Except as otherwise indicated by the context, references in this Quarterly Report to "we", "us", "our" or the "Company" are to the condensed 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, 2011.

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 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 shareholders of Goodcar to acquire all issued and outstanding stocks of Goodcar for a net purchase price of $4.47 million, net of acquired cash, and completed the acquisition simultaneously. Goodcar 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 websites (www.cali.com.cn, www.at188.com, www.at160.com and www.goodcar.cn), provides individual and business customers with services related to automobile sales, customs clearance, storage and interstate delivery and a platform to provide automobile pricing, and information relating to automotive services and products, including discounted gas, 24/7 emergency roadside assistance, car repairs and maintenance. Also, the Company sells imported automobiles, manages auto mall for customers, and as the only one-stop service provider in Tianjin provides dealer financing to our customers.

Critical Accounting Policies, Estimates and Assumptions

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements. These condensed consolidated 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 condensed consolidated financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. The most significant estimates and assumptions include the collection of accounts receivable, and the useful lives and impairment of property and equipment, goodwill and intangible assets, the valuation of deferred tax assets and inventories and the provisions for income taxes. 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 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.

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.

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

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 services 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 condensed 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 products are comprised of the purchase cost of automobiles which declines in value over time. We continuously evaluate our inventory to determine the reserve amount for slow-moving inventory.

Income Taxes

In the process of preparing condensed consolidated 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 carryforwards 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 March 31, 2012, the deferred tax assets amounting to approximately $203,000 resulting from net operating loss carryforwards, advertising expenses carryforwards and allowance for doubtful accounts are not more likely than not to be realized and a full amount 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 $26.9 million as of March 31, 2012. 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 March 31, 2012 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 March 31, 2012, there are no interest or penalties related to uncertain tax positions. The Company does not anticipate any significant increases or decreases to its liability for unrecognized tax benefits within the next 12 months.

Goodwill and Acquired Intangible Assets Impairment

We perform our impairment tests for goodwill and acquired intangible assets with indefinite lives on an annual basis, during the fourth quarter of our fiscal year, or more frequently, if changes in facts and circumstances indicate that impairment in the value of goodwill and acquired intangible assets recorded on our condensed consolidated 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.

During the year ended December 31, 2011, due to the planned closing of Goodcar's operations related to sales of VIP membership cards and other promotion services, which is a reporting unit under our Automobile Value Added Services segment, we reevaluated our goodwill and intangible assets related to this reporting unit and determined that the related goodwill and intangible assets were impaired. We recorded impairment losses of $810,571 and $83,012 ($62,259 after-tax) in respect of our goodwill and intangible assets related to this reporting unit for the year ended December 31, 2011. Except for this reporting unit, there was no indication that the carrying value of goodwill or intangible assets related to other reporting units may not be recoverable based on the result of our evaluation.

There was no impairment loss during the three months ended March 31, 2012.

New Accounting Pronouncements Not Yet Adopted

In December 2011, the FASB issued ASU No. 2011-11, Topic 210 - Balance Sheet:
Disclosures about Offsetting Assets and Liabilities ("ASU 2011-11"). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 will be effective for fiscal years beginning on or after January 1, 2013, with retrospective application for all comparable periods presented. The Company does not expect the adoption of this guidance to have a material effect on the Company's consolidated financial statements.

RESULTS OF OPERATIONS

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 for the Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011

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                            Three
                                     Months                            Months
                                      Ended                            Ended
                                    March 31,        % of net        March 31,        % of net       Change
                                      2012           revenue            2011          revenue         in %
Net revenue                       $ 107,445,586         100.00 %    $ 81,573,988         100.00 %       31.72 %
Cost of revenue                     103,915,001          96.71 %      77,599,764          95.13 %       33.91 %
Gross profit                          3,530,585           3.29 %       3,974,224           4.87 %      (11.16 )%
Operating expenses                    1,086,953           1.01 %       1,056,963           1.30 %        2.84 %
Income from operations                2,443,632           2.27 %       2,917,261           3.58 %      (16.24 )%
Other income (expenses)                (118,256 )        (0.11 )%          3,431           0.00 %      (3,547 )%
Income before income taxes and
noncontrolling interests              2,325,376           2.16 %       2,920,692           3.58 %      (20.38 )%
Net income                            1,588,787           1.48 %       2,104,504           2.58 %      (24.51 )%
Net income attributable to
shareholders of China
Auto Logistics Inc.               $   1,581,477           1.47 %    $  2,077,134           2.55 %      (23.86 )%

For the three months ended March 31, 2012, our net revenue increased 31.72% to $107,445,586, from $81,573,988 for the same period in 2011, and our cost of revenue increased 33.91% to $103,915,001 from $77,599,764 for the same period in 2011. Gross profit margin decreased from 4.87% for the three months ended March 31, 2011 to 3.29% for the same period in 2011. As compared to the same period in 2011, our gross profit, income from operations, net income and net income attributable to shareholders of China Auto Logistics Inc. for the three months ended March 31, 2012 decreased 11.16% to $3,530,585, decreased 16.24% to $2,443,632, decreased 24.51% to $1,588,787 and decreased 23.86% to $1,581,356, respectively, primarily due to the decrease in our web-based advertising revenue which was partially offset by the increase in our sales of automobiles and growth in our other services operating segments, led by financing services revenue.

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                           Three
                                       Months                           Months
                                        Ended                           Ended
                                      March 31,        % of net       March 31,        % of net       Change
                                        2012           revenue           2011          revenue         in %
Net revenue                         $ 107,445,586         100.00 %   $ 81,573,988         100.00 %       31.72 %
- Sales of Automobiles                104,297,837          97.08 %     78,268,418          95.94 %       33.26 %
- Financing Services                    2,000,432           1.86 %        698,671           0.86 %      186.32 %
- Web-based Advertising Services          294,827           0.27 %      1,971,982           2.42 %      (85.05 )%
- Automobile Value Added Services         615,994           0.57 %        398,903           0.49 %       54.42 %
- Auto Mall Management Services           236,496           0.22 %        236,014           0.29 %        0.21 %

Sales of Automobiles

Net revenue from sales of automobiles increased 33.26% to $104,297,837 for the three months ended March 31, 2012 from $78,268,418 for the same period in 2011. During the three months ended March 31, 2012 and 2011, the Company sold 1,129 automobiles and 785 automobiles, respectively, representing an increase of 43.82% in volume. The average unit selling price per automobile for the three months ended March 31, 2012 decreased 7.34% to $92,381 from $99,705 for the same period in 2011. According to a forecast report issued by IHS Automotive ("IHS") on April 28, 2012, it is expected that the growth rates for high-end automobile market will exceed those for the mainstream automobile market. IHS also forecasts the sales will grow 139.5% during the period from 2010 through 2015. Based on the current growth forecast, China will soon become the top market for most of the major luxury automotive manufacturers. The Company will continue its focus on the marketing of higher-end luxury automobiles. During the three months ended March 31, 2012, our vendors offered better prices for our purchases which translated into lower selling prices which allowed us to increase the numbers of automobiles sold. In addition, we experienced higher demands for lower end models for our top selling brands, Toyota, BMW and Mercedes Benz. As a result, average selling prices for these top three brands declined 3%, 5% and 18%, respectively for the three months ended March 31, 2012 as compared to those of the same period of 2011. Total sales for these top three brands accounted for approximately 70% and 80% of our total automobile sales for the three months ended March 31, 2012 and 2011, respectively. Our gross margin for sales of automobiles was increased slightly from 1.61% for the three months ended March 31, 2011 to 1.70% for the three months ended March 31, 2012.

Sales to the Company's top three customers, each of which are car dealers, accounted for approximately 32% and 15% of the Company's sales during the three months ended March 31, 2012 and 2011, 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 from its customers for drawing its facility lines related to its customers' . . .