to our critical accounting policies and estimates.

The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our condensed consolidated financial statements:

Revenue Recognition

We recognize revenue when there is persuasive evidence of an arrangement, delivery has occurred upon shipment or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectibility is reasonably assured.

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

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

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

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

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

Receivables Related to Financing Services

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

We evaluate the collectibility of outstanding receivables at the end of each of the reporting periods and make estimates for potential credit losses. We have not experienced any losses on our accounts receivable historically.

Inventories

Inventory is stated at the lower of cost (using the first-in-first-out method) or market. We continually evaluate the composition of our inventory, assessing slow-moving and ongoing products. Our inventory is comprised of the purchase cost of automobiles, which declines in value over time. We continuously evaluate our inventory to determine the reserve amount for slow-moving inventory.

Income taxes

In the process of preparing financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

We account for income taxes using an asset and liability approach for financial accounting and reporting for income tax purposes. Under the asset and liability method, deferred income taxes are recognized for temporary differences, net operating loss carry-forwards and credits by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We conduct this analysis on a quarterly basis. As of June 30, 2011 and December 31, 2010, the respective deferred tax assets amounting to $456,835 and $429,711 resulting from net operating loss carried forward, advertising expenses and allowance of doubtful accounts are not more likely than not to be realized and a full of valuation allowance has been provided.

The Company has not provided deferred taxes on unremitted earnings attributable to its international subsidiaries as they are to be reinvested indefinitely. These earnings relate to ongoing operations and are approximately $22.5 million and $18.5 million as of June 30, 2011 and December 31, 2010, respectively. Because of the availability of US foreign tax credits, it is not practicable to determine the US income tax liability that would be payable if such earnings were not indefinitely reinvested.

The Company has no material uncertain tax positions as of June 30, 2011 and December 31, 2010 or unrecognized tax benefit which would affect the effective income tax rate in future periods. The Company classifies interest and/or penalties related to income tax matters in income tax expense. As of June 30, 2011 and December 31, 2010, there are no interests or penalties related to uncertain tax positions. The Company does not anticipate any significant increases or decreases to its liability for unrecognized tax benefits within the next 12 months.

Goodwill and Acquired Intangible Assets Impairment

We perform our impairment tests for goodwill and acquired intangible assets with indefinite lives on an annual basis, during the fourth quarter of our fiscal year, or more frequently, if changes in facts and circumstances indicate that impairment in the value of goodwill and acquired intangible assets recorded on our balance sheet may exist. In order to estimate the fair value of goodwill and intangible assets with indefinite lives, we typically estimate future revenue, consider market factors and estimate our future cash flows. Based on these key assumptions, judgments and estimates, we determine whether we need to record an impairment charge to reduce the value of the asset carried on our balance sheet to its estimated fair value. Assumptions, judgments and estimates about future values are complex and often subjective. They can be affected by a variety of external and internal factors, including industry and economic trends and changes in our business strategy or our internal forecasts. Although we believe the assumptions, judgments and estimates we have made have been reasonable and appropriate, different assumptions, judgments and estimates could materially affect our reported financial results. As of June 30, 2011 and December 31, 2010, there was no impairment of goodwill or acquired intangible assets with indefinite lives.

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

RESULTS OF OPERATIONS

Results of Operations for the Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010

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

	Three Months Ended June 30, 2011		% of net revenue			Three Months Ended June 30, 2010			% of net revenue			Change in %
Net revenue	$	126,226,569		100.00	%	$	54,820,581			100.00	%		130.25	%
Cost of revenue		122,069,426		96.71	%		51,786,674			94.47	%		135.72	%
Gross profit		4,157,143		3.29	%		3,033,907			5.53	%		37.02	%
Operating expenses		1,031,514		0.82	%		479,489			0.87	%		115.13	%
Income from operations		3,125,629		2.47	%		2,554,418			4.66	%		22.36	%
Other income (expenses)		13,674		0.01	%		(16,681	)		(0.03	)%		181.97	%
Income before income taxes and noncontrolling interests		3,139,303		2.48	%		2,537,737			4.63	%		23.70	%
Net income		2,313,371		1.83	%		1,887,003			3.44	%		22.59	%
Net income attributable to shareholders of China Auto Logistics Inc.	$	2,286,200		1.81	%	$	1,861,205			3.40	%		22.83	%

For the three months ended June 30, 2011, our net revenue increased 130.25% to $126,226,569, from $54,820,581 for the same period in 2010, and our cost of revenue increased 135.72% to $122,069,426 from $51,786,674 for the same period in 2010. Gross profit margin decreased from 5.53% for the three months ended June 30, 2010 to 3.29% for the same period in 2011. As compared to the same period in 2010, our gross profit, income from operations, net income and net income attributable to shareholders of China Auto Logistics Inc. for the three months ended June 30, 2011 increased 37.02% to $4,157,143, 22.36% to $3,125,629 and 22.59% to $2,313,371 and 22.83% to $2,286,200, respectively, primarily due to an increase in our revenues from most of the operating segments.

Net Revenue

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

	Three Months Ended June 30, 2011		% of net revenue			Three Months Ended June 30, 2010		% of net revenue			Change in %
Net revenue	$	126,226,569		100.00	%	$	54,820,581		100.00	%		130.25	%
- Sales of Automobiles		123,093,521		97.52	%		52,782,164		96.28	%		133.21	%
- Financing Services		519,788		0.41	%		460,468		0.84	%		12.88	%
- Web-based Advertising Services		2,001,057		1.59	%		1,167,519		2.13	%		71.39	%
- Automobile Value Added Services		375,560		0.30	%		159,644		0.29	%		135.25	%
- Auto Mall Management Services		236,643		0.18	%		250,786		0.46	%		(5.64	)%

Sales of Automobiles

Net revenue from sales of automobiles increased 133.21% to $123,093,521 for the three months ended June 30, 2011 from $52,782,164 for the same period in 2010. During the three months ended June 30, 2011 and 2010, the Company sold 1,129 automobiles and 681 automobiles, respectively, representing an increase of 65.79% in volume. The average unit selling price per automobile for the three months ended June 30, 2011 increased 40.67% to $109,029 from $77,507 for the same period in 2010. The Company will continue its focus on the marketing of higher-end luxury automobiles.

Sales to the Company’s top three customers, each of which are car dealers, accounted for 21.08% and 31.62% of the Company’s sales during the three months ended June 30, 2011 and 2010, respectively. The Company will continue to maintain close working relationships with its top customers while attempting to reduce the concentration of revenues among these top customers by actively looking for new customers to enlarge its customer base.

Financing Services

The Company provides financing services (“Financing Services”) to its customers using the Company’s bank facility lines of credit. The Company earns a service fee for drawing its facility lines related to its customers’ purchases of automobiles and payment of import taxes. Customers bear all the interest and fees charged by the banks and prepay those fees upon the execution of their service contracts with the Company.

Net revenue from Financing Services for the three months ended June 30, 2011 increased 12.88% to $519,788 from $460,468 for the same period in 2010. The Company has expanded its aggregate credit lines by approximately $84 million to $135 million as of June 30, 2011, from approximately $51 million as of December 31, 2010. As a result of the increase in credit lines during the period, revenue from financing services increased.

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

We provide Financing Services to our customers with our lines of credit with major commercial banks in the PRC, including the Agricultural Bank of China, China Merchants Bank, PuDong Development Bank, China ZheShang Bank, Industrial and Commercial Bank of China, Shengjing Bank and China Minsheng Bank. We continue to strengthen our relationship with these banks and aim to negotiate with additional banks for higher lines of credit at more favorable terms. Based on the Company’s business relationships with certain financial institutions, we are able to obtain financing on an “as-needed” basis and we are in negotiations for a number of new credit lines. As of June 30, 2011, the Company had aggregate credit lines of $135 million (RMB875 million). Although all of our lines of credit have maturities of less than two years and may not be renewed on the same terms, if at all, we do not expect that the expiration of our lines of credit with any one of our existing banks will have a material adverse effect on our ability to provide Financing Services. However, if the automobile market in the PRC, and in particular the market for imported automobiles, slows down in the future, our revenue from Financing Services would be materially and adversely affected by a decreased number of transactions.

Web-based Advertising Services

Our Web-based Advertising Services Revenue has experienced continuous growth in recent periods as a result of the expanded coverage and increased popularity of our websites and our acquisition of Qizhong. Our revenue from Web-based Advertising Services increased 71.39%, from $1,167,519 for the three months ended June 30, 2010 to $2,001,057 for the three months ended June 30, 2011.

In the three months ended June 30, 2011 and 2010, all of our revenue from our websites is generated by subscription fees and advertisements. We aim to generate 50% of our revenues from our websites from subscription fees and advertisements, and 50% from automobile value added services sold over the Internet. We are experiencing rapid development in our websites and expected to a continuous growth in revenue from our website through growing from 35 cities currently to 60 cities throughout China reaching 70% of the auto buying public in 2012.

Automobile Import Value Added Services

Our Automobile Value Added Services revenue increased 135.25%, from $159,644 for the three months ended June 30, 2010 to $375,560 for the three months ended June 30, 2011. The increase is primarily due to the increase in sales of automobiles and the acquisition of Qizhong.

Auto Mall Management Services

Pursuant to a services agreement entered into by and between the Company and Tianjin Prominent Hero International Logistics Co., Ltd., dated as of March 1, 2010, the Company agreed to provide services to manage Tianjin FTZ International Automobile Exhibition and Sales Center (“Auto Mall Management Services”) for a one-year period for an aggregate consideration of $1,000,000. The Company started to provide such services on March 1, 2010 and the related services fee is recognized ratably over the service period. The related revenue earned in the period is included under our Auto Mall Management Services segment. On March 1, 2011, such service agreement was renewed for a term of 1 year for an aggregate consideration of $1,000,000.

Our Auto Mall Management Services revenue for the three months ended June 30, 2011 and 2010 were $236,643 and $250,786, respectively.

Cost of Revenue

	Three Months Ended June 30, 2011		% of net revenue			Three Months Ended June 30, 2010		% of net revenue			Change in %
Net revenue	$	126,226,569		100.00	%	$	54,820,581		100.00	%		130.25	%
Cost of revenue		122,069,426		96.71	%		51,786,674		94.47	%		135.72	%

Our cost of revenue primarily consisted of the cost of automobiles imported from foreign automobile manufacturers and certain direct labor and overhead costs related to our Financing Services, Web-based Advertising Services, Automobile Value Added Services and Auto Mall Management Services. Our cost of revenue increased 135.72%, from $51,786,674 for the three months ended June 30, 2010 to $122,069,426 for the three months ended June 30, 2011. The increase was primarily due to an increase in the purchase price of imported automobiles and the number of automobiles sold in the period, which is consistent with our net revenue growth rate.

As our cost of revenue consists primarily of the purchase price of imported automobiles, we have limited control over such costs. The prices of imported automobiles are determined solely by suppliers and are dependent upon market conditions. We will continue to work on obtaining more favorable terms and discounts by strengthening our relationship with suppliers and placing more batch orders.

Operating Expenses

	Three Months Ended June 30, 2011		% of total			Three Months Ended June 30, 2010		% of total			Change in %
Operating Expenses
- Selling and Marketing	$	364,496		35.34	%	$	187,127		39.03	%		94.79	%
- General and Administrative		667,018		64.66	%		292,362		60.97	%		128.15	%
Total	$	1,031,514		100.00	%	$	479,489		100.00	%		115.13	%

During the three months ended June 30, 2011, our total operating expenses increased 115.13% to $1,031,514 from $479,489 for the same period in 2010. This increase was a combination of a 94.79% increase in selling and marketing expenses to $364,496 for the three months ended June 30, 2011 from $187,127 for the same period in 2010, and a 128.15% increase in general and administrative expenses (“G&A”) to $667,018 for the three months ended June 30, 2011 from $292,362 for the same period in 2010.

The following table sets forth a breakdown of the primary selling and marketing expenses of the Company:

	Three Months Ended June 30,				Change in %
	2011		2010
Primary selling and marketing expenses
- Payroll	$	132,531	$	43,184		206.90	%
- Staff related costs		27,544		10,038		174.40	%
- Office supplies		25,851		22,971		12.54	%
- Advertising and promotion		36,564		7,642		378.46	%
- Entertainment		22,670		8,462		167.90	%
- Rent		56,248		44,723		25.77	%

The Company acquired Qizhong on November 1, 2010 and includes the result of operations of Qizhong for the period since the date of acquisition. As a result, selling and marketing expenses include Qizhong’s selling and marketing expenses of $163,345, representing 44.81% of our selling and marketing expenses for the three months ended June 30, 2011.

Payroll expenses and staff-related costs increased 206.90% and 174.40% to $132,531 and 27,544, respectively, for the three months ended June 30, 2011 from $43,184 and $10,038, respectively, for the same period in 2010 due to the acquisition of Qizhong in November 2010, which increased the number of the Company’s employees as compared to the second quarter of 2010 and the rising costs of remuneration packages related to recruiting and maintaining skilled employees. Advertising and promotion expenses increased by 3.8 times for the three months ended June 30, 2011 as Qizhong incurred promotion expenses of approximately $35,643 to advertise its VIP membership cards and auto-related products and services. Entertainment expenses increased by 167.90% for the three months ended June 30, 2011 as there were more corporate events in the three months ended June 30, 2011. Rental expenses increased by 25.77% for the three months ended June 30, 2011 primarily due to the acquisition of Qizhong.

The following table sets forth a breakdown of the primary G&A expenses of the Company:

	Three Months Ended June 30,				Change in %
	2011		2010
Primary general and administrative expenses
- Payroll	$	202,928	$	84,879		139.08	%
- Staff related costs		40,377		25,216		60.12	%
- Entertainment		9,273		18,469		(49.79	)%
- Depreciation		52,397		50,997		2.75	%
- Legal and professional fees		239,734		73,802		224.83	%
- Rental		27,689		-		100.00	%

As a result of the Qizhong acquisition, general and administrative expenses include Qizhong’s general and administrative expenses of $195,056, representing 29.24% of our general and administrative expenses for the three months ended June 30, 2011.

Payroll expenses and staff related costs increased 139.08% and 60.12% to $202,928 and $40,377, respectively, for the three months ended June 30, 2011 from $84,879 and $25,216, respectively, for the same period in 2010 primarily as a result of the acquisition of Qizhong and the rising costs of offering competitive remuneration packages to maintain qualified management staff.

Legal and professional fees increased 2.2 times for the three months ended June 30, 2011 to $239,734 from $73,802 in the same period of 2010, primarily due to financial consultant fees of approximately $160,000 incurred in this period.

Income from Operations

Income from operations increased 22.36% for the three months ended June 30, 2011 to $3,125,629 from $2,554,418 in the same period of 2010, which is primarily attributable to growth in revenue and gross profit of the segments of Sales of Automobiles, Web-based Advertising Services and Automobile Value Added Services. Income from operations of Sales of Automobiles, Web-based Advertising Services and Automobile Value Added Services increased by $177,223, $450,563 and $ 157,339, respectively, for the three months ended June 30, 2011 as compared to the same period in 2010.

Other Income and Expenses

Other income and expenses consist primarily of interest income and interest expenses. The Company’s interest income is generated by interest earned through bank deposits while interest expenses are amounts paid by the Company with respect to its borrowings from banks.

Results of Operations for the Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010

	Six Months Ended June 30, 2011		% of net revenue			Six Months Ended June 30, 2010			% of net revenue			Change in %
Net revenue	$	207,437,369		100.00	%	$	108,969,853			100.00	%		90.36	%
Cost of revenue		199,306,002		96.08	%		103,199,954			94.71	%		93.13	%
Gross profit		8,131,367		3.92	%		5,769,899			5.29	%		40.93	%
Operating expenses		2,088,477		1.01	%		1,070,199			0.98	%		95.15	%
Income from operations		6,042,890		2.91	%		4,699,700			4.31	%		28.58	%
Other income (expenses)		17,105		0.01	%		(23,647	)		0.02	%		(172.33	)%
Income before income taxes and noncontrolling interests		6,059,995		2.92	%		4,676,053			4.29	%		29.60	%
Net income		4,417,875		2.13	%		3,440,803			3.16	%		28.40	%
Net income attributable to shareholders of China Auto Logistics Inc.	$	4,363,334		2.10	%	$	3,389,651			3.11	%		28.73	%

For the six months ended June 30, 2011, our net revenue increased 90.36% to $207,437,369, from $108,969,853 for the same period in 2010, and our cost of revenue increased 93.13% to $199,306,002 from $103,199,954 for the same period in 2010. Gross profit margin decreased from 5.29% for the six months ended June 30, 2010 to 3.92% for the same period in 2011. As compared to the same period in 2010, our gross profit, income from operations, net income and net income attributable to shareholders of China Auto Logistics Inc. for the six months ended June 30, 2011 increased 40.93% to $8,131,367, 28.58% to $6,042,890 and 28.40% to $4,417,875 and 28.73% to $4,363,334, respectively, primarily due to an increase in our revenues from each of the operating segments.

Net Revenue

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

	Six Months Ended June 30, 2011		% of net revenue			Six Months Ended June 30, 2010		% of net revenue			Change in %
Net revenue	$	207,437,369		100.00	%	$	108,969,853		100.00	%		90.36	%
- Sales of Automobiles		201,361,939		97.07	%		105,166,506		96.51	%		91.47	%
- Financing Services		855,271		0.41	%		780,051		0.72	%		9.64	%
- Web-based Advertising Services		3,973,039		1.92	%		2,244,850		2.06	%		76.98	%
- Automobile Value Added Services		774,463		0.37	%		444,338		0.41	%		74.30	%
- Auto Mall Management Services		472,657		0.23	%		334,108		0.30	%		41.47	%

Sales of Automobiles

Net revenue from sales of automobiles increased 91.47% to $201,361,939 for the six months ended June 30, 2011 from $105,166,506 for the same period in 2010. During the six months ended June 30, 2011 and 2010, the Company sold 1,914 automobiles and 1,307 automobiles, respectively, representing an increase of 46.44% in volume. The average unit selling price per automobile for the six months ended June 30, 2011 increased 30.75% to $105,205 from $80,464 for the same period in 2010.

Sales to the Company’s top three customers, each of which are car dealers, accounted for 17.80% and 32.30% of the Company’s sales during the six months ended June 30, 2011 and 2010, respectively. The Company will continue to maintain close working relationships with its top customers while attempting to reduce the concentration of revenues among these top customers by actively looking for new customers to enlarge its customer base.

Financing Services

Net revenue from Financing Services for the six months ended June 30, 2011 increased 9.64% to $855,271 from $780,051 for the same period in 2010. Our revenue growth from financing services is heavily dependent on overall industry growth and economic market conditions in the PRC. As of June 30, 2011, the Company has expanded aggregate credit lines of $135 million (RMB 875 million). Revenue from Financing Services increased as a result of the increase in credit lines during the period.

Web-based Advertising Services

Our revenue from Web-based Advertising Services increased 76.98%, from $2,244,850 for the six months ended June 30, 2010 to $3,973,039 for the six months ended June 30, 2011. This increase is primarily due to the increased advertisement services rendered following the expanded coverage and increased popularity of our websites as a result of expanding our reach to 35 cities throughout the PRC, representing increased coverage in additional 15 cities as compared to its presence in 20 cities for the six months ended June 30, 2010.

Automobile Import Value Added Services

Our Automobile Value Added Services revenue increased 74.30%, from $444,338 for the six months ended June 30, 2010 to $774,463 for the six months ended June 30, 2011. The increase is primarily due to the increase in sales of automobiles and the acquisition of Qizhong.

Auto Mall Management Services

Our Auto Mall Management Services revenue for the six months ended June 30, 2011 and 2010 were $472,657 and $334,108, respectively, which represented revenue from a management service agreement entered into with Tianjin Prominent Hero International Logistics Co., Ltd.

Cost of Revenue

	Six Months Ended June 30, 2011		% of net revenue			Six Months Ended June 30, 2010		% of net revenue			Change in %
Net revenue	$	207,437,369		100.00	%	$	108,969,853		100.00	%		90.36	%
Cost of revenue		199,306,002		96.08	%		103,199,954		94.71	%		93.13	%

Our cost of revenue increased 93.13%, from $103,199,954 for the six months ended June 30, 2010 to $199,306,002 for the six months ended June 30, 2011. The increase was primarily due to an increase in the purchase price of imported automobiles and the number of automobiles sold in the period, which is consistent with our net revenue growth rate.

Operating Expenses

	Six Months Ended June 30, 2011		% of total			Six Months Ended June 30, 2010		% of total			Change in %
Operating Expenses
- Selling and Marketing	$	738,643		35.37	%	$	385,527		36.02	%		91.59	%
- General and Administrative		1,349,834		64.63	%		684,672		63.98	%		97.15	%
Total	$	2,088,477		100.00	%	$	1,070,199		100.00	%		95.15	%

During the six months ended June 30, 2011, our total operating expenses increased 95.15% to $2,088,477 from $1,070,199 for the same period in 2010. This increase was a combination of a 91.59% increase in selling and marketing expenses to $738,643 for the six months ended June 30, 2011 from $385,527 for the same period in 2010, and a 97.15% increase in general and administrative expenses (“G&A”) to $1,349,834 for the six months ended June 30, 2011 from $684,672 for the same period in 2010.

The following table sets forth a breakdown of the primary selling and marketing expenses of the Company:

	Six Months Ended June 30,				Change in %
	2011		2010
Primary selling and marketing expenses
- Payroll	$	247,010	$	76,715		221.98	%
- Staff related costs		59,255		19,496		203.93	%
- Office supplies		47,112		54,531		(13.61	)%
- Advertising and promotion		90,722		14,233		537.41	%
- Entertainment		55,913		14,665		281.27	%
- Rent		110,182		86,760		27.00	%

As a result of the Company’s acquisition of Qizhong on November 1, 2010, selling and marketing expenses include Qizhong’s selling and marketing expenses of $318,290, representing 43.09% of our selling and marketing expenses for the six months ended June 30, 2011.

Payroll expenses and staff-related costs increased 221.98% and 203.93% to $247,010 and 59,255, respectively, for the six months ended June 30, 2011 from $76,715 and $19,496, respectively, for the same period in 2010 due to the acquisition of Qizhong in November 2010, which increased the number of the Company’s employees as compared to the first half of 2010 and the rising costs of remuneration packages related to recruiting and maintaining skilled employees. Advertising and promotion expenses increased by 5.4 times for the six months ended June 30, 2011 as Qizhong incurred promotion expenses of approximately $87,980 to advertise its VIP membership cards and auto-related products and services. Entertainment expenses increased by 2.8 times for the six months ended June 30, 2011 as there were more corporate events in the first half of 2011. Rental expenses increased by 27.00% for the six months ended June 30, 2011 primarily due to the acquisition of Qizhong.

The following table sets forth a breakdown of the primary G&A expenses of the Company:

	Six Months Ended June 30,				Change in %
	2011		2010
Primary general and administrative expenses
- Payroll	$	385,972	$	168,784		128.68	%
- Staff related costs		78,290		43,711		79.11	%
- Entertainment		32,585		42,250		(22.88	)%
- Depreciation		117,124		96,547		21.31	%
- Legal and professional fees		502,612		259,680		93.55	%
- Rental		55,786		-		100.00	%

As a result of the Qizhong acquisition, general and administrative expenses include Qizhong’s general and administrative expenses of $349,262, representing 25.87% of our general and administrative expenses for the six months ended June 30, 2011.

Payroll expenses and staff related costs increased 128.68% and 79.11% to $385,972 and $78,290, respectively, for the six months ended June 30, 2011 from $168,784 and $43,711, respectively, for the same period in 2010 primarily as a result of the acquisition of Qizhong and the rising costs of offering competitive remuneration packages to maintain qualified management staff.

Legal and professional fees increased 93.55% for the six months ended June 30, 2011 to $502,612 from $259,680 in the same period of 2010, due to financial consultant fees of approximately $160,000 incurred in the second quarter of 2011 and the increased costs in relation to the acquisition of Qizhong.

Income from Operations

Income from operations increased 28.58% for the six months ended June 30, 2011 to $6,042,890 from $4,699,700 in the same period of 2010, which is primarily attributable to growth in revenue and gross profit of the segments of Sales of Automobiles, Web-based Advertising Services and Automobile Value Added Services. Income from operations of Sales of Automobiles, Web-based Advertising and Automobile Value Added Services increased by $403,767, $987,899 and $257,514, respectively, for the six months ended June 30, 2011 as compared to the same period in 2010.

Other Income and Expenses

Inflation

We believe that inflation has had a negligible effect on operations for the three months and six months month period ended June 30, 2011 and 2010. However, overall commodity inflation is an ongoing concern for our business and has been a considerable operational and financial focus for the Company. We continue to monitor commodity costs and work with our suppliers and customers to manage changes in commodity costs.

LIQUIDITY AND CAPITAL RESOURCES

We generally finance our operations through a combination of operating profit, short-term borrowing from banks and shareholder loans. During the reporting periods, we arranged a number of bank loans to satisfy our financing needs. As of the date of this Form 10-Q, we have not experienced any difficulty in raising funds through bank loans, and we have not experienced any liquidity problems in settling our payables in the ordinary course of business and repaying our bank loans when they come due.

On July 1, 2011, the Company entered into a Securities Purchase Agreement, pursuant to which the Company issued 3,000,000 shares of common stock of the Company at the price of $1.75 each for the aggregate price of $5,250,000. This issue was completed in July 2011. The Company expects that most of the proceeds from this share issue will be utilized in the second half this year to complete the acquisition of an auto mall in Tianjin, China, which the Company intends to convert into the largest auto mall in Tianjin City.

We believe that the level of financial resources is a significant factor for our future development and accordingly we may determine from time to time to raise capital through private debt or equity financings to strengthen the Company’s financial position, to expand our facilities and to provide the Company with additional flexibility to take advantage of business opportunities. No assurances can be given that we will be successful in raising such additional capital on terms acceptable to the Company.

The following table sets forth a summary of our cash flows for the six months ended June 30, 2011 and 2010.

	Six Months Ended June 30,
	2011			2010
Net cash (used for) provided by operating activities	$	(7,466,048	)	$	1,173,600
Net cash used for investing activities		(54,591	)		(194,715	)
Net cash used for financing activities		(3,306,565	)		(1,318,247	)
Effect on exchange rate change on cash		219,823			15,539
Cash and cash equivalents at beginning of period		17,733,502			2,255,058
Cash and cash equivalents at end of period		7,126,121			1,931,235

Operating Activities

During the six months ended June 30, 2011, we used net cash for operating activities of $7,466,048, as compared to net cash provided by operating activities of $1,173,600 in the same period of 2010. The increase in net cash used for operating activities is primarily a result of an increase in net cash flows used for operating assets and liabilities as compared to the same period in 2010. This increase in net cash used for operating assets and liabilities is primarily comprised of an $27,058,194 increase of cash pledged as restricted cash, a $10,375,952 increase in inventories, a $8,889,673 increase in advances to suppliers and a $1,332,659 increase in value added tax refundable, which was partly offset by an increase in net cash provided by the decrease in receivables related to financing services of $1,564,185 and the increase in line of credit related to financing services of $30,095,836 and the increase in customer deposits of $3,805,060, as compared to the same period in 2010.

Investing Activities

During the six months ended June 30, 2011, net cash used for investing activities was $54,591. This was attributable to cash used for purchases of property and equipment of $55,122 and the proceeds from disposals of property and equipment of $531.

Financing Activities

During the three months ended June 30, 2011, net cash used for financing activities was $3,306,565, as compared to $1,318,247 of net cash used for financing activities in the same period of 2010. The net cash used for financing activities mainly represents the partial payment of acquisition consideration to ex-owners of Qizhong and the repayment of loans to Cheng Weihong, a director of the Company.

Our total cash and cash equivalents increased to $7,126,121 as of June 30, 2011, as compared to $1,931,235 as of June 30, 2010.

Working Capital

As of June 30, 2011, the Company had working capital of $39,968,176 compared to working capital of $34,510,762 as of December 31, 2010.

The Company’s general cash needs have been to finance the accumulation of inventory and the build-up in restricted cash, accounts receivable and advances to suppliers. As of June 30, 2011, the Company’s restricted cash increased by $27,471,379 or 4.6 times and its inventories increased by $10,963,390 or 57.54%, as compared with those as of December 31, 2010. The Company had outstanding borrowings of $59,217,488, representing 1.64 times of its borrowings as of December 31, 2010.

We aim to continue to improve the level of working capital through increased revenue and efficiently controlling costs. The Company adopted measures to lower holding costs of inventories and to develop and maintain good relationships with banks for favorable financing terms.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any outstanding derivative financial instruments, off-balance sheet guarantees or interest rate swap transactions of foreign currency forward contracts. The Company does not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. The Company does not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to the Company or that engages in leasing, hedging or research and development services with the Company.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.

Controls and Procedures

A.	Material weakness previously disclosed

As discussed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2010, we identified one material weakness in the design and operation of our internal controls. The material weakness is related to the failure to retain sufficient qualified accounting personnel in Qizhong, a subsidiary group acquired by the Company in November 1, 2010, to prepare financial statements in accordance with accounting principles generally accepted in the U.S. Since the first quarter of 2011, additional qualified accounting personnel have been hired and put into place to assist preparation of financial information, as required for interim and annual reporting, in accordance with generally accepted accounting principles in the U.S. As the newly implemented remediation activities have not operated for a sufficient period of time to demonstrate operating effectiveness, we will continue to monitor and assess our remediation activities to ensure that the aforementioned material weakness is remediated.

B.	Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in the Company's filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The Company's management, with the participation of its principal executive and financial officers, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation and solely due to the unremediated material weakness described above, the Company's principal executive and financial officers have concluded that such disclosure controls and procedures were not effective for the purpose for which they were designed as of the end of such period. As a result of this conclusion, the financial statements for the period covered by this report were prepared with particular attention to the unremediated material weakness previously disclosed. Accordingly, management believes that the condensed consolidated financial statements included in this report fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows as of and for the periods presented, in accordance with generally accepted accounting principles, notwithstanding the unremediated weakness.

C.	Changes in Internal Control over Financial Reporting

Since the first quarter of 2011, we put into place additional qualified accounting personnel to address the aforementioned material weakness. This action strengthened our internal controls over financial reporting.

Except for the above, there was no change in the Company's internal control over financial reporting that was identified in connection with such evaluation that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings.

There have been no material developments in any legal proceedings since the disclosures contained in the Registrant’s Form 10-K for the year ended December 31, 2010.

Item 1A.

Risk Factors.

Not required.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

On April 5, 2011, the Company issued 1,063,427 shares of the Company’s common stock as part of the acquisition of Qizhong. The issuance of such shares was exempt from registration in accordance with Section 4(2) of the Securities Act of 1933 as a transaction by an issuer not involved in a public offering.

On July 1, 2011, the Company, entered into a Securities Purchase Agreement (“Purchase Agreement”), with certain accredited investors (collectively, the “Investors”), pursuant to which the Company issued 3,000,000 shares of the Company’s common stock to the Investors. The purchase price for each share was $1.75 and the aggregate purchase price for the shares was $5,250,000. The Company sold the shares in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

(Removed and Reserved).

Item 5.

Other Information.

(a) On April 29, 2011, Shisheng entered into a Contract of Integrated Credit Line with China Minsheng Bank attached hereto as Exhibit 10.12, whereby Shisheng obtained a credit line of RMB 80 million with a term from April 29, 2011 until April 29, 2012.

On June 14, 2011, Shisheng entered into a Credit Line Agreement with China Merchants Bank Co. Ltd Tianjin Branch attached hereto as Exhibit 10.13 whereby Shisheng obtained a credit line of RMB 80 million with a term from June 14, 2011 to June 13, 2012.

(b) There were no material changes to the procedures by which security holders may recommend nominees to the registrant’s board of directors during the quarter ended June 30, 2011.

Item 6.

Exhibits.

The following exhibits, which are numbered in accordance with Item 601 of Regulation S-K, are filed herewith or, as noted, incorporated by reference herein:

Index to Exhibits

Exhibit Number		Exhibit Description
2.1 (1)		Share Exchange Agreement dated as of November 10, 2008, between USCo, the Company and Stockholder.
2.2 (1)		Share Exchange Agreement dated as of November 1, 2007, among Ever Auspicious International Limited, Cheng Weihong, Xia Qiming, and Qian Yuxi.
2.3 (1)		Supplementary Agreement to Share Exchange Agreement dated as of November 1, 2007, among Ever Auspicious International Limited, Cheng Weihong, Xia Qiming, and Qian Yuxi.
3.1 (2)		Amended Articles of Incorporation of the Company
3.2 (2)		Amended and Restated Bylaws of the Company
10.1 (1)		Form of Employment Contract
10.2 (3)		Audit Committee Charter
10.3 (3)		Compensation Committee Charter
10.4 (3)		Corporate Governance and Nominating Committee Charter
10.5 (4)		Car Exhibition Hall Lease Contract, dated July 1, 2010, by and between Tianjin World Trading Bonded Automobile Distribution Center Co., Ltd and Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.
10.6 (5)		Share Transfer Agreement, dated November 1, 2010, by and between Long Jiegui and Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.
10.7 (6)		Memorandum of Understanding on Performance of Share Transfer Agreement, dated March 15, 2011, by and between Long Jiegui and Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.
10.8 (6)		Credit Line Agreement, dated June 2, 2010, by and between China Merchants Bank Co. Ltd Tianjin Branch and Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.
10.9 (6)		Import Negotiation Agreement and Agreement on Opening of Irrevocable Documentary Letter of Credit, dated November 1, 2010, by and between Tianjin Free Trade Zone (FTZ) Branch of Industrial & Commercial Bank of China and Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.
10.10 (7)		Trade Credit Line Contract, dated February 24, 2011 by and between Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd. and Tianjin Branch of Shengjing Bank.
10.11 (7)		Cooperation Agreement, dated March 1, 2011, by and between Tianjin Prominent Hero International Logistics Co., Ltd and Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.
10.12*		Contract of Integrated Credit Line, dated April 29, 2011, by and between Tianjin Seashore New District Shisheng Business Trading Group Co., Ltd and Tianjin Branch of China Minsheng Banking Inc.
10.13*		Credit Line Agreement, dated June 14, 2011, by and between China Merchants Bank Co. Ltd Tianjin Branch and Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.
10.14 (8)		Securities Purchase Agreement dated July 1, 2011, by and among China Auto Logistics Inc. and the Investors listed on the Schedule of Buyers attached hereto
31.1*		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*		XBRL data files of Financial Statements and Notes contained in this Quarterly Report on Form 10-Q

*Filed herewith

(1) Incorporated by reference to the Company’s Form 8-K, filed with the Securities and Exchange Commission on November 10, 2008.

(2) Incorporated by reference to the Company’s Definitive Schedule 14C Information Statement, filed with the Securities and Exchange Commission on December 5, 2008.

(3) Incorporated by reference to the Company’s Form 8-K, filed with the Securities and Exchange Commission on December 24, 2008.

(4) Incorporated by reference to the Company’s Form 10-Q, filed with the Securities and Exchange Commission on November 15, 2010.

(5) Incorporated by reference to the Company’s Form 8-K, filed with the Securities and Exchange Commission on November 5, 2010.

(6) Incorporated by reference to the Company’s Form 10-K, filed with the Securities and Exchange Commission on March 31, 2011.

(7) Incorporated by reference to the Company’s Form 10-Q, filed with the Securities and Exchange Commission on May 16, 2011.

(8) Incorporated by reference to the Company’s Form 8-K, filed with the Securities and Exchange Commission on July 7, 2011.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		CHINA AUTO LOGISTICS INC.

	By:	/s/ Tong Shiping
		Tong Shiping
		Chief Executive Officer

Date: August 15, 2011

Index to Exhibits

Exhibit Number		Exhibit Description
2.1 (1)		Share Exchange Agreement dated as of November 10, 2008, between USCo, the Company and Stockholder.
2.2 (1)		Share Exchange Agreement dated as of November 1, 2007, among Ever Auspicious International Limited, Cheng Weihong, Xia Qiming, and Qian Yuxi.
2.3 (1)		Supplementary Agreement to Share Exchange Agreement dated as of November 1, 2007, among Ever Auspicious International Limited, Cheng Weihong, Xia Qiming, and Qian Yuxi.
3.1 (2)		Amended Articles of Incorporation of the Company
3.2 (2)		Amended and Restated Bylaws of the Company
10.1 (1)		Form of Employment Contract
10.2 (3)		Audit Committee Charter
10.3 (3)		Compensation Committee Charter
10.4 (3)		Corporate Governance and Nominating Committee Charter
10.5 (4)		Car Exhibition Hall Lease Contract, dated July 1, 2010, by and between Tianjin World Trading Bonded Automobile Distribution Center Co., Ltd and Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.
10.6 (5)		Share Transfer Agreement, dated November 1, 2010, by and between Long Jiegui and Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.
10.7 (6)		Memorandum of Understanding on Performance of Share Transfer Agreement, dated March 15, 2011, by and between Long Jiegui and Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.
10.8 (6)		Credit Line Agreement, dated June 2, 2010, by and between China Merchants Bank Co. Ltd Tianjin Branch and Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.
10.9 (6)		Import Negotiation Agreement and Agreement on Opening of Irrevocable Documentary Letter of Credit, dated November 1, 2010, by and between Tianjin Free Trade Zone (FTZ) Branch of Industrial & Commercial Bank of China and Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.
10.10 (7)		Trade Credit Line Contract, dated February 24, 2011 by and between Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd. and Tianjin Branch of Shengjing Bank.
10.11 (7)		Cooperation Agreement, dated March 1, 2011, by and between Tianjin Prominent Hero International Logistics Co., Ltd and Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.
10.12*		Contract of Integrated Credit Line, dated April 29, 2011, by and between Tianjin Seashore New District Shisheng Business Trading Group Co., Ltd and Tianjin Branch of China Minsheng Banking Inc.
10.13*		Credit Line Agreement, dated June 14, 2011, by and between China Merchants Bank Co. Ltd Tianjin Branch and Tianjin Seashore New District Shisheng Business Trading Group Co. Ltd.
10.14 (8)		Securities Purchase Agreement dated July 1, 2011, by and among China Auto Logistics Inc. and the Investors listed on the Schedule of Buyers attached hereto
31.1*		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*		XBRL data files of Financial Statements and Notes contained in this Quarterly Report on Form 10-Q